REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT ON THE STATE OF THE INTERNAL MARKET FOR SERVICES presented under the first stage of the Internal Market Strategy for Services

TABLE OF CONTENTS

EXECUTIVE SUMMARY

INTRODUCTION

I. Barriers to the internal market for services

A. Legal barriers

1. Difficulties relating to the establishment of service providers

2. Difficulties relating to the use of inputs necessary for the provision of services

3. Difficulties relating to the promotion of services

4. Difficulties relating to the distribution of services

5. Difficulties relating to the sale of services

6. Difficulties relating to after-sales aspects of services

B. Non-legal barriers

1. Lack of information

2. Cultural/language barriers

II. The common features of the legal barriers

A. The changing nature of the barriers

1. Administrative practice

2. Regionalisation of the barriers

3. Implementation of Community instruments

4. Collective non-government rules

5. The conduct of operators

B. The horizontal nature of the barriers

1. Application of a single system to establishment and the provision of services

2. Legal uncertainty surrounding freedom of establishment and the free provision of services

3. Application of the same type of requirements in different fields

C. The common origin of barriers

1. Lack of mutual trust between Member States

2. Resistance to modernisation of the national legal frameworks

3. Protection of national economic interests

III. The impact of the barriers

A. The knock-on effects on the entire economy and on European competitiveness

1. The key role of services in the economy

2. The interdependence of services

3. The demand for cross-border services

4. The costs of barriers to services

5. The lost growth and performance of the European economy

B. The principal victims

1. Small and medium-sized companies

2. The users of services, in particular consumers

C. The weak credibility of the internal market in services

1. Perception of the internal market as a danger zone

2. "Arrangement" strategies

3. "Black market" strategies

CONCLUSIONS

ANNEX

NOTICE TO THE READER

This report is intended to present the difficulties affecting the provision of services between Member States as perceived by interested parties according to the consultations carried out by the Commission and Member States, or which arise from complaints, written and oral Parliamentary questions, petitions or studies and surveys. These consultations, accompanied by specific studies, will be continued in order to obtain further information, in particular on the situation of consumers in the Internal Market for services.

The report does not set out:

* to make a judgement on whether measures causing difficulties are compatible or not with Community law, and in particular with the principles of the freedom to provide services and/or the freedom of establishment, or with secondary Community law. Indeed, these measures could be justified by objectives of overriding public interest such as protection of health, consumers, workers or the environment. The report does not prejudice the position that the Commission may take with regard to current or future complaints. Certain difficulties listed may already have been pronounced as justified by the Court or, on the other hand, condemned by it. Others may be covered by existing Community instruments but arise from the unsatisfactory application of these, while other problems may be addressed by further Commission initiatives.

* to determine the type of measures necessary to resolve these difficulties, in particular the need for harmonisation or adaptation of existing rules or any infringement procedures which it might be necessary to begin against certain Member States

In the course of the second stage of the implementation of the Internal Market Strategy for Services, the Commission will undertake a legal and economic evaluation in order to determine what initiatives should be proposed at the Community level to resolve the problems encountered both by providers and recipients of services. This evaluation will be carried out in consultation with all interested parties, including consumer organisations.

EXECUTIVE SUMMARY

The Lisbon European Council adopted an economic reform programme with the aim of making the EU the most competitive and dynamic knowledge-based economy in the world by 2010. A key part of this programme is to make the Internal Market work for services. With this aim the Commission adopted its two-stage Internal Market Strategy for Services. This report, which completes the first stage, attempts to draw up a comprehensive inventory of the Internal Market barriers that continue to inhibit services. This report analyses the common features of the barriers and makes a preliminary assessment of their economic impact.

The large-scale consultation which forms the basis of this report involved the European Parliament, the Economic and Social Committee, the Committee of Regions, Member States and interested parties, and was carried out throughout 2001 and early 2002. This report provides a basis for actions that will be launched as a second stage in 2003. Because of the interdependence of different service activities, this report, in line with the Internal Market Strategy for Services, is based on a horizontal rather than a sectoral approach. The report covers a large variety of activities, such as consultancy services, certification services, estate agents, engineering, construction, distribution, tourism, leisure and transport. Furthermore, since a barrier affecting a consumer or service provider at any one stage of the business process, may undermine the entire cross-border service, this report covers barriers encountered at each of the six stages of the business process ranging from establishment of the service provider, use of inputs necessary for the provision of the service, promotion, distribution and selling of services, to the after-sales phase. The report covers the whole range of difficulties perceived as obstacles by the providers and users of services, but does not at present seek to assess whether they are compatible with Community law; this question will form part of the second stage of the strategy which will propose solutions.

