That Seanad Éireann pursuant to the Order of the Seanad of 18th February, 1981, takes note of the Report of the Joint Committee on the Secondary Legislation of the European Communities on Taxes other than Turnover Taxes which Affect the Consumption of Manufactured Tobacco which was laid before the Seanad on 11th March, 1981, and which contains a request for a debate thereon.
I should like to put before the House the background and conclusions of one of the most recent reports which was considered and adopted by the Joint Committee on the Secondary Legislation of the European Communities. This Report on the proposed Council Directive on Taxes other than Turnover Taxes which Affect the Consumption of Manufactured Tobacco is a very important report, in our opinion. The committee felt that it would be appropriate to recommend that the matter be considered by the Seanad in the light of the seriousness of the issues involved.
The committee felt this was important because they are dead against the proposals coming at the moment from the EEC in the form of a Council Directive, amending Directive 72/464/EEC on this matter. We wanted to get the support of the Seanad for the line we took. The line was to go completely against the recommendations of this Directive and the intention of this Directive. The committee are convinced that the whole approach should be reviewed and that the matter should be followed up in the EEC by all concerned to ensure that this Directive does not go ahead in the form in which it exists at the moment.
The matter is important because we are dealing here with an important Irish industry — the tobacco industry. We considered the representations from the Irish Tobacco Manufacturers' Advisory Committee, ITMAC, and we are convinced that they have a very good case. We are dealing here with a situation which, as we say in the report, is potentially disastrous for the industry which employs around 2,000 people, in which £45 million is invested and which has a turnover of £210 million per annum. That sets the scene for the impact we think this report should have on the policy to be adopted in relation to this Directive coming from the EEC.
It is all the more important when we consider that in 1976 the Taoiseach, then Deputy Charles J. Haughey, was chairman of the committee which considered this matter and more or less reached the same conclusion. In their report, the 41st Report of the Joint Committee on the Secondary Legislation of the EEC, they said they considered it was essential that the Irish industry be given every opportunity of remaining economically viable in conditions of more intensive competition and trusted that this would remain a major consideration in negotiations on the tax structure.
The Taoiseach was then chairman of the committee which put forward that view and the committee today feel that matters may have gone down the road a bit too quickly in relation to this subject. We want to do whatever we can as a committee and we are calling on our colleagues in the Seanad to help us to slow down this whole development and have the whole matter reconsidered. That is the seriousness of the situation.
I will mention some details and my colleagues on the committee might elaborate on them when they are speaking. It comes down to a problem about the way excise duty is levied on cigarettes. Basically that is the problem. There are two ways of handling this excise duty. One suits us and the other does not suit us. In the original Community of six, two different systems operated, one known as the specific component method of tax and the other the ad valorem component method of tax.
In Germany, excise tax was levied at a fixed amount per cigarette. In the other five States excise duty was levied as a percentage of the retail price, tax included. In 1972, following their policy of harmonising taxes 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 a specific component, that is a tax per cigarette, and partly of an ad valorem or proportional component with a view to having an ad valorem component rather than a specific component. As I develop the point Senators will see we are not very happy from the Irish point of view, that the ad valorem method would be to our advantage.
Of the three member states who joined the Community in 1973, Denmark had a system like the German one. It was a specific component, a specific tax per cigarette. Ireland and the UK operated a third system. They levied excise duty according to the weight of the leaf tobacco. The idea was that the harmonisation should move in stages, the first stage to run from 1973 to 1978, and the second from 1978 to 1980. Recently this was extended to 30 June 1981. That is why the matter is fairly urgent.
The committee are proposing to implement the first stage to run until 31 December 1986. The first stage of the harmonisation of the duty began on 1 July 1973. In 1972 it was implemented in all the member states except Ireland and the United Kingdom. Implementation in those States was postponed until 1978. In the second stage of harmonisation in accordance with the 1977 Directive the specific excise duty is fixed at not less than 5 per cent and not more than 55 per cent of the total tax charged — excise duty plus VAT.
Some effects of the second stage were looked at recently with the following data coming from the review: of the most popular cigarettes in 1978 the table shows that four member states, the Benelux countries and France, apply specific components close to the authorised minimum of 5 per cent. Of the range allowed, they went to the lower end. Italy has so far failed to reach the 5 per cent minimum, while the remaining four States, Germany, Denmark, the UK and Ireland. apply a specific component close to the authorised maximum of 55 per cent. Senators can see the trend for those States to move towards a specific rather than a proportional tax.
The Commission said that, judging by the information received from member states, the effects of the measures introduced by them during the second stage have been very limited. They point out that changes have taken place in the market structure and the competitive structure in the UK and the Irish markets regardless of the effects of taxation.
