Opinion of the Committee of the Regions on 'The significance of the intra-EU duty free regime to the regions` (98/C 373/06)

THE COMMITTEE OF THE REGIONS,

having regard to Council Directives 91/680/EEC () of 16 December 1991 and 92/12/ECC () of 25 February 1992 as they relate to the abolition of the intra-EU duty free regime on 30 June 1999;

having regard to its Bureau decision taken on 12 March 1998, under the fourth paragraph of Article 198c of the Treaty establishing the European Community, to draw up an own-initiative opinion on the subject and to direct Commission 6 - to undertake the preparatory work;

having regard to the EP's Directorate General for Research's Working Document of October 1997 on 'The Economic and Social Consequences of Abolishing Duty Free with the EU` ();

having regard to the conclusions of the EP public hearing on duty free held on 29 October 1997;

having regard to the 3 April 1998 EP Resolution on the abolition of duty free sales ();

having regard to the draft opinion (CdR 109/98 rev.) adopted by Commission 6 on 20 July 1998 (Rapporteur: Mrs McCarthy-Fry, Co-rapporteur: Mr Cummins);

whereas the Committee of the Regions has already drawn attention to the importance of tourism and transport infrastructures to the regions, in for example, the following opinions: A policy for the development of rural tourism in the regions of the European Union - CdR 19/95 (); Commission Green Paper on the role of the Union in the field of tourism - CdR 376/95 (); Proposal for a Council Decision on a first multiannual programme to assist tourism - Philoxenia (1997-2000) - CdR 302/96 fin (); Cohesion policy and culture - a contribution to employment - CdR 69/97 fin (); Urban cultural tourism and its employment impacts - CdR 422/97 fin;

whereas at the 17 March 1998 Council of Transport Ministers an overwhelming majority of Ministers present called for a Commission study on the economic and social consequences of abolishing duty free with the EU to be undertaken;

whereas at the 19 May 1998 ECOFIN Council a substantial number of Member States expressed their support for a full review of the future of the intra-EU duty free regime,

adopted the following opinion at its 25th plenary session on 16 and 17 September 1998 (meeting of 17 September).

1. Introduction

1.1. The Single European Act envisaged the creation by end-1992 of an Internal Market without frontiers in which the free circulation of goods, persons, services and capital is assured. The achievement of the Single Community Market would entail the elimination of technical, physical and fiscal obstacles as factors which divided the markets and economies of the Member States as identified in the Commission's 1985 White Paper on the completion of the Single Market.

1.2. The abolition of the intra-EU duty free system was proposed by the Commission as one measure to complete the Single Market by 1 January 1993. The logic for the abolition of the system as cited by the then responsible Commissioner Scrivener was that the continuation of tax free sales for intra-Community journeys would imply the retention of some kind of frontier controls and would continue to distort the market in goods and of transport.

1.3. The abolition of the intra-EU system required amendments to the common system of value added tax and new legislation on excise duties arrangements. Accordingly, in 1990, the Commission came forward with two proposals, the first concerned transitional arrangements for taxation with a view to establishment of the internal market (the 'Fiscal Frontiers Directive`) (). The second laid down general arrangements for products subject to excise duty and on the holding and movement of such products ('movement of excisable goods Directive`) ().

1.4. During its debate on the 'Fiscal Frontiers` Proposal in November 1990 the European Parliament noted that that there could be serious social and economic consequences arising from the abolition of tax and duty free trade and called on the Commission to determine these consequences in a report to be presented to the Council and the European Parliament. Commissioner Scrivener confirmed that a study would be carried out, and again in May 1991 responding to a Parliamentary written question Commissioner Scrivener stated that 'The Commission agreed with the wish of the European Parliament concerning a study on the social and regional consequences of the abolition of the fiscal borders, and most of all of the tax-free shops in the areas involved`.

1.5. Similarly, the European Parliament's report on the 'movement of excisable goods` Directive urged that the abolition of intra-EU duty free be postponed until 31 December 1995 in order to allow the industries involved adequate time to adapt and the Commission time to produce its report on the economic and social consequences.

1.6. In November 1991, in a general decision on both the Commission's proposals, the ECOFIN Council agreed that an extension until 30 June, 1999 would be appropriate in order to allow for the necessary measures to be taken 'to deal with both the social repercussions in the sector affected and the regional difficulties, in frontier regions in particular ....`. The 'Fiscal Frontiers` Directive was adopted as amended at this meeting, the 'movement of excisable goods` Directive was adopted, also with the amended deadline, in February 1992. Thus the transitional regime for duty (i.e. VAT and excise) free was introduced. In order to facilitate the discontinuation of border controls, a vendor control system was later introduced by political agreement on 14 December 1992.

