The two tobacco giants Philip Morris International (PMI, owner of the iconic Marlboro brand) and British American Tobacco (BAT, owner of Lucky Strike) continue to battle for their share of the European market, including the fast-growing market for a variety of smoke-free products. At the same time, these industry giants are allying against the EU’s plans to tighten tax regulations.

Manufacturing and distributing e-cigarettes and heated tobacco products (HTPs) has been incentivized by generous taxation policies in the majority of member states, as well as elsewhere around the world. These so-called next generation products (NGPs), including oral products such as gums and nicotine pouches, are not covered by the current Tobacco Taxation Directive (TTD) of the EU. The directive dates back to 2011, when alternatives to ordinary cigarettes were yet to rise in popularity.

An expanding market

Smokeless products (which heat rather than combust the active substance, whether tobacco or liquid, in e-cigarettes) are still far from leading tobacco consumption. In 2021 they represented just 8 percent of the retail value (almost 100 billion euro) of all smoking products in the EU, according to Tobacco Intelligence statistics. Furthermore, they are also banned in a number of countries outside of Europe.

However, Big Tobacco has increasingly advertised these products as safer substitutes in order to claim tax benefits, maintain low prices and ramp up sales to compensate for the decline of increasingly taxed traditional cigarettes. In Western Europe (the world’s second largest market after Asia-Pacific), cigarettes lost another 0.2 percent in sales value between 2019 and 2020, while NGPs gained over 11 percent, according to Euromonitor statistics.

Europe as a whole represents one third of the global market of both HTPs and e-cigarettes. According to a survey released last February by the European Commission’s Eurobarometer, 57 and 25 percent of respondents said that they switched to e-cigarettes and HTPs respectively, in order to stop or reduce their tobacco consumption. Among these respondents, 37 and 39 percent believed that e-cigarettes and HTPs respectively are less harmful, while 23 and 14 percent considered them cheaper.

In order to avoid NGPs becoming a gateway to cigarette addiction (mainly among young people), the European Commission is considering controlling their circulation (as well as that of raw tobacco, also unregulated) through harmonised fiscal rules. At the same time, the Commission aims to approximate excise duties across product categories and countries. The TTD revision proposal is expected by the end of 2021, as part of the broader EU Beating Cancer Plan that health commissioner Stella Kyriakides announced in February, with the ambition to create a “Tobacco Free Generation” by 2040.

Lobbying for (un)healthier smoking

For many years PMI and BAT, along with their smaller cousin Japan Tobacco International, have fought to maintain the taxation status quo for both e-cigarettes and HTPs. A 2018 report by the European Commission delayed the extension of TTD’s to NGPs. Starting in 2019, other groups (including the European Smoking Tobacco Association as well as the German and French vaping associations) supported Big Tobacco’s claim that NGPs are designed exclusively to help adult smokers quit traditional cigarettes, rather than to attract new customers, and therefore they must remain affordable.

Industry influence is evidenced through the European Commission Health Department’s public records and FOI requests by the NGO Corporate Observatory Europe (CEO), which uncovered meetings and correspondence between lobbyists and taxation decision-makers. Such behind-the-scenes interaction constitutes a breach of the World Health Organization’s Framework Convention on Tobacco Control (FCTC) requiring public institutions to protect public health policies from commercial interests and tax all kinds of smoking products. 

Additional revelations show that Big Tobacco has also tried (unsuccessfully) to delay implementation of the EU-wide traceability system. As of 2024, this mechanism will track NGP distribution. Until then, it covers only cigarettes and rolling tobacco. It was launched in 2019 under the Tobacco Products Directive (separate from the TTD), the revision of which will also likely begin soon, in order to ensure stronger compliance with the WHO’s Protocol to Eliminate Illicit Trade in Tobacco Products . 

“TTD revision is likely to be high on lobbyists’ priority list this year”, warned a recent report by the global partnership Stopping Tobacco Organizations and Products (STOP). During a public meeting at the end of March, Věra Jourová, EU Transparency Commissioner, said that all the Commission’s departments should publish tobacco-related industry interaction minutes. “In the context of the revision of EU tobacco legislation this recommendation is very important”, said Olivier Hoedeman, researcher at CEO. “We as civil society organisations will follow up on this in the coming weeks”.

Persisting health risks

BAT and PMI have promoted evidence of NGPs’ low-harm on dedicated websites (bat-science.com , pmiscience.com ) and in scientific journals. According to independent scientific consensus and the WHO’s information sheet , the fact that HTPs limit exposure to some chemicals does not necessarily lower the overall health risk, which remains unknown given that these products have not been on the market long enough for their potential effects to be studied. Similar caution applies to e-cigarettes, although they are considered less toxic than normal cigarettes and HTPs mostly due to the absence of tobacco.

