Regulatory Burdens, Excessive Taxation and the Lost EU Directive

The new European Commission will definitely need to deliver on tackling Europe's economic decline and defending its geopolitical position. The past five years have shown that it can react when needed, responding to two major crises: the coronavirus pandemic and the invasion of Ukraine. 

The economic challenges for the new College of Commissioners are undoubtedly colossal. Mario Draghi's recent report outlined them clearly. There is doubt about the Union's ability to create wealth. The EU does not invest enough in research and innovation. Spending on R&D is lacking, and there is insufficient high-skilled labour. Europe also needs to invest more in defence and prepare for a rapidly ageing population.

Europe must profoundly refocus its efforts to close the innovation gap with the US and China. It has to break free from its static industrial structure and foster new companies and growth engines. According to Draghi's report, innovative companies that want to scale up in Europe are hindered by inconsistent burdens: regulatory obstacles, administrative burdens, and high taxation are their greatest challenges.

Therefore, the new EC has to break away from its eternal image of "too late - too slow". One of the examples of "too slow" is the postponed tobacco taxation directive from 2011.  EU Council directive 2011/64/EU on excise rules for tobacco was not fully implemented until 2020 after the last derogation for fine-cut tobacco expired.

EU Council Directive 2011/64/EU (TED) sets out EU rules on the structure and rates of excise duty applied to manufactured tobacco. In particular, it defines and classifies various manufactured tobacco products according to their characteristics and lays down the relevant minimum rates of excise duty for the different types of products. The purpose of the Directive is to ensure the proper functioning of the internal market and a high level of health protection

In 2020, the EC decided to review this directive. In particular, it wanted to increase the minimum rates to discourage consumption and bring them closer to the higher rates that many other countries already impose. It also wanted to regulate new products like e-cigarettes that appeared after the adoption of the 2011 directive.

A new proposal on tobacco taxation was initially scheduled for May 2022, but nothing happened.   The latest draft TED proposed a large increase in the EU minimum excise rates for traditional tobacco products, with a four-year transition period for some products, including cigars and waterpipe tobacco. The transition period did not apply to cigarettes or fine-cut tobacco for rolling cigarettes.

The unofficially circulated draft TED, as indicated by the Smoke Free Partnership, introduced a higher excise tax level for heated tobacco products - which are not covered by the current law - that is closer to the tax level of regular cigarettes. It also targeted nicotine pouches. For e-cigarettes, it introduced a sliding rate scale based on health considerations. For other tobacco and tobacco-related products, it introduced a gradual increase of the fixed minimum rate over four years. The text also introduced a "catch-all regime" covering all other manufactured tobacco products.

According to the study of Prof. Ángel López-Nicolás of the Universidad Politécnica de Cartagena (Spain) dating from begin this year, cigars, cigarillos, and pipe tobacco are covered by the current TED, but the structure of their minimum rates differs from that of cigarettes and FCT in an important way: the value of the minimum tax may be set as a percentage of the product's retail selling price. 

The current TED does not cover novel products, and a variety of treatments have emerged across member states. Some tax heated tobacco products (HTP) with the rules applicable to pipe tobacco, while others have advanced towards equal treatment with cigarettes. Some levy excise tax on liquids for electronic cigarettes using volume as the tax base, and others do not levy taxes other than the general value-added tax. Nicotine pouches are not excised in most countries where they are commercialized. The European Commission's proposals for the revision of the TED include the creation of separate tax categories for each of these novel products.

It is obvious that the former Commission has made work and scheduled the update of the 2011 directive in 2022. All technical steps have been duly performed, the draft text appears to have been finalized, but everything was blocked by a political decision, without a clear justification.

The EU harmonized rules for taxing tobacco products, dating from 2011, need urgent updates to ensure effectiveness in reducing smoking prevalence and to also cover new tobacco and nicotine products. The new Commission cannot afford any more delays: Member States, anti-tobacco NGOs, and even part of the industry urge politicians to capitalize on the work performed and to swiftly release the revised tobacco taxation directive proposal.

The Union finds itself at a crossroads in a world where geopolitical and economic landscapes shift at lightning speed. This is a moment to reflect on the wider business environment. The tobacco industry often associated with traditional tobacco products is the midst of transforming its business. It is investing billions in facing out cigarettes in favour of scientifically substantiated reduced risk smoke-free for adult smokers who don't quit. Europe is a stepping-stone for this successful transformation and the subject of several strategic investments.   

Our societies can not be simply divided into good and bad; if some sectors are considered bad, then there is no democratic debate. These sectors are simply deplatformed. This is different from how problems get solved. Debate is essential in democratic decision-making because it promotes open discussion, transparency, and informed decision-making, which are the cornerstones of a functioning democracy. This should also be the case with the debate about the tobacco industry, a specific branch of the economy that drives growth through high-skilled jobs and innovation. All parties should be involved, including EU institutions, MS governments, NGOs, consumers, academia and the industry.

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