A key element of the state of the Internal Market for services is consumption. The report emphasises that the recipients of services, and particularly consumers, are the principal victims of the dysfunctioning of the Internal Market. Consumers can be prevented from having easy access to services from other Member States, or have to pay a high price, or lack the confidence to buy from other Member States. A more fundamental analysis of the nature and impact of these difficulties on consumers will be carried out during the second stage of the Internal Market Strategy for Services, with a view to bringing forward appropriate solutions.

Services are the engine of economic growth

Growth in the economy is essentially driven by services. They account for 70% of GDP and employment in the majority of Member States. Services are to be found in all areas of modern economies, including traditional manufacturing sectors, where, for instance, car manufacturers offer financial, consulting, training and rental services. A number of demand-based factors have contributed to an ever-growing number of different services, ranging from more traditional service sectors such as transport, retail distribution, telecommunications, tourism and the regulated professions, to more recently developed services such as waste management, energy conservation, business services (including management consulting), data processing and technical analysis and testing.

However, the potential for growth in services cannot be fully realised while expansion of services activities across national borders in Europe is hampered by a wide range of Internal Market barriers.

Internal Market barriers hit services harder than goods...

Services are much more prone to Internal Market barriers than goods and are harder hit. Because of the complex and intangible nature of services and the importance of the know-how and the qualifications of the service provider, the provision of services is often subject to much more complex rules covering the entire service activity than is the case for goods. Furthermore, while some services can be provided at a distance, many still require the permanent or temporary presence of the service provider in the Member State where the service is delivered. Whereas with goods only the goods themselves are exported, in the case of service provision it is often the provider himself, his staff, his equipment and material that cross national borders. As a result, some or all of the stages of the business process may take place in the Member State where the service is provided and be subject to requirements differing from those in the Member State of origin. This also means that barriers at a single stage of the business process cannot be looked at in isolation; their cumulative impact throughout the service activity must be considered.

...and occur at every stage of the business process...

Barriers to establishment in another Member State may result from, for example, requirements relating to authorisation or professional qualifications, restrictions on the use of a certain legal form for the service provider or on the partnerships between different professions. The number of authorisations required, the length and complexity of the procedures, discretionary powers of local authorities and duplication of conditions already fulfilled in the Member State of origin of the service provider have all emerged as key themes in the consultation. The next problem service providers meet when engaging in cross-border activities concerns the use of inputs necessary for the provision of the service. A variety of restrictions affect, for example, the posting of workers, the use of equipment or material by the service provider or the use of cross-border business services. The promotion of services is rendered particularly difficult because of very restrictive and detailed rules for commercial communications ranging from outright bans on advertising for certain professions to strict control on content in other cases. The large divergence of legislation between Member States impedes pan-European promotional activities for many services.

The distribution of services across borders is hampered by a variety of restrictions, including requirements for the service provider to be established or resident in the Member State where the service is provided, which precludes service provision from the provider's home base. In addition, there are authorisation, registration and declaration requirements which are combined with requirements concerning professional qualifications or other conditions for exercising an activity which differ significantly from those of the service provider's country of origin. Problems directly or indirectly linked to the selling of services across borders result from differences in contract law, fixed or recommended prices for certain services, requirements relating to payment and reimbursement of VAT subject in different Member States to different rates, classification systems and procedures. Finally, in the after-sales phase a service provider can also face particular difficulties resulting from divergences between Member States concerning professional liability and insurance, or financial guarantees, or problems with repair or maintenance services if they involve the posting of workers across borders. At the very least, all service providers encounter barriers at one stage of the business process; often they encounter them at several or even at all stages. Since many barriers have been reported to exist in Candidate Countries, problems will multiply with enlargement.

....as well as affecting consumers

Lack of transparency, lack of confidence, divergent rules between various Member States: these factors prevent consumers, who account for a large part of the demand for services, from enjoying the full benefits of the Internal Market and from playing their full role in the market. From the perspective of consumers, the difficulty in obtaining information, problems of access to cross-border services and the weak protection against, for example, abusive behaviour, contribute to the fragmentation of the Internal Market for services.

Lack of information as well as cultural and language barriers add to the burden

Business and consumers have considerable difficulty in obtaining precise information on the regulatory framework, the competent authorities and the procedures in other Member States. Furthermore, companies and consumers are often not aware of the principles of the Internal Market which allow them to challenge unjustified or disproportionate measures or to enforce their right to supply or receive services. In addition, the question of cultural and language barriers, and the tendency of a large number of companies still to think only in terms of their domestic market, which can make life particularly difficult for consumers, were both raised in the consultation.

