EUROPEAN COMMISSION

Brussels, 16.7.2025

SWD(2025) 560 final

COMMISSION STAFF WORKING DOCUMENT

IMPACT ASSESSMENT REPORT

Accompanying the document

Proposal for a COUNCIL DIRECTIVE

on the structure and rates of excise duty applied to tobacco and tobacco related products (recast)

{COM(2025) 580 final} - {SEC(2025) 560 final} - {SWD(2025) 561 final}

Table of contents

1.Introduction: Political and legal context

2.Problem definition

3.Why should the EU act?

4.Objectives: What is to be achieved?

5.What are the available policy options?

6.What are the impacts of the policy options?

7.How do the options compare?

8.Preferred option

9.How will actual impacts be monitored and evaluated?

ANNEX 1: PROCEDURAL INFORMATION

1.Lead DG, Decide Planning/CWP references

2.Organisation and timing

3.Consultation of the RSB

4.Evidence, sources and quality

ANNEX 2: Stakeholder consultation (Synopsis report)

1.Consultation strategy

2.Feedback on the policy problems

3.Feedback on specific policy options

ANNEX 3: Who is affected and how?

1.Practical implications of the initiative

2.Summary of costs and benefits

3.Relevant sustainable development goals

ANNEX 4: Analytical methods

1.Introduction

2.Data collection

3.Desk research

4.Call for a data

5.Case studies

6.Methodological limitations

7.Baseline scenario

8.Impact analysis

ANNEX 5: Competitiveness check

1.Overview of impacts on competitiveness

2.Synthetic assessment

ANNEX 6: SME check

ANNEX 7: Smoking prevalence and price levels

1.Smoking prevalence

2.Smoking prevalence. Gender and socio-economic groups

3.Affordability and the role of EU minima on tobacco products

4.Excise duty levels

ANNEX 8: Cross-border flows of tobacco and new products

1.Context

2.Assessment of cross-border flows

ANNEX 9: Illicit trade and manufacturing of tobacco products

1.Overview

2.Estimated magnitude and characteristics of ITTP across the EU

3.Illicit manufacturing within EU

ANNEX 10: Incoherent fiscal treatment of cigarillos and waterpipe tobacco

1.Cigarillos

2.Waterpipe tobacco

ANNEX 11: Purchasing Power Parities approach

1.Overview

2.Comparison between Relative Income Price (RIP) and Purchasing Power Parities (PPP) based mechanisms

3.Limits of the PPP approach

4.Conclusion

ANNEX 12: Heated tobacco products

1.Market and demand trends

2.Legal framework of HTP in Member States

3.Tax revenue

ANNEX 13: Liquids for electronic cigarettes

1.Market trends and demand

2.Legal framework for e-cigarettes in Member States

3.Liquids for e-cigarettes regime’s implementation and obligations

4.Tax revenue

ANNEX 14: Other tobacco-related products

1.Market trends and demand

2.Legal framework in Member States

ANNEX 15: Raw tobacco

1.Reconstruction of the tobacco supply chain

2.Legal framework for raw tobacco in Member States

ANNEX 16: Current excise duty rules for manufactured tobacco

1.Excise duty structure

2.Relevance of the current excise duty structure

ANNEX 17: Impacts of the proposed options

1.Revision of EU minima for traditional tobacco products

2.Holding, movement and control requirements under Horizontal Directive

3.Enlarging the scope to new products

4.Impacts related to enlarging the scope of the Directive to raw tobacco

5.Environmental impacts

ANNEX 18: Elasticity

1.Market effects: elasticity

2.The price elasticity of the demand for tobacco products in the relevant literature

ANNEX 19: Expressing revised EU minima in nominal terms

1.Traditional tobacco products

2.New products

Glossary

1.Introduction: Political and legal context

Tobacco consumption is one of the greatest avoidable health risks in the European Union. 1 Tobacco is a highly addictive substance, and its use is linked to cardiovascular and respiratory diseases, and 27% of all cancers. Tobacco consumption remains the largest behavioural risk factor to health and each year accounts for about 700 000 deaths across EU Member States. In Europe’s Beating Cancer Plan 2 , the European Commission proposed to create a ‘Tobacco Free Generation’ and set a target of reducing smoking prevalence to less than 5% of the population by 2040. The plan is based on a wide consultation with stakeholder groups, the European Parliament and the Member States.

The revision of Council Directive 2011/64/EU on the structure and rates of excise duty applied to manufactured tobacco (‘the Directive’), which is the subject of this impact assessment, as an integral part of Europe’s Beating Cancer Plan, should focus on ensuring a high level of human health protection. Higher tobacco taxes and prices have been demonstrated to be the single most effective measure to reduce overall tobacco use, induce current smokers to quit, reduce uptake by young people, lower consumption among those who continue to smoke, improve population health, increase tobacco tax revenues, and produce additional public health benefits. The revision of the Directive will contribute to the delivery of these objectives.

Other actions contributing to these objectives include the adoption in December 2024 of updated Council Recommendation on Smoke-Free Environments (to extend its coverage to emerging products, such as electronic cigarettes and heated tobacco products) 3  and a comprehensive evaluation of the Tobacco Products Directive and the Tobacco Advertising Directive 4 . The evaluation will determine whether and to what extent the current legal frameworks needs to be amended.

reviewing the Tobacco Products Directive. Tobacco tax policy and other tobacco control policies act in synergy. Taxation in addition to its behavioural impact, delivers an overall ‘price signal’ to society that smoking is indeed harmful for consumers and should be discouraged by all possible means.

The revision of the Directive will support Member States in meeting the objectives of the WHO Framework Convention on Tobacco Control 5 , including by adopting tax measures to reduce the demand for tobacco.

The initiative shall also be considered in the context of the EU agenda to strengthen EU competitiveness and growth while upholding high standards and achieving economic, social, and environmental goals and to fight against fraud. These political objectives, in the tobacco context, have three main dimensions:

§To streamline rules and reduce the administrative burdens 6   for businesses by introducing clear definitions of new tobacco and tobacco-related products to facilitate cross-border trade involving these products while, at the same time, helping Member States enforce tax rules and improve tax compliance, ensuring they can secure reliable tax revenues.

§The fight against illicit tobacco trade, in line with the 2nd EU Action Plan 7 , which focuses on limiting some of the key input materials going into the illicit manufacture of tobacco products, including raw tobacco, and the use of the Excise Monitoring and Control System (EMCS) for risk analysis and control.

§The fight against tax fraud and evasion, in line with the EU Action Plan for fair and simple taxation supporting the recovery 8 , which sets out measures to help Member States enforce tax rules and improve tax compliance, ensuring they can secure reliable tax revenues.

EU legislation for the taxation of manufactured tobacco products 9 , in place since the 1970s, lays down minimum tax rates that Member States must respect when taxing tobacco products. The Directive continues to be an instrument for Member States to collect tax revenues 10 . The legal framework has been revised and amended several times 11 . The Directive is part of a broader EU policy framework that includes the common provisions applicable to all products subject to excise duty and the customs union legislation, as well as key tobacco control policies.

This revision follows the evaluation of the Directive published on 10 February 2020. 12 The evaluation highlights the main limitations of the current regulatory framework and concludes that the Directive no longer fully achieves its objectives. The current minimum tax rates have lost traction in terms of making an effective contribution to reducing tobacco consumption. Notwithstanding that the Directive contributed to the decline of smoking prevalence, to a certain extent, smoking prevalence levels remain higher than expected. Existing differentials incentivise cross-border flows. The current scope of the Directive is not adapted to market developments such as electronic cigarettes (‘e-cigarettes’) and heated tobacco products. Furthermore, illicit trade in tobacco products remains substantial and continues to constitute a source of concern in Member States. Most public health authorities of the Member States are not satisfied with the impact of the Directive on tobacco control targets and call for stronger fiscal measures.

The Directive can support and complement the objectives of Europe’s Beating Cancer Plan by better aligning the taxation of tobacco and related products with health objectives, adapting to new developments and market trends, and introducing harmonised rules on tobacco and related products.

On 2 June 2020, the Council adopted conclusions on the review of the Directive 13 based on the findings from the evaluation. The Council invited the European Commission to submit a legislative proposal for the revision of the Directive on the basis of an impact assessment.

2.Problem definition

This section defines and analyses the problems and their drivers and it assesses the expected evolution of these problems in the absence of any EU policy intervention. Figure 1 shows visually the problems, their drivers, as well as the consequences if unaddressed.

Figure 1. Problem tree

Source: Commission analysis 

2.1.What is/are the problems?

At the time of its adoption, the Directive represented a positive contribution to the EU legislative framework by harmonising rules for the taxation of tobacco. However, the Directive has remained unchanged over the past 15 years, despite changes in the tobacco market, other EU legislation, and the political context with an increased focus on public health both at national and EU level. As noted above the evaluation found that the Directive no longer fully achieves its objectives, which for this impact assessment is translated into three intervention areas: (1) revising EU minima and certain categories for traditional tobacco products as smoking prevalence is not declining sufficiently quickly to meet Europe’s Beating Cancer Plan objectives; (2) enlarging the scope of the Directive to new products as the current scope of the Directive is not adapted to market developments and the fiscal treatment between and across products is incoherent; and (3) enlarging the scope of the Directive to raw tobacco to address increasing illicit manufacturing of tobacco products within the EU.  As verified in the evaluation, in general the regulatory burden and the current excise duty structure for tobacco products is neither an issue for Member States authorities nor for operators (also see  ANNEX 16:2 on relevance of the current excise duty structure). Only certain provisions of the Directive related to the definitions of and EU minima for traditional tobacco products need to be revised, and the regulatory framework should be updated due to the disparities in the tax treatment of new products across Member States and due to the lack of a proper control system for raw tobacco. The options envisaged for each of the identified problem areas will be subsequently presented. By tackling the problem drivers, each policy option aims at achieving one or several of the specific objectives. Acknowledging the complexity of the issues at stake and their analysis,  Figure 3 offers an overview of the intervention logic behind the initiative (see section 4 ).

2.1.1.Smoking prevalence not declining sufficiently quickly to meet Europe’s Beating Cancer Plan objectives

Although smoking prevalence has declined in the EU over the past decade (from 28% to 24% between 2012 and 2023), substantial differences remain between countries and population groups. In some Member States (e.g. Greece, Bulgaria and Croatia) smokers still represent more than 35% of the population, while in others (e.g. Denmark, the Netherlands and Sweden) prevalence has fallen below 15%. 14 Without intervention, even at current rates of declining usage, the long-term target set out in Europe’s Beating Cancer Plan, which is to reduce smoking prevalence to less than 5% by 2040, will not be achieved.

Around 40% of the smoking prevalence decline in the EU can be attributed to the impact of taxation policies. 15 The effectiveness of taxing addictive substances in changing behaviour and improving public health is widely recognised and reflected by, amongst others, the World Health Organisation (WHO) 16 , the World Bank 17 , and academics. 18 According to the WHO, a tax rise that increases tobacco prices by 10% decreases tobacco consumption by about 4% in high-income countries and by up to 8% in most low- and middle-income countries.

Furthermore, taxation, as a measure to reduce tobacco consumption, is specifically called for in Article 6 of the WHO Framework Convention on Tobacco Control. 19 The European Union is a Party to the Convention.

While other policy measures such as product regulation, smoke-free environment policies, tobacco advertising bans, health warnings and labelling policy measures can reduce demand, the relationship between tobacco control policies and taxation is complementary in fostering greater reduction in smoking prevalence than each element would have achieved alone. 20

Within the EU, the relationship between the Weighted Average Price (WAP) of cigarettes in each Member State and prevalence of smoking may be demonstrated (see

Figure 2 below). In general, the higher WAP of cigarettes, the lower the smoking prevalence within that Member State.

Figure 2. Weighted Average Price per 1000 cigarettes in EUR (WAP) and Smoking prevalence in % within the EU (2023)

Source: Commission analysis

The EU minima set in the Directive have been moderately effective in raising tax rates, and consequently, prices in Member States, especially in the case of cigarettes. However, EU minima have not been updated since 2010 and inflation 21 has eroded their effectiveness. This loss of traction of EU minima is confirmed by public health authority’s survey results, where a majority admitted that their smoking prevalence reduction objectives over the last few years could be achieved only to some moderate or limited extent, particularly among young people and women. In addition, the real effect of price increases on consumers is dependent on income levels within Member States and this is not reflected in the Directive. Artificial tax driven cross-border shopping, whereby private individuals buy tobacco products in another Member State and bring them home for consumption 22 , lowers the effective price at which tobacco is available. This lack of convergence is to be seen together with the difficulties of enforcing the concept of personal use as foreseen by Article 32 of the Horizontal Directive (guidance to what quantity of excise good a private person can transport across Member States borders for his/her own use). The high levels of (cheaper) cross border cigarettes clearly undermine national public health policies by reducing the effective price at which tobacco is available, hence affecting efforts to reduce smoking prevalence, although it is difficult to quantify. Such cross-border shopping distorts competition and market functioning by incentivising businesses to cluster in countries with lower tax rates. The loss of tax revenue is significant for some Member States, while others register considerable extra revenue compared with local consumption 23 . In 2023, the estimated of volume of cross-border purchases of cigarettes by private individuals for their own use in other EU Member States was approximately 28 billion pieces, i.e. around 7% of total consumption. In some Member States, the magnitude of cross-border flows is estimated to reach well above 10% of domestic demand. 24 The aggregated forgone excise revenues throughout the EU amounts to approximately EUR 2.9 billion per annum (that can be used to compensate for the social costs of smoking). The incidence of cross-border flows is even greater for fine cut tobacco (FCT) 25  in relative terms, with volumes estimated to reach between 13% and 20% of the total consumption in the EU. 26   The estimated forgone excise revenue associated would range between EUR 1.3 billion and EUR 2 billion. For heated tobacco products (HTP) 27 and liquids for e-cigarettes 28 , recent market developments show cross-border flows which are also relevant, albeit in a limited number of EU countries (see ANNEX 8: ).

