Report of the Joint Committee on the Secondary Legislation of the European Communities: Motion.

Mr. Mulcahy

I move:

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.

Mr. Alexis FitzGerald

I should like to support Senator Mulcahy on this motion and, in doing so, to draw attention to the fact that the work done on this matter for the Joint Committee, of which I am chairman, was done by a sub-committee of which Senator Mulcahy was the chairman. He has put a great deal of work into it.

All this talk about the ratio between the specific duty and the ad valorem duty which is to be established in the different countries and the common ration which is aimed at in the original Directive sounds very complicated. It is very easy to get lost in an effort to understand precisely where we are now and where we are going. We might start with this clarification for the House. The conclusions of the committee are that. if this stage of the harmonisation is proceeded with as proposed, it will lead to a decline in and finally the demise of the Irish tobacco industry. It is at this stage that the particular type of harmonisation proposed has got to be stopped.

It is my duty as chairman of this Joint Committee speaking in this House to urge fierce resistance by the Minister at the Council to this proposal. I do so very much affected by the fact that there are 1,900 persons employed in that industry at the moment whose jobs will be put at risk if this step is taken. There are grounds for resisting this step in the harmonisation stage which are of wider appeal, an appeal which is more than just the interests of the persons employed in the Irish tobacco industry. I suggest to the House that a step is being taken here which will do damage and which may be a cynical move in breach of the Treaty which of course, under the provisions of the Treaty, can be corrected by judicial findings in due course. If it is left to that for correction the damage will have been done, in particular to the Irish tobacco industry which is our concern.

I should like to clarify the factual situation as I understand it. We are advised that the multiplier of the manufacturers' selling price pre-tax, which would be as high as two in the determinant of the retail selling price as a result of taxation, would be the point at which serious damage is done to that industry. The committee were given a formula for determining how the multiplier is reached. The formula for determining how you reach the multiplier is a simple one. If you take 100 and you divide a 100 by 100 minus the ad valorem rate, the proportional rate, you will get a result which will give you the multiplier. Within the present range of the parameters of specific taxation, a country is entitled to go as high as 55 per cent specific of the total excise duty and value added tax duty. Ireland at the moment is at 54.8. We are informed that the present arrangement will continue from July of this year up to which the second stage, the stage at which we are, continues. From 1 July of this year, the first part of the next stage begins. The parameters are 5 per cent to 55 per cent. That is to say, a country can go as low as 5 per cent specific, or as high as 55 per cent specific. One country, Italy, has not yet brought up its specific duty to 5 per cent, being still short of 5 per cent. Presumably, that is the reason for having the first part of the next stage running on to December 1982.

From January 1983 to December 1984 the parameters will change. The 5 per cent will go up to 7½ per cent, the 55 per cent will come down to 42½ per cent. From the point of view of planning an industry, investing and getting money and being able to justify the return of the money in competitive conditions, January 1983 is very soon. From that point, the proportion of specifics will go down and the multiplier will go up to 2 per cent. From July 1985 to the end of 1986 — the next part of the next stage — the parameters will be 10 to 35. At that point the multiplier will be 2.4 and then, in the conditions of the Irish tobacco industry, we are in real trouble. We are in real trouble for a number of reasons, particularly because of the nature of the demand for cigarettes, the kind of cigarettes which people here want, based on Virginia tobacco — a high cost raw material. The increase in the multiplier will increase the effect of taxation on that high cost production. At the same time, other countries with tobacco industries are operating on low cost production, using different leaf tobacco with the benefit of monopoly conditions, and premiums given to the tobacco buyers in these countries. The industry here will thus have to face import penetration where the advantage is given to other members of the Common Market.

It is important that we should remind ourselves of what the Common Market is about. The Community was given as its task in Article 2 of the Treaty, to establish its common market and progressively approximate the economic policies of member states, to promote, through the Community, a harmonious development of economic activities, a continuous, balanced expansion, an increase in stability, an accelerated raising of the standard of living and closer relations between the States belonging to it. If we proceed with the harmonisation of tax along the route which the Commission have plotted and get to a parameter of 20 per cent — which is a proposal made to the Commission, and which the Commission in December or November of 1979 thought was too high a proportion of specific duty — if we get to that stage, the harmonious development, where this country is concerned, of the economic activities here will be disturbed because of the selective harmonisation of tax laws, without harmonisation of other conditions.