1.7. However, to date no report on the social, economic and regional consequences has been forthcoming from the Commission. When questioned in July 1997 year on the subject during a European Parliament Economic and Monetary Affairs Committee hearing, the Commission stated that in view of the fact that intra-EU duty free was due to be abolished on 30 June, 1999 a study of the social and economic implications would no longer be relevant.

This was not considered satisfactory by the Parliamentary Committee and its Chairman instructed the Parliament's research services to review the available independent economic data, to produce an assessment of the consequences identified and to suggest further areas of research to be undertaken by the Commission. This study () was completed in early October and was used as the basis for an EP public hearing on duty free, held on 29 October 1997. The report concluded that 'at a time of high unemployment in much of the European Union, the possibility that ending intra EU duty free will result in substantial job losses cannot be taken lightly. The Commission should carry out its own study, paying particular attention to regional and local effects`.

1.8. On 3 April, 1998, the European Parliament unanimously adopted a Resolution which notes: 'there is considerable concern and apprehension about the consequences of abolition on jobs, regions and transport sectors, especially in peripheral regions and in the sectors of ferry services and regional airports` and calls on the Commission 'to carry out and publish an independent study into the social, economic, regional and revenue consequences of the abolition of duty and tax free sales in the EU as a matter of absolute urgency and no later than 30 September 1998 to ensure that a clearer picture of the situation is available` ().

1.9. At the ECOFIN Council meeting of 19 May 1998 several Member States expressed their support for a review of the future of intra-EU duty free trade. These countries represent approximately 85,5 % of the population of the EU.

At this ECOFIN meeting, it is understood that the Commission acknowledged that there may be negative impacts arising from the abolition of the system and undertook the presentation of a working document to clarify the existing instruments available to Member States to address the consequences of the abolition of the intra-EU duty-free system. It is expected that this working document will be presented to and discussed at an ECOFIN meeting in Autumn 1998.

2. General Comments

2.1. Research already available would indicate that the abolition of the intra-EU duty free system may give rise to severe social and economic consequences for many regions of the Union, particularly those that rely heavily on the contribution that duty-free trade makes to the viability of regional transport systems and to the promotion of tourism.

2.2. Despite repeated calls, the Commission has not come forward with an independent analysis of the impact of the abolition of the current regime. As the deadline for the discontinuation of the intra-EU system grows closer, many regions and localities are facing an uncertain future. An abundance of conflicting independent studies are gaining currency in the regions the larger part of which paint gloomy scenarios for many regions primarily in terms of job losses across a broad range of sectors from ferry services to tourism and distillers to retailers.

2.3. In view of the EU's commitments to reducing unemployment and to the promotion of economic and social cohesion any perceived threat to a substantial number of jobs spanning a broad range of sectors must be carefully scrutinised. Both short and long term benefits of all EU measures must be carefully weighed up and their appropriateness constantly reviewed.

2.4. With regard to the 1991 Council decision to abolish the intra-EU duty free system with effect from 30 June 1999, the following questions have yet to be fully answered:

2.4.1. Have the circumstances which gave rise to the Council decision to extend the system to June 1999 as opposed to the Commission's proposed deadline of end-December 1992 substantially changed?

2.4.2. Has the Single Market developed to the extent envisaged (in terms of fiscal harmonisation) at the time that the decision was taken?

2.4.3. Has adequate consideration been given to the impact of the discontinuation of the system and have any guidelines been put forward to assist regions and Member States to mitigate any short or long term negative effects that discontinuation may have?

2.4.4. What has been the experience of Member States in applying the 'Fiscal Frontiers` and 'movement of excisable goods` Directives?

2.4.5. Do convincing arguments exist for a further limited extension of the regime beyond 30 June 1999 in order that proper, independent data on potential socio-economic effects of its abolition may be presented?

2.5. In the absence of an independent, Commission study on the social and economic implications of the abolition of the intra-EU duty-free system, data referred to hereafter is based on independent reports from regions, Member States, the various transport and manufacturing sectors and various interest groupings.

3. Duty Free and the Single Market

3.1. The abolition of the intra-EU duty-free system was proposed in the context of a Single Market with harmonised rates of VAT and excise duties. In such a market, the abolition of the system had a compelling logic. However in the absence of harmonisation of VAT and excise rates serious distortions of the market have occurred against which the effects on the operation of the Single Market as it stands of an intra-EU duty free system must be measured:

3.1.1. In theory, the coming into being of the Single Market should imply that travellers within the Union could purchase an infinite amount of tax/duty paid goods for export to another Member State. Although significant differences in VAT rates do still exist between neighbouring Member States (e.g. Denmark and Germany), these have not been considered to have given rise to unacceptable trade distortions. In the case of excise rates, differences between Member States are so vast that the Member States have found it impossible to accept complete free movement of duty paid goods. Thus the free movement of duty-paid goods applies only if these goods are personally transported by the traveller and are intended for final consumption. In order to enforce these two preconditions, a set of indicative allowances have been retained for duty paid.