The travel restrictions during the COVID–19 period highlighted the extent of the phenomenon. During confinements, consumers had more limited access to cheaper tobacco products in other Member States resulting in increases in the sales of domestic products. For example, in the case of France - a Member State with high cross-border inflows of tobacco products - during the lockdown, the estimated volume of cigarettes purchased cross-border was 9.5% of domestic sales while in 2023 it was 23.4%. 29 There is a consensus among all stakeholders that the EU tobacco taxation policy should contribute to reduce differences in taxation between Member States and therefore decrease the incentive for cross-border flows.

2.1.2.Incoherent fiscal treatment of certain products

The lack of clarity as to the definition of products leads to the incoherent application of the Directive, resulting in difficulties for Member State authorities, economic operators, and consumers 30 . This affects harmonised products, such as cigarillos and waterpipe tobacco as well as products that contain tobacco or nicotine but currently fall outside the scope of the Directive.

Until recently, the heterogeneous nature of cigars and cigarillos, and their limited demand, meant that a single tax category was appropriate. However, the development of economy cigarillos (low priced cigarillos) as substitutes to cigarettes has differentiated these products. Economy cigarillos take advantage of lower taxation rates compared with cigarettes under the Directive and a lighter regulatory regime under the Tobacco Products Directive 31 , so undermining both price and non-price measures taken by Member States in pursuit of health objectives.

Waterpipe tobacco (WPT) currently falls under the category of ‘other smoking tobacco’ for excise purposes. The lack of a specific category reduces the ability of Member State authorities to monitor WPT consumption and movements specifically. 32 The combination of an enhanced economic incentive and poor visibility acts as an incentive to illicit trade. It is estimated that around half of all WPT consumed in the EU could come from illicit sources.

Several products containing tobacco or nicotine fall outside the scope of the Directive. These include (1) other manufactured (smokeless) tobacco 33 (chewing tobacco 34 , nasal tobacco 35 and other tobacco for oral use 36 ) and (2) related products (nicotine pouches, nicotine gums, other products for nicotine intake through chewing, dissolving, sniffing, etc.). The categorisation, and therefore fiscal status, of such products may be unclear, giving rise to uncertainty for economic operators and Member State authorities 37 . Although their markets remain marginal, such products have become increasingly available across the EU, especially after a new generation of oral tobacco and tobacco-free products containing nicotine has appeared on the market 38 . Nicotine pouches in this document refer to small flavoured pouches, placed between the lip and gum that releases a hit of nicotine to satisfy cravings. Approved nicotine replacement therapies are not part of this analysis.

The growth of new products, such as heated tobacco products (HTP), e-cigarettes, other manufactured tobacco and other tobacco-related products, which primarily includes nicotine pouches used in the past years as substitutes to traditional tobacco products, especially among young people, has raised concerns among tax and public health authorities alike. While in 2018 these products accounted for little more than 4% of the aggregated EU market value for smoking and other tobacco-related products, in 2023 this market had grown to nearly 13%, or an almost threefold increase. The existence of substitution patterns between traditional and new products is not only suggested by market trends but also confirmed on the supply side by the fact that these products (especially HTP and e-cigarettes) were developed as alternatives to cigarettes and are marketed as such by manufacturers. In 2023 15% of HTP users and 24% of e-cigarettes users were former smokers. While the percentage of former smokers among HTP users has increased since 2020 (from 9% to 15%) in the case of e-cigarettes it has declined (from 30% to 24%), possibly related to the younger age of e-cigarettes users. The majority of new products users remain ‘dual’ users of new and traditional products. 39

In particular, the value of total sales of HTP exceeded EUR 12 billion in 2023, i.e. more than doubling the value recorded in 2020 and with a eight-fold increase compared with 2018., i.e. accounting for around 8% of the total tobacco market value. The total HTP users’ population in the EU can be estimated at around 7.6 million, and the consumption prevalence in Member States is generally comprised between 1% and 5%. The prevalence of HTP use among people in the 25-39 years age group was 3%, compared with just 1% for older generations. 40

After a few years of stagnation, the e-cigarettes market has expanded considerably in recent years, from an EU aggregate value of EUR 2.9 billion in 2020 to nearly EUR 5 billion in 2023. The share of Europeans regularly using e-cigarettes was at 3%. Prevalence varies across Member States from below 1% in Portugal up to 9% in Estonia. The prevalence rate is higher among young people. Overall, the e-cigarettes users’ population in the EU can be estimated at around 11.5 million. 41

Nicotine pouches are a relatively new product, and sales increased considerably in recent years. In 2023, the EU market for nicotine pouches was valued at about EUR 1.1 billion, i.e. almost three times more than the value recorded in 2020 and more than twenty times the value recorded in 2018. At EU level, 1% of the population uses nicotine pouches, and the relative majority of daily users of nicotine pouches are found primarily in younger generations (15 – 24 age bracket). 42

Neither HTP nor the current generation of e-cigarettes and other tobacco-related products were on the market when the Directive was last revised and Member States have implemented different national measures in respect of such products. Incoherent responses have resulted in a range of negative impacts on Member State authorities, economic operators, consumers, and the functioning of the Single Market. Differences in the structure and rates of taxation distorts competition between domestic and foreign manufacturers, especially in Member States that adopted relatively high tax rates 43 . Different movement and control regimes result in additional administrative and compliance costs and cross-border movement difficulties. The absence of a common monitoring system reduces the capacity of Member State authorities to identify and prevent fraudulent trade and detect the emergence of ‘borderline’ products 44 . Diverging excise rates based on tax categorisation rather than consumer usage incentivises economic operators to develop and market ‘borderline’ products to circumvent tax categories and induces consumers to adopt substitutes, which may be equally damaging to health.

Some Member States include HTP in a harmonised category, mainly other smoking tobacco (OST). However, this means that Member State authorities cannot distinguish between the regime applied to HTP and to other products in that category, such as pipe tobacco. Nor is it the case that the optimal tax rate for HTP is appropriate for pipe tobacco and vice versa.

2.1.3.Increasing illicit manufacturing of tobacco products within EU

Illicit (tax-evaded) trade of tobacco products represents a major, persistent threat to the functioning of the internal market. It is also a serious problem both in terms of revenue losses and security – as it may contribute to financing organised crime. Additionally, it undermines tobacco control policy causing adverse public health effects, as it reduces the cost of tobacco products making them more accessible to consumers. Finally, it distorts competition, as it subtracts consumers from the legal market.

It is estimated that around 13 billion illicit cigarettes are manufactured in the EU annually. 45  In the case of fine cut tobacco (FCT) and WPT, it can be assumed that half of illicit products are manufactured in the EU – i.e. more than 10 000 tonnes. Estimated foregone revenue associated to illicit trade of cigarettes amounts to approximately to EUR 9.0 billion while for other tobacco products – to approximately EUR 3.5 billion. Some Member States 46 have adopted national measures to monitor and control the movement of raw tobacco. 47 Measures include fiscal definitions, authorisation schemes for operators, administrative controls on holding and movements, deposits and financial guarantees to cover diversion risks, prohibitions on selling to unauthorised operators, and the application of tax rates on raw tobacco 48 . However, divergent national definitions and procedures have led to legal uncertainty for legitimate economic operators and Member State authorities, and the number of seizures and disputes over shipments of (claimed) raw tobacco has increased in the majority of Member States. A majority of public consultation respondents see the need to fight illicit tobacco trade and manufacturing as a priority and called for increased EU action on the subject.

2.2.What are the problem drivers?

2.2.1.Relative low average price levels of tobacco products

The Directive aims at impacting consumption behaviour through taxation. However, the evaluation of the Directive concluded that current level of the minimum excise rates had been moderately effective in raising tax rates and end-users prices in Member States. The metric used to analyse this evolution is affordability, i.e. the ability for an end-user to buy a given product. 49 This indicator varies greatly across Member States: the lowest affordability levels for cigarettes (highest Relative Income Price (RIP)) can be found in countries with comparatively lower income, such as Romania, Bulgaria and Hungary, but also in countries with relative high price, like France. Conversely, cigarettes are most affordable in Luxembourg and Sweden. The affordability of cigarettes has only marginally declined over time. In 2023, the EU average RIP index was only slightly higher than in 2011 (i.e. 2.4% instead of 1.9%). In practice, the price of cigarettes in real terms has barely increased (although trends varied across Member States).

2.2.2.Unfit EU minima

The current EU minima laid down in the Directive have lost traction and no longer make an effective contribution to reducing tobacco consumption. Excise levels in Member States are generally much higher than EU minima. 50

With respect to cigarettes, the Directive requires that the excise duty charged represents at least 60% of the weighted average retail selling price (WAP) 51 and be not less than EUR 90 per 1 000 cigarettes. 52 In comparison, the excise duty rates 53 levied by Member States range from EUR 95 to EUR 469 per 1 000 cigarettes, meaning that some Member States apply five times the EU minimum rate. On average, the excise rate effectively applied in 2023 (EUR 187) is more than twice the minimum. For FCT, the Directive requires that excise duty represents at least 50% of WAP or be no less than EUR 60 per kg. Actual excise rates in Member States range from EUR 61 to EUR 437 per kg.

The Directive requires excise duty levied on cigars and cigarillos to represent at least 5% of the retail selling price 54 or be no less than EUR 12 per 1 000 items; the average excise duty levied by Member States in 2023 was EUR 727 per 1 000 items for cigars, and EUR 137 per 1 000 items for cigarillos. As regards other smoking tobacco, the Directive requires excise duty levied to represents at least 20% of the retail selling price or be no less than EUR 22 per 1 000 items; the average excise duty in 2023 was EUR 132 per kg.

The main reason why EU minima are so low is that they have been set in nominal terms, meaning that both inflation and income growth compound to make them quickly obsolete. Assuming that smokers keep constant the quantity of tobacco they purchase, a 2% inflation rate coupled with a 1% increase in real disposable income, which would represent a conservative long-term trend for a catching-up 55 Member State, would imply that the excise burden on consumption falls by over 25% in ten years. 

This problem is exacerbated by the fact that EU minima, having been set at the same nominal level for each Member State 56 , take account of neither different income and price levels, nor different rates of economic growth. Worse, there is ample scope for divergence as both inflation rates and GDP growth rates differ significantly between Member States: the Harmonised Indices of Consumer Prices (HICP) inflation as of March 2022 ranged between a low of 4.5% in Malta to a high of 15.6% in Lithuania, whereas the 2021 real GDP growth rate ranged between 2.9% in Germany to 13.5% in Ireland. This situation leads to the rapid obsolescence of nominal minima fixed for all at the same level. As a result, in nominal terms, EU minima for cigarettes in Bulgaria and Romania are high relative to income levels because of a lower GDP per capita. Conversely, EU minima are low compared with price and tax levels in Denmark and Sweden, which are among the highest in the EU. In other words, EU minima fixed at the same level in nominal terms inevitably imply that they are too cheap in more prosperous Member States while being very expensive in Member States with a lower GDP per capita.

Almost all Member States have fought the erosion of the real value of EU minima by increasing their national excise duty rates. However, given freedom of movement within the EU, the effective price of tobacco products for consumers may be lowered, and health policy undermined, through access to cheaper tobacco products (due to cross-border shopping, substitution, and the illicit market). In particular, differentials in taxation and, consequently, retail prices between Member States continue to be a major driver of cross-border shopping. In turn, this can create negative economic incentives as Member States with a starting point of low excise duties may be held back from increasing them by the fear of a loss of tax revenue from cross-border tobacco sales. Diverging trends in prices, incomes and health policies inevitably make any set of nominal EU minima quickly obsolete over time.

Moreover, differentials in excise duty levels encourage price-sensitive consumers (especially youth) to substitute cigarettes with less expensive alternatives. 57 While the size of the cigarette market has fallen from some 678 billion sticks in 2005 to less than 400 billion in 2023, the volume of FCT sales had been increasing until 2012, when due to a reduction in the price gap, substitution plateaued and then started a slow decline which was reversed only in 2020 presumably in conjunction with the consumers’ down-trading registered during the COVID – 19  confinement period. 58  The trend observed is a 3.78% year-on-year decline between 2020 and 2023.  On the one hand, differentials in EU minima across harmonised products unduly create a tax advantage for certain products such as FCT and economy cigarillos (low priced cigarillos) 59 over cigarettes. On the other hand, the tobacco market has experienced the emergence of various new products, which are not covered by the Directive, being promoted as substitutes for cigarettes and other harmonised tobacco products. Tax-induced substitution has several adverse effects, such as competitive distortions, tax revenue losses, and the undermining of tobacco control policies.

In addition to creating difficulties for Member State authorities and economic operators, uncertainty as to the categorisation of products creates opportunities for those involved in illicit trade. Such problems exist in relation to both WPT and raw tobacco.

2.2.3.Divergent approaches to taxation between new products and Member States

The growth of HTP and e-cigarettes consumption prompted Member States to establish ad hoc national tax regimes in order to address substitution.

The varying excise regimes applicable to HTP may be summarised as follows: 60

§HTP taxed as a harmonised product in seven Member States (Bulgaria, Germany, Greece, Ireland, the Netherlands, Spain and Sweden) in most cases in the OST category. Sweden differentiates between HTP sticks (taxed as cigarettes) from other HTP formats (taxed per weight). In Germany, HTP is considered a harmonised product, but the rate is calculated in relation to the rates of both cigarettes and OST.  This classification allows HTP to be controlled under the EU-wide Excise Movement and Control System (EMCS 61 ).

§Specific tax regime for HTP. All other Member States where HTP is commercialised have adopted this national approach.

At the end of 2024, 21 Member States had established ad hoc national taxes on liquids for e-cigarettes, three more countries will join in 2025 bringing the total to 24 Member States taxing liquids for e-cigarettes. which may be summarised as follows: 62

§18 Member States are taxing any liquid, irrespective of whether they contain nicotine. Excise duty rate varies from EUR 0.09 to 0.70 per ml. Croatia remains the only Member State having a tax regime with a zero rate in place.

§Denmark and Sweden apply tax only to nicotine-containing products.

§Since 2021, Latvia has abandoned its mixed system that involved a specific flat rate on the liquid plus another specific rate per mg of nicotine. Some Member States modulate the rates: Denmark, Spain and Sweden apply a higher rate if the nicotine concentration exceeds a certain threshold; Italy, Portugal and Slovenia apply a reduced rate to nicotine-free products.

