Committee Reports > List of Committees > Joint > 1992 > Committee on the Secondary Legislation of the European Communities (6th Committee) > Report No. 14 - Commission Proposals on the Harmonisation of the Structure and the Approximation of Rates of Excise

A. SUMMARY

Commission Proposals

1The removal of fiscal barriers to trade forms an important part of the Community’s programme for the completion of the internal market. In 1989, the Commission put forward four proposals dealing with the harmonisation of structures (i.e. the rules and regulations governing the administration of excises) and four dealing with the approximation of rates of excise on mineral oils, tobacco and alcohol.

2In 1987, the Commission had proposed that member states would all adopt the same rates of excise for each excisable product. However, agreement could not be reached on the rates of excise to be applied. In the proposals circulated in 1989, the Commission proposed that minimum rates of excise would be adopted for each product to start with. At the same time, the member states would adopt target rates of excise towards which they would move their rates over a period of time.

3In June 1991, and again in July 1992, at meetings of the Community Council of Ministers for Economics and Finance, (ECOFIN June 1991 and ECOFIN July 1992) agreement was reached on the minimum rates to be applied to excisable products. However, the concept of target rates was abandoned.

Views of Interested Parties

4The provisions of the draft Directives have attracted a great deal of criticism from the principal relevant industrial interests in Ireland.

5In the case of tobacco, it has been agreed that excises should amount to at least 57% of the retail price of cigarettes. The tobacco industry believes that this will alter the present form of tobacco excise from a predominantly specific excise (i.e. so much per packet of cigarettes) to an ad valorem excise (i.e. so much per. cent. of the price). The industry believes that this will enhance the competitiveness of cheap continental cigarettes and that it will also tend to reduce excise revenue.

6The Irish brewing, distilling and cream liqueur industries object to the decision to permit member states to charge a zero excise on wine. They point out that this puts all other drinks at a competitive disadvantage. They argue that excises should be levied on the different products according to their alcoholic content - as is broadly the case in Ireland.

7The draft Directives dealing with mineral oils (petrol, diesel, LPG, fuel oil, etc) will have little impact on Ireland since Irish excises are higher than the minima proposed. An exception is heavy fuel oil where Irish rates will have to be increased. The Confederation of Irish Industry objects to this on the grounds that it will raise industrial costs.

Views of the Joint Committee

8The Directive on the structure of excises provides for the situation when customs controls at frontiers are abolished from 1 January 1993. This Directive provides for new controls which will take the place of border controls. The Joint Committee is concerned that these controls will not be as effective as border controls and that as a result there will be loss of revenue to the Exchequer, as well as competitive losses to the Irish drink and tobacco industries and the businesses engaged in the distribution of excisable products.

9The Joint Committee notes that when the Commission proposed in 1987 that all member states would adopt the same rates of excises, estimates were made of substantial losses to the Exchequer. As a country very dependent on excises, the Government requested that Ireland should be compensated for adopting lower rates of excise. But the decision to focus solely on minimum rates means that there will be no formal programme of approximation and so it is difficult to formulate a claim for compensation. Current official estimates of the revenue loss are based on the assumption that Ireland will approximate to UK rates of excise. However, the UK may be forced to approximate to continental rates. Thus approximation with the EC will be accomplished by stealth as it were, and there will be no compensation.

10The Joint Committee would have preferred that the member states reached agreements on single rates of excise for all excisable products. This would have made for a much more integrated market and so maximised the Community-wide benefits from the programme to eliminate barriers to trade. At the same time, the ordinary consumer in Ireland would have benefitted from substantial decreases in excises on a number of items. Agreement on single rates of excise would further have provided a solid platform for an Irish claim for compensation. This compensation would have shielded the Irish Exchequer from the costs of fiscal harmonisation. As it is, the Joint Committee urges that a claim for compensation be pursued with the Community. But the Joint Committee recognises that inevitably the Revenue Commissioners will have to take measures to ensure that the excises due under the new arrangements are collected.

Recommendations of the Joint Committee

11In the light of the foregoing the Joint Committee makes the following recommendations:

aThe Joint Committee believes that the present trend of policy in this area is tending to produce the worst of all possible worlds: increased excise-based disadvantages for Irish industry and loss of revenue to the Exchequer while at the same time no real progress towards equality of treatment of products amongst the member states.

bThe Joint Committee’s view is that the ultimate objective should be for member states to agree on single rates of excise to be applied throughout the Community and which are non-discriminatory as between competing classes of products. This would ensure fair competition for Irish products, integrate the single market, benefit consumers, reduce revenue losses through smuggling and reduce the costs of customs surveillance.

cThe Community agreement on excises provides for a two-year review of the situation starting in 1994. The Joint Committee recommends that the Government should use this review process to try and get agreement on Community-wide target rates of excises to be attained in the long run. In the meantime, agreement should be sought that member states should be permitted to make changes in excise rates which are consistent with convergence on the target rates.

dHowever, the immediate prospect for Ireland is that Irish excise rates are liable to forced downwards as a result of the removal of border controls from 1 January next. The Joint Committee recommends that the Department of Finance should formulate a claim for compensation for loss of excise and that this should be based on something lower than UK rates.

eThe Joint Committee notes with concern the Government decision to replace excises on cars with a registration tax calculated to yield the same level of revenues. While recognising the need to preserve sources of revenue, the Joint Committee strongly urges that this registration tax should be phased out over a three to four year period so that the consumer can benefit in a tangible way from the creation of the single market.

fIn the case of drinks, the Joint Committee urges that the 1994 review should result in an agreement that excises should eventually be fixed in proportion to alcoholic content. Agreement should also be sought that in the meantime, member states should not be permitted take any steps which would worsen existing inconsistencies in this regard.

gWith regard to the system to be used for calculating excise on beer, the Joint Committee recommends that the “worts” system (the system in use in Ireland at present) should, if at all possible, continue for some years to allow brewers to recover the investments (see paragraph 48) they have made to adapt to this system before changing over to the “end use” system proposed by the Commission and accepted by the Government.

