I should like to introduce the report on the proposed Council Directive on taxes other than turnover taxes which will affect the consumption of manufactured tobacco. May I say at the outset that we are going completely against this Directive and because of that we will later be asking you to support a move to have the matter debated in the Seanad, the only House where it can be done at present.
The difficulty here is that some harmonisation of excise duties on cigarettes has taken place over the past ten years, from 1972, in a number of phases. The third phase is upon us and the Sub-Committee does not like it. The representatives of the tobacco industry do not like it and, as can be seen, other bodies in the EEC are not too happy about it. The previous Joint Committee did not like it and we might as well get that perspective right before we move into the report.
The historical background is given in the report. The original Community of Six had two different systems of excise duty. In Germany tax was levied as a fixed amount per cigarette. In the other five states it was levied as a percentage of the retail price, tax inclusive. In 1972 the Council of Ministers decided to combine these systems into a harmonised system under which in each member state the duty charged would consist partly of what they called a specific component, which is a tax per cigarette, and partly of an ad valorem component, which is a proportion based on the retail selling price. This will come up time and time again, the notion of a specific amount and an ad valorem amount. Of the three member states that joined later, Denmark had a system like Germany, while Ireland and the UK operated on a third system which was a specific duty based on the weight of leaf tobacco. One can then see that there was a problem.
It should be noted that the harmonisation does not affect the actual amount; it is the structure of the method of tax it affects. The 1972 Directive provided that the harmonisation would be introduced in stages. The first stage ran from 1973 to 1978, the second from 1978 to 1980, which has been extended to 30 June 1981. The Commission has now proposed a further Directive which will implement the third stage scheduled to run from 31 December 1986.
The first stage of harmonisation was implemented in 1972 in all the member states except Ireland and the United Kingdom. We, in effect, had a derogation from that until 1 January 1978. That Directive provided a range within which member states could choose the proportion of specific tax in their excise duties and this range was fixed at between 5 and 75 per cent of the total excise duty levied on cigarettes in the most popular price category. Any country that wanted to take advantage of the low percentage could have a low specific amount and any country that wanted to take advantage of the higher percentage could go for a higher proportion on a specific basis. The idea of harmonisation was to achieve the same ratio ultimately.
Under the second stage of harmonisation the specific duty was fixed at not less than 5 per cent and not more than 55 per cent of the total tax charged. The former Joint Committee, as mentioned earlier, dealt with the Commission proposal for the second stage and were not happy at the way the trend was going. An examination of how the second stage worked out was carried out by the Commission. It related to the price structures on 1 January 1980. It showed that four member states — the Benelux countries and France — apply a specific component close to the authorised minimum of 5 per cent, so that they are not on for a specific component of so much per cigarette. Italy has so far failed to reach the 5 per cent minimum, while the remaining four member states — Germany, Denmark, the UK and Ireland — applied a specific component close to the authorised maximum of 55 per cent. In Ireland it is very close at 54.8 per cent. The Commission state that, judging by the information received from the member states, the effects of the measures introduced by them during the second stage have been very limited. They point out that this is not to ignore the fact that the structure of the market has changed anyway for other reasons. They also pointed out that there was a derogation as far as the UK and Ireland were concerned.
The scope of the new Commission proposal, which was to run from 1 January 1981 to 1986, envisages that the range of the specific components of the excise duty would gradually be further narrowed and fall within the parameters of 10 per cent to 35 per cent of the total tax burden. In addition, in attaining this objective two intermediate stages were seen, a 5 to 55 per cent stage and a 7.5 to 42.5 per cent stage. Even in that, the proposal does not complete the process of harmonisation nor does it establish the eventual fixed proportion envisaged by the 1972 Directive. The Commission in its explanatory memorandum concludes that eventually the specific component should be 20 per cent at the final stage. That is their target. The proposal also includes two other amendments.