The fact of the matter is that the tobacco industry in France and in Italy is a monopoly in both cases, and a State monopoly at that. The State can do what they like with their prices in these monopoly conditions, in addition to which, by virtue of the operation of the common agricultural market in tobacco leaves, the buyers of the tobacco leaves which are used in these industries get a premium for buying it. Against that premium and against monopolist conditions we will be in the absurd position that we will be trotting along with a harmonisation of tax laws intended to make economic conditions equal between the different countries, but there can be no possibility of equality where these monopolist conditions continue in Italy and France without control in the interests of the other partners of the Common Market.

Just to give the House some particulars with regard to the Belgian situation, in a paragraph of the committee's report we drew attention to a group of cases which were, in fact, related to the Belgian position. In these cases, the Advocate General considered the decision of the Commission with regard to Article 85(1) of the Treaty that agreements between Belgian producers were contrary to the provisions of Article 81. The Advocate General concluded that the State intervention in Belgium was such that it limited the scope for, and distorted competition so much, that the restrictive industry agreements, notwithstanding the fact that they existed, had not been shown to have sufficient appreciable effect in restriction or distortion of competition so as to constitute a breach of Article 85(1) of the Treaty. In other words, the State was already so active in the affairs of the Belgian tobacco industry that the agreements, in the view of the Advocate General before the court — which was not followed by the court incidentally, although the court agreed with the Advocate General on his analysis of the facts — could not be said to be in breach of Article 85(1) because they would have such little effect on competition, having regard to the extent to which the State's intervention already had operated in relation to competition.

In a rather helpful paragraph in regard to the Belgian situation, quite apart from this case, the Economic and Social Committee described the way prices were arrived at in Belgium. In the Common Market of which Ireland is a member, this is the situation that our tobacco industry is going to be faced with in the name of the Treaty, to get harmonious development, to create a common market so as to make the position between all our countries just the same as if we were all members of a domestic market. This is describing the Belgian tobacco industry, after we have harmonised the tax laws in accordance with what is proposed by the Commission.

In Belgium, prices are arrived at as follows: it is illegal to sell cigarettes by retail at a price other than that stated on the tax banderole affixed to each packet. Cigarettes can be sold only at retail prices for which the Government is prepared to make a banderole available. Any price increase takes place on an industry-wide basis. If manufacturers wish to increase prices, they must collectively submit to the Government a detailed case for doing so and must obtain Government agreement. Because of the high multiplier in Belgium, a large part — typically two-thirds of any price increase — goes to the Government as additional tax. The system results in 80 per cent of all cigarettes being sold at the same price and other conclusions are drawn from that.

In these cases, while the Advocate-General's view in the cases was not accepted by the court, the court, in its judgment, accepted his opinion as a result of the multiplier effect — which is what is proposed to be increased for all of us. That, combined with the minimal excise enforced by the Belgian state to ensure its fiscal income, results in all competitive action by the manufacturer / importer which has an effect on the retail price being limited.

We are talking about improved competition between all industries in the Common Market of the ten countries. Apart from particular action which it is the object of this debate to obtain — that is to say, resistance by the Council of Ministers — the Commission need to go back to their original directive. It is in the name of this that we are proposing this tax harmonisation, whereas the object of the Treaty is to establish an economic union within which there is healthy competition of the kind one gets when one lets two roaring monopolies loose on the rest of the Community and one featherbedded Belgian industry whose cartel agreements in the view of the Advocate-General might be held to have minimal effect because of the other effect of action by the Belgian Government.

The directive encourages an economic union within which there is healthy competition and whose characteristics are similar to those of the domestic market and as regards manufactured tobacco — and this is the bit which does not follow — achievement of this aim presupposes that the application in the member states of taxes affecting the consumption of products in this sector does not distort conditions of competition, does not impede their free movement within the European Economic Community. That is only one of the presuppositions. The Irish industry, and I speak, for the moment, only for Irish industry, is most unfairly damaged.