hIn the case of cigarettes, the Joint Committee urges that every opportunity should be used in the drafting of the regulations to ensure that the excise on cigarettes should operate as a specific rather than an ad valorem excise. As in the case of spirits the 1994 review process should be used to try and get Communoity acceptance of specific rates of excise.

iIf Ireland adopts the minimum excise on heavy fuel oil, the excise will still be one of the lowest in the Community. Therefore the Joint Committee recommends that, unlike the other products, the Irish government should not press for the adoption of target rates of excise on heavy fuel oil. Thus, Ireland would retain the right to have low rates of excise on heavy fuel oil and so alleviate pressure on Irish industry’s costs.

jThe Joint Committee recommends that the Danish system, whereby excise is deferred on cars bought by car rental companies until the cars are resold by the rental companies, should be introduced into Ireland in the case of the proposed registration tax for as long as there is such a tax in this country.

kThe Joint Committee believes that the only way to prevent distortion of trade and illegal movements of excisable products after 1 January next is through the adoption of single rates of excise throughout the Community which should be coupled with compensation to the Irish exchequer for the loss of revenue thereby entailed. Until this does come about, and therefore as a temporary measure, the Joint Committee recommends that tax stamps should be required on cigarettes, spirits and wines. Adequate documentation should also circulate with excisable goods inside the country in order to minimise the incidence of excise evasion.

lThe Joint Committee notes that the removal of borders could increase the bonding requirements and costs of Irish exporters who must now cover consignments to the point of consignment, and not, as heretofore to the point of embarkation. The Joint Committee urges the Revenue Commissioners to consult closely with Irish exporters with a view to finding means of alleviating this cost.

mThe abolition of border controls is not the direct consequence of the legislation under consideration in this report. However, the Joint Committee views with sympathy the position of customs clearing agents who will become redundant after the abolition of border controls on 1 January and urges that the development agencies should formulate special programmes, using the funds allocated by the Community for this purpose, to help those concerned to find alternative employment. The Joint Committee’s views on this issue are dealt with in the Annex to this report.

B: INTRODUCTION

12An important part of the European Community’s programme for the creation of the internal market comprises the abolition of what are termed fiscal barriers. These are distortions in the free flow of trade between member states caused by differences in the rates of indirect taxes (i.e. VAT and excise duties) and in the way in which these taxes are administered. The Commission’s legislative programme in this area has particular significance for Ireland because the Irish Exchequer is relatively more dependent on indirect taxes than the Governments of other member states. The Joint Committee decided therefore that an examination of the programme was in order. It decided to confine its attention to the Directive and draft Directives in the area of the harmonisation of the structure and approximation of the rates of excise which had been proposed in 1989. These relate to tobacco, alcohol and mineral oils. Thus they affect the important indigenous Irish industries of tobacco manufacturing, brewing and distilling. Ireland’s position as a peripheral economy, and its consequent dependence on transport, also gives particular importance to the cost of mineral oil products.

Harmonisation of Structures

13The harmonisation of the structure of excises comprises:

Directive (92/12/EEC) on the general arrangements for products subject to excise duty and on the holding and movement of such products;

and draft Directives on:

the harmonisation of the structure of excise duties on alcoholic beverages and on the alcohol contained in other products (Com (90) 432 final)

the amendment of Council Directives 72/464/EEC and 70/32/EEC on taxes other than turnover taxes which are levied on the consumption of manufactured tobacco (Com(90) 433 final including addendum Com (90) 433 final/2)

the harmonisation of the structure of excise duties on mineral oils (Com(90) 434 final)

Approximation of Rates

14The programme on the approximation of the rates of excise comprises draft Directives on:

the approximation of the rates of excise duty on alcoholic beverages and on the alcohol contained in other products (Com (89) 527 final).

the approximation of taxes on cigarettes and on manufactured tobacco other than cigarettes (Com (89) 525 final)

the approximation of the rates of excise duty on mineral oils (Com(89) 526 final)

the fixing of certain rates and target rates of excise duty on mineral oils Com(91) 43 final)

Acknowledgements

15The present report was prepared by Deputy Sean Barrett, Chairman of the Sub-Committee on Economic, Commercial and Financial Matters. The Joint Committee is indebted to Deputy Barrett and his colleagues on the Sub-Committee for their dedicated work on these proposals.

16Written and oral evidence was received from the Department of Finance, the Revenue Commissioners, the Confederation of Irish Industry, the Food Drink and Tobacco Federation, the Irish Brewers Association, the Car Rental Council of Ireland, the Irish Road Haulage Industry and the Irish Tobacco Manufacturers Advisory Committee. Written submissions were also received from the Department of Tourism and Transport, the Border Clearing Agents Association, the Association of Customs Clearance Agents and Freight Forwarders of Rosslare Harbour, the Wine and Spirit Association, Irish Distillers Group Ltd., R. A. Bailey & Co Ltd. and A. Guinness Son & Co. Ltd. All of these contributions were of considerable assistance to Deputy Barrett’s Sub-Committee. The Joint Committee would like to express its appreciation to the personnel and organisations concerned. The Joint Committee would also like to acknowledge the assistance of the consultant, Mr. Jim Dorgan in preparing this report.

C. BACKGROUND

17The Treaty of Rome sets out the objective of creating an integrated economic area among the member states of the Community based on the “four freedoms”: the free movement of goods, services, capital and persons without artificial restraints of any kind. In the years immediately following the establishment of the Community, the member states abolished tariff and quota restrictions on the movement of goods and adopted a common external tariff vis á vis countries outside the Community.

18However, the abolition of these overt barriers to trade brought into focus the large number of obstacles to intra-Community trade represented by the member states’ differing technical and fiscal regulations. Progress on the elimination of these barriers was extremely slow, partly because of their inherent complexity but perhaps also because of the reluctance of member states to abandon protectionist instincts. However, in 1985 the Commission put forward the White Paper “Completing the Internal Market” (Com(85) 310) which mapped out the steps which needed to be taken to eliminate these obstacles. The proposals had a galvanizing effect on the member states and the programme to complete the internal market was adopted.