Barriers have common features across service activities

Although barriers are widespread, they have a number of common traits in both their origins and effects. It is apparent that while the previous Internal Market programmes were effective in removing physical and technical barriers, these have been replaced by "legal barriers" arising from national, regional and local regulation. In addition, new barriers arise from the behaviour of administrations, including the use of discretionary powers or heavy and non-transparent procedures, which favours domestic operators. A number of difficulties result from unsatisfactory application of certain EU instruments. It seems obvious that Member States lack the necessary confidence in the quality of each other's legal regimes and are reluctant to adapt their own regimes where necessary to facilitate cross-border activities.

Many barriers are horizontal and affect a range of service activities. One common feature is that Member States apply a single regime both to service providers who want to establish themselves on their territory and to those who want to provide services from their home base. For the latter, which are already subject to legal requirements and control by national authorities in the country where they are established, this may result in duplication of requirements and disproportionate burdens. Another common trait is the legal uncertainty resulting from unclear requirements applied on a case-by-case basis by national authorities, the result of which is often unpredictable.

The impact of barriers to services hits the entire economy ...

The impact of the barriers identified in this report is on all sectors of the economy. Barriers to one service will trigger knock-on effects for other services and also for the wider industrial economy, given the integration of services into manufacturing. Services are intricately intertwined. They are often provided and used in combination and feature as inputs at each stage of the service provider's business process. For example, an operator of retail stores established in one Member State and wanting to establish in a number of other Member States might wish to use the services of the real estate agents, shop designers, architects, engineers, construction companies, banks and insurance companies with whom he works in his Member State of origin. In most cases this is impossible because of barriers affecting those service providers who may not have, say, the authorisations or qualifications required in the other Member States. As a result, the establishment of the retailer may be delayed or rendered more costly and difficult, which in turn affects the services he provides to manufacturers and consumers. This interdependence of services means that it will be necessary at the second stage of the strategy to develop further the economic assessment of the problems identified so that it covers the effects on the entire economy and is not limited to the impact on one service activity.

Barriers result in considerable costs for companies engaging in activities doing business between Member States. A service provider seeking to enter a market, whether through establishment or cross-border service provision, will have to bear the significant costs associated with complex legal assistance. Such assistance is required to examine whether he can export his business model or whether parts of it, such as his promotional strategy, will have to be altered. These costs are additional to costs resulting, in particular, from different languages or cultural differences in commercial and consumption habits. Since barriers may occur at each stage of the business process, these costs will multiply throughout the provision of the service. Furthermore, in addition to the legal assistance costs, a company bears significant further costs resulting from necessary changes to its business model. The impossibility of using the same business model throughout the Internal Market prevents companies from taking advantage of economies of scale. The consequence of these negative effects is a general misallocation of resources within the companies concerned, limiting investment in innovation and differentiation of services. Given the key role of services, this in turn affects the performance of the entire economy.

... but SMEs and ultimately all consumers are particularly affected

Small and medium-sized enterprises (SMEs) are prominent in the services industry, but their prospects for cross-border growth are severely hampered. They are hit much harder than their larger rivals, since the legal assistance costs are fixed and not proportionate to firm size. As a result, SMEs will either be dissuaded from cross-border activities altogether or will be put at a clear competitive disadvantage compared to domestic operators. SMEs in small and peripheral Member States seem to be particularly disadvantaged. Furthermore, SMEs may become an attractive target for acquisition by larger companies because of their significant local knowledge, experience and innovation potential.

However, it is the service users and in particular consumers who pay the price for these restrictions through not being able to benefit from a greater variety of better quality and competitively priced services. Ultimately this affects their quality of life. They suffer directly when administrative and legal requirements prevent them from using services offered from other Member States, or they suffer indirectly when existing barriers dissuade companies from offering their services to customers in other Member States or result in higher prices, less differentiation and lower quality. Finally European citizens suffer from the lost job creation potential of the services industry as a whole.

Barriers need to be removed urgently to meet the objective of economic reform

A decade after the envisaged completion of the Internal Market, there is a still huge gap between the vision of an integrated EU economy and the reality as experienced by European citizens and European service providers. The range of barriers perceived as affecting service provision and use, which are far more wide-ranging than was expected, amounts to a considerable drag on the EU economy and its potential for growth, competitiveness and job creation.

