April 19th, 2014
cigarettes: infringement proceedings against ireland
cigarettes: infringement proceedings against ireland
The European Commission has decided to send Ireland a reasoned opinion the second stage in the infringement procedure provided for in Article 226 of the EC Treaty because of the fixing of minimum and maximum retail prices for cigarettes by that country. The Commission takes the view, based on well established case law of the Court of Justice of the European Communities, that such prices infringe Community law, distort competition and benefit only manufacturers, by safeguarding their profit margins (see IP/06/483). Unless the legislation in the Member States concerned is brought into compliance within two months of receipt of the reasoned opinion, the Commission may decide to refer the case to the Court of Justice of the European Communities.
I strongly support Member States in their efforts to implement new health policy. However, this must respect Community law.” said Taxation Commissioner L szló Kov cs. “Introducing minimum retail prices for cigarettes is against Community law and mainly benefits manufacturers who are able to protect their profit margins .
Health protection objectives may be adequately attained by increasing excise duties
The Commission recognizes that price and tax measures are effective means for reducing tobacco consumption. However, tax and price measures must be in line with other Treaty obligations.
In this respect, the European Court of Justice has already stated that
- imposing a minimum price is incompatible with the current legal framework (Directive 95/59/EC), since the setting of a minimum price by public authorities inevitably has the effect of limiting the freedom of producers and importers to determine their selling price (see also case C 302/00, Commission/France)
- minimum prices are not necessary, since the health objectives may be attained by increased taxation of tobacco products. (Case C 216/98, Commission/Greece).
The Commission fully supports Member States in designing measures on tobacco control in order to ensure a high level of public health protection. Among the measures that could be used, the European Commission advocates minimum taxes to tackle cigarettes consumption. This would have the same impact on the prices and would not hamper price competition to the sole benefit of manufacturers.
This is demonstrated by a legislative proposal currently pending before the Belgian Parliament to modify the legislation on minimum retail prices of cigarettes in Belgium (see IP/06/866).
Background
Cigarettes are taxed by means of a specific and an ad valorem excise duty. Specific excise duties are taxes on the quantities of cigarettes. Ad valorem excises are a percentage applied to the price of the cigarettes. Consequently, for cheap cigarettes, the ad valorem excise duty will be small.
In order to increase the price of cheap cigarettes, Member States can either increase the specific excise duties and/or the minimum ad valorem excise duties. Minimum excise duties (calculated on the quantity) are independent of the price of the cigarettes and also ensure that all cigarettes, whether cheap or premium brands, are properly taxed.
The Council, acting on the basis of a report from the Commission, must re examine the rates and structures of excise duties on tobacco products before the end of 2006. In the context of this review, the Commission will examine whether and to what extent the current EU directives can be improved with a view to health protection whilst also respecting the principle of “proportionality”.
Commission case reference number is 2006/2083.
New For the press releases issued on infringement procedures in the taxation or customs area see
For the latest general information on infringement measures against Member States see
Smoke and mirrors: european parliament may clear the air on e-cigarettes
The European Parliament is set to vote Tuesday on proposals to regulate electronic cigarettes as part of a new tobacco control directive. This legislation directed toward minimizing smoking and access to minors in particular includes a provision to limit e cigarettes by treating them like medications in terms of approval to bringing products to market.
Europe is hardly known for its success in minimizing smoking after all, the highest rates of smoking are all in Eastern Europe, but movement by Parliament will likely encourage the U.S. to also re examine its own already controversial regulations over e cigarettes.
Smokeless smoking?
E cigarettes are small battery powered cigarettes that vaporize a solution of nicotine, the compound in cigarettes known to activate the nucleus acumbens in the brain, a center that triggers the reward cascade and is essential in establishing addiction.
This dose of nicotine provides the hit that smokers crave, without the impurities and tobacco of traditional cigarettes that are known to cause most of the detrimental health effects of smoking.
In theory, e cigarettes should provide a much healthier alternative to smokers unable to break the habit. In analogy, methadone is the “alternative” for heroin addicts, giving them a doctor prescribed and highly regulated dose of maintenance level opioid and controlling the detrimental behavioral and health effects of street heroin.
The big 3
Since the popularity of e cigarettes has risen, leaders in the tobacco industry have been acquiring e cigarette companies. If European regulations tighten on e cigarettes, it could drive market share to tobacco if these regulations do not pass, tobacco can reign supreme. For tobacco companies that already have their own e cigarette divisions, movement will more likely cause shifting of dollars within the corporation rather than an outflow of revenue.