19As a measure of the importance which the member states attached to the programme it was also agreed that decisions on proposals relating to the internal market should be by qualified majority vote thereby modifying the principle of unanimity hitherto required by the Treaty for most decisions. It was also agreed that as the completed internal market would mean stronger competition for the less well of areas of the Community, the resources of the structural funds should be augmented. The necessary changes to the Treaty were made in the Single European Act which was adopted in 1987. It is important to emphasise, however, that the qualified majority voting procedure was not extended to measures relating to indirect taxes.

20The barriers which the Commission proposes to abolish with the internal market programme are technical, physical and fiscal. Technical barriers are those which arise because different member states have different standards and definitions. Physical barriers are those arising from the need, as things stand, for member states to exercise controls over the movement or persons and goods at national frontiers. Fiscal obstacles are those which arise because of the different rules and regulations which member states have with regard to VAT and excises and the different rates of tax which they apply. As the Commission itself has pointed out; “…all taxation tends to alter the relative price levels and thus the relative competitivity of the products it affects” (Sec(92) 1138 of 5 June 1992).

21In fact the fiscal and physical obstacles are interrelated because differences in the VAT and excise regimes amongst the member states are part of the reason why frontier controls exist. Thus because excise is levied on the destination principle (i.e. on the basis of the rates of excise prevailing in the country where the goods are consumed) they leave the producing country tax free. Frontier controls are used to ensure that the goods genuinely do leave the country and do not loop back into domestic circulation. By the same token frontier controls are used to ensure that excisable goods entering the country pay the relevant excise. It should be noted in this context that the Cecchini report estimated that the removal of frontier controls in the Community would result in a fall of 1% in consumer prices, an increase of 0.4% in GDP and 200,000 extra jobs (“The European Challenge: The Benefits of a Single Market”, Paola Cecchini, 1988)

22Differences in the regulations concerning the application of excises, and the rates of excises themselves can distort trade between the member states. For example, different rates of excise on vehicles and on mineral oils can affect vehicle operating costs in member states. Transport and tourism are two industries likely to be affected by such distortions but their effects may spread to the whole economy given the importance of transport. Another example is the distortion which arises because of different rates of excise on competing products in different member states. Thus, the fact that wine bears virtually no excise in certain wine-producing countries, but spirits bear heavy rates of excise is considered by some member states, including Ireland, to disadvantage spirit producers. It should be noted that the exemption for wine is sometimes justified in continental countries by referring to wine as an “agricultural product”. This overlooks the fact that beer and spirits are produced from cereals, also an agricultural product. Different methods of calculating excises can also distort trade, even where the nominal rates of excise are similar.

D: THE COMMISSIONS PROPOSALS

23Prior to the initiation of the 1985 programme, the Commission had tabled a number of proposals on excises. With the exception of two relating to tobacco, none of these had progressed into legislation. Following the adoption of the 1985 programme, and the Single European Act, the Commission’s programme amounted to a total of twelve directives covering structures and rates of excise. In the Directives relating to rates of excise, a single rate of excise was proposed for each product based on the average of the rates prevailing among the member states.

24These proposals involved major changes in the fiscal regimes of the member states and the opposition from the member states was such that the Commission replaced them in 1989 with proposals which became the basis for the draft Directives under consideration in this report. In place of a single rate of excise for the different products, the Commission proposed a minimum to be adopted by 1 January 1993. It also proposed a target rate of excise for each product towards which the member states would gradually approximate.

25At the meeting of the Council of Ministers of Economics and Finance in June 1991 (ECOFIN June 1991) agreement was reached on minima for certain products only. No agreement was reached on target rates and this concept was abandoned within the context of the current “round” of legislation on excises. Subsequent to ECOFIN June 1991 discussion continued at working party level and on 27 July the Council of Ministers (ECOFIN July 1992) agreed almost all outstanding issues subject only to certain reserves by the French and Spanish governments. Until these reservations are overcome, the Directives will remain in draft form, but it seems very likely that the French and Spanish reservations will be overcome without significant adjustments to the agreements reach at ECOFIN July 1992. The paragraphs which follow describe the principle features of the 1989 proposals by the Commission and the agreements adopted at ECOFIN July 1992. Table 1 at the end of this section summarises the rates of excise that were adopted.

General Arrangements for Products Subject to Excise Duty (Directive 92/12/EEC)

26This Directive is based on the Commission proposal Com(90) 431 final. It was passed into national legislation under the Finance Act, 1992 (Sections 103 to 119). The Directive lays down arrangements which are general for tobacco, alcoholic beverages and mineral oils. It makes provisions with regard to geographic boundaries, the type of products subject to excise duties, the “chargeable event”, the “chargeability of the tax”, the principle of “fiscal territory” and the arrangements for the holding and movement of products subject to excise duty. Three important principles are that:

(a) excisable goods will circulate under duty suspension between authorized warehouses. But it is important to note that there is provision for other traders to acquire supplies duty free. These traders will be required to give financial guarantees for their liability for duties.

(b) the excise is payable in the country where the products are actually consumed. Moreover, it is when the goods are released for consumption - and not just when they cross frontiers - that the excise becomes payable.

(c) individuals will be able to bring in quantities of excisable goods on a duty paid basis provided that these are for their “personal use”.

27The Directive also provides that it will be possible for member states to continue to have excise duties on other products but only provided that they do not give rise to taxation on entry or remission of tax on exit or to frontier controls.

Harmonisation of Structure of Excises on Alcohol (Com(90) 432 final)

28The purpose of this draft Directive is to ensure that all alcoholic drinks are taxed. It lays down a standard system of definitions of what constitutes the different types of drinks (alcoholic strength, method of production, etc). Thus the same products in different countries will be subject to the same treatment. Provision is made for exemptions of certain types of product such as home made beers and wine, low strength drinks and so on.

Amendment to Directives on Taxes on Tobacco (Com(90) 433 final and Com(90) 433 final/2)

29This amending draft Directive changes the definition of the “manufacturer”, makes adjustment for collection procedures involving the use of tax stamps and lays down the main exemptions permissable.

