Kingsley Wheaton
Why does it feel that ideological dogma is being injected into the process?

Donato Raponi
Because they have a lack of discussion with industry for ideological reason? I think the relationship between industry and European Commission is very, very important, because an industry is collecting taxes on behalf of the state, and you have to trust them, and you have to respect them. It's like a partnership.

Kingsley Wheaton
The EU has its smoke free plan. Current smoking rate in Europe is 24% Surely, there comes a moment when you have to have something that drives the smoking [down].

Donato Raponi
They will have to realize with our substitution product, why not to use it?

Kingsley Wheaton
Welcome to The Smoker's Word today, I'm joined by Donato Raponi, former EU Commission official in the DG for tax. Donato and I will delve into the inner workings of the EU tax machine, why targeting tax fraud is a win, win solution to growing fiscal pressures, and why the EU needs to rethink its plans or risk falling short of the 2040, smoke-free goal. Enjoy this episode. This podcast is intended for regulators, scientists, policy makers and investors only. The views expressed in this podcast are the personal opinions of the speaker only. Any references to products having a reduced risk or reduced harm are based on the weight of evidence and assume no continued smoking. This material is not intended for U.S. audiences. So Donato, welcome to the studio. I hope that you you like it. You know, we have an important discussion ahead of us. I think you told me when we met that you've been with the EU Commission for 37 years. Do you want to just tell the audience a bit about, you know, those years your role in tax, what you've done, you know, just a bit of background on yourself would be terrific.

Donato Raponi
It will be a long story. So I started very young, at 26 so I succeeded a competition in the Commission and the court of auditor. I decided to work within the Commission, because the court of auditor was in Luxembourg. Okay? It's not so fun here as Brussels. So I decided, so I didn't start in taxation field. I studied in budget. So I start, I worked three years, and then I switched to internal market and then to taxation. So I am graduating law especially international tax law and basically also in economics. And I been professor of European tax law for 25 years and business school in Brussels. So I started young people, now I've been retired for some years now. And I worked a lot in indirect taxation field, so especially exise duty, I've been head of the exise duty unit for six or seven years. So I implemented, for example, EMCS, so it means movement. And also I've been responsible for fighting tax fraud, right? All taxes, not only indirect taxation. Head of VAT unit for six or seven years and acting director for two years. Okay, so it's a long story.

Kingsley Wheaton
It's a long story, and just tell me about that. You know that legal background and then economics later. How did that work out?

Donato Raponi
So legal background, it's important, because for the Commission, you have to draft proposal, so your legal background could help you. But when you are drafting proposal, you need some economic background to understand what we are doing, why we are proposing, what could be the effect social has economic effects. So it's reason why combining this economic and law background, from my point of view, it's very interesting. It's a reason why a lot of people in the Commission has this background, and it helped me a lot. So it reason why I could better understand the point of view of industry, for example, and it's reason why. So I think that both are very important, but economic it's essential now more and more, because when you are presenting the proposal for a directive, you need to prepare what we call an impact assessment, yep, yep, yep. And if you don't have an economic background, it's quite difficult to prepare an impact assessment. So it means sometimes it's contradictory, but in the end, it's only way to proceed.

Kingsley Wheaton
Okay, well, a little known secret, probably for most of the viewers, that my degree is in economics as well. I'm not entirely relishing going toe to toe with you on economic theory. But we'll, we'll see how that, how that goes. Let's turn to the EU then, and excise first. Just broadly outline what, what what is the EU, what is, what is the Commission trying to achieve, beyond just, you know, raising revenue, but what's the sort of strategic view of that as it goes forward?

Donato Raponi
The strategic view was, in fact, described in 58 in the Treaty of Roma. What has been said, we have to have a common market. At that time, it was a common market. Then the wording is changed, it's being an internal market. It means that the product, excise product should move from one country to another one freely, and we have to avoid distortion of competition because of taxation level. It's reason why we need some kind of harmonization, I would say, more approximation. It's reason why it is being decided to have this kind of framework for tobacco product. And in 1986 I think, with a new treaty, etc, it has been added, you have to to account also of health consideration; in the beginning, it was not the case. It just, just to avoid distortion of competition. So have come kind of harmonization between member states, and then now you have it, but it's not the first priority. The first priority is a functioning of the internal market. And if you read the definition of an internal market, it should work as a domestic market, right, right? So it means it should not be different between region and between countries, member states. This is the first the reason why it has been decided, obviously, because indirect taxation is more sensitive to the movement of goods instead of direct taxation. So it reason why it has been decided to start with indirect taxation. So it means VAT and exise duty, because VAT, it's applied also in exise duty and afterwards last year, so the Commission made some progress on direct taxation. It's more about cooperation between member states, following, more or less what OECD decided, this is more or less what is the plan. But indirect taxation, it's fundamental for the movement of goods other persons too, because you are allowed to buy cigarettes in other country if it is for your own consumption. It's an internal market. It's like you you buy in London, or you buy Manchester, the same.