It is clear that the goal set by the Lisbon Council to make the European economy the most competitive in the world cannot be met unless sweeping changes are made to remove barriers to cross-border services in the near future. The nature and the scope of the problems to be addressed require a major effort and a clear political commitment by all European institutions and Member States finally to make the Internal Market work for services. This report provides a framework for actions to be launched in 2003 as a second stage of the Services Strategy on the basis of further discussions with the European Parliament, Member States and interested parties.

This report, and the reactions to it, forms the basis of work for the next stage of the services strategy. It will involve both legislative and non-legislative actions whose scope and content require further analysis. In respect of possible legislative proposals, a careful balance has to be found between the need to avoid too detailed and wide-ranging regulation at Union level and the need to protect the general interest objectives concerned. In respect of non-regulatory initiatives, the Commission will in the first instance consider what measures could provide to consumers and business the information and assistance necessary to allow them to benefit fully from the EU's Internal Market.

INTRODUCTION

Services are everywhere in the modern economy. In the EU they account for almost 70% of GDP and employment and offer prospects for further growth and more jobs. Realising this potential, and ensuring that services deliver better quality and value to European citizens and business, is a major aim of the EU's economic reform programme. Much more progress is required in order to make the Internal Market work for services.

This challenge has been recognised by European leaders. The Lisbon European Council in March 2000 asked the Commission and Member States to devise a strategy for the removal of barriers to services [1]. The need for further action was also highlighted by the Stockholm and Barcelona summits in 2001 and 2002, while the Internal Market, Tourism and Consumer Affairs Council, in reviewing the EU's priorities for economic reform, concluded that improving the Internal Market in services remained "a crucial strategic challenge for the Community" [2].

[1] Presidency conclusions, Lisbon European Council, 24.3.2000, 17. More recently, the ECOFIN Council, in its recommendation 10093/02 of 21 June 2002 concerning the Broad Guidelines of the Economic Policy of the Member States and the Community, considered that it was necessary to re-launch structural reform, which should include creating "an effectively functioning Internal Market in services by the removal of barriers to cross-border trade and market entry".

[2] 2412th meeting of the Council (Internal Market/Consumer Protection/ Tourism), Brussels 1 March 2002, document 6496/02 MI 35.

In response to the call from the Lisbon summit, the Commission set out a broad-ranging strategy in December 2000 [3]. The strategy recognises the impact of the information society on methods of supplying and using services. As more and more businesses use a mixture of techniques to meet customer needs and provide both on-line and off-line services, it is increasingly necessary to ensure that the Internal Market for off-line services can develop in a way which complements the Internal Market for services delivered on-line [4].

[3] Communication from the Commission to the Council and the European Parliament, An Internal Market Strategy for Services, COM (2000) 888 final, 29.12.2000.

[4] It should be noted that in the context of the e-Europe 2005 action plan the Commission, in co-operation with the Member States, will re-examine applicable legislation in order to identify, and, as the case may be, to remove those problems which prevent business from taking up e-business and consumers from benefiting from the Internal Market. This examination will in particular consider how to ensure that the provision of goods and services off-line can, as with services provided on-line, benefit from a true internal market. An e-summit to be organised in 2003 will mark the launch of this examination involving all interested parties, and will provide high-level representatives of economic operators the opportunity to describe the difficulties encountered in the context of e-business.

The objective of the strategy is to allow services to move across national borders in the EU as easily as within a single Member State. It takes in the first instance a horizontal approach across all economic sectors involving services and proposes two stages. The first stage of the strategy, which is completed by this report, involves identification and analysis of existing barriers to the cross-border movement of services whilst at the same time accelerating a number of ongoing initiatives. Amongst these, flanking measures have been initiated with the aim of gaining a comprehensive view of employment in, and the added-value created by, the sector. The gathering of data and economic analysis are being completed by studies on productivity in services and on the "virtual economy". The second stage, based on this analysis, will bring forward appropriate solutions to the problems identified. This approach has been endorsed by the European Parliament [5], the Economic and Social Committee [6] and the Committee of Regions [7].

