The Irish treasury has been given two months to change the way it collects tobacco taxes - or face European Court action.
The ultimatum came from the European Commission in a warning that Dublin is out of step with EU single market requirements about how - and in particular when - excise duties are collected.
Under EU rules, payment of duty can only be demanded from traders in manufactured tobacco once the product reaches the retail market.
Applying the same timing across the EU is vital to the smooth running of the single market, the Commission says, and the EU rules state that excise duties cannot be charged until goods are "released for consumption".
This means that traders producing goods liable for excise duties can manufacture, store and transport those products across the EU, but pay the duties only when they go on sale.
The Government operates a tax system under which manufactured tobacco must carry "fiscal marks" on the packaging - marks which are made available only on payment of the excise duty.
A Commission statement explained this afternoon: "The Commission considers that, by treating the time at which traders are asked to obtain fiscal marks as equivalent to the time of release for consumption, Irish law is incompatible with (EU law).
"This may deprive traders of the opportunity to hold and move products, and pay excise duties only when the products are released for consumption."
The Commission says the Irish government has failed to respond to previous requests from Brussels to change the system, breaching its EU Treaty obligation of "loyal cooperation" with the Commission.
"In the absence of a satisfactory reaction within two months, the Commission may refer the matter to the European Court of Justice" said this afternoon's statement.
PA