Kingsley Wheaton
I think you were telling me. Think you said that the excise generated in Europe is larger than corporation tax, more or less, more or less the same. We talk about corporation tax, possibly all the time, but the excise revenue much less.

Donato Raponi
Yes, and excise duty, member states like very much exise duty. You know why you have a few producer, few taxpayer, collecting taxes on behalf of the state?

Kingsley Wheaton
Sure

Donato Raponi
You have not a lot of legal challenge. With corporation tax, it's a mess, it's completely you have a lot of legal challenges, etc. It's reason why exise duty, it's more popular for member states because they think it's easier to collect exise duty because depending a few for tobacco, you have very few big producer it means it's here. They have trust you. Reason why I think the relationship between industry and tax administration and European Commission is very, very important because and at the end, industry is collecting taxes on behalf of the state, and you have to trust them, and you have to respect them. It's like a partnership. I would say, from my point of view, it's reason why, when I worked in the Commission, I insist a lot about this. It's reason why I'm very proud. I set up a group, what we call VAT exper group and tax forum, putting together industry and tax administration to work together to understand more.

Kingsley Wheaton
And I, you know, this is, this is probably, it's probably a slightly British view of my question, but I always felt there was a tension in the EU about sort of fiscal sovereignty, you know, and revenue raising powers within country is, Do I sense there's a sort of direct, indirect split there a little bit in terms of how that, how that, you know, comes to life,

Donato Raponi
yeah, of course, of course, yeah. You know, taxation, it's a question of sovereignty for member states. Because at the end. The EU is not collecting taxes. It's member states collecting tax. The only own resource, I would say, is customs duties. Even custom duty are collected by national Customs Administration and give it back to the Commission. And I take 25% for the cost for the other it's it's purely sovereignty of the member states. It's reason why it has been decided at EU level to have unanimity rule. So it means everybody should agree. Yes, yes. Which is more complicated, if you are 28, 27 now is more and more complicated to get an agreement, yeah? But it's because of the sovereignty and the Commission try, I try myself, because I work to try to to have another rule saying or super qualified majority could help, for example, impeding one country to block. Yeah, yeah, just one of two, but giving qualifying majority, as we have for other issues. From my point of view, it will never been accepted by member states because taxes, sovereignty is representation,

Kingsley Wheaton
yeah, yeah, you seize too much power. We'll come back to, you know, the unanimous nature of it a bit later, if we may. Can I turn now more specifically to sort of tobacco and I suppose now nicotine excise. Can you just sort of briefly recount, when did the tobacco excise directive start? Where have we got to? Where are we today, with regard to Tobacco Excise Directive two, you know, what's the current shape of the landscape?