As far as Irish legislation is concerned, if the specific component proposals as outlined were adopted, no changes would be required by Ireland until 1 January 1983, since we already operate within the parameters of 5 per cent to 55 per cent. However, from 1983 an alteration to the specific element of taxation on cigarettes would call for a recasting of the components of the excise duty applicable in order to maintain the overall yield of revenue. The Committee understands that section 66 of the Third Schedule of the Finance Act, 1980 (No. 14 of 1980) which at present provides the legal basis for excise duty rates on tobacco products, would need to be amended. It is also understood that the proposal for a minimum excise facility of 80 per cent would require no action on our part. Ireland has never implemented nor availed of the facility because the issue has never arisen. Ireland favours the acceptance of the option of a minimum excise duty at a high rate as it could be of particular advantage where a duty includes a high proportional element. Eventually, this facility could act as a guard against a fall in tax revenue in the event of low-quality, low-cost cigarettes coming on the market. In other words, if it was based on an ad valorem amount and we went in for lower cost cigarettes then there would be a big drop in revenue from cigarettes. The representatives of the Irish Tobacco Manufacturers’ Advisory Committee in their submission to the Joint Committee went against this trend and they have convinced us that they are right. They point out that the Community approach to the harmonisation of tax structures for cigarettes has been of deep concern to the Irish industry ever since Ireland acceded to the Community and that the matter is now critical because the Commission’s latest proposals, should they be adopted, would lead to the decline and ultimate demise of the tobacco industry in Ireland. The Joint Committee are satisfied that this is a situation which cannot be allowed to develop along these potentially disastrous lines for an industry which employs around 2,000 persons, in which £45.5 million is invested and which has a turnover of £210 million per annum. That is the magnitude of the problem.
The justification for the harmonisation process is that it will eliminate distortion and we feel that this is not necessarily the case, and so far the findings from phrase 2 show that the results are very limited. There are two other important aspects to this. One of these is that other countries are using excise credits. In some countries there is an extended time period for the payment of the tax, for instance, in Belgium, 91 days and in the Netherlands, 107 days. In effect, this means that these countries are getting an interest-free loan of capital for these periods and this is a decided advantage for them in competitive terms. It does not apply at our end.
The other aspect is that in countries like France and Italy the tobacco industry is a Government monopoly in that they hand out the franchise for the industry. They also have extensive leaf-growing interests deriving cost advantages under the Common Agricultural Policy. Therefore, it is not a simple matter of harmonising the tax on cigarettes. It is much more complex and interwoven with other economic issues.
Another point I should like to underline is that the ad valorem tax tends to exaggerate, or multiply — the term used by the industry — the relative basic price differences and therefore an expensive, high-value cigarette is taxed more heavily than a cheap cigarette, so that the gearing-up effect that arises from having a tax introduces a bigger price differential and as a consequence messes up the market. This multiplier notion has been accepted across the industry and also in the EEC. Consequently, competitive advantage flows to the lower-quality cigarette. The Irish industry do not see that it should get into the business of producing a low-quality cigarette. There are enough problems with cigarettes and they do not envisage going into continental type cigarettes as an option.
The Irish cigarette market is small and there are involved three significant manufacturers who are giving a lot of employment. They cannot take advantage of economies of scale which is another way of counteracting this competitive disadvantage that might flow from these harmonisation measures. They point out that they must be profitable because they must be prepared to invest in order to run effective concerns and that, therefore, retaliatory price cutting is not an option for them.
In a recent decision of the European Court of Justice, the Advocate-General emphasised the point that very high ad valorem taxation markedly limits the scope for competition between operators in the market and went on to say that there appeared to be a conflict between Community competition law on the one hand and fiscal policy on the other. The Court appears to have accepted the Advocate-General’s opinion that a result of the multiplier effect, combined with the minimum excise enforced by the Belgian state to ensure its fiscal income, is that all competitive action by the manufacturer or importer, which has an effect on the retail price is limited.
We also had the views of other bodies in that the Section for Economic and Financial Questions of the EEC Economic and Social Committee have disagreed with the Commission's main proposal for tax harmonisation. The Committee on Economic and Monetary Affairs of the European Parliament have questioned the Commission's approach in the recent Beumer Report. The Joint Committee understand also that a majority of the member states do not seem to be in favour of further harmonisation at present.
I have noted today, too, in the issue of European Report of 28 February (Economic and Monetary Affairs Section) that the Economic and Social Committee confirms these views that the multiplier would lead to distortion of competition and calls on the Commission to re-think their entire strategy in relation to harmonisation.
There are a lot of problems which I have already described. We note that in other EEC countries there are cartels and Government monopolies and there is the excise credit system which needs to be investigated before any further steps are taken with harmonisation. Because of that case I recommend that you accept this report and I should like to put with it a recommendation that the matter be sent to the Seanad to be debated because we are taking such a strong line we feel the report should be justified in the House.