2.2.4.Ineffective control of tobacco supply chain by Member States

In accordance with the provisions of the Horizontal Directive 63 , excise goods are subject to the EMCS. Raw tobacco, including intermediate products such as first-processed tobacco, is outside the scope of the Directive and therefore not subject to EMCS. When diverted from the legitimate supply chain raw tobacco is an ingredient for illicit manufacturing activities. Member States tax authorities consider the poor control of the raw tobacco supply chain as a key driver of illicit domestic manufacturing.

2.3.How likely is the problem to persist?

In the absence of EU intervention, the problems identified will persist. The current EU minima for tobacco products will neither address the lack of convergence in price levels between countries, nor affect sufficiently consumption behaviours and tobacco products substitution. Spontaneous price convergence is – in line with historical experience - highly unlikely, as relative income prices are divergent among Member States and economic incentives for cross-border shopping remain. The incoherent treatment of new products will continue among Member States and control will remain limited as Member States will continue to apply different ad hoc regimes. Market fragmentation will persist. The lack of harmonised rules at EU level on substitutes to cigarettes and to other traditional tobacco products will lead to a competitive advantage for these products and their sellers. New products will remain out of scope of EU legislation, creating further distortions of competition in cross-border trade. The relevance of this problem is expected to intensify, in light of the speed of innovation and technological development 64 in this sector. At the same time, effective tax administration will not be ensured, as these products will not be subject to movement and control requirements established in the Horizontal Directive.

Due to substitution and to illicit trade of tobacco products (including diversion of raw tobacco for illicit manufacturing), Member States will continue to lose revenue. The absence of EU intervention in the area of excise duty will continue undermining the effectiveness of tobacco control policies, leading to a negative impact on national health policies, and contradicting the ambition of Europe’s Beating Cancer Plan to reduce consumption of tobacco.

Currently witnessed global megatrends 65 are expected to increase the scale of the problems identified. Europe is facing shifting health challenges, as unhealthy lifestyles are causing an increasing burden on public health systems. Smoking is indirectly connected to two other megatrends:

§Aggravating resource scarcity: tobacco production is related to the use of pesticides, water, land and energy. The land used for tobacco growing is not dedicated to food production. In addition, tobacco manufacturing has an impact on the environment due to water, energy, paper use, CO2 and pollutants emissions.

§Increasing inequalities: tobacco is a leading contributing cause to health inequities in Europe, and reduction in smoking has so far mainly benefitted middle- and high-income groups 66 .

3.Why should the EU act?

3.1.Legal basis

The EU’s right to act in the area of excise duty is established in Article 113 of the Treaty on the functioning of the European Union (TFEU) 67 , which invites the EU to lay down harmonised taxation rules to ensure the proper functioning of the internal market and avoid distortion of competition.

It is therefore necessary for the Commission, which is responsible for ensuring the smooth functioning of the internal market to propose action in this field.

3.2.Subsidiarity: Necessity of EU action

In analysing the problems and their drivers, it is clear that EU action can best achieve the proper functioning of the internal market and a high level of health protection across the EU.

The increased divergence between excise duty rates since the Directive was last revised engenders significant cross-border shopping from low-tax to high-tax countries.

Unclear definitions of certain tobacco products at EU level (in particular waterpipe tobacco and cigarillos) resulted in varying national approaches to rates and taxation regimes as well as adapted business strategies aiming at circumventing the tax.

The lack of EU level regulation of new products (mainly heated tobacco products and e-cigarettes) has led to different tax regimes for these products, leading to administrative difficulties in movements between Member States. There is a large consensus among stakeholders on the need to harmonise new products in the EU excise legislation 68 . The urgent necessity to upgrade the EU regulatory framework, in order to avoid legal uncertainty and regulatory disparities in the EU was highlighted in the Council conclusions on the evaluation of the Directive. 69  

In most Member States, movements of raw tobacco are subject to notification obligations to the competent authorities. At the same time, Member States recognise that the strictly national scope of these regimes is a major limitation to their effectiveness. Cross-border movements of raw tobacco cannot be effectively controlled due to the absence of appropriate control rules at EU level. The latter is reiterated in the Council's conclusions.

The issues outlined above damage the interests of Member States and have common roots. These issues also negatively affect the effectiveness of national tobacco control policies, which undermines the objectives of Europe’s Beating Cancer Plan.

It is not possible for Member States to address the problems and their drivers in isolation without a proposal to amend the provisions of the Directive. No alternative national, bilateral or other international initiative would provide the same level of effectiveness in terms of addressing this issue for all stakeholders at EU level.

3.3.Subsidiarity: Added value of EU action

Under the Directive, EU countries can freely set the rates for different products according to their national preferences, as long as they are above the EU minima. Scope is also left to Member States as regards to the structure of the tax. 70  As a result, the EU action is limited to addressing the issues that Member States cannot tackle at national level, in relation to the proper functioning of the internal market. The Directive remains the best instrument to achieve these objectives.

Clearer definitions of product categories, and the extension of the scope of the Directive to new products and to raw tobacco will support the effective enforcement of rules by Member States.

The increases of EU minima proposed are proportionate with the objective of ensuring a high level of human health protection set out in the TFEU, and other measures will support the effectiveness of national tobacco control policies. At the same time, several of the measures proposed aim at minimising the burden potentially generated by the revision of the Directive. For example, the structure of the excise duty rates, as currently implemented, remains broadly the same.

4.Objectives: What is to be achieved?

As detailed in the problem definition, given the scope of the Directive covering various tobacco products and provisions, the problem areas of this initiative are somewhat different from each other and require specific analysis. The revision of the Directive aims at filling the identified gaps and providing tools to effectively address shortcomings. By tackling the problem drivers, each policy option aims at achieving one or several of the general and specific objectives:

§with the revision of current EU minima for traditional tobacco products and the introduction of EU minima for new products, to approximate tax levels, discourage tax induced substitution between products, and ensuring legal certainty to support the proper functioning of the internal market;

§with the increase of EU minima (increasing relative price levels), to influence consumption behaviours and contribute to reduced smoking prevalence for a high level of public health;

§with the harmonisation (and hence monitoring and control) of raw tobacco and new products, to ensure effective excise administration and tax collection as well as tax avoidance mitigation.

The UN adopted the 2030 Agenda for Sustainable Development (the ‘2030 Agenda’) in 2015, at the heart of which are 17 Sustainable Development Goals (SDGs) and 169 associated targets. The 2030 Agenda represents a commitment to eradicate poverty and achieve sustainable development by 2030 worldwide. The EU is fully committed to be a frontrunner in implementing the 2030 Agenda and the SDGs, together with its Member States, in line with the principle of subsidiarity.

The revision of the Directive supports the achievement of sustainable development goals, in particular SDG 3 concerning health, SDGs 10 and 17, concerning equality and resource mobilisation, SDGs 6, 7, 8, 12, 14, 15 on the sustainable use of natural resources and the protection of the environment, and SDGs 2 and 11, concerning food security and sustainable communities. For more details on SDGs see ANNEX 3: section  3 .

4.1.General objectives

Under Article 113 of the TFEU, the Directive aims to harmonise the excise duty regimes of tobacco products in Member States to ensure the proper functioning of the internal market and, at the same time, a high level of health protection. The public health approach is also supported by Article 168 of the TFEU bearing in mind that tobacco products can cause serious harm to health and that the Union is Party to the WHO Framework Convention on Tobacco Control. Although not explicitly mentioned, the Directive has also the overarching objective of ensuring an efficient excise administration.

The general objectives of the initiative are:

§ensure the proper functioning of the internal market;

§ensure high level of health protection;

§fight against fraud and safeguard Member States’ revenues.

4.2.Specific objectives

The specific objectives of the initiative are:

§approximate Member States tax rates and regimes over the medium term; 71

§discourage tax induced substitution between different tobacco products and their substitutes within the short term;

§increase relative price levels to influence consumption behaviours with a view to reducing smoking prevalence along Europe’s Cancer Beating Plan objective for 2040;

§ensure legal certainty in terms of product definition and fiscal classification for all stakeholders within the short term;

§ensure effective excise administration, including effective enforcement, tax collection, fraud and avoidance mitigation, within the short term by expanding application of the movement and control provisions.

The revision of the Directive aims at striking the right balance between these different objectives, which are equally important. Trade-offs exist between certain of these objectives: for instance, increasing EU minima will necessarily magnify the economic incentive behind illicit manufacturing and trade. Similarly, proposing EU minima based on relative income prices in different Member States may hamper upward convergence. These trade-off and related choices are further detailed in the following sections.

The problems, their drivers, objectives and corresponding options are illustrated in  Figure 3 below. The baseline scenarios have not been included in this figure although they are systematically described under each policy area and constitute the framework against which all options will be assessed.

Figure 3. Overview of the intervention logic

Source: Commission analysis

5.What are the available policy options?

As shown in Figure 3 , the policy areas examined further through the impact analysis are (1) the revision of the minimum excise rates and of certain categories for traditional products; (2) enlarging the scope of the Directive to new products and (3) enlarging the scope of the Directive to raw tobacco. A wide range of options under each policy area were explored through the stakeholder consultation. The report considers all possible policy options but focuses its analysis on the ones which have been retained. The reasons for discarding some options early on are presented under each revision area. But first, an important element for review is the metric according to which excise duty rates are expressed.

5.1.Moving from nominal rates to an approach partially based on purchasing power parities

Under the current Directive, EU minima for each product category are expressed in nominal terms, i.e. as a fixed monetary amount applicable in all Member States. This is in line with the approach traditionally used for harmonising indirect taxes. However, as discussed in the problem section, from a tobacco control perspective this approach cannot provide a durable solution, as the combination of inflation and income growth results, over time, in a rapid erosion of the minima. The dissuasive effect of the tax depends on real parameters, such as the inflation-adjusted price and the percentage of one’s personal income needed to sustain the habit, rather than simply its nominal value.

Furthermore, due to the substantial and persistent diversity in economic conditions in Member States (not only in income, but also in the general price level), any nominal minimum rate set at EU level is generally too low to have an impact in higher-income countries. This concern was highlighted in the Commission’s evaluation of the Directive, and indeed the Council insisted that any future revision should take into account the ‘specific economic situations’ of Member States 72 , which is also supported by stakeholders 73 . Thus, in the current context where health objectives are a key driving factor behind the revision of the Directive (see section 2 ), moving away from an approach purely based on nominal rates is essential to ensure the effectiveness of the Directive in durably curbing tobacco consumption among individuals. What is needed is a mechanism that goes beyond a simple nominal value for the minima and can take into account the different economic growth trends for each Member State.

After examining various alternatives, the External study supporting this impact assessment 74  concluded that the approach that best achieves this objective requires abandoning the idea of a fixed nominal minimum in favour of an index whereby the minimum would be periodically adjusted for each individual Member State as a function of the purchasing power of its residents (see Box 1  and ANNEX 11: for details). In practice, when strong economic growth boosts the purchasing power of a given Member State, the minimum excise duty for that Member State would be automatically increased (or, conversely, cut, should purchasing power decrease).  This approach would ensure that affordability of these products at national level is better reflected in the rates to have a more targeted impact on consumption. 75  At the same time, to ensure the durability of the policy stance over time, the minimum rate of excise duty should take into account the EU average inflation trends, based on the Harmonised Index of Consumer Prices (HICP). This periodic adaptation thus partially removes the two main sources of obsolescence of the minima discussed in the problem section.

All in all, the proposed policy option is clearly more future-proof than the current system. This is because the main weakness of the current fixed nominal minima, as shown by the External study, is their inability to remain relevant in case of changes in the general price level, within each Member State as well as between Member States.

Box 1. What is the Purchasing Power Parity adjustment?

Despite the advantages of this approach, a changeover to a full purchasing power adjustment would not be advisable. This is because purchasing power differs so much across Member States that the method would create very large price swings at introduction, destabilising the market. Price Level Index (PLI) differences between Member States are significant (the PLI of Luxembourg is almost three times higher than the PLI of Bulgaria). Hence, a 100% conversion of minima into PPP may lead to (1) huge and potentially disrupting tax hikes for a few high-income countries (e.g., Luxembourg, Denmark, Austria, and Sweden) and, conversely, (2) keeping or even increasing the price gap between Member States. In this sense, overarching objectives of the Directive would be poorly supported. Therefore, the solution proposed is to adopt a partial PPP system where 2/3 of the tax is expressed in nominal terms and 1/3 in PPP terms.

This proportion between nominal and PPP components has been derived from the increase scenario for the EU minima on cigarettes. It strikes a good balance between increasing convergence and distributing the impact across Member States (see

Figure 4 ).

Figure 4. Comparison of nominal versus partial PPP approach in the case of cigarettes weighted average price, according to options

Source: Commission analysis based on the External study

A fixed reference year for the PPP and HICP adjustment would be established and periodic revisions of the PLI and HICP (e.g. every 3 years) would be scheduled to ensure that rates remain up to date (with changes in prices and income) while providing sufficient perspective for Member States to prepare their multi-annual tax increase plans. The calculation of the minima for each Member State is made slightly more complex as a result of the partial PPP approach as it entails introducing the PLI in the formula. Nevertheless, the periodicity of the adjustment would be such as to give ample preparation time for stakeholders.

For the sake of readability and conciseness, all the policy options envisaged are expressed in partial PPP. The impact of the different options expressed in nominal terms was however assessed and is broadly the same for most criteria. It is available in ANNEX 19: .

5.2.Revising the EU minima and certain categories for traditional tobacco products

The proposed options aim to foster the convergence of tax levels applied in Member States, to minimise cross-border flows, to contribute to fair competition between different types of products, preventing or mitigating tax-induced substitution and to support public health protection objectives, by triggering tax rise able to curb smoking prevalence and achieve Europe’s Beating Cancer Plan objectives.

Despite citizens and industry respondents to the public consultation resisting the idea of increased taxation for a number of products, a majority conceded that further action to close excise rate gaps between cigarettes, fine-cut tobacco and cigarillos could be justified. Academics, NGOs, public health experts and other respondents categories almost universally agreed that taxation had to be increased and existing gap levels closed (see ANNEX 2: for details).