Harmonisation of the Structures of Excises on Mineral Oils (Com(90) 434 final)

30This draft Directive lists the mineral oil products which should be subject to excise. In simple terms they are all products which can be used as fuel or motor fuel: petrol, diesel, heating oil, heavy fuel oil, LPG and kerosene. It also defines certain key concepts such as the “chargeable event” and the “producer” of hydrocarbons. Exemptions are also provided for. These include hydrocarbons for industrial raw material, public transport, commercial aviation and commercial navigation. Member states will be free to retain exemptions for hydrocarbons used in electricity generation, agriculture and local public transport.

Approximation of the Taxes on Cigarettes and on Manufactured Tobacco (Com(89) 525 final)

31In Community member states cigarettes are excised by means of a specific tax (so much per 1000 cigarettes) and an ad valorem tax (equal to a certain percentage of the retail price). As a generalisation, cigarette excise in southern member states is mainly comprised of ad valorem excises while in northern member states the emphasis is on specific excises. Thhe Commission proposed minimum and target amounts of specific and minimum and target rates of ad valorem excise for cigarettes. As noted above, the concept of a target rate was abandoned and the Council finally agreed that the minimum rate of excise on cigarettes should be 57% and the proportions of this which should be in specific and ad valorem excises in each member state should be unchanged.

Approximation of the Rates of Excise Duty on Mineral Oils (Com(89) 526 final)

Fixing Certain Rates and Target Rates of Excise on Mineral Oils (Com(91) 43 final)

32All member states levy specific excises on mineral oils. However, these do not conform to any particular pattern as between member states. In its proposals, the Commission adopted the same approach as in the tobacco area: a combination of minimum and target rates. However, the approach was somewhat different from product to product depending on whether the product was primarily for consumer use (e.g. petrol) or industrial use (e.g. heavy fuel oil). In the case of the products used in industry, the Commission considered that the distortions caused by different rates were more significant than in the case of products mainly for consumer use, and so proposed rates which required a closer degree of alignment. With the abandonment of the target concept, the draft Directive specifies only minimum rates of excise for each mineral oil product.

33A complicating factor in the mineral oils area is that amongst the different member states excises can and do play a role in a number of different policy fields notably health, transport, energy and the environment. For this reason, and in order to give time for studies to be completed and for policy in these areas to evolve, the Commission decided not to put forward target rates of excise in the 1989 proposal. These were added in the 1991 proposal and hence as noted in the preceding paragraph there were two proposals in this area (i.e. Com(89) 526 final and Com(91) 43 final).

Approximation of the Rates of Excise Duty on Alcoholic Beverages and on the Alcohol Contained in Other Products. (Com(89) 527 final)

34Factors taken into account by the Commission in framing its proposals in this area include the need to reduce distortions and the need to avoid too much disruption of member states’ systems. Concerns about alcohol abuse also had a part in the Commission’s proposals though any implication in the Commission’s proposals that spirit based drinks are more prone to abuse than other forms of alcoholic drink (because the Commission proposed higher rates of excise for spirits than for beer and wine) would not be accepted as factually correct by the Joint Committee. However, in selecting the minimum and target rates, the Commission acknowledges that since the different categories of products are to some degree competitive with each other, there must be some relationship between the rates based on their alcoholic content. In the event, it was agreed to specify a fairly low minimum rate of excise for spirits and a nil minimum rate of excise for wine. The Commission’s proposed minimum for beer was adopted.

Imports of Excisable Goods for “Personal Use”

35An important amendment to the Commission’s original proposals relates to imports by individuals of excisable goods for “personal use”. As now set out in the Directive on general arrangements (Directive 92/12/EEC) member states are allowed to lay down guide levels as to the maximum amounts which can be imported in this way but specifies that these guide levels cannot be less than the following:

By exception and until June 1997, Ireland is authorised to apply guide levels not less than 45 L for wine and 55 L for beer.

36Individuals can import larger quantities than is laid down in the guide levels, but if they do, it can be expected that the national authorities will impose a heavy burden of proof on the individuals concerned that the quantities are for their own use. By the same token, the importation of smaller quantities may be queried by the Revenue Commissioners if they have good grounds for believing that they are being imported for trade purposes.

37It should be noted that there is no corresponding concept of importation for personal use in the area of mineral oils. Beyond what can be accommodated in the fuel tanks of their vehicles individuals will not be able to import fuels duty paid. Likewise, movements of heating oil on a duty paid basis will not be possible.

Table 1: EXCISE DUTIES IN IRELAND AND UK AND AS ADOPTED AT ECOFIN 27 JULY 1992*

(IRISH £ equals 1.2958ECU and £0.91 Sterling)

(Irish and UK Excise Rates as of June 30 1992)

(All prices in £ Irish)

E. VIEWS OF INTERESTED PARTIES

Tobacco: Irish Tobacco Manufactures Advisory Committee

38The Irish tobacco industry has expressed strong reservations about the implications for their industry of the draft Directive on tobacco excises. According to the Irish Tobacco Manufacturers Advisory Committee (ITMAC) the effect of the draft Directive will be to undermine the competitiveness of their manufacturing operations in Ireland. ITMAC points out that the southern member states including Greece, Italy, Spain and Portugal, have industries which have traditionally been dominated by state monopolies. ITMAC claims that these have a non-commercial ethos and benefit from state aids of various kinds. The products of these industries tend to be low quality from the point of view of blend of tobacco, packaging, and production standards. Excises in these countries are predominantly ad valorem. On the other hand, ITMAC identifies a northern group of countries which includes Ireland, the UK, Denmark and Germany, where tobacco is a private sector operation, products tend to be high quality and excises are predominantly specific.

39The implications for the industry, and for the Exchequer, can be illustrated by reference to the following simplified example. (See Table 2) Under a specific tax regime where the excise is £1.50 per pack, the difference between two packs of cigarettes with a cost of production of £.50 and £.40 respectively is exactly the same at both pre-tax and retail level, that is £.10. However, if, as has been agreed, there is a switch to ad valorem taxes where the tax is (for example) 75% of the retail price, then the difference in the cost of production of £.10 becomes a difference of £.40 at retail level. By specifying that excise must be a percentage of the retail price, the draft Directive in effect converts all member states to an ad valorem system. The example illustrates how the attractions of cheaper products of the sort produced in the southern member states will become magnified in the Irish market under an ad valorem regime.