The Commission should be told by the Council of Minister to look in particular, at Article 4(3) of their first directive in this field. It is provided as the final stage of harmonisation of structures, that the same ratio should be established for cigarettes in all member states between the proportional excise duty and the specific excise duty. That should be revised. This ratio should be established in such a way that the range of retail selling prices reflects fairly the difference in the manufacturers' delivery prices. There is no assistance provided by the Commission as to how this proposed harmonisation moving in this direction of establishing the same ratio in all the member states can be justifiably regarded as achieving a range of retail selling prices reflecting fairly difference in the manufacturers' delivery prices.

When we talk about a Common Market, we can speak about consumer choice and consumer taste. It is, perhaps, significant that 85 per cent of the export trade of the Community is being made by countries where the specific rate of duty is low and where there is not this multiplier effect on increased costs. Finally, there is an example of an increased cost which should not have, as a consequence, an increase of a proportionate rate of duty reflected unduly in the selling price. There are three tobacco manufacturing companies in this country devoting money to eliminating anything from their raw material which may be found to be deleterious to the health of the consumer. Expenditure of that kind will go into the cost of the manufacturer's delivery pre-tax selling price and will be reflected unduly in his final market price and therefore it is a disincentive to such expenditure.

Minister of State at the Department of Finance (Mr. McEllistrim)

I compliment the Joint Committee on their comprehensive report on the proposed European Council directive for further harmonisation of excise duties on cigarettes. I should stress that harmonisation of the system of duty is under discussion, not the rates of duty; we are completely free to decide what aggregate level of taxation should apply to cigarettes. This area of taxation is complex and unlike any other of our excise duties. As Senators are aware, excise duties are normally charged as a specific amount of money on a specified quantity of a commodity or as a fixed percentage of the value of the commodity. Examples of the former are the tax on beer and spirits and an example of the latter is the excise duty on motor vehicles. But in the case of cigarettes EEC legislation requires that the excise duty be composed of a specific element and a proportionate element. The matter is further complicated because the VAT element of tax is also taken into account in determining the split between the specific and proportionate elements of the excise duty.

The system of taxation was devised before we joined the EEC and it was a compromise between the systems which previously existed in the original six member states of the Community. On joining the EEC we were granted a five year derogation, but on 1 January 1978 we had to switch from our system under which the raw tobacco was taxed, rather than cigarettes, to the EEC system whereby the tax applied directly to the cigarette irrespective of the amount or quality of tobacco which it contains. This, as Senators may recall, caused some disruption in the structure of the market in Ireland.

Harmonisation of the duty structure for cigarettes has to be seen in the context of the programme for harmonising the structures of excise duties generally, a programme which has its origins in a Council declaration of March 1971 on the gradual achievement of economic and monetary union.

At the present stage of harmonisation the specific element of the excise duty must be greater than 5 per cent but not more than 55 per cent, of the total tax, including VAT, on cigarettes in the most popular price category, Carrolls No. 1. The actual charging provision is specified as a fixed amount per 1,000 cigarettes — since the budget this is £15.30 — plus a percentage of the retail price. This is now 22.4 per cent

The objective of EEC harmonisation in this area is set out in the original directive of 1972. It is simply that at the final stage of the process a single ratio of proportionate excise duty to specific excise duty would apply in all member states in such a way that "the range of retail selling prices would reflect fairly the difference in the manufacturers' delivery prices". Because of the difficulty in determining what ratio would be "fair" the European Commission has suggested that the member states should make equal effort in striving to establish the final ratio. With this in mind, the draft Council directive proposed that the next stage of harmonisation should progressively narrow the range within which the specific element of the excise duty may be set. The intention was that this new stage would apply from 1 January 1981 to 31 December 1986. However, because of time constraints on examining the proposal, the present stage has been continued until 30 June 1981 in order to avoid a legal hiatus.

I have already stated that this system of taxation, combining specific and ad valorem duty, was already a fait accompli when we joined the Community so we had no say in formulating it. We have to make the best of it and in deciding what would suit us best we must keep two possibly conflicting points of view in mind. The issue can be put fairly simply. Should the tax on cigarettes be mainly proportionate, that is, should high ad valorem rates of duty apply, or should it be mainly specific?

