The vapor category is growing rapidly in Europe. In Germany alone, e-cigarette sales are on track to generate a turnover of between €350 million ($389 million) and €400 million in 2016, up 30 percent over the previous year, according to the industry association Verband des eZigarettenhandels. Unsurprisingly, tax collectors across the continent are eager to tap the rapidly growing sector as an additional source of revenue.
Eager to prevent disorder, the EU is looking into a union-wide fiscal regime for electronic nicotine-delivery systems (ENDS). A December 2015 report by the EU Directorate-General for Taxation and Customs Union found that the current lack of taxation of e-cigarettes and other products in many jurisdictions caused market distortions.
It said that exempting e-cigarettes from excise might have “significant long-term budgetary implications for member states.” “Some member states have begun to levy a national tax on these products,” the report observed. “This might in time jeopardize the proper functioning of the internal market if other member states decide to do likewise in an uncoordinated way, which would result in differentiated treatment across the EU.”
Throughout the EU, ENDS are currently subject to member states’ individual value-added tax regimes. In addition to VAT, some countries impose a tax on e-liquid. Italy collects €0.385/mL, Portugal €0.60/mL and Romania €0.10/mL. Greece plans to implement an e-liquids excise duty of €0.10/mL. Latvia taxes both e-liquid and nicotine, at €0.01/mL and €0.005/mg respectively. A milliliter of e-liquid containing 20 mg of nicotine per milliliter—the maximum concentration allowed under the Tobacco Products Directive (TPD2)—would thus be taxed at €0.11. In June, Hungary and Slovenia announced that they, too, would start taxing vapor products. According to ECigIntelligence, Hungary will charge huf65 ($0.23) per milliliter of e-liquid from Jan. 1, 2017 and huf70/mL from July 1, 2017. Slovenia has been collecting €0.18/mL since Aug. 1.
“With a quarter of the EU’s 28 member states now putting category-specific taxes on e-cigs, [taxation] is no longer the rare policy anomaly it once seemed,” ECigIntelligence wrote. “An important question for the industry is, how far it will spread?” ECOFIN, which represents EU member states’ economics and finance ministers, recently asked the European Commission to investigate the introduction of new product categories into its tobacco tax legislation in order to “facilitate an appropriate, equal taxation treatment of new products within the internal market and remove potential inconsistencies and legal uncertainty.”
It stressed, however, that any solution needed to strike the right balance between revenue, expenses of tax administration and public health objectives. A complex task The announcement of the council conclusions caused excitement, particularly in the British media. Several newspapers suggested that ECOFIN wanted the same tax level for vapor products as for combustible cigarettes, which, they wrote, “could send the prices of e-cigarettes soaring.” (Under existing rules, all EU countries must impose an excise tax of at least 60 percent on tobacco products.) Indeed, The Guardian reported that France and two other nations had called for aminimum excise duty for e-cigarettes, to be set at “the highest common denominator.”
ECigIntelligence, however, pointed out that ECOFIN’s moves were only one step toward a tax regime. While such a regime is likely to arrive—possibly as early as 2017—the decision still depends on the commission’s findings, it said. Developing a pan-European system of taxing ENDS will be a complex task. “The commission and member states are currently facing a major challenge in discussing proposals for harmonization of excise taxation of e-cigs,” says Francesco Gaglioppa, taxation manager at Japan Tobacco International.
“There is a substantial lack of relevant data on sales dynamics and consumers’ behavior in order to assess the market evolution, and there is limited time to collect it before the 2017 deadline,” he says. “Any proposal or decision by the deadline risks to be [a] rushed [one]. Market data on e-cigs will soon become available under the TPD2 reporting requirements as set out in recitals 44, 52 and articles 20.7(i) and 28.2(g) of the TPD2. It can assist in carrying out impact assessments of introducing optimal excise tax regulation.”
In addition, member states take different positions on the matter. While some support tax harmonization, others have no intention to tax vapor products in the absence of reliable market data and/or without understanding the health impacts. “Care will need to be taken, as the e-cig market is much more price-elastic compared to combustible cigarettes,” says Tim Phillips, managing director of ECigIntelligence. “There has been research to show that as price increases are applied to e-cig liquids, the demand drops significantly.” Gaglioppa quotes dramatic figures from Italy, where a previously rapidly growing market started declining after the government introduced a 58.5 percent tax on vapor devices in January 2014.
As a consequence, e-cigarettes generated only €5.2 million in tax revenue in 2015—far below the budgeted €85 million. “This clearly highlights the negative impact taxes on e-cigs could bring to consumers,” says Gaglioppa. Tax with care Gaglioppa believes regulators should be cautious about imposing an EU-wide tax standard for ENDS, pointing out that the category is still at its nascent stage and that the volumes involved are small.
Moreover, organizations such as Public Health England (PHE), the U.K. Royal College of Physicians (RCP) and Public Health France have acknowledged the relative safety of e-cigarettes as compared with combustible products. “A report from U.K. PHE agreed that e-cigs are likely to be around 95 percent less harmful than cigarettes,” says Gaglioppa. “Having excessive taxes on e-cigs could discourage vapers and lead them back to smoking, as recently said by the RCP.” He adds: “We see the interest to adopt a harmonized approach for taxation of novel products, but we have to observe that this interest is mainly driven by two reasons—both of them not entirely convincing. First is the aspiration to increase revenue, which is not supported by currently available data, since the tax base is small and the category is developing.
Second is the uncertainty around the patchwork situation in Europe where in some member states a market for e-cigs does not exist or where neighboring member states have different taxation systems. All the efforts to harmonize taxation of traditional tobacco products did not succeed to harmonize the prices. On the contrary, price gaps today are wider than they were before the first EU measures on tobacco taxes.” If member states decide to tax e-cigs, Gaglioppa says, they should be reminded that the key to success in tax policy is limiting incentives for tax evasion and avoidance, as they undermine tax revenues and broader government policy objectives.
“We have to have the right tax base, excise tax structure and rates,” he says. “Rates should—initially—be low so as not to impede the development of the tax base and to encourage innovation in this new category.
A specific tax based on the physical volume of the nicotine-containing liquid is the most effective way to levy taxes, as it relies on consumption, minimizes the administrative and monitoring costs, and reduces compliance costs for legitimate manufacturers and importers of e-cigs.”
Barnaby Page, editorial director of ECigIntelligence, remains confident regarding the development of the EU vapor market after the introduction of a tax standard for e-cigarettes: “I would think there might be a small negative effect, but not a huge one. While price is a motivation for some people to switch from combustibles to e-cigs, it is not the major one. What I do think there might be is more brand switching among e-cig [users]—or, looking at it another way, more price competition—where brand loyalties are much less adamant than they are for combustibles.”