[5] European Parliament resolution on the Commission communication "An Internal Market Strategy for Services", A5-0310/2001, 4.10.2001

[6] Opinion of the Economic and Social Committee on the Communication from the Commission "An Internal Market Strategy for Services" (Additional Opinion) CES 1472/2001, INT/105, 28.11.2001

[7] Opinion of the Committee of the Regions on the Communication from the Commission "An Internal Market Strategy for Services", 134/2001 fin, 27.06.2001

The Services Strategy is consistent with, and complements, a range of other initiatives designed to facilitate the operation of the Internal Market in services. The "2002 Review of the Internal Market Strategy" [8] provides an overview. It shows that progress has been made in many fields, for instance in implementing the Financial Services Action Plan, the adoption of the regulation on cross-border payments in euro, the adoption of the new regulatory package on electronic communication networks and services and the directive on postal services, the forthcoming adoption of the regulatory package for public procurement and the presentation of the Commission's proposals to harmonise the legal regime for sales promotions and to provide a uniform, transparent and flexible regime for recognition of professional qualifications.

[8] Communication from the Commission to the Council, the European Parliament, the Economic and Social Committee and the Committee of the Regions, 2002 Review of the Internal Market Strategy: Delivering the promise, COM (2002) 171 final, 11.4.2002.

In the area of consumer protection, the development of consumer policy at the EU level has been the essential corollary of the progressive establishment of the Internal Market. The free circulation of goods and services has necessitated the adoption of Community rules aimed at providing sufficient protection for consumers while eliminating regulatory obstacles as well as distortions of competition. The strategy adopted by the Commission on 12 May 2002, and in particular the Community approach envisaging a high common level of consumer protection [9], aims to remedy those aspects linked to consumers' lack of confidence in cross-border transactions. Moreover, the consultation launched by the Green Paper on consumer protection [10] recognised that existing EU rules in the area of consumer protection did not match up to the challenges posed by a market in constant evolution and so had to be reformed. A number of responses indicated that the disparities between national rules, particularly in the area of commercial practices, led to significant distortions of competition. The majority of responses to the consultation expressing a preference wished for reform to proceed on the basis of a framework directive on fair commercial practices in relations between business and consumers. In order to reduce legal fragmentation as well as to improve consumer confidence, the framework directive should be accompanied by the revision in due course of consumer protection directives and by the replacing of minimum harmonisation clauses with maximum harmonisation rules.

[9] Consumer policy strategy COM (2002) 208. See also the Communication on the follow up to the Green Paper on consumer protection COM (2002) 289 and notably the proposal currently under consultation on a framework directive on commercial practices.

[10] COM(2001)531 final.

It should be noted that consumer protection may involve obligations to services of general interest such as transport, energy (electricity and gas), telecommunications and postal services. In this respect, the Commission Communication "Services of General Interest in Europe" emphasises the importance of these services and the role of public service obligations or other obligations relating to consumer protection to which certain activities might be subject.

In the area of contract law, future initiatives [11] should be mentioned which follow up the consultation launched by the Communication on European contract law [12] in order to resolve legal problems affecting the functioning of the Internal Market.

[11] Following the request of the Council and the European Parliament, the Commission will present these initiatives by the end of 2002.

[12] Communication from the Commission to the Council and European Parliament on European Contract Law COM(2002) 398 final, 11 July 2001.

In the context of the European social dialogue, initiatives in skills, qualifications and the promotion of quality have been launched or completed in several areas such as personal, cleaning, private security and construction services.

In the area of the free circulation of persons, the abolition of internal border controls, which has become a reality due to the Schengen acquis being integrated in the EU by the Treaty of Amsterdam [13], will also facilitate contact between service providers and their potential clients [14]. This removal of controls will also gradually contribute to citizens and economic operators becoming more aware of all the dimensions of the internal space without frontiers.

[13] OJ L 239, 22 September 2000

[14] The free movement of persons without controls at borders between Member States benefits EU citizens and members of their family, but it also allows foreigners holding a residence permit from a Member State to circulate freely without a visa on the territory of Member States for up to 3 months (article 21 of the Convention applying the Schengen agreement of 14 June 1985, signed at Schengen on 19 June 1990). However, this legal principle does not allow service providers who are third country nationals to supply their service in a Member States other than one in which they are established.

As far as the international dimension is concerned, there is a synergy between internal market policy and external trade policy, including the services negotiations in the context of the GATS (General Agreement on Trade in Services). More specifically, it will be necessary to take account of the results of the current discussions on domestic regulation in the context of article VI:4 of GATS.

This report forms an important step in the process of creating a true Internal Market for services by presenting an overview of the reality of the Internal Market today. For the first time since the presentation of the "General Programmes" for the suppression of restrictions to the freedom of establishment and the free provision of services in 1962 [15], the Commission has undertaken a comprehensive analysis of the existing barriers in the Internal Market for services. Since then, progress has been limited. The Commission's 1985 White Paper on completing the Internal Market [16] stated that "progress on the freedom to provide services has been much slower than the progress achieved on the free movement of goods". And the 1992 Cecchini report [17] concluded that the potential of services sectors "for much more significant growth is being artificially pinned back by regulations and practices which significantly inhibit the free flow of services and thus the free play of competition between companies supplying them".

