Italian e-cigarette firms say new tax benefits tobacco

(This February 27 story was corrected to say CFO, not CEO, in third paragraph of second section)

E-cigarettes are displayed in a shop in downtown Rome February, 27, 2015. REUTERS/Tony Gentile

LONDON (Reuters) - Electronic cigarette firms in Italy say a new levy that doubles the price of e-liquid refills unfairly helps tobacco giants like Philip Morris International and will hurt their industry.

The tax, which was adopted in January, is set at half the rate of that on traditional cigarettes. The controversy centers on the fact that the lower rate is applied to both electronic cigarettes and to tobacco products such as Marlboro HeatSticks, which Philip Morris is launching in Italy alongside a 500 million euro ($568 million) factory investment.

E-cigarette companies say applying the discount to tobacco products is unfair, and designed to help Big Tobacco. The firms and industry experts also say the method of calculating the tax is too complicated and gives an unfair discount to Philip Morris’ products.

“It’s unjust,” said Massimiliano Mancini, president of ANAFE-Confindustria, a national trade association of e-cig and e-liquids producers. “It’s clear that this legislation has been drafted for other interests than just taxing the e-cigs.” He declined to elaborate.

Philip Morris would not comment on whether the new law gave it an advantage. “We have shared our views with the government via public hearings just like our competitors and others,” a spokesman told Reuters by email.

It pledged last year to make HeatSticks and other “reduced risk” products in a new factory in Bologna. Shortly before the plant’s inauguration, the firm’s CEO in Italy, Eugenio Sidoli, told the Senate Finance Committee that he welcomed the new tax rules, saying they would create “a certain and stable” regulatory outlook for the kind of investment his company was making.

Italy is one of the first countries to tax e-cigarettes; the European Union is considering the idea. The devices do not use tobacco, which contains hundreds of toxins, but instead heat liquids laced with nicotine. Many scientists agree the products are probably safer than conventional cigarettes.

Other new devices such as Marlboro HeatSticks do use tobacco and have not yet been tested to the same degree. Unless studies prove they are as safe as e-cigarettes, e-cig firms say, they should not be taxed at the lower rate.

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In all, Italy collects around 12 billion euros a year in tobacco taxes. Philip Morris’ products account for 7.5 billion euros of that, according to the testimony Sidoli gave the Senate committee last October.

But Italy’s tobacco tax take has declined by more than 500 million euros since 2013. The government has said that’s partly due to the rise in e-cigarette sales. It began to think about taxing the devices in 2013 and initially introduced a tax that more than tripled e-liquid prices, and also applied to batteries and chargers sold with e-cigarettes.

That tax was blocked by Italian courts as too confusing, forcing Rome to rethink its plans. But e-cigarette distributors and some big tobacco companies object to the latest scheme, too.

The drawn-out controversy has hurt the industry in Italy, e-cig backers say. While e-cigarette use has been growing globally, the number of regular “vapers” in Italy has slumped to 255,000 from almost half a million in 2013, health ministry figures show. Thousands of e-cigarette shops have closed.

Italy’s Economy Ministry declined to comment.


Italy’s new law assumes that e-cigarettes are safer and should be taxed at a lower rate than traditional cigarettes. The e-cigarette lobby welcomes this but objects to extending that discount to other new products, such as the tobacco-based systems sold in Italy by Philip Morris and Japan Tobacco International (JTI), which heat tobacco in pen-like devices. The Philip Morris system uses tobacco sticks that look like mini cigarettes while JTI’s system, called Ploom, uses aluminum pods filled with tobacco.

Philip Morris says HeatSticks, which it is also testing in Japan, are potentially less harmful than traditional cigarettes “because they are not intended to be lit on fire and smoked, but rather heated and vaped.”

But neither it nor JTI include health claims in their marketing for heat-not-burn products. Philip Morris expects to have more scientific evidence during the first half of this year, its CEO told analysts earlier this month.

Even so, Italian lawmakers said in the tax decree that a tax discount on such products was justified by the “absence of combustion” which gives them “minor toxicity” compared with traditional cigarettes.

Valerio Forconi, Corporate Affairs and Legal Director in the Italian branch of tobacco giant Imperial Tobacco, says the principle of the tax is wrong.

Imperial, whose subsidiary Fontem Ventures plans to launch a new e-cig model in Rome in March, does not object to the tax charge, he said, but believes it is too high compared to tobacco products. Philip Morris’ HeatSticks can be lit and smoked, according to Forconi. This makes Italy perhaps “the only country in the world” that effectively gives Philip Morris a tax discount on smoking.

Philip Morris said HeatSticks should not be lit and smoked. “If burned,” the spokesman said, “the experience would not be pleasurable.”

Additional reporting by Giuseppe Fonte and Steve Scherer in Rome; Edited by Simon Robinson