40The other points argued by ITMAC are:

Exchequer: It is to be observed that the cheaper products also entail a lower Exchequer contribution.

Administration: Under Directive 92/12/EEC (originally proposed as Com(89) 431), which sets down general regulations on the structure of excises, it is possible for anyone to apply to be allowed to import tobacco and not just simply (as at present) a few licensed manufacturers and importers. The number of tax debtors will increase enormously thus exacerbating the Revenue Commissioners’ control problem.

The Retail Price: The ad valorem taxes are applied as a percentage of the retail price. To ensure accurate tax collection the retail price must be effectively established at the time the tax is levied.

Fraud: Individuals will be able to obtain supplies outside the normal warehouse channels of brands on sale in Ireland. Multiple sources of supply will increase the difficulties in establishing whether tax has been paid. This is likely to be exacerbated by the temptations to smuggling which will become more feasible with the abolition of frontier controls. ITMAC calculates that the potential profit from one journey by 7.5 ton truck could be from £50,000 to £120,000 depending on where the product is sourced.

Other: Because the minimum is expressed in percentage terms, it will involve an increase in the disparity of the amounts of excise paid throughout the Community - the opposite to what is intended by the Commission’s programme for indirect taxes.

41With regard to the control of smuggling and protection of the Irish revenue, ITMAC urges the introduction of a system of tax stamps to be purchased by manufacturers and distributors from the Revenue authorities and applied to cigarette packets. This process, which is common on the continent, makes it immediately apparent whether or not excise has been paid on cigarettes.

Mineral Oils: Confederation of Irish Industry

42It is agreed that minimum excise on heavy fuel oil will be £9.50/1000L. However, the present Irish rate is £7.60 and is the only case where Irish excise rates do not exceed those adopted in the draft Directives. The CII has pointed out that Ireland’s low rate in this area reflects a deliberate policy by the Government of minimising industrial costs. The CII argued that in peripheral regions such as Ireland such policies should not be reversed by the Community. It recommended that the excise be abolished altogether as had been proposed by the Commission of Taxation. The sums involved, though significant for the specific enterprises involved, do not appear to be large. The consumption of heavy fuel oil by industry has declined in recent years, not least because of competition from natural gas. As a result the CII estimates that the cost of the increase in the excise would be £3.5 million.

Alcoholic Drinks: Irish Brewers Association and Food, Drink and Tobacco Federation.

43The brewers and distillers strongly object to the compromises reached with regard to the different rates of excise which have been adopted on the grounds that they imply the perpetuation of a discrimination in favour of wine at the expense of spirits and beer found amongst several member states. The Commission proposed that the minimum rates of excise on beer and wine be the same, while that on spirits would be forty-eight times higher than both. ECOFIN June 1991 adopted the rates proposed by the Commission for beer but decided that the rate for wine would be nil and reached no decision with regard to spirits. At ECOFIN July 1992 the minimum excise for spirits was fixed at half the rate proposed by the Commission. At least this means that excises on spirits in some countries will not have to be raised but of course it does nothing to eliminate the existing discrimination against spirits. (See Table 3 for a tabulation of rates of excise in the twelve member states as calculated on an alcoholic content basis).

44The Irish drinks companies argue that the rates of excise should be arranged in the same proportion as their alcoholic content. This is, in fact, approximately the situation in Ireland. (See Table 3). In the UK, an attempt by the Government to impose an excise on Italian wine which was five times the excise on beer in terms of alcoholic content led to a case in the European Court. It was argued by the Italians that alcoholic drinks were substitutes for each other and therefore an excise which was disproportionate to the alcoholic content of the beverage in question constituted unfair treatment. This was accepted by the Court and the UK excise had to be lowered. On these grounds it would seem that the raft Directive is inherently unfair. It should be added that the European Parliament, in amendments agreed on 13 February 1992 in relation to the draft Directive urged that alcoholic content was the proper basis for determining the level of excises on different drinks.

45The draft Directive also does nothing to rectify a severe form of discrimination against cream liqueurs resulting from the low rate of excise on wine. Cream liqueurs have an alcoholic content of around 17% and so fall between wine at 12% alcohol and spirits at 37.5% to 40% alcohol. Other products with intermediate alcoholic content are port, sherry, vermouth, etc. Irish cream liqueurs are manufactured from spirit based alcohol. Under the Irish system, as noted in paragraph 44, the level of excise is mainly related to the quantum of alcohol rather than the form it takes. Consequently the excise burden on cream liqueurs is the same in Ireland as it is on competing intermediates like port and sherry which are, or are considered to be

Source: Scotch Whisky Association

manufactured solely from wine alcohol. However in countries where the wine excises are low, Irish cream liqueurs suffer a disproportionate excise burden (because of the element of spirit-based alcohol) by comparison with wine-based intermediates, including some wine based cream liqueurs. Thus, the competitive situation of Irish cream liqueurs is worse than that of spirits. For while all spirits will be at a disadvantage vis á vis wine, Irish cream liqueurs are also at a disadvantage against directly competing intermediates and some cream liqueurs as well as other spirit products of low strength.

46In addition to the perpetuation of unfair discrimination against Irish spirits and cream liqueurs on export markets, the Wine and Spirits Association points out that the present proposals also imply a threat to the home market for Irish producers of beer and spirits and to distributors of all alcoholic products. This is because the abolition of border controls and the increased personal allowances will encourage the importation, by one means or another, of alcoholic drinks from abroad. While some of these imports will have been produced in Ireland it cannot be the case that all will be so sourced. In any case, these forms of importation imply a loss of revenue to the state and of trade to Irish distributors. The Association adds that a particular threat applies to wine imported through the UK where there is still a substantial difference in excise with Ireland. There is also a substantial difference in the excises on beer in Ireland and the UK, but because beer is a relatively low value/weight product, importation is likely to be less of a problem than for wine.