Lorillard (NYSE LO ) , the third largest tobacco company in the U.S. with 14.5% market share of traditional cigarettes, has been a leader in the e cigarette industry since their popularity arose. Known for cigarette brands Newport, Maverick, Kent, and True, Lorillard acquired Blu eCigs in April 2012 for $135 million, establishing it as a leader in the e cigarette industry. Blu eCigs currently accounts for 37.2% of the e cigarette market.
Lorillard has more at stake than the rest of the big 3 with Parliament’s upcoming vote. The U.S. based company acquired this past month UK e cigarette brand SKYCIG for 30 million pounds with an additional 30 million pounds due in 2016 upon achieving certain criteria. The acquisition was to establish a significant European presence for Lorillard, but if legislation passes to limit e cigarettes, this investment may have lower yield than hoped.
Reynolds American (NYSE RAI ) , the second largest tobacco brand with 23.5% of traditional cigarette market share, is known for cigarette brands Camel and Pall Mall. Reynolds has Vuse as its e cigarette arm and revamped its product this summer, planning on expanding beyond its Colorado market to the rest of the country.
Arguing that it has superior technology in delivering consistent vapors, Reynolds has been focusing heavily on marketing, recently launching a TV marketing campaign for Vuse. Legislation in 1971 banned TV advertising for cigarettes, but has yet to apply that to e cigarettes Reynolds is capitalizing on that loophole before it is likely closed.
Philip Morris International and Altria Group (NYSE MO ) , known for Marlboro, are the biggest of the big 3, with Altria responsible for the U.S. market and Philip Morris International being the spin off from Altria that’s responsible for the international market. Altria controls 47.3% of the market share of traditional cigarettes and is also the leader in smokeless tobacco products but was the last of the big 3 to roll out an e cigarette. Altria recently launched its first e cigarette, MarkTen, under its Numark subsidiary this past summer.
While the big 3 dominate the e cigarette space, several companies are still formidable anklebiters. Privately owned Njoy may lead that category, owning 32% of the e cigarette market share. The company recently raised $75 million, with high profile investors including Sean Parker of Napster, Douglas Teitelbaum of Homewood Capital, and musician Bruno Mars.
Blowing smoke up investors’ bottom(line)s?
The e cigarette industry is certainly a force to be reckoned with. E cigarette sales are expected to double this year to between $1 billion to $1.7 billion. While tobacco sales are on the order of $80 billion, Bloomberg projects e cigarette sales surpassing that of traditional cigarettes by 2047. At Reynolds, analysts have estimated that its traditional cigarettes will outsell its e cigarettes only until 2021 the same analysts have estimated similar dates for Altria and Lorillard.
Anti tobacco lobby groups are lobbying hard to restrict e cigarettes but for the time being, FDA regulation has been lax at best and scientific evidence is still in development over potential harms of e cigarettes, crippling the government’s ability to justify strict regulations. The FDA has also been considering restrictions on online sales of e cigarettes in an attempt to minimize access by minors.
Currently the FDA states that the safety and efficacy of e cigarettes “have not been studied,” in terms of safety for intended use, inhalation dosages of nicotine and other chemicals with e cigarettes use, and benefits of use. Some studies have scrutinized the safety of e cigarettes after finding trace amounts of carcinogens, including formaldehyde, acrolein, and propylene glycol. Many criticisms of e cigarettes revolve around the marketing of e cigarettes as a way to taper smokers as the use of flavored e cigarettes as a way of targeting kids the FDA currently only regulates e cigarettes marketed for therapeutic use.
By anecdote, several addiction specialists in my practice suggest electronic cigarettes to patients as an alternative to smoking and as a way to bridge to complete cessation. Patients report that it helps them maintain the social function of smoke breaks, as well as the comfort they associate with the physical act of smoking many praise it as the only remedy successful to help them kick tobacco.
The movement within medical management of tobacco addiction mirror what analysts are saying about the e cigarette industry that it is growing and quickly. Even with regulations constantly in flux, there appears to be a significant movement of proponents of e cigarettes in medical practice. No physician would ever prescribe cigarettes, but several would suggest e cigarettes this general acceptance will likely make regulations more difficult and the e cigarette industry more profitable.