In July 2020, the US Federal Drug Administration (not an FCTC signatory) authorized PMI to use “reduced exposure” labelling on its flagship HTP brand IQOS, while at the same time rejecting the company’s arguments for securing “reduced disease risk” status (BAT has never submitted an application for its GLO). Likewise, UK health authorities have taken a favourable stance on e-cigarettes.

In the EU, no regulatory endorsement of the industry has appeared so far. A science review of e-cigarettes by the Scientific Committee on Health, Environmental and Emerging Risks (a consultative body of the European Commission) concluded in September 2020 that there is strong evidence of long-term deterioration of the cardiovascular system and a moderate correlation with respiratory and carcinogenic dysfunctions.

Earlier in May a report by the government of Italy, home to PMI’s largest IQOS production plant, published an excerpt from the National Health Institute’s findings noting that “The scientific data presented is not enough to establish that [IQOS] reduces the risk of the product compared to combustion products with the same conditions of use”. 

Low taxation and tax disparity

Recent research shows that e-cigarettes are not taxed in half of the EU member states, and HTPs are taxed under either the TTD “other smoking tobacco” category or ad hoc regimes. The average EU rates for the two products are consistent with their different levels of supposedly reduced health impact and are respectively 95 and 72 percent lower than traditional cigarettes, according to recent calculations .

The excise duty on HTPs and e-cigarettes, as well as traditional cigarettes, varies widely across EU countries. An assessment by the European Commission in February 2020 warned that tax disparity encourages cross-border shopping and even smuggling, which undermines smoking prevalence reduction, as well as revenue in countries with higher taxation. Moreover, national duties on traditional tobacco products (based on the previous year’s average price in each country) have become generally higher than the minimum rates set in the Directive, meaning that prices are no longer deterring consumption.

The options on the table

Following the EU Council’s conclusions adopted in June 2020, in March the European Commission launched a consultation with stakeholders and citizens. It is also awaiting an impact assessment of the different policy options, commissioned to the consultancy firm Economisti Associati. Based on all inputs, the Commission will eventually table a legislative proposal.

“We could merely opt for new tax categories for HTPs and e-cigarettes or attach to these categories a minimum taxation rate”, a confidential source from the EU regulatory body foresees.

The first option could be an easy compromise, since it means that countries only need to insert the products in their tax systems under common categories, but do not necessarily have to tax them. The immediate benefit would be a reduction of the administrative costs of product authorisation, tracking and tax collection for both operators and authorities.

The second option will likely be contentious due to lack of solid science which results in different political views. “We can anticipate a collision between those countries which believe and those which don’t believe that e-cigarettes and, to a lesser extent, HTPs are less harmful,” explains Dr. Rob Branston, Senior Lecturer in Business Economics at the University of Bath School of Management, with expertise in the tobacco industry. “The former expect that smokers’ switch to these products will generate public health savings, whilst the latter fear that no or low taxation will reduce the public revenues needed to cover health costs substantially unchanged”. Let alone the fact that not all countries have clear roadmaps for their national smoking prevalence reduction plans. 

Text negotiations will exclusively pertain to the EU Council. European Parliament members, most of whom think that smokeless devices are safer than traditional cigarettes, have only a consultative role on tax issues. “Since decisions in this matter require consensus, we can imagine that a Member State with a HTP factory could have reasons to veto taxation which may damage its economic interests”, our anonymous source says. This comment suggests that Italy, from where PMI supplies most of its IQOS to the whole EU market and overseas (with 2450 employees and turnover and exports worth 750 million and 650 million euro respectively), may well be one of the three countries which rejected a minimum excise duty for HTPs in a confidential questionnaire circulated in 2019 by the European Commission. The Italian Ministry of Health declined any comment.

The Italian government has banked on PMI’s 1-billion-euro investment, which began in 2016 with the manufacturing facility in Bologna , by providing a generous tax rebate on the HTPs category. From the initial 50 percent discount, in 2019 the excise went down to 25 percent of the amount levied on traditional cigarettes (although increased by an yearly 5 percent from 2021 to 2023 along with e-cigarettes, previously paying only 10 or 5 percent of taxes depending on whether nicotine is present or not). The allowance boosted IQOS’ competitiveness in Italy, which represents one of the largest populations of smokers in Europe. 

