Additional information to the questionnaire: Public consultation – Excise duties applied to manufactured tobacco
“Tobaksindustrien” (Tobacco Manufactures Association of Denmark) represents companies with a Danish headquarter and production. The members are important players in the manufacturing and sale of the niche tobacco products: cigars, cigarillos and pipe tobacco, and minor players in fine-cut tobacco as well as smokeless tobacco. The consumption of cigars, cigarillos and pipe tobacco is declining and constitutes around 2 % of the total EU consumption of tobacco products. Fine-cut tobacco constitutes less than 10% of the total EU consumption of tobacco products.
We welcome the opportunity to complement our response to the questionnaire withdetailed comments on the considerations and questions raised in the questionnaire.
Ad “E-cigarettes”:
New products, such as e-cigarettes and heat-not-burn products, differ from tobacco products handled by the excise directive by the fact that an electronic device is required for the new products to be enjoyed, irrespective of whether the new product contains tobacco or not. If the European Council wishes to regulate the taxation of these new products, a separate directive for electronic products and not as a part of the excise directive is the preferred way.
Ad “Borderline tobacco”:
The current excise directive contains the measures needed
Experience shows that the current Excise Directive offers Member States the possibility to apply a minimum tax floor not only on cigarettes but on cigars as well in order to tackle any problem of low priced products under the existing arrangements, or use the ad valorem combined with a specific rate. E.g., Denmark and Spain introduced a minimum tax floor. Since January 2015 for Germany and Hungary, the special derogation in the current excise directive article 4, 2 no longer applies. The same cigar and cigarillos definition now applies in all Member States. The former very cheap “cigarillo” products In Germany and Hungary can no longer be sold as cigars/cigarillos. Consequently, from 2014 to 2015 the sale of cigars and cigarillos dropped by 75% (415 million pieces) in Hungary, 23% (902 million pieces) in Germany, 41% (60 million pieces) in Denmark and 1% (17 million pieces) in Spain.
Low priced cigarillos are substantively different from cigarettes. Any similarity between the lowest priced cigarillos and cigarettes lies only in the packaging. The construction of the product and the tobacco used for the production of the two types of products is not the same. Therefore, the taste and the smoking experience are also different. Also in production, method and production costs there are huge differences.
Cigars and cigarillos (which include the low priced cigarillos) represent 1.6% of the total tobacco market. The consumption of cigars and cigarillos has been steadily declining over the last 30 years. This declining development in sales has continued significantly in the last couple of years and after 2013 where the Ramboll study was conducted.
Alignment of minimum excise taxes
It is a well-known fact that cigars and cigarillos (incl. the low priced cigarillos) have a very low tax bearing capacity compared to cigarettes. An alignment of minimum excise taxes on cigars/cigarillos with those of cigarettes would heavily affect the traditional cigars and cigarillos and therefore be disproportionate.
The manufacturing of cigars and cigarillos is characterized by products and packages of many shapes, sizes, brands, types of packaging, different materials (cardboard, metal, plastic, wood) and small scale production processes. Cigars and cigarillos are produced at a speed between 16 and 160 pieces per minutes (excl. packaging), to be compared with up to 20,000 cigarettes per minute (incl. packaging).
Further, a cigar and a cigarillo (incl. the low priced cigarillos) normally consist of three parts, the filler, the binder and the wrapper, parts that are characterized by being much more expensive than tobacco and components in cigarette production. Moreover, for all products the natural tobacco leaf wrapper and for many products the binder as well need to be meticulously cut in the correct shape, which is a very labor intensive and therefore expensive process.
Mixed structure
Today, only few Member States have low priced cigarillos. Establishing a mandatory mixed structure would force all member states to change national regulation without a reason to do. In addition, leading to major changes in member states where very low priced cigarillos do not exist.
Substitution
To our best knowledge, there is no evidence of a substitution between the lowest priced cigarillos and cigarettes. The volume of the lowest priced cigarillos is too small in the total consumption picture to argue that the introduction of these products affects the sale of cigarettes noticeably. A number of factors, such as changes in smoking habits, lower number of smokers, illicit trade, the introduction of new products like e-cigarettes, heat-not-burn products and other factors primarily affects the development in sale of cigarettes.