Donato Raponi
Starting point has been tobacco. Clearly, it's only at that time on the market we had only tobacco products. So it's reason why at the EU level is I try to harmonize, especially to have a common definition of the product, which is very important, and to have, don't forget, minimum taxation rates, yeah. So giving some flexibility to member states, and you have complicated with ad valorem specific, because it was depending on the interest of the selfs country because producing tobacco leaves, they wanted more ad valorem than what country wanted to have specific, etc, yeah. But now you face new products. The market is changing, and you have on the market new products like vape, e-cigarettes, heat, but not tobacco. You have nicotine pouches, etc. So you have to take into account of the reality of the market. And this product on the market from few years, I think. But the Commission took some times to produce this directive, to chant, to modernize this directive, because the first separation, what I had is, I say no, but the market is so small, so it's not urgency to but at the end, they did. So we will come this the modernization of the framework, but now fixing the rate, depending of the risk of these different categories. We don't find this in the proposal presented by the Commission, yeah, yeah. And from my point of view, this is from my point of view mistake, because you have to take account of the reality they have some opinion. I don't care about your opinion. You have to take into account of the reality of the fact, yes, yeah, yeah, if they are less risk. So is depending. I would prefer, and we are, I'm proposing to have some kind of hierarchy of the risk. And you will have hierarchy of the level of taxation depending on the risk, etc. What we do, more or less, in the different sectors, like in alcohol, etc, why not to do so? Is there some kind of ideology I would say, which I don't I don't understand correctly. It's reason why now in the council during the negotiation, because a proposal has been presented two years ago. Now it's negotiating during with Cyprus presidency, and now the rate has been reduced, not yet what you we expect to you are expected. But at the end it will be a compromise. As a compromise, you know, the level of tax will be decided at the end. First, you need to have clear definition to avoid new force, etc. At the end, it will be decided. And it will be decided. Also, one of the technique use I use a lot is to fix some level and to give more time to member states. Derogation, derogation, derogation, variation we had in the past, the derogation for seven years. Yeah, yeah. So what it could be a solution, we use a lot in the past now is depending, obviously, of the position of the member states. But clearly, and this time, we don't have any unanimity the proposal of the Commission, so it reason why we have to now it's depending a lot of the negotiation.

Kingsley Wheaton
My memory of economic theory is that excise, rather specifically, was supposed to cover externalities. That was the logic. And I think that started with alcohol, possibly.

Donato Raponi
Pigovian tax.

Kingsley Wheaton
We see, yeah, exactly. So therefore your hierarchy of risk is exactly the right point. That's where more pure economic theory would take you. So why does it feel to us and you sometimes that ideological dogma is being injected into the process?

Donato Raponi
Because they've been under pressure of some lobbies. I think you know what? I pointed out, they have a lack of discussion with industry for a ideological reason. I don't know why, because in my time myself, I had always consulted industry. It's not if you are confronted with industry, you can discuss with industry. It doesn't mean that you will please industry, etc, just to listen to. I was reading this morning in the train coming into London, the Commission taxes is calling for evidence, how to simplify rules for corporate taxation. Why for corporate taxation and why not for other? In VAT, we do we do the same. We always consulted industry stakeholders, what we call exactly why not in excess duty, just to understand what the problem, what could be the economic effect, the social effects, the health issues, etc. And I see that it's not the case. And from my point of view, it's really ideological position.

Kingsley Wheaton
Is it the injection of you mentioned that it was interesting about 10 minutes ago. You said initially it was just about the internal market, and then there became a health angle. And I wonder if that's the kind of pollution?

Donato Raponi
Yeah, because I gave so I changed the title of the unit responsible for exise duty, exise duty and behavioral taxation. So it means right we have to to account. But you know, if you are taking into account the old externalities, everything will be taxed because you have externalities for everything. But here clearly you have a chance. And we have example like Sweden, which is a good example. in smokeless,

Kingsley Wheaton
absolutely and absolutely.

Donato Raponi
And in this case, which is fascinating, from my point of view, its industry took the initiative, not waiting for it takes an initiative. So you have, okay, we understand that we have to change our way to produce this product. So we're smokeless world, so we are promoting this product. So and taxation should follow in the end. But here, if the level of taxation is so high, you are killing the what you want to do. So it's reason why at the end the smoke world will remain, you will have certainly less revenue, and you will miss, from health point of view, the priority. So, lose, 

Kingsley Wheaton
Lose, lose, lose, yeah, I mean, you know, I just, I'm interested Donato and listening to you, because 37 years in the European Commission, so there's a European in you, but I also sense there's a sort of markets, free markets, solve problems in you as well. Of course, is that fair? I mean, how do you reconcile those two?