[15] Programmes généraux pour la suppression des restrictions à la liberté d'établissement et à la libre prestation des services, OJ C 2, 15.1.1962.

[16] Completing the Internal Market : White Paper from the Commission to the European Council (Milan, 28-29 June 1985), COM (85) 310, 14.6.1985.

[17] "The European Challenge, 1992: The Benefits of a Single Market", Paolo Cecchini, Wildwood House, for the European Commission, 1988.

Some measures have already been adopted in order to suppress the most obvious difficulties which limit the development of the Internal Market in services. These measures are the result of the application by the Commission of its role as guardian of the Treaty and of exercising its power of initiative to bring forward harmonisation proposals aimed at making the Internal Market work. These measures have enabled the Internal Market to reach a higher level of economic integration than regional trading arrangements elsewhere in the world. Nevertheless, in spite of progress so far, contributors to the consultation were able to identify a wide range of difficulties which remain and which are the object of this report.

This report is based primarily on a large-scale consultation with interested parties, but also draws on information from other sources such as European Parliament petitions and questions, complaints to the Commission, economic and statistical studies and Member States' contributions. The consultation, which lasted throughout 2001 and early 2002, was launched in order to gather first-hand information on the barriers which hinder the development of cross-border services in the EU. It covered any and all problems encountered in the context of the provision and use of services, and of cross-border establishment in the EU. It is clear from the jurisprudence of the Court that any measure liable to prohibit, impede or render less advantageous the supply or use of cross-border services or cross-border establishment within the EU could constitute a barrier. This report therefore includes examples of barriers which are not simply prohibitions, discriminations or conditions which are impossible to meet, but various types of requirements which, if applied to companies from other Member States, would undermine the freedoms to establish or provide services. Some barriers are due to complex, burdensome or non-transparent regulation or practices; most are just due to the wide divergence of national rules.

The overall aim of the report is to describe the realities of the Internal Market as seen by providers and users of services. It does not at this stage seek to assess whether any individual barrier is justifiable or not.

The report covers areas which are subject to Community instruments or proposals. Furthermore, the report reflects comments made in the consultation on barriers faced by EU companies in the Candidate Countries. In these countries the companies are confronted with the same obstacles as in the Member States. However, additional barriers may result from nationality requirements, restrictions on ownership of companies in certain sectors by non-nationals or restrictions on access to real estate.

In line with the Services Strategy, this report covers barriers throughout the entire business process, starting from establishment and the use of inputs necessary for the service provision, to promotion, distribution, sales and after-sales activities. It is clear that service providers are far more exposed than producers of goods to barriers in each of these stages of their business activity. This is because the provision of services often requires the permanent or temporary presence of the service provider in the Member State where the service is delivered. As a result, some or all of the stages of the business process may take place in the Member State where the service is provided and be subject to requirements differing from those in the Member State of origin. For instance, a company wanting to establish in, or provide services to, another Member State might face obstacles in gaining authorisation, including mutual recognition of qualifications, posting its employees or using its equipment, promoting its services, distributing its services, concluding contracts with customers and providing guarantees or after-sales services. Obstacles at any of these stages may render the entire cross-border activity less attractive.

Furthermore, in accordance with the horizontal approach of the Services Strategy, this report covers barriers affecting a large variety of different economic activities. The reason is not only that a number of barriers, such as authorisation procedures, affect different sectors in a similar way, but that services are intricately intertwined and barriers affecting one service have knock-on effects on a number of different other services. A comprehensive approach is required to evaluate barriers to services in the Internal Market and their overall impact.

Services play a key role in the economy and in the life of every citizen. Barriers to services therefore not only affect the competitiveness of service providers themselves, they also deprive the recipients of services, which includes every business and every consumer in the EU, of the increase in innovation, price competition and quality, which greater access to services would bring.

I. Barriers to the internal market for services

With regard to the definition of the "Internal Market" in the EC Treaty ("an area without internal frontiers") and the objective, set out in the "Internal Market Strategy for Services", of making the provision of services between Member States as easy as within a Member State, it has to be said that the Internal Market for services is far from being a reality. Two broad categories of problems can be singled out: those deriving directly or indirectly from legal constraints and those deriving from non-legal factors.