5.2.1.What is the baseline from which options are assessed?

The baseline for the revision of the EU minima for traditional tobacco products (cigarettes, fine-cut tobacco, cigars and cigarillos and other smoking tobacco) assumes no change in EU policy. This means that the EU minima remain the same, expressed in nominal terms. Their structure is shown in Table 1 below (see also ANNEX 16: ).

Cigarettes are currently subject to a mixed structure of excise, comprising both a duty calculated with reference to the retail selling price (the ad valorem) and a duty calculated per unit of the product (the specific). The Directive requires that the overall excise duty levied by Member States must represent 60% of the weighted average retail selling price (WAP) of all cigarettes made available for consumption in that Member State (the relative minimum condition) and be no less than EUR 90 per 1 000 cigarettes (the fixed minimum). However, the 60% requirement needs not be met where an excise duty of at least EUR 115 per 1 000 cigarettes is levied. Member States may also establish a minimum excise duty.

All other manufactured tobacco products may be subject to an ad valorem duty based on the retail selling price, a specific duty per kg or per unit, as appropriate, or a mixture of both. In respect of cigars and cigarillos the overall excise duty must represent at least 5% of the retail selling price or EUR 12 per 1 000 items or kg. In respect of fine-cut tobacco intended for the rolling of cigarettes, the overall excise duty must represent at least 50% of WAP or EUR 60 per kg. In respect of other smoking tobacco, the overall excise duty must represent at least 20% of the retail selling price or EUR 22 per kg.

Table 1. EU minima for traditional tobacco products

Example of the calculation of the tax for a pack of 20 cigarettes

 The products covered by the Directive automatically fall into the category of harmonised products. As a result, EU procedures for handling excise goods apply: they involve specific authorisation, control and movement rules as per the Horizontal Directive. They are supported by two pan European IT systems: the Excise Movement and Control System (EMCS) and the System for Exchange of Excise Data (SEED).

5.2.2.Description of the policy options

The options considered differ across products based on both the starting conditions (how low are current EU minima compared to actual excise duty levels) and the targeted minima condition (i.e. fixed or relative).

Three increase options have been considered. For fine-cut tobacco (FCT) EU minima should be equivalent to those for cigarettes to better prevent and mitigate tax-induced substitution. 76 For other traditional tobacco products, the EU minima have remained so far very low and have become irrelevant. Given the lower baseline for OST and notably for cigars and cigarillos where current levels are well below the actual excise duty levels applied in Member States 77 , substantial increases have been considered to partly bridge the gap with cigarettes while also bringing minima closer to actual practices by Member States. The average excise duty for OST currently applied in Member States is EUR 132 per kilogram of the product while for cigarillos, it is 137 per 1 000 units. The current EU minimum rate is EUR 12 per 1 000 units or kg in the case of cigarillos and EUR 22 per kilogram of the product in the case of OST. It is proposed to bring current fixed minimum to 107 EUR in option 1, and a more ambitions and progressive increase to EUR 143 over 8 years in option 2 and over 4 years in option 3. The gradual increase approach follows the model used in the current Directive to progressively raise the tax level of FCT.

Introduction of separate categories better tailored for cigarillos and waterpipe tobacco (WPT)

All three options envisage the introduction of separate categories for cigarillos and WPT. 78 This would imply the revision of current definitions. As regards cigarillos, the distinction already exists in the excise legislation 79 and thus could be based on physical characteristics of cigarillos (e.g. weight and other related criteria) 80 and, for consistency with the existing criterion used in the excise legislation, encompass all products that weigh less than 3 g. For WPT, the definition would be based on the one used in the Tobacco Products Directive 81 . The same minimum excise duty rates as for other smoking tobacco (OST) are proposed for cigars and cigarillos to avoid tax-induced substitution. WPT is a very specific product 82 , with around half its market estimated to be illicit. 83 To avoid unintentionally incentivising the illegal trade, a lower increase of the EU minimum rate is proposed 84  when compared to OST. A gradual increase approach is also adopted for option 2 and 3.

Option 1: Limited increase of EU minima

Option 2: Moderate increase of EU minima

Option 3: High increase of EU minima

5.3.Enlarging the scope to new products

The harmonisation of new products is important for the proper functioning of the internal market, collection of fiscal revenues, prevention of tax-induced substitution, fraud and tax evasion and a high level of health protection.

5.3.1.What is the baseline from which options are assessed?

The baseline for the harmonisation of the tax regime for new products assumes no change in EU policy. The new products - liquids for e-cigarettes, other manufactured tobacco and related products - continue not being covered by the Directive and hence would not be harmonised at EU level. Member States would continue to apply their national tax regimes, if any. As regards heated tobacco products (HTP), which are not explicitly defined in the Directive (however falling in the scope of the Directive due to the lack of clear harmonised taxation rules), the legal uncertainty remains.

5.3.2.Description of the policy options

Harmonising new products requires clarifying the application of excise duty rules for HTP, extending the Directive’s scope to include e-cigarette consumables (liquids including other refill containers), other manufactured tobacco (for example, chewing and nasal tobacco) and related products, in particular alternative products containing nicotine which can be considered as substitutes to tobacco products from a fiscal perspective (for instance, nicotine pouches); and adopting a ‘catch-all’ approach, to ensure that future market developments are covered. 85 The approach is technologically neutral 86 and can encompass current and prospective new products, mitigating the risk of product engineering for the purpose of circumventing tax definitions.

The extension of the scope of the Directive entails an appropriate definition and tax regime for new products. As a result of this extension, new products would be covered by the holding, movement and control requirements from the Horizontal Directive (see ANNEX 17: section 2 for details).

5.3.2.1.Heated tobacco products

There is a broad consensus among stakeholders on the need to establish a separate excise duty category for HTP at EU level. 87

The options are based on wide but objective definitions to capture current and future formats. The HTP excise category would be based on the following characterising elements: (1) the heating or activation of products without combustion; (2) the delivery of an aerosol for inhalation; and (3) a substrate which may or may not consist of tobacco (for analogy with cigarettes and smoking tobacco, substitute products partly or entirely made of substances other than tobacco would be included in the excise category). For instance, this category should also include heated products partly or entirely made of substances other than tobacco. These elements, to a greater or lesser extent, reflect the definitions applicable in Member States 88 .

Given the heterogeneity of this class of products, the tax base would reflect how the product is marketed: (i) HTP sold in sticks (minimum rates would be set ‘per stick’ as in the case of cigarettes, i.e. per 1 000 units); (ii) other HTP, to ensure a common denominator applicable to all different product formats 89 , by setting a ‘per weight’ (in kg) tax base.

Two options for the minimum rates are proposed taking into account preferences of Member States for HTP taxation 90 (per weight, or per stick approach). To avoid major market distortion or regulatory loopholes an equivalent taxation level was designed.

Options for EU minima for heated tobacco products

As for traditional tobacco products, this option includes the possibility to apply specific or ad valorem taxation, or a combination thereof and the minimum excise duty 91 .

5.3.2.2.Liquids for e-cigarettes

EU-level harmonisation of liquids for e-cigarettes excise duty is welcomed by tax authorities and most industry players (including 57% of companies declaring themselves as SMEs in the public consultation), while it remains debatable among consumers. 92

The options propose creating a new excise category for liquids based on two key elements, in line with the Tobacco Products Directive and customs classification (Combined Nomenclature 93 ). The first element refers to the intended use in an ‘electronic cigarette’ device. The second element is the reference to the acts characterizing consumption of liquids, as implicitly opposed to smoke and smoking. These elements, to a greater or lesser extent, reflect the definitions currently applicable in Member States. Liquids used exclusively for medical purposes are excluded from the scope.

E-cigarettes are viewed as substitutes, from a fiscal perspective to traditional tobacco products and in particular to cigarettes. Alongside the similarity in the use and consumption behaviour, e-cigarettes filled with nicotine containing liquids also offer an alternative means for nicotine intake. The nicotine, which is highly addictive and toxic, is the trigger for substitution.

Regarding the tax base, all the options follow a ‘per volume’ approach (i.e. taxation proportional to the volume). This is in line with the practice of Member States. This is confirmed by the results of the stakeholder consultation. 94

Option 1: Zero rate for the EU minimum

Under this option a fixed minimum of EUR 0/ml of liquid applies. This option would allow Member States without excise duty in place to maintain the status quo, but at the same time to monitor the movement of liquids for e-cigarettes through the EMCS.

This level of taxation corresponds to the approach adopted in Croatia.

Option 2: Higher level for the EU minimum

Under this option, a fixed minimum of EUR 0.36/ml of liquid applies with a relative minimum of 40% of the retail selling price, as an alternative condition.

Option 3: Moderate level for the EU minimum with a higher rate for high nicotine concentrations in liquids for e-cigarettes

This option offers the possibility of applying a higher level of excise duty to liquids with a high concentration of nicotine 95 , for example nicotine ‘boosters’ that are added to ‘shortfill’ nicotine-free liquids (underfilled bottles of flavoured liquids).

Under this option, a fixed minimum of EUR 0.12/ml of liquid applies for products 96 with up to 15 mg of nicotine per ml, including nicotine-free liquids, with a relative minimum of 20% of the retail selling price as an alternative condition. The minimum rate for products with any concentration higher than 15 mg/ml is set at EUR 0.36/ml, with a relative minimum of 40% of the retail selling price as an alternative condition.

5.3.2.3.Other manufactured tobacco and related products

The options propose creating an excise category for other manufactured tobacco and related products. There is consensus among tax authorities for including them in the scope of the Directive, although opinions then differ on how best this could be implemented. The public consultation confirms that, for this category of product, there is no prevailing view on implementing an EU minimum rate among stakeholders, except for citizens that were against. 97 To this end, two main catch-all categories with a broad, flexible definition are proposed:

§Other manufactured tobacco. This is a residual excise category designed to capture any manufactured tobacco product which does not belong to the smoking tobacco or heated tobacco products categories. To deal with the heterogeneity of the products concerned, it is proposed to established a catch all regime covering all hypothetical other manufactured tobacco products that cannot be classified otherwise, and a special regime, for traditional ‘non-harmonised’ smokeless products, like chewing tobacco and nasal tobacco, but not including snus which is only allowed for sales in Sweden. 98

§Related products. The second category proposed concerns related products, such as smokeless products for final consumption that contain nicotine but not tobacco and which are intended for the intake of nicotine by the human body. Two regimes are also proposed: a catch all regime to capture a multitude of products for nicotine intake through chewing, dissolving, sniffing, etc., and a special regime for nicotine pouches, which is the main emerging product in this area. However, some nicotine-containing products should be explicitly excluded from the scope of these categories, such as approved nicotine replacement therapies 99 , industrial nicotine 100 , and products containing a minimal amount of nicotine. 101

Regarding the EU minima for other manufactured tobacco, three options are proposed.

The rationale for option 1 is to introduce these products in the scope of the Directive with a basic EU minimum rate, reflecting the marginal and declining consumption of smokeless tobacco products.  102 The proposed rate is EUR 26/kg (or 10% of retail selling price (RSP).

Under option 2 a limited EU minima of EUR 107/kg (or 40% of RSP) is proposed, to align with the minimum rate proposed for other smoking tobacco (OST) under this scenario. This approach aims at preventing tax-induced substitution and risks of abuse of this new category.

Under option 3, following the same approach as for OST under the high increase option, a gradual increase of the fixed minimum over 4 years to EUR 143/kg of the product is proposed. The gradual phase-in of the tax increase is justified by the considerable evolution from the current situation where no EU minimum is applicable.

Regarding the EU minima for related products, the same rates are proposed for simplicity and considering the similarity in consumption patterns between nicotine pouches and chewing tobacco 103 . Regarding the structure, only an ad valorem excise rate (based on the retail selling price) is proposed as it is unrelated to the product’s substrate or how it is prepared for sale. Indeed, as a heterogeneous category, the excise structure should be sufficiently flexible to adjust to different product characteristics. 

Options for EU minima for other manufactured tobacco and related products

5.3.3.Options discarded at an early stage

Minimum rates set per nicotine content

The ‘per nicotine’ approach (i.e. taxation proportional to the concentration of nicotine contained in the liquid) is endorsed by some public health stakeholders on the hypothesis that it would discourage users to consume liquids with a higher concentration of nicotine, a highly toxic and addictive substance. However, the current market price of liquids is not linked to nicotine concentration, consequently, setting EU minima to be proportional to nicotine concentration could be too disruptive of the current market practice. Finally, an entirely ‘per nicotine’ approach would exclude nicotine-free liquids from taxation, would require more burdensome procedures for economic operators and tax authorities to verify tax declarations, and would magnify the incentives behind the illicit trade of pure nicotine, which is a risk frequently highlighted by Member States. None of the Member States has adopted a ‘per nicotine’ approach to the taxation of liquids for e-cigarettes.

Excluding nicotine free liquids from taxation 

Excluding nicotine-free liquids would fail to address ‘do it yourself’ practices, especially in the case of positive excise duty rate for nicotine containing liquids 104 . Liquids still have a negative health impact (e.g. leading to cancer, pulmonary and cardiovascular diseases) because of the harmful products (e.g. formaldehyde, heavy metals) they contain. Among other things, SCHEER found a moderate to strong risk of adverse health effects for heavy users of e-cigarettes, while adding that more research and data are needed to estimate long-term effects, as these products are relatively new 105 . While the relative health risks of e-cigarettes are still debated, excluding nicotine free liquids from taxation would hamper the pursuit of the public health goals in Member States as there is strong evidence that e-cigarettes play a role in the initiation of smoking, especially for young people 106 . Finally, the need to include into the scope of the Directive nicotine free liquids is supported by an overwhelming majority of tax authorities.

5.4.Enlarging the scope to raw tobacco

Harmonising excise duty rules for raw tobacco would resolve disparities in interpretation of the demarcation between manufactured tobacco products and raw tobacco for excise purposes and would imply the application of movement and control requirements under the Horizontal Directive. This is supported by most tax authorities surveyed (75%). Also, more than two thirds of the respondents to the public consultation expressed support for monitoring raw tobacco movements through the Excise Movement and Control System (EMCS), to curb illicit manufacturing.

5.4.1.What is the baseline from which options are assessed?

