Luxembourg, along with Croatia and Greece, are notable in the euro area for their significant reliance on tobacco taxation. The EU rules on taxing tobacco products are being re-evaluated and updated, which could have a notable impact on the grand duchy.
Assessing directive 2011/64/EU
In February 2020, the European Commission directive 2011/64/EU, which sets the excise duty rates on manufactured tobacco. The assessment aimed to determine the effectiveness of these tax rates in safeguarding public health and ensuring the internal market’s proper functioning. Results indicated that while the directive ensures predictability and stability in fiscal revenue for member states, its impact on deterring tobacco consumption is waning. The increase in EU minimum rates for cigarettes and fine-cut tobacco mainly affected member states with initially low taxation levels.
Tax structure and its effects
EU cigarette taxes consist of a fixed tax per pack and an ad valorem tax, a percentage of the retail sale price. The minimum cigarette excise taxes in the EU are €1.80 per 20-cigarette pack, with the total excise duty being at least 60% of a country’s weighted average retail selling price.
As of 2023, the average euro area member state imposes taxes exceeding 80% of the retail selling price, leading to a tax-driven price increase of over 450%.
Price discrepancies and cross-border shopping
A key issue in the commission review is the wide variation in tobacco product prices across euro area member states, with the average cost of a 20-cigarette pack ranging from €3.33 to €15.30 as of 1 July 2023, data from EU customs and taxes has shown.
This price difference has inadvertently promoted cross-border shopping, leading to unexpectedly high levels of such activities. The commission has observed the arbitrage that takes place, stating, “As regards prices and excise levels, in particular for cigarettes--by far the most important category of tobacco products--as well as for fine cut-tobacco intended for the rolling of cigarettes, there are still considerable differences between member states which may disturb the operation of the internal market. A certain degree of convergence between the tax levels applied in the member states would help to reduce fraud and smuggling within the union.” A European council argued for the need for a more unified approach to mitigate the impact of these discrepancies.
Scale of illicit trade
The European anti-fraud office recently highlighted the extent of illicit cigarette trade within and beyond the EU’s borders. In 2022, a staggering 531m illegal cigarettes, 205 tonnes of raw tobacco and 65 tonnes of water-pipe tobacco were . Notably, about 316.7m cigarettes (59.5%) were linked to illegal production within the EU. Nearly 200m cigarettes were intercepted at the EU’s external borders, originating from outside the EU, while around 15m cigarettes were seized outside the EU.
New excise duty directive 2020/262
From 13 February 2023, EU member states have applying the new rules under EU directive 2020/262. This directive focuses on digitizing the taxation process and improving the efficiency of information exchange across the EU to combat excise duty fraud.
Tobacco tax revenue
Member states with substantial tobacco tax revenue relative to GDP and total tax revenue, such as Croatia (1.33% of GDP, 3.63% of total tax revenue), Greece (1.18% of GDP, 2.94% of total tax revenue) and Luxembourg (1.02% of GDP, 2.66% of total tax revenue), demonstrate a high dependence on tobacco taxation as a government revenue source.
In Luxembourg, the lower cigarette prices relative to the euro area average, coupled with high disposable incomes, may render price-based deterrents against smoking less effective. The widespread practice of cross-border shopping, fueled by these lower prices and a significant influx of cross-border workers and travelers transiting the country, further indicates that much of the tobacco consumption likely takes place beyond its borders.
In contrast, Greece and Croatia, boasting larger and more diverse economies, generate considerable revenue from tobacco taxes, a trend that seemingly aligns with consumption patterns influenced by tourism. Meanwhile, Ireland, despite tobacco taxes accounting for a smaller portion of its GDP (0.30%), maintains the highest retail tobacco prices, signaling a strategic effort to curb smoking. Despite these distinct approaches in each country, smoking prevalence across the union remains somewhat similar.
Proposed directive revisions
The revised tobacco tax directive from the European Commission, originally scheduled for presentation to the European Parliament in the , has been delayed. As of 15 March 2023, the European economy commissioner, Paolo Gentiloni, in a parliamentary , has affirmed that “the structure and rates of excise duty applied to manufactured tobacco is currently being finalised,” without specifying a date or timeline.
This initiative remains crucial in the commission’s ongoing efforts to combat the high prevalence of smoking, given that 26% of the adult population and 29% of young Europeans aged 15-24 are currently smokers, in nearly 700,000 deaths in Europe every year.