A. Legal barriers

The term "legal barriers" covers all obstacles to the development of service activities between Member States deriving directly or indirectly from a legal constraint and which are liable to prohibit, impede or otherwise render less advantageous such activities. Such barriers also stem from difficulties caused by divergent national regulations, as well as from problems relating to the behaviour of national authorities, or from the legal uncertainty caused by the complexity of some cross-border situations. In all cases, the result is the same: consumers and businesses alike are discouraged from using services from other Member States, and service providers are discouraged from offering their services in other Member States [18].

[18] These "barrier effects" and the fact that they largely replace the technical, physical and tax barriers referred to in the 1985 White Paper on the completion of the Internal Market, already cited above, explains the use of the term "legal barriers".

The inventory of barriers set out below highlights the difficulties which service providers are liable to encounter when seeking to exercise freedom of establishment or freedom to provide services in order to develop their activities in other Member States. These are difficulties which were identified by interested parties and Member States in the course of the consultation or which have emerged from complaints made to the Commission, from European Parliament petitions and written question, from recent cases filed with the European Court of Justice or from studies and surveys which have come to the notice of the Commission. This method, aimed at taking stock of how the Internal Market for services is operating in reality, has three major consequences

- This report does not take a position on the compatibility with Community law of the barriers identified, this question being the subject of the second phase of the Strategy, which will focus on solutions, particularly in terms of harmonisation needs. It is not the object of the inventory to call into question the need for, or content of, national rules as such, but merely to highlight problems to which they may have given rise when applied to cross-border activities;

- The difficulties identified may already be the subject of ongoing Community initiatives, existing Community instruments or measures, infringement proceedings or Court judgments;

- Some difficulties may not have been identified, even though this risk has been minimised by drawing on numerous sources of information.

In order to draw up as broad an inventory as possible of all difficulties hindering the development of service activities between Member States [19], the method employed was to identify the problems which a service provider is liable to encounter at any stage in his activity, whether it be during the process of establishment in another Member State (stage 1), when posting staff to or using equipment in another Member State (stage 2), when promoting the particular service in another Member State (stage 4), when selling the service (stage 5) or, finally, after having provided the service in another Member State (stage 6). The inventory set out below presents all the difficulties identified as affecting cross-border activities in relation to each link in the business process.

[19] The inventory also includes difficulties identified in candidate countries. It should be borne in mind that very many of the difficulties cited in Member States are also encountered in candidate countries.

1. Difficulties relating to the establishment of service providers

The consultation showed that a national of a Member State, or a company already established in a Member State, wishing to become established in another Member State in order to engage in a service activity there, may face a large number of difficulties. These have a particularly severe impact in the case of services: whereas goods can circulate among Member States (via distribution networks) without the manufacturer having to cross a border, the provision of services depends on know-how that requires a direct relationship between service provider and client. Even though the temporary relocation of the service provider or the provision of the service from a distance may enable such a relationship to come about (and is the preferred approach of SMEs) establishment in the target market remains a key commercial strategy [20]. This is particularly the case where the operator intends to maintain a long-term presence in the country concerned or where he wishes to adapt to the specific conditions of the market or boost customer confidence. Moreover, the complexity of regulating services, coupled with the fact that the quality of a service is directly dependent on the characteristics of the provider, engenders a number of requirements which are not to be found in regulations governing goods, e.g. specific rules on the legal form of the service provider and restrictions imposed on multidisciplinary activities.

[20] See in particular a study entitled "Service internationalisation characteristics, Potential, Barriers", A. Henten, T. Vad, CRIC workshop, Manchester 1-3.10.2001, section 3, which stresses that the services sector is more dependent than manufacturing on cross-border establishment.

(i) Monopolies and other quantitative restrictions on access to activities

Monopolies in some Member States were singled out, as they have the effect of preventing the establishment of service providers from other Member States in which no such monopoly exists. The monopoly concerned may be one that is entrusted to a specific body, such as those in partially liberalised sectors (such as postal services or energy utilities), a monopoly on the distribution of certain products [21], which could affect distribution services in particular, or activities reserved exclusively for certain operators [22].

[21] For example, alcoholic beverages and tobacco products.

[22] For example, gambling activities or the distribution of pharmaceutical products. See also a OECD study entitled "Regulatory reform in road freight and retail distribution", Economic Department working papers No 255, 10.08.2000, section 39 et seq., and a study carried out for the Commission entitled "Barriers to Trade in Business Services", Centre for Strategy and Evaluation Services, January 2001, page 15.

