Archipel, French Somalia, New Caledonia and Terri- 

 tories, Wallis and Futuna Islands, French Polynesia, 

 Southern (Austrahan) and Antarctic Territories, 

 Surinam, and the Netherlands AntUles). Tunisia, 

 Morocco, Spain, Malta, and Israel also enjoy preferen- 

 tial treatment for tobacco products. 



The United Kingdom is expected to maintain 

 duty-free treatment for unmanufactured tobacco 

 imports from 20 independent Commonwealth coun- 

 tries (the Annex VI countries) including such im- 

 portant tobacco exporters as Malawi, Tanzania, and 

 Zambia (Appendix A). 



The three new EC members are expected to 

 extend preferences to the over 23 countries now 

 receiving preferential treatment for tobacco exports 

 to the EC-6, and all of the other members may 

 extend duty-free treatment to tobacco exports from 

 the 20 countries receiving preferential treatment in 

 the United Kingdom. Negotiations on the latter 

 action are expected to begin by August 1, 1973. 



The countries which now have duty-free access to 

 the tobacco market of the EC-6— Greece, Turkey, and 

 the Yaounde and Arusha countries— have a combined 

 tobacco production of about 600 milHon pounds. 

 The Commonwealth countries which might be given 

 access to the tobacco market of the EC-9, the 

 Annex VI countries, less the Arusha countries, which 

 are specified in Annex VI but which already have 

 duty-free access to the EC-6 and to the United 

 Kingdom, have a combined production of about 130 

 million pounds. The EC itself produces about 300 

 million pounds. Adding all of this production to- 

 gether, countries which produce about 1 billion 

 pounds of tobacco may have duty-free access to the 

 tobacco market of the nine countries of the expanded 

 EC. 



Excise Tax Harmonization 



The EC eventually plans to harmonize its excise 

 taxes on cigarettes to a common level which would 

 consist of an ad valorem component and a specific 

 component. If a high ad valorem component is 

 adopted, it will adversely affect the sale of cigarettes 

 containing high-quality, high-priced tobaccos such as 

 those exported by the United States. 



An EC council directive on tax harmonization was 

 adopted by the Council of Ministers December 18 

 and 19, 1972. This directive requires that during the 

 first stage of harmonizarion, July 1, 1973 to July 1, 

 1975, each Member State must have an excise tax 

 with a specific and a proportional (ad valorem) 

 component. The specific component may not be 

 lower than 5 percent or higher than 75 percent of the 

 total tax. 



An earUer EC council resolution proposed that 

 during a planned first stage of harmonization, July 1, 

 1971 to the end of 1973, the specific portion of the 

 excise tax in each Member State would be between 5 

 and 75 percent of the excise tax applied at retail 

 prices of cigarettes most in demand. 



As a result of this original proposal, Germany now 

 has a tax with an ad valorem component of 25 

 percent. The other five original members now have a 

 tax with a 95 percent ad valorem component. Italy 

 did not have to comply with the first stage resolution 

 until January 1, 1973, which means that during that 

 period Italy still maintained its 100-percent ad 

 valorem tax. The United Kingdom and Ireland both 

 have traditionally had a 100 percent specific^ fiscal 

 charge. A part of the fiscal charge became a 100 

 percent specific excise tax for Ireland January 1, 

 1973. The United Kingdom will change part of its 

 fiscal charge to a 100 percent specific excise tax 

 April 1, 1973. Neither of these countries is required 

 to comply with the December 18 directive untO 

 January 1, 1978, thus they may maintain their 100 

 percent specific excise tax until that time. About 

 two-thirds of Denmark's excise tax revenue is based 

 on an ad valorem tax and one-third is based on a spe- 

 cific tax. 



Value-Added Tax Harmonization 



Five of the six EC countries have a value-added tax 

 (VAT) which appHes to tobacco, as well as to other 

 products. Italy did not adopt this tax until January 

 1973. Each of the three new members also must 

 adopt a VAT. Denmark already has a VAT which 

 applies to tobacco products. The level is 15 percent. 

 Ireland adopted a VAT November 1, 1972. The level 

 for cigarettes is 5.26 percent. The United Kingdom 

 wUl adopt a VAT April 1, 1973. 



Initially the level of the tax may be different in 

 each of the nine members but, eventually, the level of 

 the tax is to be harmonized at the same percentage 

 rate in all nine countries. An unsettled question is 

 whether or not the VAT will be included as a part of 

 the ad valorem component of the excise tax. A 

 decision to apply it on top of the excise tax rather 

 than including it as a part of the ad valorem 

 component would widen the spread between ciga- 

 rettes made from higli-priced leaf and those of lower 

 quality. It would, thus, create a disadvantage to 

 consumers who smoke high-quality cigarettes and it 

 would be disadvantageous to countries which export, 

 and to firms which use, high-priced, high-quality leaf. 



No part of the tax is ad valorem. 