47One aspect of the structures Directive also gives rise to difficulty for the brewers. This is the proposal that the measurement of the beer on which excise should be calculated (the “chargeable event”) should take place when the beer leaves the brewery. (The so called “end product” system). This is common on the continent. In Ireland, the UK and the low countries, measurement is by the “worts” system which takes place at the brewing stage. But in calculating the amount of excise, the national authorities in these countries allow for a certain proportion of wastage (due to spillage, breakages, etc) as the product proceeds through the final stages of production and packaging. This allowance varies from country to country and the Commission takes the view that it constitutes an interference with fair competition. This point has been accepted by the Government and the necessary legislation to switch to the end product system was incorporated in the Finance Act 1992. However, a considerable amount of investment has taken place in the breweries in these countries to limit wastage and perhaps nowhere more so than in Ireland since the allowances are permitted by the authorities are low. For that reason, and given that it is the system which brewers and the authorities have come to accept, the Irish industry objects to being obliged to change.

48One further point about the administration of the new system has been brought to the attention of the Joint Committee by the drinks interests. At present, exporters of excisable goods must bond their goods up to the point of embarkation. This is usually a brief period since the distance from factory to port in Ireland is short. With the abolition of intra-member state borders, the bond will have to cover goods up to their ultimate destination and cannot be discharged until appropriate documentation has been received back from the customs authorities in the recipient country. This is a much greater period of time and will obviously multiply exporters’ bond requirements enormously. The industry believes that closer consultation between the industry and the Revenue Commissioners might have avoided this particular problem.

Tourism and Transport Interests

49High rates of excise prevailing on vehicles, motor fuels, alcohol and cigarettes, by comparison with other countries militate against the competitiveness of the Irish transport and tourism industries. The Department of Tourism and Transport, speaking for these industries, argued that it would therefore be in their interests if the Commission had adhered to its programme for approximating rates of excise rather than, as at present, simply imposing minima. The most important comparison is between Ireland and the UK where Irish excises are higher than UK excises in the case of wine, beer and intermediates.

50The draft Directive on the structure of mineral oil excises (Com (89) 434) provides for exemptions for fuels used by air and sea transport. These are in force in Ireland and the Department urges that the right to exempt these fuels should be continued.

51However, very high absolute and relative rates of excise are applied on motor vehicles in Ireland and this has contributed to the problems facing the car rental industry. According to the Car Rental Council of Ireland, the high rate of excise on new cars makes it possible to import second hand cars at attractive prices. This has made it difficult for the car rental companies to dispose of their vehicles after the end of the season without heavy discounting. This has reduced the profitability of the industry and led to a scarcity of cars at the height of the season. The industry proposes that this country could copy a scheme in operation in Denmark whereby payment of excise on new cars by car rental companies is deferred until the car enters normal private or commercial use.

E. VIEWS OF THE JOINT COMMITTEE

52The effect of the Commission’s proposals in the area of excise on the Exchequer is one of the principal concerns of the Joint Committee. Table 4 below shows that excise revenues accounts for about £1.7 billion or about 21% of total Government tax revenue. This makes Ireland more dependent on excises than any other member state and more than twice as dependent as the average member state. (See Table 5). Of the total, excises on tobacco, alcohol and mineral oils, the subject of the present draft Directives, account for £1.4 billion or over 80% of the total. In addition, while it would have been possible under the Commission’s proposals to maintain “small excises”, the abolition of frontier controls will make this impracticable and consequently they have had to be abolished with the loss of about £24 million in revenue.

53Since Irish rates of indirect tax are amongst the highest in the Community, the Commission’s original proposals to approximate around the average rates of excise and VAT bands prevailing among the member states implied heavy losses to the Irish Exchequer. This led the Government to formulate a claim to the Commission for compensation. Various estimates of the size of the anticipated loss were made by independent researchers and the Government. The figures resulting from this work varied depending on what year the calculations were based, the methodologies used and the assumptions made about the rates of VAT (the VAT proposals provided for a degree of choice) which would eventually be chosen. (One estimate prepared by the Department of Finance which was quoted by the NESC (NESC Report No 88: Ireland in the European Community) is shown in Table 6).

Source: Statistical Report of the Revenue Commissioners, 1990

Source: OECD Revenue Statistics

Source: NESC Report No 88: Ireland in the European Community.

54Of course, since these estimates were made, the Commission’s proposals in the excise area have changed from aiming at the approximation to a Community-wide average, to the establishment of minimum rates. With the limited exception of excise on heavy fuel oil none of these changes appear to require Ireland to change any excise rates. Thus on the face of it would seem that no loss in excise will result from the adoption of the draft Directives. In reality, in conjunction with the disappearance of frontier controls there will be pressure for Ireland to conform to rates prevailing in the other member states. This pressure will be transmitted in two ways:

aPassenger Movements: Individuals will be able to purchase large quantities of excisable products in other member states excise paid and import them into Ireland without any restriction other than that the quantities must be for personal use. As indicated in paragraph 35 about a dozen bottles of spirits, 60 bottles of wine and 100 pints of beer can be imported in this way before passengers could be asked to prove that the goods were for personal use - unless the Revenue Commissioners already had grounds for suspecting the bona fides of the transaction.¹ Also, duty free allowances for travellers will continue, at least until 1999:

bSmuggling: Since excise will continue to be paid in the country of consumption, the abolition of frontier controls will increase the possibilities for smuggling commercial quantities of excisable goods excise paid or excise free into the country.

55The force of the pressure generated by (a) above will depend on the difference between excises prevailing in Ireland and the UK since passenger movements between the two countries are large and are assisted by a large land border. Irish and UK excise structures and levels are still dissimilar so it would seem that significant losses would accrue by this route. In fact, the latest estimated revenue loss quoted by the Minister for Finance is based on the approximation of Irish indirect taxes to UK levels and amounts to £560 million, less some offsetting gains resulting from the indirect taxes on goods and services bought as a result of the stimulus to consumption caused by the fall in prices. (Dail Debates. 18 April 1991, columns 492-3).

56However, UK (and Irish) excises are very different to those prevailing on the continent. Passenger movements between the UK and the continent are large and, with the opening of the Channel Tunnel are likely to increase. In the Joint Committee’s view it is entirely feasible that the UK will be obliged to tailor its rates to continental levels and that this would therefore oblige Ireland to follow suit.