The conflict arises because high rates of proportionate tax are attractive from a fiscal point of view. Revenue is maintained in real terms in times of high inflation, without any deliberate adjustments having to be made to the rate of tax. This is obviously attractive to Ministers for Finance.

The other aspect is that high proportionate taxes discriminate against high quality, but high cost cigarettes because higher manufacturers' costs are accentuated by the tax system at the retail level. Irish manufactured cigarettes have been traditionally made from high quality, high cost tobaccos, and have been packaged to a high standard compared with continental-type cigarettes. The Irish Tobacco Manufacturing Advisory Committee, ITMAC, contend that high proportionate taxes would make Irish cigarettes less competitive and would open up the Irish market in a discriminate way to cheaper foreign cigarettes. They contend that the Irish industry could be badly affected. Accordingly they would favour high specific rates of tax.

In 1977 a difficult initial choice had to be made because of the change-over to the new regime which took place on 1 January 1978. Having considered the conflicting views it was decided that we would opt for as high a specific element of excise duty as the system would allow, in the interests of domestic industry and notwithstanding the revenue attractions of a greater proportionate tax element.

Once again we are faced with the same choice and in our working party negotiations on the draft Council directive which is the subject of this report, we have followed the same line as in 1977. We have argued that high proportionate rates of duty could be discriminatory rather than fair, in that the tax system could have too large a role in determining the relative prices of different brands of cigarettes.

It is interesting to see that the Committee for Economic and Monetary Affairs of the European Parliament have proposed that the present stage of harmonisation should be continued while re-evaluating the position in general.

We agree with this because there are many other factors which influence the cigarette industry that need to be examined. The different member states have different advertising codes, for instance. The organisation of the industry in France and Italy is State run, and hence in a different position from the free enterprise cigarette industry which operates here and in the United Kingdom. They also benefit from the common agricultural policy in respect of home-grown tobacco. Even more to the point, the credit terms for payment of duty can differ markedly in the different member states. Then, of course, there is the very difficult issue of health policy and cigarette smoking, which is, strictly speaking, outside the tax area, but nevertheless has an influence on the cigarette industries. So all in all this might be as good a time as any for the member states to take stock of the harmonisation process and its objectives.

I would assure Senators, however, that in future negotiations in the EEC on this issue we intend that the line I have set out above will be continued. The grounds remain compelling for seeking to protect the domestic manufacturers from discriminatory systems of taxation, although at the end of the day we may have to show some measure of flexibility.

The report deals with two other minor items which are covered in the draft directive. One deals with the existing option to prescribe a minimum excise duty for all brands of cigarettes. This could be necessary in order to protect the revenue if very cheap cigarettes were to be marketed. We have not had to use this provision but we feel that it is a desirable safeguard to have: and in order to be effective, we feel that the minimum duty should continue to be 90 per cent of the duty on the most popular price category of cigarettes rather than the lower 80 per cent which is now proposed.

The other item concerns the present option to exclude common customs duty from the base on which the national excise duty is charged. We have never exercised this option and we feel that it should be abolished.

Mr. Markey

The Minister has given some welcome news as far as it goes. It will be up to the Government to keep a very vigilant eye on the negotiations proceeding in this matter. The Irish Tobacco Manufacturers have been watching this whole thing since, as they say in the submission, 1975 and I congratulate the Joint Oireachtas Committee on the Secondary Legislation of European Communities for highlighting and indeed giving timely warning as to the consequences of this harmonisation of taxation. It might seem rather ironic in two instances. We all speak so lavishly about the ideal of harmonisation on occasions, but when it comes to one's front door we begin to be rather careful and cautious about it. The second matter in which the whole subject can be seen to be ironic is in this matter of tobacco, cigarette smoking and so on, about which there has been so much adverse publicity in recent years. Here we see the Government of today taking a very cautious step in ensuring that the production of cigarettes within our own domestic market is continued.