The baseline for the harmonisation of the tax regime for raw tobacco assumes no change in EU policy. Raw tobacco would not be covered by the Directive, hence would not be harmonised at EU level and would be free to move unsupervised by national authorities throughout the EU. Member States would continue applying their own tax regimes and control measures.

5.4.2.Description of the policy options

The options propose creating a new excise category for raw tobacco. Taking into account Member States’ practices 107 , raw tobacco would be defined in contrast with the existing manufactured tobacco categories, i.e. the definition of raw tobacco would include any form of tobacco that is neither a live plant nor a manufactured tobacco product. In practice it would include tobacco leaves and intermediate products.

As a result of harmonisation, the same as for new products as already presented in section 5.3.2 , the excise movement and control requirements established in the Horizontal Directive 108 would apply to raw tobacco, but with an exemption for the movements from cultivation areas (where the tobacco is grown) to the first processing 109 facility, as at this stage the risk of fraud is limited 110 . The EMCS would therefore start applying when raw tobacco is eventually received by the first processor. As most of the imported raw tobacco is first processed, this option would ensure equality of treatment as the EMCS obligation would apply at the same stage to both EU and non-EU grown raw tobacco. 

As regards to EU minima, two options are proposed.

Option 1: Zero EU minimum

Under this option a fixed minima of EUR 0/kg of the product is proposed 111 . This option is supported by almost all tax authorities.

Option 2: Positive EU minimum

Under this option a fixed minima, the same rate as for other smoking tobacco (OST), is proposed, with a gradual increase of the fixed minimum over 4 years to EUR 143 per kg. It should be noted that this option would be in line with the current practices of Member States which use taxation as a deterrent for trading raw tobacco outside of the recognised supply chain. In these countries, the tax rate applied to raw tobacco is typically the rate of OST 112 .

5.4.3.Options discarded at an early stage

Application of excise movement and control requirements at the initial stage of the supply chain

This option would include applying the control requirements established in the Horizontal Directive at the initial stage supply chain stage 113 , i.e. to tobacco growers and their organisations. It would imply high administrative burden for economic operators, typically SMEs, who are not generally involved with the manufacture of tobacco products and their placing on the market. Furthermore, national agricultural legislation already imposes registering obligations to tobacco growers. This option has been discarded as disproportionate.

6.What are the impacts of the policy options?

This section gives an overview of the main impacts of the options considered under the revision of the Directive by comparing them to the baseline. The impacts of the policy options for three revision areas have been assessed mainly on the basis of the External study.

The ‘no EU policy change’ scenario is based on a dynamic baseline. In this analysis, external factors e.g. fiscal developments at national level, other EU initiatives (e.g. in the context of anti-fraud or tobacco control policy) and broader economic and socio-cultural trends were considered. The baseline analysis focused on these specific aspects that are relevant to each of the three areas of intervention. For instance, in the area of new products, the External study looked at market value and price of e-cigarettes, heated tobacco products, other tobacco and related products, the number, type of consumer and consumption patterns, existing legal frameworks, estimated tax revenues in countries where taxes have been introduced, issues related to ad hoc regimes and disparities of treatment, related administrative burden for businesses and administrations.

The significant impacts considered in detail for each policy option relate to: (1) impacts on excise duties and on the market (including tax revenues and the impact on fraud and tax evasion); (2) administrative costs and savings (including the impact on SMEs and on competitiveness) taking into account digital aspects; (3) public health effects (smoking prevalence and related social costs); (4) impacts on employment.

The quantification of the impact of each policy option on the prices, quantities sold, and excise revenue was carried out following a partial equilibrium approach augmented with a module for intra-EU movements. The first step of the estimate was to identify, for each policy option, which Member States would have to increase their excise duties, for each market segment; this is because, in almost all cases, Member States currently levy higher excises than mandated by the Directive. Once determined which excises would have to be increased in each Member State, the resulting price increase was calculated taking into account that producers of tobacco and related products typically absorb part of the tax increase within their profit margin, adapting the price less than proportionately. On the basis of historical patterns, the expected degree of tax shifting to the consumer was determined by the External study at 0.7. The resulting impact on the demand for the various tobacco products was finally determined based on estimates for the price elasticity of demand calculated by the External study. The methodology also involved estimating how much consumption would shift from one product to another (notably from cigarettes to FCT, but also between higher- and lower-priced market segments of the same product), following a price increase. For new products, the pass-through rate was modulated to account for segment-specific price and demand dynamics, based on empirical evidence (see ANNEX 4: for details). The impact on revenue was finally calculated by adjusting the increase in unit tax revenue for the expected reduction in volume. Additionally, the analysis of market impacts has included a specific assessment of the expected variations in cross-border flows and of tax-driven substitution between cigarettes and FCT.

The External study assumed, conservatively, that only directly affected Member States would raise excise duties, ignoring the possibility that other Member States would ‘follow the example’ and hike their excise duties voluntarily.

This assumption was needed to disentangle the expected effects of the proposed revisions from other changes that would occur as a result of Member States’ internal excise policies. In this sense, these scenarios should not be seen as a prediction of future evolution in excise and price levels across the EU. 114 Details of the analytical methods are provided in ANNEX 4: .

Regarding impact on SMEs, the relevant impacts based on the SME check are presented in ANNEX 6: . 

General impacts are expected in other areas. However, they are not assessed in detail because they are similar in all policy options and are less direct and significant. These are:

§ Environmental impacts. Tobacco products are characterised by a peculiar environmental footprint in the various phases of their lifecycle. In particular, tobacco is characterised by being a crop with very high water demand, whose manufacturing can be seen as relatively energy-intensive, both because of curing requirements and because its complex logistics and distribution require a notable number of km be travelled. According to the WHO, tobacco growing is significantly more water-intensive than food crops such as tomatoes, rice or potatoes. 115 Tobacco production requires substantial amounts of energy (oil), with consequential adverse environmental effects in terms of CO2 emissions. Discarded cigarette butts present a danger to the environment, as filters do not biodegrade and can remain in the environment for very long periods of time in the form of microplastics. The European Commission has identified tobacco filters among the top five most common pieces of litter found on beaches. 116 Any reduction in tobacco consumption triggered by taxation would, in theory, reduce such impact. This in line with the goals of the European Climate Law 117 and other EU environmental legislation. As regards e-cigarettes, heated tobacco and smokeless tobacco products, there is a notable paucity of information on environmental impacts. However, it is reasonable to assume that e-cigarette emissions and waste are a significant source of environmental pollution. 118  All the options and the baseline scenario considered the principle of ‘do no significant harm’ to the environment.  For more details see ANNEX 17:  section 5 .

The right to a high level of human health protection is enshrined in the EU Charter of Fundamental Rights and already addressed under public health impacts. The interaction of the Directive and the potential impact of the policy options on other fundamental rights was not considered significant, in light of the fact that the scope of the Directive is limited to setting minimum taxation levels, and therefore is not assessed in detail.

6.1.Revising the EU minima and certain categories for traditional tobacco products

6.1.1.Baseline

In 2023, smoking prevalence in the EU amounted to 24%, i.e. one percentage point less than 2020 and four points down compared to 2012 levels. Tobacco related healthcare costs attributable to tobacco are close to EUR 48 billion annually. In terms of years of life lost, the burden of tobacco is close to 11.3 million annually, which in economic terms may translate in EUR 587 billion for the EU overall (see Table 2 ).  119

Under the baseline, smoking prevalence is likely to decrease by 1.7% a year, due to Member States spontaneous tax increases and the impact of other factors like tobacco control policies, and broader change in cultural attitude. The EA 2021 study estimated that such factors would reduce the social costs of tobacco consumption by roughly EUR 37 billion by 2025.

Table 2. Smoking prevalence and health costs

Source: External study based on TEDB / Euromonitor (unit consumption) and Eurobarometer (smoking prevalence and smokers’ population). Baseline values refer to 2023. Health impacts are based on Global Burden of Disease data and Eurostat.

Legend: DALY=Disability adjusted life years.

Notes: FCT and OST have been converted into sticks applying a 0.75g=1 stick equivalence. (*) The estimates for these variables are presented with a higher degree of granularity for the sole purpose of showing the possible different impact.

Excise duty revenue from tobacco products in the EU for 2022 was estimated at approximately EUR 79 billion. 120   Table   3  shows how the market is expected to evolve under the baseline (current EU minima unchanged).

Table 3. Traditional tobacco products under the baseline

Source: External study

Notes: * Given the inherent heterogeneity of cigars, it is impossible to compute a meaningful overall representative price, i.e. a WAP.

Under the baseline, the substitution between FCT and cigarettes is expected to decrease progressively in line with current trend, as the tax gap has been bridged progressively over time, through both scheduled increase in the EU minimum for FCT and Member States tax policies. 121 However, the last increase mandated by the Directive entered into force in 2020 and there are no further required increases. Sales of FCT increased while COVID – 19 restrictions were in place, suggesting substitution increased during that time, possibly due to reduced access to (cheaper) cross-border products, however, FCT sales have since declined between 2020 and 2023.

6.1.2.Impacts on excise duties and the market

Table 4  presents the economic impacts of the three options presented for each traditional tobacco product (see section 5 ). For cigars, cigarillos and OST, a gradual increase of the fixed minimum from EUR 107 to EUR 143 over 8 years is proposed in option 2 and over 4 years in option 3. The impacts presented are those relevant to the EU minima at EUR 107 (for option 1) and EUR 143 level (for option 2 and 3). Disparities between Member States are greater for cigars and cigarillos, compared to cigarettes, so the proposed increases will inevitably have different impacts, with very low taxing Member States required to significantly increase rates, while others remaining unaffected. In absolute terms, the proposed increase would increase the average excise duty from EUR 137 (per 1 000 units) to between EUR 143 and EUR 150 for cigarillos, and from EUR 727 (per 1 000 units) to between EUR 732 and EUR 740 for cigars.

The impact on the price of traditional tobacco products would depend not only on the extent of excise duty increases prompted in Member States, but also on how much of the increase is passed on to consumers or, conversely, absorbed by manufacturers by reducing profit margins or implementing portfolio optimisation strategies. Price level increases would in turn reduce demand and sales of tobacco products. The EU average price (WAP) for 1 000 cigarettes is estimated at EUR 319 in option 1, at EUR 336 in option 2 and at EUR 368 in option 3. For 1 kg of FCT, it is estimated at EUR 277 under option 1, at EUR 282 under option 2 and at EUR 294 under option 3.

Table 4. Estimated impacts on excise duties, revenues and market

Source: External study

Notes: Estimates refer to the EU-wide aggregated market. For tax-driven price increases, a pass-through rate of 0.7 is assumed. The impact on demand is calculated assuming an elasticity coefficient of -0.54. Figures are rounded.

Traditional tobacco products consumed in the EU are mostly manufactured within the Union and, obviously, manufacturers could be affected by reduced demand, even if some losses could be offset through exporting. The impact of increased EU minima on market sales would affect primarily large companies, which dominate the cigarettes segment, whereas SMEs, which are more present in the FCT, cigars, and cigarillos segments, would be comparatively less affected. Certainly, the degree of market power that the four large transnational tobacco companies are capable of exercising may allow for raising prices, even beyond that required by higher taxes, in order to minimise reduced profitability. 122 The impact on general retail is expected to be negligible, as retailers rarely sell only tobacco products. The impact may be more felt by first and second processors who depend directly on sales volumes and are typically bound to local markets.

Regarding the impact on fraud, while price levels may act to incentivise the illicit trade of tobacco products (ITTP) the main driver is not the relative levels of price or taxation 123 , instead other drivers are at play such as the permeability of borders; the severity of sanctions for offenders; the geographic proximity to illegal production and/or distribution sites. 124  The World Health Organisation contends that weak governance has a greater influence on the scale of the illicit tobacco trade than price differentials. 125 By contrast, within the EU, tobacco is subject to strong fiscal and regulatory controls, overseen by Member States with effective administrative frameworks.

Evidence from Ireland, which is the Member State with the highest tobacco taxes and prices in the EU, has shown that sustained tax and price increases can coexist with a general downward trend in the use of illicit tobacco products 126 .  

In other words, there is no direct proportionality between tax levels and the level of illicit trade (also see ANNEX 17: section 1.1 .).

The traceability and security features system for monitoring distribution of tobacco products in the EU under the Tobacco Products Directive is now well in place 127 in Member States for cigarettes and FCT. Since May 2024 it has been expanded to cigars, cigarillos and smokeless tobacco products.

Finally, the risk of ITTP should also be addressed by appropriate enforcement actions.

Impact on the consumer price index. The increase in the price of tobacco products, consequent to increased taxation, would impact inflation rates in the Member States, somehow proportionally to the extent of the increase and of the weight of products on consumer’s basket - as measured by Eurostat’s Harmonised Index of Consumer Price (HICP). Overall, EU aggregate HICP would increase by 0.18 percentage points in the case of option 1, 0.34 in the case of option 2 and 0.55 in the case of option 3 (see ANNEX 17: section 1.2 ).

Overall, the projected impact contributes in a limited way to inflation dynamics. However, it should be noted that price increases deriving directly from consumption tax increases usually fall outside the definition of inflation relevant for monetary policy purposes. 128 Moreover, it should be understood that the consumer price impact calculated is a purely arithmetic average between a zero impact for non-smokers and a higher (but intentional) impact for smokers, assuming other things being equal.

Separate categories for cigarillos and waterpipe tobacco (WPT) would allow Member States to adopt a more tailored taxation regime for these products according to their consumption patterns and risk analysis for these specific products. 129

A separate sub-category for WPT with a modest EU minima increase would improve legal certainty, allow tax authorities to monitor the WPT market more effectively, which could reduce illicit trade and tax evasion and give Member States more flexibility to adapt the WPT rate to discourage the illicit trade. According to the External study, while a lack of robust market data hampers a quantitative estimation, a decline in illicit sales is expected, especially under option 1. As regards the impact on annual tax revenue, an increase of EUR 10 million for option 1 and EUR 20 million for options 2 and 3 are expected.

6.1.3.Impact on substitution between products

Increase in the demand of FCT caused by substitution is likely to exceed the decline in sales caused by FCT own price increase. Regarding other products, the options proposed would mitigate tax-induced substitution across products 130 because current levels are well below the new EU minima proposed.