Donato Raponi
Because I think especially for taxation, I just explain taxation is important, but you have a player in taxation, this is a taxpayer, and you have to take into account of the reality of the taxpayer. Or if you have an industry, you have to take into account of the industry. What are the consequences? Etc. It's reason why take I would take another example, which is completely the opposite one. Is electric car. Industry didn't take any initiative. It has been decided at EU level, EU technocrat, I would say we have need was a green economy. So asking car industry producer to produce electric car, they were not prepared to do so at the end we what we have is the Chinese car is coming, and now we are going back. Yeah, this is absolutely here. It's contrary. Then industry prepare, yeah, yeah. So you have to go along, yeah, it's and you have to take into account of the priority, yeah. This is,

Kingsley Wheaton
how do I, you know, I was in Brussels last year. The EU has its smoke free plan by 2040 that would mean reaching Sweden like rates below 5% the current smoking rate in Europe is 24% it's fallen by one percentage point in the last decade. 25 to 24 it's not working. Surely, there comes a moment when they're making all these claims about 2040 that you have to have something that drives the smoking [down]. Why does that not sort of permeate as a bit of logic?

Donato Raponi
I will have to realize that at the end, we need somebody. There are substitution product, yeah, why not use it, yeah, yeah. I think that we have to take into account the best practices, which could be Sweden, etc. So maybe they will change their mind. In general, they are clever enough to change their mind. Takes time.

Kingsley Wheaton
And I mean, you know, fairly basic interpretation of the Laffer curve would say that tax rates should be set at the level of sustainable revenue optimization, you know, seems quite a simple economic principle to me, and yet, and yet, it just seems to be, if ignored, is the right reason? I don't know, but some of the rates we're looking at probably got unintended consequences, illicit trade, you know, societal concerns that you know, why? Why are these sort of fairly well proven principles not not more able to gain support?

Donato Raponi
They will gain support, but not immediately. It takes time. You know what I was when I was working in the Commission as officials, I was saying to member states, industry, we have time. It takes time. So it's reason why they have to realize that, and especially speaking with them, with industry, and this is what is lacking, from my point of view, and just to have this kind of confrontation, dialog, yeah, what we call in Roman disputatis, it means you are confronted better in the civilized way. It's okay you have this and and maybe you have a gang in situation, and it's right reason why it may takes time. Yeah, you see, with a green economy, it takes two. It took time. Now we change completely. 

Kingsley Wheaton
Yeah, yeah, so within that time fences. It's a great lead into my next question. We were, what nearly, you know, we're nearly halfway through the Cypriot Presidency, or where we are. I think the Irish come next. You know, I think there's a bit of a feeling on our side. The Cypriot period could be quite important. Then I listen to what you say about time, and I'm less optimistic, you know. Do you know, do you think this is a critical period for Tobacco Excise Directive two the Cypriot Presidency? Or is that just wishful thinking?

Donato Raponi
No, it's, it's, it's, I think it's normal, which, you know, I was speaking with colleagues, negotiating and directed like an exise. It takes 2, 3, years. Yeah, yeah. It takes time because you need unanimity. You have to agree. 27 it's not easy. Some countries does do not understand that they are not alone, like France, for example, fixing very high trade. They don't realize they have neighbor or countries and cross border shopping. It's completely legal, so it's normal. So you have to take account. You cannot impose what you want to do in your country. Sure, you have to take into account as a reality. And we have a common market, an internal market. Now we had the former Prime Minister Letta asking to have a more deep internal market, and now we are doing the contrary, member states like France would like to reintroduce this kind of control to the border, with this compulsory quantity of cigarettes or tobacco product, etc, to to use as a consumer, final consumer for your own consumption, which is contrary to the principle of internal market. For me, it's a shame, I would say, frankly, and every EU citizen, I'm free to to buy. And clearly, if you don't take into account this reality, you will not be able to fix a high level of tax like France, one 1/3 of the cigarettes, it's highly illegal.

Kingsley Wheaton
Yeah, correct.

Donato Raponi
This is the result. Yeah, yeah. In Italy, they feel a lot this, as I understood a lot very the direct link between the level of taxation and illegal activities is very correlated, I think so. And, you know, criminal organization, it's not only tobacco etc. Because they have this cash, they have to invest in illegal activities. And they are very well organized, because they've been for six years irresponsible. They have very they have their lawyer, their bank, etc. So it's polluting the society. Is a common interest. It's not only illegal activity just to get money on tobacco. They could be another commodity. It's not only this, but it's, it's really important to understand this.

Kingsley Wheaton
And you know, I want to come back to some of the key points that you've made Donata. But let me turn to TED, or, you know, own resources, you know, the, I think, TED 2, the, some talk of 15% of what's raised being skimmed, you know, for OR purposes is, is that ever going to happen? Can that happen? No, okay, yeah.