57It should be remembered that pressure to change rates of indirect tax is not exclusively based on an economic calculation of the national gain from higher rates versus the loss from smuggling and passenger imports encouraged thereby. The effect on traders in border regions, who will be obliged to bear the burden of the diversion of trade, may also prompt Governments to lower indirect taxes in the interests of equity vis á vis traders not directly affected by trade diversion. Such considerations have played a part in the reduction in Irish rates of indirect taxes in recent years and may prompt the UK Government to respond in the same way with respect to traders in the south east of England.

58With respect to smuggling, the Joint Committee was assured by the Revenue Commissioners that effective replacement controls will be devised. In place of controls at the border, the Revenue Commissioners will exercise control at wholesale and distributor levels. The Revenue Commissioners point out that excisable goods tend to be high value and there are a relatively limited number of manufacturers and importers/wholesalers. With close cooperation between the administrations of the member states, particularly the UK, the Revenue Commissioners believe that it should be possible to keep track of significant movements.

59The Joint Committee wondered whether it would have been possible to institute a system whereby the excise would be paid at origin according to the rate of excise payable in the jurisdiction of the consignee. In other words, a French vendor of wine would apply Irish excises to Irish customers, German excise rates to German customers, and so on, with the proceeds being remitted through a form of clearing house. The Joint Committee’s view was that this would obviate the need for border controls while at the same time ensuring that the excises were collected. The Revenue Commissioners pointed out that this had been suggested by the Commission in an early proposal with respect to VAT but it had been rejected by all twelve member states. Apparently no member state was confident that the others would be diligent in remitting the amounts due to foreign authorities.

60The Joint Committee hopes that this mutual distrust will not also apply to the international cooperation procedures upon which the Revenue Commissioners hope to rely to help make up for the loss of controls at the borders (See paragraph 58). The Joint Committee is somewhat sceptical about the effectiveness of the new arrangements and this is reinforced by its suspicion that even with border controls a good deal of smuggling goes on. There is the further point that under Directive 92/12/EEC, it will be possible for small scale traders to import consignments of excisable goods under duty suspension. This is in contrast to the present situation where movements of alcoholic beverages, tobacco and mineral oils are between a few very large enterprises. Thus the number of entities engaged in the cross border movement of excisable goods could increase substantially thereby complicating the control problem.

61Different considerations apply the other major source of excise: motor vehicles. As Table 4 shows these yielded £258 million in 1990. Excises on cars will not be possible without border controls. Consequently the Government decided to implement a registration tax to replace the existing excise since the revenue is too large to forego. The details of this registration tax are contained in Finance Act 1992, Sections 130 to 144.

62The Joint Committee is concerned that the net effect of all the foregoing will be that, whether through private passenger movements, or as a result of smuggling, the Irish Government will be obliged, albeit over a period of time, to lower its rates of excise towards the minimum rates prevailing in the Community. Thus market forces, aided by improvements in transport and by the elimination of border formalities, will bring about an approximation of excise rates. This process will happen without any overt action by the Community. The Joint Committee is concerned that the diffuse nature of the process will make it difficult, if not impossible, for the Irish Government to find a firm basis for formulating a claim for compensation from the Community.

63One other general consideration informs the Joint Committee’s consideration of this area and that is the economic importance of the two industries engaged in the production of excisable goods: tobacco manufacturing, brewing and distilling. Table 7 below presents some summary statistics on the importance of these activities. It can be seen that collectively, the industries employ 5,106 persons, have a gross output of £633 million and export about £280 million. The Joint Committee is concerned that whatever action is taken should minimise the commercial threat to these industries.

Source: Census of Industrial Production, Trade Statistics, 1988.

There may be some inconsistency between gross output and exports as Trade Statistics and the Census of Industrial Production employ different industry definitions.

G. RECOMMENDATIONS OF THE JOINT COMMITTEE

64The Joint Committee generally supports the programme for the completion of the internal market. By the same token it supports the principles of the programme to remove fiscal barriers to trade. However, it notes that the Commission’s progress in this area has been disappointing. As previous paragraphs have recounted, the Commission originally started with proposals for excises to be adopted by all member states. When agreement proved impossible, the Commission proposed minima and target rates towards which member states would gradually approximate. In the event, what has been agreed are the minima. Moreover, these minima are very low so that in most cases, few countries are obliged to make an adjustment. Thus the Community has accomplished very little with respect to the approximation of excises. (In the case of cigarettes, it has actually produced a divergence.)

65The Joint Committee would have preferred a situation in which agreement had been reached on single Community-wide rates of excise for all excisable products. This would have maximised the benefits of the programme to create a single market, including the removal of discrimination against Irish producers both at home and in export markets. It would also have meant significant declines in the prices of a number of items thus bringing home to the consumer some of the benefits of increasing economic integration within the European Community. The losses to the Irish Exchequer would have been substantial and would have had to be made up by the Community. But agreement on single rates would have provided a fairly objective basis on which to calculate the compensation. Failure to reach agreement on single rates means that differences in excise will continue between member states and member states will have to bear significant surveillance costs in order to ensure that the excises which are due are actually paid. The Joint Committee accepts that nowhere is the burden of tight surveillance by the authorities higher than in Ireland where excises tend to be relatively high and the potential loss from smuggling relatively great.

66However, ECOFIN July 1992 did agree that a review of the rates of excise should take place every two years, beginning before the end of 1994. The Joint Committee’s view is therefore that the Government should take the opportunity of these reviews to press for a resumption of the move towards single rates of excise. A first step would be to try and restore the concept of target rates of excise (abandoned during ECOFIN June 1991) towards which member states would be obliged to gradually change their rates of eexcise.

Revenue Consequences

67The Joint Committee believes that there is a strong case for formulating a request to the Community for financial support for the cost to the Irish Exchequer of the programme to removal fiscal barriers. The Joint Committee would like to emphasise in this context, that the removal of fiscal barriers, even if it is not accompanied by a formal agreement on uniform rates throughout the Community, will remove what is now an important instrument of fiscal autonomy. In conjunction with the programme to establish Economic and Monetary Union, which will constrain other aspects of our fiscal independence, this will leave Ireland highly dependent on transfers from the Community. Thus the importance of establishing a soundly based claim in respect of the Community’s programme on indirect taxes cannot be overemphasised.