6.1.4.Impact on cross-border flows of cigarettes and FCT

Although the increase of the EU minima will foster price convergence among EU Member States to some extent, it will not eliminate the incentive for cross-border shopping 131 . However, the results, summarised in  Table 5 , show that the increase of EU minima would be associated with a reduction of cross-border flows 132 . Cross-border purchases of cigarettes are expected to reduce by approximately 1.8 to 5.8 billion cigarettes (equivalent to 6.4 % and 20.5% respectively) depending on the option.

Table 5. Impact on cross-border flows of cigarettes and FCT

Source: External study

Note: lb and up stand for the lower and upper bound, respectively. Numbers were rounded with different precision applied to different products

6.1.5.Public health impacts

According to WHO estimates, an increase of tobacco prices by 10% decreases tobacco consumption by about 4% in high-income countries and about 5% in low- and middle-income countries. 133 Any reduction in tobacco consumption triggers health benefits (defined as reduced health costs). The number of smokers would reduce between 5 and 12 million approximately, depending on the option. The smoking prevalence (aged 15+) would drop from a minimum of 1.2 percentage points up to 3.2 depending on the option, and under the most ambitious option it would drop to 20.8% (from the current 24%) (see  Table A17 ‑1  in ANNEX 17: ). This corresponds to the opinion of public health experts and NGOs who consider that increasing taxation of conventional tobacco products and closing tax differentials between cigarettes and other tobacco products were high priority for achieving the objectives of Europe’s Beating Cancer Plan.

As presented in

Table   6 , in line with the above projections of smoking prevalence, the proposed options would lead to possible savings in terms of social costs of between EUR 32 and 55 billion for option 1 and 2 and EUR 85 billion for option 3 by 2025 compared with the baseline. 134

Table 6. Impacts on public health costs

Source: External study

Notes: Estimates based on Global Burden of Disease data and Eurostat. Figures are rounded.

Legend: DALY=Disability adjusted life years.

6.1.6.Impacts on administrative costs and savings and on SMEs

The increase of EU minima would negatively affect consumers’ ability to buy the products (and hence lead to reduced sales for economic operators) but would not per-se entail relevant increase of administrative costs for business and Member States.

6.1.7.Impacts on employment

The employment impact is likely to depend on the market segment. There are no official statistics on jobs linked to tobacco because these fall across three different sectors: growing of tobacco in the primary sector, tobacco manufacturing, and retail. These sectors differ considerably in terms of their production function, labour intensity and market structure; as such the impacts will be correspondingly diverse. Even within the sectors, the impact on each individual business will vary depending on its product mix. 135 In overall it can be concluded that impacts on economy-wide employment would be marginal and concentrated in a handful of Member States. 136  Tobacco manufacturing employment has tended to decline for years as growing automation and mechanisation has made the tobacco product industry capital intensive. It should be mentioned that to minimise possible negative impact it is at Member State (or regional) level that initiatives must be taken to organise retraining courses for tobacco sector workers, which is supported at EU level through policy frameworks (such as the European Pillar of Social Rights Action Plan, the 2020 European Skills Agenda 137 ) and funding (such as the European Social Fund, Recovery and Resilience Facility, Just Transition Fund, Erasmus+). One particular action that the sector could take is to set up a partnership within the Pact for Skills 138 , bringing together actors (authorities, companies, unions, training providers etc.) to analyse and respond to the skills challenges of the sector.

6.2.Enlarging the scope to new products

6.2.1.Baseline

Under the baseline scenario, Member States would continue to apply various national regimes for new products.

Regarding heated tobacco products, excise duty levels vary greatly, from EUR 55 to EUR  1 000 per kg (EUR 226 on average), which translates into EUR 73 per 1 000 units on average for the most popular product on the market and taking into account the different rates applied in some Member States 139 . 

Regarding liquids for e-cigarettes, Member States have adopted heterogeneous tax regimes as regards the tax base (per volume of liquid or per nicotine concentration) and scope (whether nicotine-free products are within scope or not). Whereas the average rate applied by those Member States who tax liquids for e-cigarettes is 0.20 per ml, positive rates vary significantly, from EUR 0 .09 to EUR 0.70 per ml.

Certain traditional ‘other manufactured tobacco’ markets are broadly in decline, whereas related products, such as nicotine pouches are becoming increasingly popular, particularly among youth, and their market share is expected to grow substantially in the next five years. Not considering markets where nicotine pouches are banned or not taxed, the EU average rate applied is around EUR 88 per kg.

6.2.2.Impacts on excise duties and market

6.2.2.1.Heated tobacco products (HTP)

The impacts of proposed options 1 and 2 are based on the application of the excise duty ‘per unit’, as the near totality of HTP currently on the market would fall under this regime.

The main estimated impacts of harmonised excise duty minima for HTP are presented in Table 7 . The average excise duty level at EU level would increase by EUR 32 (option 1) and EUR 39 (option 2) per 1 000 units compared to the baseline. Under option 1 the average excise rate would be EUR 105 per 1 000 items, and EUR 122 under option 2. Under these options, 17 and 18 Member States respectively would be affected, with an increase exceeding 100% in some Member States.

Table 7. Impacts of proposed EU minima on excise duty, market, price levels, sales and excise duty revenues for heated tobacco products

Source: External study

Notes: Relative=relative minimum condition. The impact on demand is calculated assuming an elasticity coefficient of -1.36. For more details on methodology and assumptions see ANNEX 4:  and  ANNEX 17:  section 3.1 . Figures are rounded.

The new excise duty levels are expected to influence the selling price, and consequently the sales of HTP products as shown in

Table 7 . The retail price (WAP) would potentially increase by 8% under option 1 and 17% under option 2 on average with great variation across Member States (from 0% up to possibly 36% under option 1 and 55% under option 2). The impact on demand would be magnified by the price-sensitive nature of these products. Considering that over the past few years the HTP market has been growing 140 , the anticipated impacts would translate into a growth deceleration rather than a decline of this market. Excise duty revenues collected would increase by 40 % in option 1, by 55% in option 2.

6.2.2.2.Liquids for e-cigarettes

Under option 1 (zero EU minimum rate for all liquids), no significant impact on excise duty and price levels is expected. The main impact would be a harmonisation of EU rules and placing these products under the excise movement and control system. For options 2 and 3, the main estimated impacts are shown in Table 8 .

Table 8. Impacts of proposed EU minima on excise duty, market, price levels and revenues of liquids for e-cigarettes

Source: External study

Notes: Average price for all products is EUR 1.32/ml (2023). For the tax-driven price increase a pass-through rate of 0.25 is assumed. The impact on demand is calculated assuming an elasticity coefficient of - 1.36. Figures are rounded.

Option 2. The impact of option 2 would be more substantial and would require 23 Member States to raise their tax levels. The average price of standard liquids would increase possibly by 21% Overall, consumption is expected to go down 40 %, which would markedly affect the sector. Nicotine-free liquids could be more affected, as in the baseline scenario they are less or not taxed in some Member States.

Option 3. The EU minima envisaged under option 3 would lead to a moderate price increase. 22 Member States would need to adapt their tax regime. Sales would possibly decline by 17% over 2023 levels.

The new tax regimes are expected to have positive effects on tax avoidance by limiting the incentives for ‘do-it-yourself’ behaviours. 141 More importantly, a reduction in tax evasion could be expected, since all transactions would be subject to movement and control rules. Cross-border movements for commercial purposes would be subject to the EMCS and, therefore, bulk movements of e-cigarettes would be tracked. However, controls on business-to-consumer duty-paid distance sales would remain complex and burdensome to enforce. Furthermore, as products would be subject to excise duty in countries where they are not currently taxed, the incentive for cross-border shopping would reduce.

6.2.2.3.Other manufactured tobacco and related products

In Member States where nicotine pouches are taxed the average rate applicable is EUR 88 per kg, although there are substantial variations, from EUR 19 to EUR 429. For smokeless tobacco products, the average rate is EUR 103, varying from EUR 32 to EUR 211.

Depending on the scenario adopted, average prices for nicotine pouches would be expected to rise from EUR 293 per kg, to be between EUR 311 and EUR 406. For smokeless tobacco products, the average price is expected to increase from EUR 307 per kg to between EUR 368 and EUR 472.

Smokeless tobacco products and nicotine pouches. The market impact of option 1 would be very limited, with an indicative decline in smokeless tobacco products consumption of 1%. Under options 2 and 3, the decline could reach 38% and 44% respectively. As regards nicotine pouches the market impact of option 1 would be limited while under option 2 and 3 consumption could go down by 38% and 52% respectively (see  Table 9 ).

The overall impact on excise revenues would be positive from nicotine pouches and smokeless tobacco products. The expected excise revenue would be EUR 150 million under option 1, EUR 280 million under option 2 and EUR 290 million under option 3.

Table 9. Impact on price, market and revenues of smokeless tobacco products

Source: External study

Notes: Estimates for these products are presented with a higher degree of granularity for the sole purpose of showing the possible different impact of scenarios, but they have to be considered as indicative 142 . The impact on demand is calculated assuming an elasticity coefficient of -1.36. Figures are rounded.

The introduction of excise movement and control provisions on other manufactured tobacco and related products may contribute to the reduction of irregular flows, 143 and induce consumers of smokeless products to purchase products taxed in their country of residence, thus increasing the total excise revenues collected.

6.2.3.Impacts on administrative costs and savings 144 and on SMEs

Introducing new harmonised tax categories would generate compliance costs for economic operators. These costs include:

- administrative costs which are primarily related to general excise arrangement obligations such as to obtain authorisation, adopt record-keeping tools and procedures, fill-in tax declarations.

- adjustment costs to establish and operate a tax warehouse (where required), to install and operate IT software for excise control and movement system management, and to issue financial guarantees (where required) by the Member States of operation. 145

Overall, estimated costs for the whole new product sector would amount to EUR 9.6 million of one-off costs and EUR 6.3 million of recurrent costs in each subsequent year depending on the option. The bulk of additional costs would be incurred by SMEs operating in the e-cigarette liquids segment 146 , especially those based in countries where no national tax regimes are currently in place. Indeed, operators in the HTP and other manufactured tobacco sector (especially the nicotine pouch segment) are likely already compliant with the majority of obligations as both segments are largely controlled by transnational tobacco companies. 147  

Focusing on SME’s and on competitiveness, the following impacts can be expected:

§The expected reduction of sales that would follow tax increases would especially affect the SME component of the e-cigarette sector, with consolidation leading to a reduction in the number of SMEs, from the current 3 100 to between 1 600 and 2 400, depending on the option adopted. However, this impact must be put in perspective, considering the number of total SMEs in the EU (23 million) as well as the dynamics in the e-cigarettes market, which is evolving rapidly and where concentration is already underway. Similar consolidation processes have been registered and reported at Member State level (e.g. in Romania, Portugal, and Italy) after the introduction of national ad hoc tax regimes. In turn, this may push a number of operators out of the market and accelerate the expansion of large companies, which are better equipped to face more challenging competitive conditions. Market shares of large companies has already increased significantly in the past 3 years and would likely continue to rise. With the new regulation requirements (including the tobacco products regulation at EU level, and in all but four of the Member States ad hoc taxation), the withdrawal from the market or expected consolidation is part of the evolution of the market. The additional costs incurred would amount on average to EUR 1 800 annually. The impact on the costs of the final product would be minimal, less than 0.2 cent per ml of liquid. 

Single market improvements and cost savings. The proposed excise harmonisation of new products would remove the market barriers caused by the fragmentation of Member State rules and regimes, improving the overall coherence of the regulatory framework, thus facilitating intra-EU trade and ensuring a level playing field across the single market for economic operators, and especially SMEs. 148

Setting an EU-wide regulatory framework by adopting a uniform, regulated approach across the single market would put economic operators on an equal footing to compete, giving them the necessary legal certainty to further their projects and develop their commercial strategies. By acting at the EU level, operators get the assurance of an equal treatment across the single market.

The harmonisation would contribute to removing disparities in taxation levels, which are behind unfair competition practices like direct business-to-consumers sales online from excise-free countries, and cross-border shopping. This issue affects primarily the liquids for e-cigarettes sector, which mostly consists of SMEs. There is a substantial degree of consensus among all categories of stakeholders that a clarified and harmonised EU-wide approach to new products will reduce trade uncertainties and increase legal certainty by reducing the divergent interpretations around product definition, administrative difficulties and associated costs for Member States and economic operators. The application of holding, movement and control requirements from the Horizontal Directive (including computerised movement supervision through EMCS 149 ) will ensure the secure movement of excise goods, simplified procedures for traders while contributing to the fight against tax evasion with real-time information and checks on goods.

As regards the administrative impact for public authorities, the introduction of harmonised regimes for the new products would require some adjustments in the legal and administrative frameworks for national excise duty. They would incur administrative costs due to extending the scope of excise duty, including IT systems, to products not previously covered and enforcement costs and savings connected to control and prosecution of abuses. Where national tax regimes are already in place for new products, it is assumed that additional regulatory costs would be negligible. Regulatory costs incurred by Member States with the extension of certain movement and control rules to operators and products which are not currently subject to those provisions would amount to EUR 10 million of one -off and around EUR 0.5 million for each subsequent year. According to Member States authorities, the benefits of harmonisation would clearly outweigh the costs. 150  

6.2.4.Public health impacts

Whereas the public health debate is still ongoing regarding the health effects of these relatively new products, none of these products have been deemed to be safe or risk free. 151 The debate on the health risks of these products continues to advance and it is currently not possible to provide a detailed picture. However, there is strong evidence that e-cigarettes play a role in the initiation of smoking, especially for young people 152 . Based on the same assumption used for traditional tobacco products, that an increase in price decreases consumption, the introduction of taxation will reduce the incentive to initiate smoking and contribute to a reduction in consumption.

6.3.Enlarging the scope to raw tobacco

6.3.1.Baseline

As possible obligations and control measures only apply at national level, cross-border movements of raw tobacco would remain poorly controlled. The diversion of raw tobacco to illicit manufacturing will continue. This could further prompt illicit manufacturing and trade activities. Consequently, Member States would continue to lose revenue.

