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Netherlands Case Study

The Netherlands learned from costly fiscal experiences of ignoring neighbouring countries’ excise levels and adopted a long-term taxation plan establishing step-by-step increases and confirming the tax differential between fine-cut tobacco and cigarettes. This avoided a negative impact on domestic duties.

Government tax revenues from tobacco products 1998 – 2017 (€ billion)
[rrj_line_chart title=”” labels=”1998; 1999; 2000; 2001; 2002; 2003; 2004; 2005; 2006; 2007; 2008; 2009; 2010; 2011; 2012; 2013; 2014; 2015; 2016*; 2017*” datasets=”%5B%7B%22title%22%3A%22(%E2%82%AC%20billion)%22%2C%22tooltips_format%22%3A%22%7Bd%7D%3A%20%7By%7D%22%2C%22values%22%3A%221.35%3B%201.55%3B%201.59%3B%201.82%3B%201.72%3B%201.75%3B%201.94%3B%202.00%3B%202.14%3B%202.14%3B%202.36%3B%202.32%3B%202.44%3B%202.53%3B%202.65%3B%202.23%3B%202.63%3B%202.22%3B%202.49%3B%202.40%22%2C%22color%22%3A%22%233a5675%22%2C%22point_style%22%3A%22circle%22%2C%22line_type%22%3A%22normal%22%2C%22line_style%22%3A%22solid%22%2C%22fill%22%3A%22none%22%2C%22thickness%22%3A%22normal%22%2C%22linetension%22%3A%22100%22%7D%5D” legend=””]
*Preliminary data

Source: Statistics Netherlands (CBS)

In the same way that markets for products operate within countries, the example of the Netherlands demonstrates the fact that markets also operate across national borders. Developments around 2013 suggest that, when setting duty rates on tobacco products, the government needs to be mindful of prevailing rates in neighbouring countries. Specifically, when domestic duty rates are increased rapidly, as in 2013, the resulting difference in prices from neighbouring countries may lead to domestic consumption being sourced abroad. The inevitable consequence was that revenues from domestic duties will be negatively impacted. The consequences of tax policy in the Netherlands from 2013 onwards highlight the fact that FCT plays an important buffer function for taxation authorities.

However, learning from these costly fiscal errors, the Dutch government has now implemented a long-term (and welcomed) tobacco taxation plan. With the latest increase in tobacco excise introduced on 1st of April 2018, future increases of excise have already been implemented in law. In particular, until 2021 excise duties will increase (1st of January), with the plan including detailed information on the specific duties to be levied on both FCT and FMC, as well as the ad valorem tax on FMC. Although the minimum duties applied to FCT being greater than the corresponding duties for FMC in percentage terms (but the same in absolute terms), the long term planning adopted by the Dutch government has established step-by-step increases whilst at the same time securing a tax differential between product categories. This new approach seems to better reflect the economic realities of tobacco taxation.