The proposed third stage, which would run from January 1981 to December 1986, envisages that the range of the specific component of the excise duty would gradually be further narrowed and would fall within the parameters of 10 per cent to 35 per cent. We would be dropping from 55 per cent to 35 per cent as far as the ad valorem content is concerned. In attaining this objective two intermediate stages are involved: from January 1981 to December 1982 the specific component would be within the range of 5 per cent to 55 per cent, and from January 1983 to 1984 a specific component within the range of 7.5 per cent to 42.5 per cent would be reached. Senators can see this converging or squeezing in effect taking place. In their explanatory memorandum the Commission concluded that eventually the specific component should be 20 per cent at the final stage. This was the attempt to harmonise.
There are also two other amendments which I will not elaborate on. They are in the report. As far as Irish legislation is concerned, if the specific component proposals as outlined were adopted, no changes would be required by Ireland until 1983, since we already operate within the parameters of 5 per cent to 55 per cent. From 1983 an alteration to the specific element of taxation would call for a recasting of the components. In relation to the Finance Act, as far as excise duty on special products is concerned, an amendment would be necessary.
As I have said, the Irish tobacco industry is a significant industry. To move towards the ad valorem method would mean that the price of cigarettes would be determined very much by this proportional content which would in effect tend to exaggerate the relative prices in relation to other cigarettes, competing cigarettes, possibly coming in from abroad. This multiplier effect, as the industry calls it, is the basic problem. If an Irish cigarette has a certain basic figure placed on it, and then a proportional amount goes on top of that, as the basic figure is changed due to the proportional effect, the actual selling price is exaggerated, making the Irish cigarette more open to competitive attack by other cigarettes, particularly if there was a move towards the area of low cost cigarettes. There would be a tendency to push the industry towards producing lower cost, low quality cigaretees. There are all sorts of disadvantages which have been well discussed in the past few years about the quality of tobacco and the medical effects.
One might ask: is it not reasonable that taxation should be harmonised? This is the whole basis of the EEC approach. As a committee we would have to agree with harmonisation but it is not a case of all things being equal, ceteris paribus does not work in this instance because the way the tobacco industry is organised in competing countries, in other European countries, is not the same as it is here or in the UK.
For instance, in the area of what are known as excise credits, in some countries there is an extended time period for the payment of the tax. In Belgium it is 91 days and in the Netherlands it is 107 days. As far as I remember, it is 30 days in the Irish case. This means, in effect, that those industries are getting an interest-free loan by virtue of withholding this tax for that period of time, which gives them a competitive advantage again over the Irish industry. In some countries the tobacco industry is a monopoly. For instance, in France and Italy the tobacco industry is a Government monopoly for production and retailing. Those countries have extensive leaf-growing interests as well. This obviously influences the strategy they will adopt in their industries. In harmonising taxation we are dealing with one dimension only of the attempts to make competition fairer and to operate under the same system.
The third area I would like to highlight is this: given that the Irish cigarette market is small compared with the market in other Community countries, and that we have three significant manufacturers with their own production facilities in this country, the Irish industry cannot operate at a level which gives them the economies of scale which would be available through mass production in other countries. This puts the Irish industry in a disadvantageous position in relation to the other countries. An ad valorem tax multiplies this disadvantage.
Finally, I should like to point out that we are not alone in being disturbed about this Directive. In a recent case before the European Court, the Advocate-General emphasised the point that very high ad valorem taxation markedly limits the scope for competition between operators in the market. That is a fairly prestigious opinion coming into line with our own. Likewise, the Section Economic and Financial Questions of the EEC Economic and Social Committee has disagreed, in an opinion of 3 February 1981, with the Commission's main proposal for tax harmonisation. The Committee on Economic and Monetary Affairs has raised questions about it. We are convinced of the validity of the general case put forward by ITMAC. We are for the rejection of the present proposal and can find no answer to many of the criticisms of the proposal.
We suggest that the whole approach of the Commission should be reviewed and that approaches towards the goal of harmonisation, other than in the narrow area covered by the present proposal, should be examined. An examination by the Commission of other factors, such as the two I have mentioned already — the case of excise credits which are a subsidy to the continental manufacturers, and the monopoly nature of the structure of the industries in some of the EEC countries — should be undertaken. We recommend that this examination should be made and reported on before any further transitional measures are implemented, because any squeezing of this range of 5 per cent to 55 per cent will put our industry under pressure. In view of the serious implications of this proposal we asked for this matter to be brought up in the House. I commend it to my colleagues for their attention and support.