3.1.2. However these indicative allowances are not globally applied and, most notably in high duty countries such as Ireland, Finland, Denmark and Sweden differing regimes concerning maximum quantities and travel-time periods apply. Moreover, the system of indicative allowances does not apply uniformly to all territories of the Union: territories including the Canary Islands, the Heligoland Islands, the territory of Gibraltar among several others continue to apply the same limits to EU travellers as to those from non-EU countries (i.e. duty-free allowances).

3.1.3. The system of indicative allowances for final consumption of duty-paid goods has given rise to losses of VAT and excise duty revenue to government exchequers in Member States which neighbour on others with substantially lower excise duty rates, and has had a negative effect on traders in neighbouring regions with differing excise rates resulting in unfair competition for legitimate traders.

3.1.4. It is clear that in Member States where rates of excise duty are low, there is no substantial difference between duty free and duty paid and that disparities in levels of duties imposed has given rise to far more significant market distortions and complications for traders, travellers and border controllers than the existing intra-EU duty-free system.

3.1.5. In this context of non-harmonised excise and VAT rates and the resulting market distortions to which this lack of harmonisation gives rise should the EU focus remain fixed on the abolition of the comparatively benign intra-EU duty free system given that its premature abolition (i.e. before the creation of the Single Market envisaged by the Commission's own 1985 White Paper) may have severe adverse consequences for those regions which are heavily reliant on it?

4. Employment ()

4.1. It has been estimated that as many as 140 000 EU citizens may see their jobs placed in severe jeopardy should intra-EU duty-free trade be abolished. This figure takes into account: direct job losses, defined as those jobs at actual duty-free outlets in airports, on board airlines and on ferries; indirect losses, defined as jobs lost in the supporting industries such as harbours, transport links, manufacturers and distributors; and, induced job losses, defined as jobs lost due to a reduced net wage income in the local economy from loss of direct and indirect jobs.

4.1.1. Current available estimates on potential job losses in the aviation sector put figures as high as 30 000 (direct, indirect and induced). This figure is based on an assumption that some 60 % of total profits from tax and duty-free sales will be lost. Such profit loss is likely to lead to an increase in air fares of up to 20 % which in turn may lead to a fall in passenger numbers of as much as 4 %. A fall in passenger numbers will in turn lead to fleet rationalisation, contraction of routes, reduced investment and further job losses in the regions and localities affected.

4.1.2. Increased fares are most likely to negatively impact low-cost and charter services which traditionally are most sensitive to price increases and loss of revenue. Furthermore, these sectors of the industry are also most likely to have a relatively high dependence on intra-EU traffic and the use of smaller regional and secondary airports serving major cities. These airports are, in turn, most often heavily reliant on duty-free sales which provide them with substantial revenues and enable them to maintain landing charges at low levels. Loss of this revenue would lead to increased landing charges which would oblige airlines to increase excursion prices. Reduced consumer demand brought about by raised prices could result in the withdrawal of services from marginal routes and even the closure of some regional airports.

4.1.3. As regards ferry services, studies carried out in relation to Ireland, the UK, Germany and Scandinavia have indicated an estimated 50 000 job losses, 18-20 000 of which would come from operators and supporting industries with a further 5-7 000 lost through effects on the regions and localities. The same source further estimates that as many as 26-27 000 jobs particularly relating to tourism in these countries will be lost. These estimates are based on a foreseen price increase of 30 % on tickets for these services following the loss of revenue from duty-free sales. Such a price increase could see a major drop in demand for these services and, ultimately the axing of between 25 and 30 routes in northern Europe. The estimated dependence of ferry services on revenue from duty-free sales in these countries ranges from approximately 65 % in Finland to 30 % in Ireland.

4.1.4. Already, clear examples of the impact of the abolition of the intra-EU duty-free regime on employment in the aviation and maritime sectors are available. According to the European Federation of Transport Unions and various regional representatives, redundancy notices have already been issued to workers on certain ferry routes operating out of Schleswig-Holstein, Denmark, and between Jakobstad and Skellaftea, and with effect from April 1998, a certain UK airline has reduced its cabin crew on intra-EU flights in anticipation of the abolition of duty-free sales on these services. In all these cases, the direct reason cited by the companies concerned has been the future abolition of intra-EU duty-free sales.