While PMI also produces IQOS products in Germany, Greece, Romania and Poland, other member states only have traditional cigarette plants. “Each member state will in part want advantages for products that are produced within its borders because of the employment and the jobs that go with them”, argues Branston. “Those countries producing traditional cigarettes are unlikely to want them to be at a disadvantage compared to heated tobacco, especially if they don’t believe there’s any health differential risk between them”. 

Big Tobacco’s battle for Europe

Launched as early as 2014, IQOS has to date conquered 90 percent of HTP users in Italy and Europe, leaving BAT’s GLO with a tiny 10 percent slice of the market. Globally, this gap is much lower: 57 versus 13 percent.

Competition between the two industry giants has led to a legal confrontation, which makes all too clear the strategic relevance of NGPs. Last year in Italy BAT unsuccessfully supported parliamentary amendments to suppress PMI’s treasury bonus, and filed a corruption lawsuit concerning an alleged price fixing agreement with customs officials. The Prosecutor’s investigation is still pending. The British multinational also submitted litigation to the European Patent Office against its US competitor, and has brought it to Court in quite a number of European countries (the UK, Germany, Czech Republic, Bulgaria, Poland, Romania) for presumed infringement of its heating technology patent. While a few cases are still ongoing, the majority have been dismissed.

Unlike HTPs, which are dominated by Big Tobacco, the e-cigarettes sector is packed with small players representing 80 percent of the global market. BAT (over 9 percent global share) tops Philip Morris (less than 1 percent), which has zero presence in various countries and has only recently jumped into the Italian arena. 

According to the most recent statistics, as of March 2021 the market value of HTPs (sold at higher prices) topped by over 60 percent that of e-cigarettes, mostly due to the success of IQOS. Worried about losing its customers to PMI, BAT will not be able to count on its home country’s support during the approval procedures at the EU Council. As we discovered, the UK responded to the EU questionnaire by rejecting a minimum excise on e-cigarettes. 

Divergence between PMI and BAT

Given these power struggles over the smokeless products market, it will come as no surprise that the two industry leaders have slightly diverging positions on the TTD review, despite apparently lobbying for a common cause.

During a public consultation launched in 2018 by the European Commission, PMI’s submission proposed to create a distinct chapter in the TTD comprising all smokeless products, exempt from a minimum excise. “PMI tries to secure friendly taxation for HTPs through putting them in the same pot as e-cigarettes, which are currently perceived by some governments as a safer option for smokers”, points out Anca Toma, Director of the NGOs coalition Smoke Free Partnership. 

BAT’s recommendation was that e-cigarettes should be clearly separated from HTPs, and that a minimum excise duty, if absolutely necessary, should only cover the latter. Alessandro Bertolini, Vice President of British American Tobacco Italy holds a stronger view. “As long as there is no science-based risk assessment, the fiscal regulatory model to be followed is that of Japan, where HTPs have experienced the World’s greatest growth and are taxed at around 80 percent of traditional cigarettes”, he said.

“PMI is primarily committed to HTPs, while BAT still bets on a larger range of novel and conventional tobacco products; albeit acknowledging that as an established tobacco company it should do more in the area of HTPs whose more complex and expensive business (the cost of a pack of 20 sticks is up to three times than that of classic cigarettes) requires greater expertise and investments than e-cigarettes”, explains Philip Gambaccini, international fiscal adviser specializing in the tobacco industry.

“That’s why BAT, in the end, may find it more tempting to preserve a less punitive tax regime for HTPs than promoting higher taxation for these products just to make its rival’s life harder”. BAT’s ambivalent attitude could be no different than that of other major companies such as Japan Tobacco International and Imperial, which have a small share of the HTP market. “Like BAT, such companies would probably not dislike tougher regulation on heated tobacco too much, since they could use e-cigarettes as a competing product where they have better positions,” Branston states.

Besides the question mark over the minimum excise and rates, another key issue is the methodology by which to calculate duties within the forthcoming tax categories. “Rather than by number of sticks (which is the case for classic cigarettes), today most Member States tax HTPs by weight (considering that this is the main harm factor), which makes these products more profitable for the industry since prices tend to be similar to regular cigarettes, but the tax burden is much lower due to the fact that sticks are usually lighter than normal cigarettes”, explains Toma.  “A similar challenge on tax methodology goes for e-cigarettes, where the main choice is between setting the excise based on the liquid volume (the method currently adopted by many governments with a tax regime in place for such products) or the nicotine concentration”. 

Branston concludes: “History shows that pricing is one of the weapons the industry uses to minimise the impact of tax increases on regular cigarettes, therefore I expect the industry to replicate this strategy, to  offset changes to the taxation of HTPs.”