Subjective criteria
Regarding the use of subjective criteria in the definition of cigars and cigarillos “normal consumer expectations” and “exclusively intended to be smoked as they are”, we fully support the additional clarity that the amendments provided when introduced to the cigar definition in 2010. The criteria are historically well founded.
In our opinion, the definitions of excisable tobacco products are clear. In practice, they do not lead to subjective interpretation. Normal consumer expectations are only related to one issue, namely if the product is intended to be smoked as it is. In our experience, it has not given rise to uncertainty in any of the markets where we operate.
Non-binding guideline for clarity
For the above reasons we do not see a fair and sufficient reason to changing the definition or taxation of cigars and cigarillos. However, it may be considered to issue a non-binding guideline on the implementation and interpretation of the articles 2-5 of the Excise Directive.
Ad “Fine-cut tobacco”:
Fine-cut tobacco constitutes less than 10% of the total EU consumption of tobacco products and the sale of fine-cut tobacco is declining, e.g. by 1.5% from 2014 to 2015 and by further 5.2% from 2015 to 2016 in Denmark. As mentioned, the Danish companies are smaller players in this category, but manufacture and sell fine-cut tobacco (roll-your-own as well as make-your-own). In some Member States, the consumers prefer roll-your-own tobacco and in others, consumers prefer make-your-own tobacco. However, make-your-own tobacco is not equal to expanded or volume tobacco. Expanded tobacco is a way of processing tobacco and can be used for different tobacco products, e.g. in cigarettes and fine-cut tobacco. The use of expanded tobacco in make-your-own tobacco varies from mainly 0% and up to 75 % or 100%.
Fine-cut tobacco has a lower tax bearing capacity than cigarettes: For the consumer it is a semi-finished product, it requires separate purchase of rolling paper, filters and/or tubes,part of the fine-cut tobacco is lost in the rolling process and part of the rolled cigarette is mostly not smoked but discarded as a butt.
Ad “Raw tobacco”:
We support a “best practice” approach. Many EU Member States have implemented effective and efficient legislation over the last couple of years. An efficient solution is the Danish model: Only operators authorized for manufacturing of tobacco products are entitled to acquire and trade in raw tobacco. Raw tobacco may only be sold to such companies. Selling of raw tobacco at retail level is therefore prohibited.
Including raw tobacco within the EMCS would burden the entire legitimate supply chain. It would not cover products released for consumption to consumers and would therefore not provide solution for raw tobacco sold at retail level.
Raw tobacco for the manufacturing is imported. However, with production facilities at various locations it is important that the raw tobacco can be moved between the facilities without unnecessary administrative burdens.
Monitoring raw tobacco via the EMCS would result in the control and monitoring only of the legitimate products, and it would create unnecessary administrative burden for law-abiding companies.
Ad “Correspondence between excise and customs classification systems”:
We see no specific issues with the different classification systems between customs and excise. We ourselves encounter no difficulties with respect to the classification/definition of excise goods. The very few incidents that have occurred due to the differences in the definitions and classifications in the CN codes and the excise directive have been related to cigarillos with a filter. The incidents arise because of the Excise Movement Control System (EMCS). The system does not take into account that a tobacco product may be classified differently for excise purposes respectively customs purposes. Customs therefore question the correctness of our indication in the EMCS.
Therefore, an alignment of the two classification systems seems unnecessary and inappropriate. The classification systems are made for separate purposes and are adopted in a different way (different decision-making bodies, different voting rules, etc.). For the same reason, the CN code changes more frequently than the excise directive. A permanent alignment requires a willingness to change the definitions in the excise directive along with the more frequent changes of the CN codes. That will may very well endanger the necessary predictability, which forms a corner stone for commercial planning and investment
Any potential confusion stemming from differences in the classification systems maybeavoided if a minor adjustment is made in the EMCS that enables entrance of excise code as well as the correct customs code.
Finally may we point out that the CN code does not have a definition for pipe tobacco – a category where the Danish companies are world leading.
Because of the very low tax, bearing capacity of traditional pipe tobacco compared to fine-cut tobacco it is vital for the Danish companies, that traditional pipe tobacco is maintained as an independent category for excise purposes.