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2017 Annual Report item 27 – Abolish tax privileges of tobacco industry

Tobacco products which the manufacturers give free to their employees are exempt from tobacco tax. This exemption is no longer justified, is contrary to tax equity and questionable in terms of health policy. Since 1989, we have repeatedly recommended that the exemption be abolished. The rejection of our recommendation by the Federal Finance Ministry has resulted in losses of tax revenue in the total amount of €171.7 million.
Dec 12, 2017

Cigarettes and cigars are subject to tobacco tax. Tobacco products given free by manufacturers of tobacco products to their employees are exempt from tobacco tax. Nationwide, this benefits about 11,000 employees in the tobacco industry. For instance, an employee receives 600 cigarettes per month (which is equivalent to about 31 packets).

The tax exemption was introduced after the First World War. It was to reduce theft by employees and boost working morale. This motive is now obsolete. Protecting the tobacco industry against theft by their employees or boosting their working morale is not the task of the taxpayer. By using this justification, the entire retail trade could claim tax exemption. Since only a small group benefits from the tax treatment, this is an issue of tax equity. Finally, the tax exemption is questionable in terms of health policy. It contradicts the goals of the Federal Government and WHO, i.e. to reduce the proportion of smokers in the population.

The Federal Finance Ministry has spoken out against abolishing the tax exemption for tobacco products given free by tobacco manufacturers to their employees, arguing that the reasons for the tax exemption were still valid and that the infringement of tax equity was negligible.

The Ministry’s opinion is not convincing. We therefore uphold our recommendation to abolish the tax exemption. We have made recommendations to this effect several times since 1989. The Ministry’s refusal to act has caused losses of tax revenue in the total amount of €171.7 million.

The Ministry’s opinion is not convincing. We therefore uphold our recommendation to abolish the tax exemption. We have made recommendations to this effect several times since 1989. The Ministry’s refusal to act has caused losses of tax revenue in the total amount of €171.7 million.

© 2018 Bundesrechnungshof