I come from a county which is the proud home of one of the three significant Irish manufacturers of tobacco and I can look at this whole matter in a rather objective way. I do not smoke so that gives me added grounds on which I can speak my mind on this matter. There is no doubt that there is a danger in this harmonisation. The committee have set out in their document that they have not been able to provide any answers against the arguments put forward by the Irish Tobacco Advisory Committee. The Tobacco Advisory Committee have fought long to get the progressiveness of these harmonisation measures. It has been going on for the past six or seven years and we see pointed out for us in the submission both by ITMAC and by the Joint Committee that when the economies of large-scale production come to the Irish threshold we will not be able to compete with the European monopolists in the cigarette and tobacco industries, particularly in France and Italy. The uncertainty that can afflict any industry is not a healthy thing and it is up to the Irish Government to abolish this uncertainty once and for all. Perhaps today the Minister has taken a step in that direction but the tobacco manufacturers will not be satisfied until this whole question of harmonisation, which they see as being to their detriment as regards investment and employment in Ireland in future years, will be conclusively resolved to the satisfaction of this State.

In Louth, which is the proud home of one of the three significant Irish tobacco manufacturers, I see at first hand the benefits that have been put into my county economy by the efficient company that is there. I see what could be the adverse consequences of taxation harmonisation both in investment and in employment opportunities. That company in Louth have a great reputation as being efficient, as being the provider of positions and jobs with the very best of conditions, providing the very best in security and tenure of employment. That is something that no county would wish to see jeopardised or prejudiced in any way. This company have diversified in no uncertain manner in the past decade. They have moved into other fields and have taken cognisance of the publicity and particularly the medical evidence against cigarette smoking. This has not stopped them from diversifying into other industries and creating further jobs and employment opportunities. They have made a great contribution to the economy, in the arts field, in the tourism field, in the sporting arena and also in educational and in recreational areas. These are all wonderful assets for any county and I wish to see them continuing.

It is initially and primarily the responsibility of the Irish Government to let the Council of Ministers in Brussels know that this is a case of the ideal of harmonisation going mad with very contrary consequences for an economy to what was outlined in the original Rome Treaty. The Joint Committee have done an excellent job in highlighting and giving warning as to what might happen to the Irish tobacco industry. It is necessary for the Government to give a commitment so that the tobacco manufacturers in Ireland will have confidence in the future that will enable them to continue investment in their industry and in diversification. I look forward to this happening. The consequences of this harmonisation have been outlined not only by the tobacco manufacturers — and we can always expect any business body to put up the best side of the coin — but also by the Joint Committee of the Oireachtas who have examined and analysed the pros and cons of the case. They have come out very conclusively and strongly on what should be done in this instance. The Joint Committee, the manufacturers and no doubt this House, see that harmonisation may be very well and may be ideal but, when it runs contrary to what could well be the principal premise of the Rome Treaty, it is time to tell Brussels to halt. The Minister has indicated that there is a sort of freeze on progress in these harmonisation matters. The Irish Government should insist that the matter be resolved in a way that will leave the Irish tobacco manufacturers in no uncertainty about their future and the future of the 2,000 jobs in the industry.

Professor Conroy

I too support this motion. I am delighted that the Minister has indicated that the Government are viewing the situation with considerable gravity. We are talking about the survival of an important industry. It would be extremely difficult for the Irish tobacco industry to continue to be successful if the harmonisation at present being pursued were continued to its logical conclusion. It is absolutely vital that in so far as possible, we modify considerably or if possible stop the progression of this EEC policy. As the Minister pointed out, we are starting slightly from behind as a certain position had already been taken before we joined the EEC. Therefore, we are compelled to accept these decisions. However, there is considerable room for manoeuvre, and for not merely the delaying but the stopping tactics that are essential.

The tobacco industry here employs directly a considerable number of persons and many more indirectly depend on that industry. As Senator Markey so clearly pointed out, one particularly excellent firm is located in County Louth and it would be a particularly severe blow for that region were progression of harmonisation to continue unallayed. It is pleasant, in a way, to find ourselves, Opposition and Government, Joint Committee, industry and workers combining on this issue. I congratulate Senator Mulcahy and Senator FitzGerald on the excellent way in which they have developed this debate. One of the very great advantages of Joint Committees is that Senators and Deputies from both sides of the House confer in detail with members of a given industry or group and all of us combine on matters which are strictly non-party matters but which are vital for the country and for the industry in question. I would like to see a lot more of this taking place.