Donato Raponi
In fact, you have to imagine so they need 2000 billion euro during seven years.

Kingsley Wheaton
Yeah, 2 trillion euros. Is that right?

Donato Raponi
Yeah. So now for TED on excise duty, it will be 11 billion a year. Okay, it's peanut, but it's not supplementary revenue. No, it will reduce a JNI contribution. Yeah, so it means there's notes, and what I understand most of the member states refuse. It's a question of sovereignty, 15% so why not 15 or 20?

Kingsley Wheaton
Given 15 next time it's 25

Donato Raponi
And it's not own resource, because it's wrong wording, because own resource you are collecting, the Commission, it's not collecting taxes, it's member states, and they have to make a statistical level, get the calculation and you give you back 15% I'm sorry, it's there is no chance to get an agreement. Especially, it's unanimity rule too. Yeah.

Kingsley Wheaton
Yeah. That's yeah. That sounds like quite a hurdle.

Donato Raponi
But, you know, from for the population say, you know, we are asking tobacco sector to pay, you know, it's for the for the future, etc. This is only from my point of view, political consideration. I think there is nothing really concrete.

Kingsley Wheaton
Yeah, nothing substantial. Let me ask you a big, big political question. You know, we've got, we've got some fracturing between the United States and Europe. We have pressure on defense spending, on NATO, levels of spending. My argument is that European exchequers require money more than ever. You know, there's huge pressure on on the fiscus. Why wouldn't governments then? You know, we you talked about a third of illicit trade in France. I think the UK is well north of 30, probably 40. These are billions of euros just washing away. Why? Why is that not taken more seriously?

Donato Raponi
This is a good question for me. I think that because when I was responsible for fighting tax fraud, it was very difficult to convince member states this was a priority, yeah, sure, sure. This is clearly and when they need revenue, the the reaction will be, how we will increase the level of taxation, more tax. Yeah, more tax. At the end, they will not collect more. They will collect less revenue. It's reason why. It's not, especially in some sector, VAT is the level of rate is very, is very high. In the EU for tobacco, it's one of the highest tax level in the world. So it means, and we face the situation, it's not better than the. So it's reason why is I have to convince that this is better, and we have this Laffer curve, yeah, yeah, which is very important from this point of view, of course, just to understand that at the end, you tax less, but you tax more, yeah, more productive Quantum. This is more. They have to but it's not easy, because I remember, and I was very surprised, because when I've been appointed head of the division for fighting fraud, the first question I asked member states, do you have any statistics, or did you make any study about the quantity of... nobody had? I'm sorry, you are complaining. You don't know what is the level of it's reason why, at that time, I launched a study about the VAT gap. So it was VAT how much VAT gap, but on the initiative of the Commission to member state, at the end, when we produced the statistic we had in VAT one 60 billion VAT gap, they were not very happy. So, no your calculation is wrong. And now slowly, slowly, they're trying, but it's not yet really convincing from this point of view. And they need to do more, more, more. And one of the things in Italy, they have a good experience. It's following the money. Follow the money. Money. If you're a black market, you have a lot of revenue. You have to invest this money where follow the money. 

Kingsley Wheaton
Let me try. So look, I'm just a simple guy. I think about Tobacco Exercise Directive two. I want to put a proposal to you as the former head of indirect taxation and see what you think. Let's move on from the last tobacco excise directive. Let's agree sensible cigarette rates with appropriate derogation. Let's agree vapour, heated and modern oral by a certain timeframe. Why not create a sustainable and durable excise directive that doesn't need to be again negotiated just by having some form of inflationary year over year modifier that allows that to exist almost in perpetuity? Why would that not be a sensible way forward?

Donato Raponi
Because you are touching, in some extent, the sovereignty of the member states. You know, when we are speaking, for example, inflation, Member State doesn't like too much different everywhere. Now, because we have to decide yourself, if it's automatic here, it means it will increase, etc. Now in the last compromise. So there is a cap. If the more 6% it will not be applied, etc. But at the end, of course, this is the best way to proceed, from my point of view, because if the Commission is to come back every time, every two years to adjust, taking account of inflation, with unanimity rule, it will take two years, etc. But you have to face the same problem in for other directive for energy taxation, it's quite the same. And member states in general refuse to. Because they say I don't have the possibility. Maybe for internal reason, domestic reason, I will say not this year. I will not adjust for inflation for different reasons. But if it's in a directive, if it's automatic, it will be obliged.