6.3.2.Reduction of fraud and tax evasion

Irrespective of the excise duty rate levied (zero or positive rate), the establishment of a harmonised category for raw tobacco in EU excise legislation would trigger the application of EU rules and procedures related to excise goods. Member States authorities would therefore have access to readily available IT tools (e.g. EMCS) that allow punctual monitoring of supply-chain operations, and could more easily detect irregularities and potential diversion routes. The output of the illicit manufacturing in the EU can amount to roughly 13 billion cigarettes, annually (i.e. around 30% of the total consumption of illicit cigarettes in the EU). According to the simulation 153 , an improved monitoring system could potentially detect up to 20% of illicit raw tobacco movements (i.e. twice the current estimated detection levels) and up to an estimated 20% to 30% of the volume of illicitly manufactured cigarettes. Besides national regulations in place 154 the application of a coordinated and effective mechanism at EU level to monitor cross-border movements will create clear and significant EU added value.  Improved coordination at EU level and better prevention tools will contribute to the measures already in place 155 to fight against the illicit manufacture and sale of tobacco products.

The proposed measure would affect raw tobacco diverted from the legitimate supply chain in the EU, but would not address irregularly imported (or cultivated) raw tobacco.

However, the reduction of EU-manufactured illicit products would not necessarily entail a reduction in the overall availability of illegal tobacco products, given that the former can be compensated - to varying degrees - by an increase in smuggling flows from non-EU countries, the extent of which cannot be predicted. 156

6.3.3.Impacts on tax revenues

The reduction of illicit manufactured tobacco would have direct positive effects on Member States tax revenues, as the losses caused by tax fraud will be partially recovered. Based on the estimated decline in illicit product volumes a reduction in foregone tax revenues of approximately EUR 1.3 billion under option 1 (i.e. with the zero rate applied) and of nearly EUR 2.6 billion under option 2 (i.e. with a positive excise duty applied) is anticipated 157 . Considering that the total excise duty loss associated with illicit trade of tobacco products is estimated to exceed EUR 12.5 billion (including illicit products not manufactured in the EU), the impact of the proposed measures, in relative terms, would translate into recovering about 10% to 20% of current tax fraud. 158

6.3.4.Impact on administrative and adjustment costs and savings

Economic operators. Compliance costs for economic operators triggered by the proposed reform would amount to EUR 0.1 million for one off costs and EUR 2 million for annual, recurrent costs under option 1 and to EUR 40 million for one off costs and EUR 4 million for annual recurrent costs (under option 2). 159  These include both the administrative costs primarily related to general excise arrangement obligations such as the need to obtain authorisation, to adopt record-keeping tools and procedures, to fill-in tax declarations and the adjustment costs to establish and operate a tax warehouse, to install and operate IT software for EMCS management, and to issue financial guarantees (where required) by the Member States. The costs of financial guarantees can be considered as being an indirect burden, given that these depend on Member States-level implementation. 160  The most substantial cost component relates to the setting up and operation of tax warehouses for the storage and control of raw tobacco. The burden could be comparatively greater for those operators who engage in very frequent cross-border movements, due to the specificities of their business.

Impact on competitiveness. Introduction of control requirements at EU level would reduce the availability of illicit tobacco and tobacco products in the market, so that legal players would experience lower competitive pressure from the illegal value chain, and this could compensate for some of these extra costs. Furthermore, some manufacturers are already willing to pay a premium for tobacco sourced from verified suppliers, mitigating the cost of implementing EMCS.

The additional costs of compliance, estimated above, will affect economic operators’ competitiveness differently, depending inter alia on their size (due to economies of scale) and position in the supply chain. The estimated additional costs are primarily of a transactional nature, the impact would be largely proportional to the volume of activities. Option 2 would affect the competitiveness of EU-grown tobacco more than imported tobacco while under Option 1 only negligible effects on their competitiveness are expected. Nevertheless, sectoral rearrangements could take place. The possible impacts on the sector would need to be monitored to address any unintended or disproportionate adverse effects.

Public authorities. The introduction of a harmonised excise category for raw tobacco would require Member States to revise their national administrative and legal framework, with a possible moderate increase in overall costs. They would incur administrative costs due to including new economic operators in excise system (registration and authorisation), and related IT systems and movements control under EMCS, and enforcement costs and savings connected to control. Overall, estimated costs 161  are as follow:

§One-off costs would be around EUR 9.7 million. The bulk of the estimated additional costs relates to the adjustment of the IT system and related training costs. 

§Recurrent costs would amount to EUR 0.7 million per year, mostly in relation to EMCS transactions.

As regards cost savings, EMCS and other control measures are expected to facilitate cross-border investigations and the prosecution of fraud. Moreover, harmonised movement and control requirements could make at least some national control measures (e.g. registration, authorisation) redundant, which would mitigate the administrative burden for both economic operators and public authorities. Finally, the definition of raw tobacco in the Directive would increase legal certainty 162 .

6.3.5.Public health impacts

The proposed options would have a direct and positive impact on tobacco control: the increased price of illicit products and diminished availability of raw tobacco would increase the effectiveness of taxation policies in curbing consumption. The options would also have a positive but more indirect impact, due to the reduced availability of low-price illegal products. Health inequalities in implementing tobacco control policies would also be reduced as a result. However, the impact would be different across Member States, because the composition of illicit trade and, specifically, the share of products originating from outside of the EU, vary greatly.

6.3.6.Impacts on employment

As for tobacco growing, while worldwide this is the greatest employment creator in the sector, less than 4% of the worldwide annual tobacco crop is grown in the EU. The number of EU growers in 2024 can be estimated at about 14 500-15 000. Their number has constantly declined in the past decade from an estimated 60 000 in 2010 (including for comparability Bulgaria and Croatia). The largest number is found in Bulgaria (approximately 6 200), followed by Greece (4 600) and Poland (3 500) 163 ; in the other Member States tobacco growing is practised in two thousand farms or less. It is reasonable to assume that a reduction in demand for tobacco will have an impact on EU tobacco growers, but its size is not straightforward and not necessarily proportional. First, the agricultural market is highly dependent on policy decisions on subsidies, tariffs and quotas on imports; this is particularly the case for tobacco, as the vast majority of it is imported. 164  Indeed, the decline in EU production of tobacco 165 was particularly steep after the discontinuation of decoupled EU aid in 2014, with some 32% reduction in output. Second, the final impact on employment may be dampened by switching to other crops, which is frequent in agriculture.

7.How do the options compare?

This section compares the various options’ impacts. The options are assessed against the criteria of effectiveness in reaching policy objectives, efficiency, as well as coherence with other EU policies. The comparison of options has been performed for each thematic area separately.

The baseline is used as point of comparison against which the other options are assessed, and is thus scored zero.

7.1.Revising the EU minima and certain categories for traditional tobacco products

Table 10  provides a comparison of the policy options for increasing the minimum rates for cigarettes, fine-cut tobacco, cigars, cigarillos and other smoking tobacco, as well as the introduction of separate categories for cigarillos and waterpipe tobacco (WPT).

Table 10. Comparison of the options

Legend:

Effectiveness. Overall, all the proposed options would help reduce the relative affordability of tobacco products, to a high or very high extent depending on the options. Option 3 could lead to significant excise duty increase in 8 to 21 Member States depending on products, with unpredictable market effects. 166 However, the PPP-adjusted approach would mitigate most extreme effects, and the transitional period envisaged would partly absorb market shocks. Regarding substitution, all the scenarios would reduce the tax gap between different products. On the other hand, option 3 is more likely to encourage consumers to switch from cigarettes to fine-cut tobacco.

Efficiency. The proposed measures display a positive cost/benefit ratio for Member States. Efficiency would be even greater if the impacts on the social costs of smoking are considered. Member States would raise additional revenue under all options, proportional to the extent of the EU minima increase under the different options. Economic operators in the tobacco sector would face reduced sales of between 5% and 14%, depending on products and options. Minor administrative costs would stem from the introduction of separate categories for cigarillos and waterpipe tobacco, possibly mitigated by savings brought by increased legal certainty.

Coherence. All the proposed options are conducive to meeting Europe’s Beating Cancer Plan target. 167 Option 3 would allow a higher reduction of smoking prevalence, i.e. a one-off decrease of smoking prevalence from the current 24% to an estimated 20.8%, and related social costs. All the proposed options risk incentivising illicit trade by increasing the price of tobacco products. This would be particularly salient under option 3, as it would entail unprecedented tax increases in certain countries.

Enlarging the scope to new products Table 11  provides a comparison of the policy options for harmonising the excise duty for HTP, e-cigarette liquids and other manufactured tobacco and related products respectively.

Table 11. Comparison of the options for enlarging the scope to new products

Legend:

Effectiveness. For heated tobacco products, option 2 would be more effective in raising relative price levels and also reducing tax-induced substitution from traditional tobacco products. For e-cigarettes liquids, option 1, in addition to not reducing consumption, would be less effective in terms of harmonisation and reducing substitution. Option 3 would possibly generate more variety among Member States tax regimes.

EU wide harmonisation of excise duty rates for liquids for e-cigarettes and other manufactured tobacco and related products would remove the market barriers caused by the fragmentation of Member State rules and regimes, creating new opportunities for operators, and especially SMEs, to expand their activities to other markets. On the other hand, their competitiveness may be affected because of their limited capacity to absorb cost increases compared to large companies.

Efficiency. All the proposed options would generate a moderate increase in compliance costs for economic operators, which can occasionally be more significant for SMEs (mainly in the e-cigarettes segment) due to the need to implement movement and control requirements applying to excise goods. Transnational tobacco companies active in the segment of new products are already equipped to deal with these rules.

Additional administrative burden for tax authorities would also be moderate. Member States that have introduced excise duties for HTP and liquids for e-cigarettes already apply similar rules and control measures as for conventional tobacco products. Although option 3 for e-cigarette liquids could appear to bring additional complexity for competent authorities, according to Article 20 of Tobacco Products Directive, Member States are already responsible for controlling appropriate levels of nicotine content, as well as ensuring that unit packets and any outside packaging of electronic cigarettes and refill containers include an indication of the nicotine content and the delivery per dose.

High increases of EU minima (option 2 for HTP and e-cigarettes, option 3 for other manufactured tobacco and related products) can lead to additional tax revenue. While the proposed minima for liquids are smaller than for option 2, option 3 would also better address the ‘do-it-yourself’ practices and related tax avoidance.

Coherence. All options are coherent with the goals of Europe’s Beating Cancer Plan, targeting the youth in particular, except option 1 for e-cigarette liquids, other manufactured tobacco and related products which would send a signal that appear in contradiction with public health objectives. Option 3 for e-cigarettes liquids, by placing an additional tax burden on high-nicotine strength products, would offer a good level of public health protection in spite of not proposing the highest increases.

7.2.Enlarging the scope to raw tobacco

Table 12  provides a comparison of the policy options for the introduction of raw tobacco in the scope of the Directive.

Table 12. Comparison of options of the introduction of raw tobacco in the scope of the Directive

Legend:

Effectiveness. Under both options, enlarging the scope of the Directive to raw tobacco would automatically trigger the application of movement and control measures set out in the EU excise duty legislation. Together with effective tax administration and control, this would lead to a reduction in tax fraud. Option 2 would enhance the deterrent effect against diversion to illicit manufacturing, because fraudulent movements would become liable to duty payment (in addition to the sanctions envisaged in the country’s legislation). That being said, option 1 would still give flexibility to Member States to adopt positive excise duty rates according to the level of tax evasion they face.

Efficiency. The anticipated reduction in sales of illicit manufactured tobacco would have direct positive effects on Member States tax revenue under both options 1 and 2, as the losses caused by tax fraud would be partially recovered. However, while generating more revenue, option 2 would trigger substantial compliance costs for economic operators, although the amount ultimately depends on Member State level implementation. 168

Coherence. Both options are coherent with and would contribute to EU policy on illicit trade of tobacco products, mainly the 2nd Action Plan to fight the illicit tobacco trade 2018-2022 169 , setting up operational tools to better monitor and control cross-border movements of raw tobacco. Both options are also coherent with the FCTC Protocol on illicit trade. All the proposed options would have moderate benefits on public health induced by the reduced availability of low-price illegal products.

8.Preferred option

This section provides an overview of the preferred options in each thematic area through which the revision of the Tobacco Taxation Directive could effectively and efficiently contribute to the delivery of the policy objectives.

8.1.Revising the EU minima and certain categories for traditional tobacco products

Based on the analysis carried out in this impact assessment, the preferred option for cigarettes, fine-cut tobacco, cigars, cigarillos and other smoking tobacco is option 3 - high increase of the EU minima with transitional period of 4 years for cigars, cigarillos, waterpipe tobacco and other smoking tobacco (with minima partially expressed in Purchasing Power Parities).

This option would be the most effective in curbing tobacco consumption. It would reduce smoking prevalence from current 24% to 20.8%, putting the EU firmly on the path to meet Europe’s Beating Cancer Plan target. The contribution is therefore tangible, although further steps, including the use of complementary non-fiscal policy, will evidently be necessary at a later stage. Associated savings in terms of social costs would potentially be significant (in the range of EUR 85 billion overall).

This option would generate EUR 14 billion of tax revenue for EU-27. It would nonetheless have a strong impact on consumers and economic operators in a number of Member States (notably Bulgaria, Cyprus, Luxembourg, Poland). The average increase of excise duty rates would be substantial (estimated at 41%) and reach up to 94% in the case of cigarettes, 24% in the case of fine-cut tobacco, while for cigars and cigarillos a few Member States would face an increase of national levels exceeding 300%.

The impact would be softened by the proposed ‘partial PPP approach’ because it would mitigate the risk of disproportionate impacts on Member States where, in nominal terms, excise duty levels are the lowest but where the price of tobacco products, relative to income levels, is high. Furthermore, this approach would extend the EU minima effects to Member States that have traditionally been unaffected, despite the relative affordability of tobacco there. In this sense, this approach would introduce more equity in EU minima implementation. The increase of EU minima for fine-cut tobacco, cigars, cigarillos and other smoking tobacco are designed to progressively bridge the gap with the rate for cigarettes to achieve a progressive convergence between products, to minimise the risk of cross-product substitution.