It is ironic in a way, as Senators have pointed out, that it should be the tobacco industry that we are combining to support as that industry has come in for a certain amount of criticism. There are aspects which we must take cognisance of. As Senator FitzGerald pointed out, this policy of harmonisation will not help the health aspect but will have quite the opposite effect. It will mean the introduction of types of tobacco which are deleterious to health. By making the industry uneconomic it will increase the difficulty of adopting appropriate health measures. On this aspect, the tobacco industry is making a very serious effort to improve the situation healthwise. At times this effort is not appreciated. This procedure of the EEC would run totally contrary to that.

There are a number of other matters which I would support, such as the Government monopoly situation which Senator FitzGerald outlined so clearly in relation to one country. It applies in other European countries also. The situation as regards tobacco and the tobacco industry is very different in these islands as compared with northern Europe or southern Europe. In these islands, for example, the main process in relation to tobacco is a flue curing process and the tobacco used is of a particular quality and standard. We do not in these islands use oriental tobacco, which is of a very different type.

In certain northern European countries which were in the EEC before we joined, oriental tobacco is used to a considerable extent. This has important implications, particularly with the enlargement of the Community. Greece is a major tobacco grower and in Greece the tobacco grown is the oriental type and therefore there is a certain natural, very understandable, vested interest from the point of view of this new member of the Community particularly as in Greece and other associate members such as Turkey, tobacco growing, not the actual production of cigarettes, is a major agricultural occupation and a major social support. Indeed, Greece is heavily dependent on tobacco exports for its economy. There are very strong vested interests, which the Minister will come up against in his arguments at the EEC. It is very important that we continue the very excellent united front that we have seen here between the Government and members of the Joint Committee from both sides of the House and, I am sure, from both sides of the tobacco industry. I certainly give my full support.

Mr. Harte

I certainly support both committees, the tobacco manufacturers committee and the Joint Committee on Secondary Legislation for highlighting the problem for us. However I must make the observation that the Minister told us that there would be need for flexibility on the part of the Government and that it would be inevitable. We cannot complain about that because it is a Common Market and it is their job to bring things into harmony. As far as we are concerned we have an obligation to use the institutions in the best way possible to give the best possible safeguards to the people we represent especially when a very responsible body like the Irish Tobacco Manufacturers Advisory Committee and the Joint Committee ask us not only to oppose but to reject the legislation. This is a very serious development. It means the people who have examined the legislation have seen the gravity of it and have asked for the ultimate in the context of rejection.

Referring to what the Minister said, we must look at the fact that because we are a member of the Common Market inevitably we will be affected. We cannot weave a cocoon around ourselves and let the world go by. We are in the EEC. We knew the problems when we were going into it. We should provide as much protection as we can — it is right that we should on this occasion — but we cannot hide ourselves from the rest of the world and weave this cocoon and think we will get by. That is not the nature of things. The legislation will eventually affect us but, while we can, we should give this motion the fullest support possible.

We must pay particular attention to the fact that there could be a decline in the cigarette trade here and its possible demise, with the loss of 2,000 jobs. Eventually the market could be flooded with Italian cigarettes because with the type of manufacturing plants in operation in Italy production is cheaper and they could rely on volume to get the benefit of undercutting on the Irish market. The Italian producers would have a great advantage over the Irish manufacturer. For this reason we must take cognisance of the report and support the motion.

The Irish Tobacco Manufacturing Advisory Committee made the case that the different structures of excise duty are not impediments to market penetration. They point out that measures in this direction so far adopted have been very limited. We take that point also. They also make the argument that the extended time for payment of tax gives producers the necessary capital for long periods — an advantage which does not apply to Irish manufacturers. They point to the existence of monopolies in France and Italy. Government monopolies, not just monopolies of individuals or private enterprise, monopolies that engage in extensive leaf-growing which benefit from the cost factors attached to the common agricultural policy through the growing of tobacco leaf.

The position is that those very large manufacturing plants could not afford to embark on productivity arrangements or productivity deals with their employees. Therefore, they produce cigarettes more cheaply and throw them on to this market and, on the basis of increased volume of sales, undercutting Irish products. Therefore, we have to give the Irish trade all possible protection, particularly in view of job loss. Maybe we were not in a position to give the industry the same type of protection or provide a hearing for it in open forum as was the case in relation to other industries. We have seen jobs going all over the place through lack of import controls and the dumping of foreign goods. Textiles and leather factories have been going to the wall. Here we can do something about it and it is only right that we should.