Kingsley Wheaton
I just think, you know, let's forget, let's forget the tobacco. Let's just talk about tax raise in general. What does big business want? Big business want, sustainability, predictability, certainty that allows us to marshal our, you know, economic forces, invest capital. It seems like a fair trade.

Donato Raponi
Tax Administration is looking also for this. Yeah, exactly, stability and revenue predictability, etc. This is the same objective. It's reason why I don't understand why should not be some kind of trade off between industry and tax administration saying, with your interest, it's my interest,

Kingsley Wheaton
yeah, where the interests are, yeah, of course, common interest, yeah. Okay, I've got a quick fire round for you. Do I need to? So I'm going to give you two choices. You have to choose. You have to choose one or the other you can avoid. But it's got a little Italian theme. Is that? Okay? Okay, so the first one, Brunello or Barolo. Brunello or Barolo, the wines, Tuscan or Northern.

Donato Raponi
Difficult question. I prefer Barolo. 

Kingsley Wheaton
Barolo. Okay, very good. Pasta or pizza.

Donato Raponi
Pasta, morning, lunch, dinner.

Kingsley Wheaton
Non stop! What's your favorite pasta?

Donato Raponi
Favorite. It's Paccheri. Its the big one, with a hole in it.

Kingsley Wheaton
Big state or small state?

Donato Raponi
small

Kingsley Wheaton
Snow or sun? You have it all in Italy.

Donato Raponi
sun

Kingsley Wheaton
Sun, okay? Formula One or football.

Donato Raponi
I like Formula One, but I prefer football. I play football in past

Kingsley Wheaton
okay, and your team - Lazio?

Donato Raponi
Lazio, Roma. Lazio, I will be I cannot go anymore to Rome.

Kingsley Wheaton
Well, that leads me into my next question, Brussels or Rome?

Donato Raponi
No, you know, Rome is beautiful, but it's not easy to live in in Roma. Brussels, much less beautiful, but it's easy to live in Brussels. Okay? Everything functional? Yeah, functional. You are not far from London, and it's and it's working more because in Rome, sometimes it's chaotic. I like romance Museum, open museum from my point of view, but it's not easy. As a tourist, yes!

Kingsley Wheaton
Yeah, I've always said that. I think that the Grand Place in Brussels is one of the greatest pieces of underestimated architecture in Europe. Absolutely stunning, absolutely stunning. Finally, Saturday or Sunday?

Donato Raponi
I hate Sunday. 

Kingsley Wheaton
Okay, all right, so we'll take Saturday. Okay, very good Donato. 

Donato Raponi
You don't work Sundays.

Kingsley Wheaton
Exactly. Everyone has the rest. So two final questions. One, any final advice for the for the Brussels lawmakers, and if you had to say, when do you think we will have a Tobacco Exercise Directive two concluded?

Donato Raponi
I don't know. Frankly speaking, I have a lot of experience, because I was negotiating on behalf of the Commission. Sometimes we negotiated 10 years we didn't find an agreement. So energy, this is the case. The Commission decided to withdraw the proposal. I don't think the Commission will withdraw the proposal concerning tobacco. I think, you know, Irish presidency in general, they are very good in negotiating, right? Okay, this is my experience, so and I think the Commission. It's also thinking that the Irish presidency can conclude, but it's depending a lot, also of the position of some member states. Because if you have some member states, you know, sticking to some principle with a high taxation, yeah, dogma. It the other will resist at the end. So it's reason why it is depending a lot, and I think the presidency is a lot to play such a game. In fact, some power and the Commission also have to play the role entering to find some kind of a trade off between the different interests. But member states asking too much, they never get what they want.

Kingsley Wheaton
So compromise?

Donato Raponi
Compromise is a compromise. And listen to industry. This is, from my point of view, the basic principle, especially for tax man.

Kingsley Wheaton
Donato Raponi, thank you for joining us on The Smokeless Word.

Donato Raponi
Was a pleasure.

Kingsley Wheaton
I've learned a lot brushed up my graduate economics, which has been good and I've really enjoyed our conversation. Thank you for joining us.

Donato Raponi
Thank you back, thank you to you. Thank you.

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