4.1.5. The timing of the proposed abolition of the intra-EU duty-free system represents a double blow for ferry services specifically in light of the obligatory implementation of SOLAS 95 - regulatory standards enforceable after 1999. SOLAS 95 was adopted as a consequence of the Estonia ferry tragedy and has meant that ferry operators have had to invest in new ships or in major upgrades of existing fleet in order to comply with the stringent standards it introduces.

4.1.6. Over and above the inevitable loss of jobs in the retailing and transport sectors, the abolition of duty free is also likely to affect certain traditional regional manufacturing industries. For example, the Cognac producing region of France has estimated that at least 3 000 jobs will be lost in the region including direct, indirect and induced employment whereas the Scotch whisky industry is expecting falls in sales of 201 million ECU in 1999 with the resulting loss of 1 000 jobs mainly in peripheral areas of Scotland where unemployment is already unacceptably high.

4.1.7. Although all the abovementioned estimates must be regarded with some caution given that they are derived from a number of independent reports based on varying methodologies and a generalisation of local conditions, even the possibility of the abolition of the intra-EU duty-free system giving rise to significant job losses must be viewed with great concern. This concern becomes even more acute when it is generally recognised that job losses resulting from the measure will, inevitably, have the most negative effect on peripheral regional economies.

5. Tourism

5.1. Should the abolition of intra-EU duty free give rise to increased travel costs, within the EU, cost conscious travellers may well choose non-EU destinations in order to minimise travel costs. Countries most likely to benefit from this shift would include North African resorts at the expense of Spain, Portugal and Italy and Cyprus and Turkey at the expense of Greece.

6. Conclusions

6.1. The COR urges the Commission, Council, European Parliament and Member States to step up the process of completion of the single market, in order to remove all market distortions.

6.2. However, the COR is of the opinion that the abolition of duty-free sales on 30 June 1999 will result in severe consequences for regional employment, local transport infrastructures, access costs and the EU tourism sector.

6.3. The COR supports the drafting by the Commission of a comprehensive report on the impact of the abolition of the current regime.

6.3.1. Pending the presentation by the Commission of its working document on the Community funds and national subsidies which may be made available to relieve any difficulties arising from duty-free abolition, particularly in relation to the impact on the peripheral regions of the EU; the COR is not convinced that even if such measures were in keeping with EU competition rules, that they provide the best solution.

6.4. In view of the abovementioned negative consequences of the abolition of the intra-EU duty free system prior to the envisaged EU-wide harmonised system of VAT and excise duties, and the presentation of an extensive independent report on socio-economic consequences from the Commission the COR does not consider that the planned abolition is appropriate at this time.

6.5. The COR is in favour of a continued extension of the current regime for a further period of five years, during which time it recommends the setting-up of a Commission task force comprising representatives of the various interests groupings (economic, social and other actors) along with national, regional and local authority representatives. This task force will have as its remit, a thorough investigation of the consequences of the abolition of the current intra-EU duty-free regime with a view to coming forward with concrete proposals for a successor system.

The COR recommends that its President not only forwards this Opinion to the Council, the Commission but also to the European Parliament, and the Governments of the Member States.

Brussels, 17 September 1998.

The President of the Committee of the Regions

Manfred DAMMEYER

() OJ L 376, 31.12.1991.

() OJ L 76, 23.3.1992.

() EP's Directorate General for Research's Working Document of October 1997 on 'The Economic and Social Consequences of Abolishing Duty Free with the EU` (ref. PE 167.048, W-30).

() European Parliament Resolution of 3.4.1998 (ref. PE 268/233).

() OJ C 210, 14.8.1995, p. 99.

() OJ C 126, 29.4.1996, p. 24.

() OJ C 42, 10.2.1997, p. 22.

() OJ C 379, 15.12.1997, p. 21.

() Council Directive 91/680/EEC - OJ L 376, 31.12.1991.

() Council Directive No 92/12/EEC - OJ L 76, 23.2.1992.

() EP's Directorate General for Research's Working Document of October 1997 on 'The Economic and Social Consequences of Abolishing Duty Free with the EU` (ref. PE 167.048, W-30).

() European Parliament Resolution of 3.4.1998 (ref. PE 268/23).

() In the absence of an independent European Commission report on the subject, all data referred to in sections 4 and 5 of this opinion have been taken primarily from various analyses carried out by individual regions and Member States, the European Parliament, industry associations, trade union associations etc. Oral exchanges with representatives of these sectors have furthermore been taken into account. As such, all data is indicative and based on best approximations of the information available.