I will conclude by saying that this motion has our full support. We should not lose sight of the fact that this is only a postponement. Inevitably we must face competition whenever it arises. By slowing down the process, the Government may not be able to get rid of the problem but rather make the problem less acute. In the meantime, it is our duty to protect the 2,000 jobs in the industry.

Mr. Mulcahy

Ba mhaith liom ar dtús mo bhuíochas a ghabháil don Teach iomlán as ucht an taca a thug gach éinne don tuarascáil seo. Mar is eol díbh go léir, agus mar a dúirt gach éinne, táimid ag cur síos ar rud atá fíor-riachtanach, an-tábhachtach ó thaobh cúrsaí tionsclaíochta sa tír seo. Táim an-shásta gur tháinig an Seanad go hiomlán taobh thiar den tuarascáil.

We are talking about the threatened destruction of an industry. Senator FitzGerald put it very well. The signal for this, the cue, appeared in 1976. When the present Taoiseach chaired the committee the problem was on the horizon and now it has become more acute. We, therefore, have to tackle it and oppose it with even greater vigour than was shown in 1976. At that stage it was only a shadow on the horizon. It is now a much larger spectre looming before us.

I have little to add. I thought the team-work was excellent. We had Senator FitzGerald, who is an expert in the tax area, covering the legal background of the situation for us including "the spirit and letter of the Treaty" and the degree to which this approach would be cutting right across it. Senator Conroy was able from his very specialised knowledge to support the contention that there is a health problem — that if the cigarette industry in this country came under this type of attack it is highly likely that the market would be flooded with low cost, possibly carcinogenous products. We should be very glad that our industry here has been based on high quality product, high quality tobacco, from the very beginning. We want it to remain so.

We had the support of the trade union side, making it clear what the employees' view would be, and we had the support of the community from Senator Markey. I thought the team-work was very good, and it goes further to make the point that Senator Conroy was making, that these committees which are made up of Deputies and Senators from all parties are enabled to get down to analyse problems for the sake of the problems and not for the sake of the political points being made.

I would like to support the point being made for possibly a greater use of committees of this kind. The Joint Committee on State-Sponsored Bodies and the Joint Committee on EEC Legislation are very fine examples of legislators working in the way it was intended.

The Minister made the point that ad valorem taxes make life easier for the Minister for Finance, that it is a way of allowing the State to generate more taxation yield without necessarily having to highlight the fact that more duty is going on cigarettes in every budget because it gets caught up in the natural increase in prices. That reminds me that in my own contribution I did not emphasise that we are rather inclined to support the view that the 90 per cent figure for revenue should be supported rather than the 80 per cent which is the intention in the new directive. The higher the amount of duty that can be raised the more you could predict the revenue in the event of any drop in price in the cost structure of the cigarette product. Therefore, at this point I would add our support for the 90 per cent rather than the 80 per cent duty limits.

I gather that the estimated yield from tobacco for 1981 is of the order of £183 million. We are not talking about buttons. About 93 per cent of that would come from cigarettes. That means in effect that if we were operating the same excise credit scheme, which has been highlighted by a number of speakers, we would be indirectly giving the industry, depending on how you calculate it, something between £20 million and £50 million investment support. That is a lot of money. That is the sort of thing we would be up against if we are trading against European competition which operates with that level of excise credit given. We are not just talking about putting a bit of tax on a fag, we are talking about an intricate structure of trading which operates in this sector, and semplice solutions are not what are required. So what we are saying is, “Refer it back and we will give the Minister every support in going back to Brussels to oppose this directive”. The whole thing needs greater examination in greater depth. There is more than a dimension of excise duty, proportion or specific content. It involves analysis of the whole competitive structure of the industry. We would recommend that that be done before any further moves are made.

Finally, I should like to thank the Minister for coming along and contributing to the debate. I thank all my colleagues for their support in coming behind this report and opposing something that could be disastrous for one of our industries.

Question put and agreed to.

The Seanad adjourned at 6.10 p.m. until 2.30 p.m. on Wednesday, 25 March 1981.

Seanad Éireann debate - Wednesday, 18 Mar 1981