Importantly, option 3 could incentivise the illicit trade of tobacco products, although other factors are also at play. For example, the permeability of borders, the severity of sanctions against offenders and in general the capacity of local authorities to detect and prosecute illicit activities.

Option 3 would provide a strong signal. The significant public health benefits of option 3, as well as the excise duty revenue generated, would largely compensate the expected impact on consumers and economic operators as well as the risks of rising illicit trade.

The proposed revision of the minimum EU tax rates for tobacco products does not imply any discrimination between domestic/imported products as excises duties are charged in the place of consumption (i.e. it is not linked to the place of origin of the excisable goods). Minima are already in place for manufactured tobacco products.

With respect to the cross-border shopping effect, it is important to note that increasing minima would mitigate, albeit moderately, price-level differences among Member States. Hence the economic incentive behind cross-border flows, particularly as regards irregular cross-border flows will remain.

In parallel, the introduction of a separate sub-category for cigarillos would allow Member States to adopt a more tailored taxation regime. Similarly, a separate sub-category for waterpipe tobacco within the larger ‘smoking tobacco’ category would improve legal certainty and help Member States fight illicit trade.

8.2.Enlarging the scope to new products

The preferred option is to introduce new excise categories for each of these product categories with high amount of excise duty (partial PPP): option 2 for heated tobacco products; for liquids for e-cigarettes option 3 is preferred, combining two flat rates for low and high-nicotine content products; option 3 for other manufactured tobacco and related products with a gradual increase of the fixed minimum over 4 years to EUR 143.

First, establishing new excise categories for HTPs, liquids for e-cigarettes, other manufactured tobacco and related products would close a regulatory gap and remove substantial fragmentation caused by different national regimes. It would also be coherent with the orientation of the FCTC and WHO recommendations on the taxation of these products.

Establishing harmonised definitions, tax treatment and movement and control requirements, would enhance the functioning of the market for these products. The preferred option relies on the extension of already proven IT systems for handling excise goods. Related administrative obligations follow the ‘digital by default’ principle. In line with the regimes currently in place in most Member States, the simple tax structures proposed would be straightforward and efficient to implement.

The increased legal clarity of the regulatory framework at EU level would support businesses acting across borders and ultimately improve their competitiveness. Also, it would guarantee the fair treatment of all products across business sectors. On the other hand, SMEs, present in particular in the e-cigarettes sector, would be less capable overall to deal with new administrative requirements and absorb cost increase than large companies, and therefore would be disproportionally affected.

Regarding the proposed excise duty rates, the introduction of high EU minima would decrease the tax gap between new products and traditional tobacco products and so reduce tax induced substitution. The proposed introduction of minimum excise duty rates would not imply any discrimination between domestic/imported products as excises duties are charged in the place of consumption (i.e. it is not linked to the place of origin of the excisable goods). On the other hand, it would trigger an increase in consumer prices in most EU countries, leading to marked drops in sales, affecting companies operating in the new products sector.

For HTP, option 2 would set the minimum excise rates closer to the taxation of cigarettes. For e-cigarette liquids, option 3 would better address the variety and peculiarities of the products and related consumption patterns. Indeed, this approach introduces a modulation of rates based on health considerations (low- and nicotine-free products are taxed less) and to some extent discourages ‘do-it-yourself’ practices (by taxing nicotine boosters more). For other manufactured tobacco and related products, option 3 would prevent the risk of regulatory loopholes.

The introduction of a high amount of excise duty for a range of new products, which are particularly appealing to young people, who are at risk of developing addiction, would contribute to achieving the long-term goal of Europe’s Beating Cancer Plan of a tobacco-free generation.

8.3.Enlarging the scope to raw tobacco

The specific analysis carried out in this impact assessment suggests option 1 - new excise category for raw tobacco with a zero minimum rate as the best option to tackle the problems specified in section 2.

The establishment of a harmonised category for raw tobacco in the EU excise legislation, even with a zero rate, would extend the movement and control measures set out in the EU excise duty legislation to raw tobacco. This option envisages applying the EMCS system to cross-border movements. In this sense, Member States authorities would have access to a readily available tool that allows monitoring of supply-chain operations, and therefore assists in detecting irregularities and potential diversion routes. Related administrative obligations follow the ‘digital by default’ principle.

The implementation of this option would generate additional costs for Member States authorities and supply-chain operators. In the case of authorities, such costs would be offset, and possibly overcome, by the benefits of a reduction in tax fraud. Regarding economic operators, the costs would be mitigated through the exemption of the first steps of the raw tobacco supply chain.

By introducing a zero rate, the mechanism remains proportionate with the objective of addressing tax evasion, fraud and avoids double taxation. At the same time, it will give flexibility to Member States in setting positive rates according to the level of tax evasion they face.

8.4.REFIT (simplification and improved efficiency)

9.How will actual impacts be monitored and evaluated?

9.1.Indicators for monitoring and evaluation

The table below provides an overview of the objectives, the indicators to measure whether they will be achieved, and the tool for monitoring them.

Legend: E: evaluation study.

9.2.Monitoring structures

Tobacco taxation is regularly monitored, at least once a year by collecting information from Member States on the basis of the Commission Implementing Decision of 28 July 2011 concerning the list of statistical data on the structure and rates of excise duty applied on manufactured tobacco to be provided by the Member States pursuant to Council Directives 92/79/EEC and 92/80/EEC. 170  Moreover, DG TAXUD and Member States update the information database on the applicable tax rates twice a year (Taxes in Europe Database). The Commission’s traceability and security features system, established by the Tobacco Products Directive, allows for real-time monitoring of the tobacco supply chain. 171

The Committee on Excise Duty, an advisory committee on excise issues chaired by the Commission in which representatives of all Member States participate, will monitor the implementation and functioning of the revised rules. The Committee on Excise Duty will report on implementation issues and the evolution of problems identified in this impact assessment. It will discuss and clarify possible interpretation issues between Member States. In case new legislative developments are required, the Indirect Taxation Expert Group might be further consulted.

Finally, in view of the fast evolution of the market for heated tobacco, liquids for electronic cigarettes, nicotine pouches and other nicotine products the Commission will review minimum levels of excise duties for those products after 2 years after the application date of the new legislation taking into account regulatory and market developments.

9.3.Evaluation

Member States shall communicate to the Commission relevant information to jointly examine and evaluate the functioning and evolutions of the new legislation, including in respect of legal certainty, market and economic distortions, excise fraud, the application of the new provisions on raw tobacco, etc. It will be used to evaluate the effectiveness, efficiency, coherence with other interventions with similar objectives, and continued relevance and EU added value of the new legislation. The evaluation should also collect input from all relevant stakeholders as regards the level and the evolution of their administrative burden and compliance costs. The Commission will prepare the evaluation at the earliest 5 years after the application date of the new legislation, allowing the markets to adjust and the results and impacts to materialise.

ANNEX 1:PROCEDURAL INFORMATION

1.Lead DG, Decide Planning/CWP references

The lead Commission service for this file is DG TAXUD. The Decide reference for this initiative is PLAN/2020/8656.

In June 2020, following publication of the Commission evaluation of the Directive, the Council invited the Commission to submit a legislative proposal for the revision of the Directive on the basis of an impact assessment.

This initiative is part of Europe’s Beating Cancer plan, which notes the pivotal role of taxation in reducing tobacco consumption. It is also included in the Commission work programme 2021.

2.Organisation and timing

The following DG were invited to the Inter-Service Steering Group (ISSG): AGRI, OLAF, SANTE, SG, LS, GROW, TAXUD and JRC.

Between 2020 and 2021 a consortium led by Economisti Associati s.r.l. (EA) and commissioned by DG TAXUD undertook the assignment titled ‘Impact analysis of the review of tobacco excise duty rules’ (‘EA 2021 study’). The EA study 2021 study relies on the findings of the previous external studies carried out by EA in 2017 (‘EA 2017’ 172 ) and in 2019 (‘EA 2019’ 173 ). In particular, the study expands and updates the previous works in the light of market developments and new emerging issues.

The study carried out an accurate analysis of existing policy issues and consistently with other EU policies on tobacco (in particular tobacco control policies and the policies against illicit trade of tobacco products and related tax fraud) in order to elaborate policy options which could be introduced to address these issues. It also assessed and compared the expected impacts of different possible options and reviewed their feasibility.

Additionally, EA assisted the Commission in conducting a public consultation to collect citizens’ comments and feedback on the initiative and the possible options envisaged for the revision of the Directive.

The ISSG reviewed and approved the following documents:

§all ISSG meetings' minutes;

§questionnaires (public consultation, Member States, economic operators) for the stakeholders' consultation;

§inception and interim reports 174 of the External study;

§final report of the External study;

§Commission's Impact Assessment Report (this document).

As the impact assessment was not followed by a legislative proposal at that time, a study was commissioned in 2024 to provide for an update of market and regulatory developments and related analysis. The update study (‘EA 2025 study’) provided a comprehensive update of EA 2021 study addressing market and fiscal changes and conducted a focused consultation to collect feedback from stakeholders.

Throughout, DG TAXUD engaged directly with stakeholders, organising a stakeholder event on the revision of the Tobacco Taxation Directive in May 2022 and participating in a Fiscalis workshop concerning new tobacco products, hosted by Poland, in October 2024.

The chronology of the main events is as follow:

3.Consultation of the RSB

On 22 June 2022, DG TAXUD submitted the draft Impact Assessment to the Regulatory Scrutiny Board and the Board meeting took place on 19 July 2022. The opinion of the Board, as issued on 22 July 2022, was positive with reservations.

The Board’s recommendations have been addressed as presented in the table below.

4.Evidence, sources and quality

The evidence for the impact assessment report was gathered through various activities and from different sources:

§Evaluation of the Council Directive 2011/64/EU of 21 June 2011 on the structure and rates of excise duty applied to manufactured tobacco, SWD(2020) 33 final;

§Council conclusions concerning the structure and rates of excise duty applied to manufactured tobacco;

§Europe's Beating Cancer Plan, SWD (2021) 13 final;

§PwC PricewaterhouseCoopers LLP, ‘Study assessing articles 32 and 36 of Council Directive 2008/118/EC concerning the general arrangements for excise duty’, 2020;

§Economisti Associati, ‘Study on Council Directive 2011/64/EU on the structure and rates of excise duty applied to manufactured tobacco’, 2019 and 2021 (EA 2019 and EA 2021 study);

§Economisti Associati, ‘Study on the impact analysis of a review of tobacco taxation rules: update with recent market and regulatory developments’, 2025 (EA 2025 study);

§Feedback on the published Inception Impact Assessment and from the public consultation;

§Results of the seminar organised by DG TAXUD with participation with experts from Members States on raw tobacco;

§Desk research.

ANNEX 1:Stakeholder consultation (Synopsis report)

1.Consultation strategy

The consultation strategy incorporated a range of different activities to comprehensively gather stakeholder opinions through interviews and various, general and specific surveys. In particular, the following activities were carried out:

A.Feedback on the Inception Impact Assessment. The consultation on the Inception Impact Assessment was launched on 8 December 2020, and closed on 5 January 2021, and it obtained 134 feedbacks mainly from Italy (52) and France (23). The majority of the replies came from EU citizens (94). There were also several replies from industry representatives (20) and NGOs (8).

B.An online Public Consultation (30 March 2021 - 22 June 2021 ), to which economic operators (businesses), business associations, professionals, public health and consumers NGOs, academicians, researchers, local authorities and EU and third country citizens, responded. The consultation, though not statistically representative, elicited 7262 responses, covering all EU Member States but also third countries (including UK), with 235 position papers. The vast majority of contributions came from EU citizens (88%). The presence of repeated open comments with identical wording suggested that some feedback could have been coordinated. Open comments also suggested that respondents were consumers of e-cigarettes concerned with the possible taxation of these products.

C.A virtual tobacco event was organised on 18 May 2022. This small-scale event was opened to any stakeholder interested in tobacco taxation and the upcoming proposal. It gave the opportunity for all interested parties to express their views on the latest developments in the area. Participants appeared to support the increase of EU minima, the regulation of novel products (although opinions on taxation of nicotine free products diverged) and the control of raw tobacco to address illicit manufacturing.

D.Targeted consultations with Member States’ public authorities. It consisted of a questionnaire survey sent to:

a)tax and customs authorities competent for tobacco excise duty legislation and administrative implementation: 25 respondents from 27 Member States;

b)public health authorities that are members of the Commission Expert Group on Tobacco Policy: 18 respondents from 27 Member States.

E.In-depth interviews with Member States authorities, Commission staff, industry representatives, public health experts and NGOs, professionals, research institutions and other stakeholders for a total of 97 interviewees. Most of interviews were ‘deep-dives’ from a sample of selected countries, namely: France, Italy, Sweden, Poland, Bulgaria, Croatia, Ireland, Denmark, Czechia and Finland. Regarding economic operators, interviews addressed companies operating at different stages of the tobacco value chain, i.e. growers, first and second processors, storage companies, manufacturers, and retailers organisations. In terms of products, consultations included manufacturers from all ‘traditional’ tobacco products (cigarettes, fine-cut tobacco (FCT), pipe tobacco, cigars and cigarillos, waterpipe tobacco (WPT), traditional chewing tobacco and snus) and from new products like e-cigarettes, heated tobacco products (HTP), nicotine pouches and the Cannabidiol industry.

F.A call for data (19 December 2024 - 12 February 2025) was conducted to collect factual evidence (e.g. data, reports, studies, legal acts etc.) in the context of the update of the External study. 53 responses were received, of which 19 from Member States authorities and 34 from industry representatives operating in various segments. Despite the call addressed also public health NGOs, no feedback was received from this group. Eight interviews have been carried out, involving European Commission relevant staff, national tax authority and law enforcement authorities, mostly revolving around unrecorded tobacco.

G.A Fiscalis workshop ‘Exchange of information and practises on implementation of excise duty for new products (heated tobacco, liquids for electronic cigarettes and other)’ (3 October 2024) allowed to collect up-to-date information from experts from the Member States on tax policies and measures in place for the monitoring of new products (heated tobacco, liquids for e-cigarettes and others).