68This claim should be based, not on approximation of Irish excise rates to those now prevailing in the UK but to something lower, on the grounds that the UK itself will be obliged to reduce its rates. This claim must be based on the large importance of indirect taxes, including excises, to Ireland and the fact of the country’s relative economic underdevelopment. It is worth noting in this context that estimates of the cost of the Community’s programme in the area of excises, are approximately equal to the transfers to Ireland under the enlarged structural funds. These funds are being channelled to Ireland to enable it to improve its infrastructure and so to survive in the integrated European economy, The Joint Committee believes that it would be an extraordinary result if the benefit of these funds was absorbed in compensating the Exchequer for the programme in one area alone: the harmonisation of indirect taxes.

Car Registration

69The Joint Committee view with concern the Government’s decision to replace the excise on cars with a registration tax which will yield the same quantum of revenue. Cars are one product where the establishment of Community-wide rate of excise, coupled with compensation for the revenue lost, would have brought substantial benefits to Irish consumers. However, recognising that the revenue loss would be severe, the Joint Committee accepts that the registration tax is unavoidable. It strongly urges, however, that the tax should be a temporary arrangement and should be gradually phased out over a period of no more than four years.

Alcohol

70The Joint Committee shares the disappointment of the Irish drinks industry with the draft Directives on the relative taxation of wine, beer and spirits. Some comfort may be drawn from the Council’s agreement of the need for a review of the situation before the end of 1994 based on a report by the Commission. It is worth recalling that the Council agreed that:

“The Report by the Commission and the consideration by the Council shall take into account the proper functioning of the Internal Market, competition between the different categories of alcoholic drinks, the real value of the rates of duty and the wider objectives of the Treaty.” (emphasis added).

71The Government is urged to use the opportunity of this review procedure to press for agreement on excises based on alcohol content. Of course Ireland’s objectives on excises will not be attained easily, but at least targets can be set for attainment in the long term and in the meantime member states can be bound to avoid actions which will worsen anomalies.

72With regard to the Community abolition of the “worts” system of measuring the alcoholic content of beer, the Joint Committee recognises that a Government decision to comply with this has been incorporated in the Finance Act 1992. However, the Act does not specify when the change over should take place and the Joint Committee recommends that an extended period of time should be given to adopt the new system so that brewers can recover their investment in waste containment equipment and procedures.

Tobacco

73The Joint Committee accepts that the ECOFIN agreements have significant disadvantages for Irish tobacco manufacturers. The Joint Committee can only urge that within the context of the review procedure efforts be made by the Irish Government to have specific excises reinstated or at least to allow member states to opt for either system.

Mineral Oils

74The CII has suggested that excises on this product should be abolished. The Joint Committee sympathises with this view: heavy fuel oil is, after all, one of the few excisable products exclusively used as an industrial raw material. Unfortunately, the Community decision in this area is not likely to be undone. The Joint Committee would urge, however, that in this product, unlike the others, the Government should not seek to have a target rate adopted during the 1994 review referred to above. This would leave the Irish heavy fuel oil excise at the minimum specified in the draft Directive which would still be one of the lowest rates in the Community. Thus some of the benefit which Irish industry now enjoys from having a low rate of excise on heavy fuel oil would be retained.

Controls: General

75The Joint Committee’s concerns about the effectiveness of controls when the border controls have been removed have been detailed above (paragraph 60). In the case of tobacco products, the concept of tax stamping offers good possibilities for a substitute. The same could also be done in the case of spirits and wine, though we understand that the drinks industry has strong reservations about such techniques on grounds of cost. Nonetheless, in the interests of preserving the revenue base, the Joint Committee urges that the Government should give serious consideration to the employment of these types of control which are widely used in continental countries. Of course, these measures can only be regarded as a second best alternative to the adoption of single excise rates throughout the Community. Hopefully, therefore, the use of such methods of control, which are relatively expensive for producers, would only be a temporary arrangement.

76No such device is available with regard to beer because the value of the smallest available units (tins and bottles) are too low to make it worthwhile. The Joint Committee can only urge that the Government should ensure that it will have the most effective possible means for controlling movements of this product until such time as excise rates are fully harmonised.

77In the case of all excisable products, the Revenue Commissioners should insist that goods should circulate in Ireland accompanied by documentation showing that the appropriate excises have been paid.

78The Joint Committee also recommends that the Revenue Commissioners should consult closely with the industry to find a means of alleviating the problem (referred to in paragraph 48 above) resulting from the increase in bonding requirements for exporters of alcoholic drinks resulting from the abolition of national borders.

Car Rental Industry

79The replacement of the excise on cars by the registration tax will mean that the car rental industry will continue to experience the problems discussed in paragraph 50 above. In principle the Joint Committee endorses the suggestion made by the Car Rental Council of Ireland that we should adopt the Danish system whereby car rental companies can defer payment of the registration tax until they dispose of their vehicles.

Peter Barry T.D.,

Chairman

23 Sept, 1992

* Subject to reserves by the Spanish and French Governments

(1) States applying rates of excise in excess of £772 per hl pure alcohol are not permitted to reduce their rates below £772 and states applying excises between £424 and £772 are not allowed to reduce them at all.

(2) Figures quoted are based on the pre-tax cost of the existing Most Popular Price Categories

(3) Figures for other tobaccos are not comparable as EC proposals use ad valorem taxes while the UK and Ireland use specific rates.

* Hectalitres of pure alcohol

* An additional £30 million would be lost due to increased spending on interest on the national debt following the need to borrow to make up for lost revenues.

¹ If each of the 33,000 or so Irish visitors who travel to the continent each year by car were to return with their full duly paid allowances, they would import the equivalent of about 1% of the beer, 6% of the spirits and 10% of the wine consumed annually in Ireland. Obviously, not all would or could do this. But on the other hand allowance should also be made for duty paid imports by foreign visitors to Ireland and by travellers to and from Northern Ireland and Britain. While to forecast what will happen would require a complicated analysis, the figures quoted indicate the orders of magnitude which might be involved.