Quantitative restrictions which some Member States impose on access to service activities, e.g. quotas or numerus-clausus rules governing the number of service providers [23], rules on maximum surface area [24], or on geographical distance [25] limit the number of service providers and could place established national operators at an advantage over new entrants.

[23] For example, national regulations stipulating there may be only one provider of chimney-sweeping services per district or per commune.

[24] For retail services, for example.

[25] For example, in one Member State medical laboratories may only analyse specimens collected at least 60 km away, while in another the mimimum distance between opticians is fixed at 350 metres, and in another shopping centres must be in city-centre locations, which prevents the establishment of new entrants.

Difficulties identified include, for example, rules in one Member State imposing a limit of 1 optician per 10 000 inhabitants and one driving school per 15 000 inhabitants.

Territorial restrictions applying in some Member States may confine authorisation to engage in service activities [26] to a specific region or locality, so that service providers wishing to cover the entire national territory are obliged to become established in several regions.

[26] For example, private security services. Concerning the difficulties encountered in connection with services of this type, see a study conducted by CoESS/UNI-Europa and financed by the Commission entitled "A comparative overview of legislation concerning the private security industry in the European Union". ECOTEC, May 2002. In the context of the social dialogue, the European social partners in the private security sector (the CoESS for the employers and UNI-Europa for the unions) signed on 13 December 2001 a joint declaration on European harmonisation of legislation governing the private security sector.

(ii) Nationality or residence requirements

Nationality requirements exist in several Member States in respect of shareholders, management and staff of service enterprises [27] and in respect of some regulated professions [28].

[27] For example, engineering enterprises, aero-clubs and NGOs.

[28] For example, chartered surveyors.

Residence requirements, particularly those relating to managers of service enterprises [29], give rise to problems. For example, depending on the particular country, two thirds, one half or at least one of the members of the management board must be resident.

[29] One such requirement may be that an applicant for a telecommunications service licence must be resident in the particular country (even before he or she has obtained the licence).

A single-establishment requirement, whereby a service provider wishing to become established in a particular Member State is directly or indirectly obliged to give up an establishment in another Member State, was pointed out by medical laboratories, for example. Such a requirement effectively prohibits the exportation of a business model by means of becoming established in several Member States.

(iii) Authorisation and registration procedures

Access to a large number of service activities [30] is subject to a prior authorisation requirement which often entails difficulties for operators from other Member States.

[30] For example, financial services, regulated professions, craftspersons, private security services, certification bodies, drinking water testing laboratories, trade fair organisers, telecommunications services providers, employment agencies and performers' agents, transport and processing of waste.

The failure to take into account requirements already met by a service provider in a Member State in which he is established, e.g. securities or guarantees already deposited [31], may have the effect of duplicating and compounding the constraints facing operators who are present in more than one Member State.

[31] For employment agencies or private security services, for example.

The number of authorisations required for some activities considerably amplifies the restrictive effects for an operator from another Member State, even if it just means having to contact more administrative bodies, fill in more forms and provide more certificates [32].

[32] In one contribution it was even stated that one had to be a "collector of licences" in order to set up a bakery business in one particular country, as the requisite authorisations varied depending on the types of products and activities of one and the same bakery. Given these difficulties, the operator in question abandoned the plan of becoming established. The multiplicity and duplication of authorisations had also been identified as a problem in the "Report from the Commission to the Council, the European Parliament, the Economic and Social Committee and the Committee of the Regions on concerted action with the Member States in the field of enterprise policy" COM (1999) 569 final, section 2.1.1.

For example, in one particular Member State, seven different local and national licences are needed in order to open a hotel or restaurant [33]; while in another a company wishing to open a retail outlet needs a building permit, an environmental permit and a socio-economic permit, as well as having to comply with zoning regulations which can sometimes be highly complex.

[33] See, for example, a study entitled "Tackling the impact of increasing regulation - A case study of hotels and restaurants". Better Regulation Task force (UK), June 2000.

The procedures and conditions associated with such regulations may have restrictive or even discriminatory effects on operators from other Member States, particularly where the procedures involve bodies made up of competitors [34] or where the applicant has to prove that the application for authorisation is justified by a genuine need [35].

[34] Those applicable to distribution services, for example.

[35] In one Member State, for example, this relates to a genuine need on the part of consumers with regard to existing shops; in another, the criterion is that there must be no negative impact on existing town-centre shops; and in another the granting of a licence is subject to a condition relating to the need for a performer's agent's activity "in terms for the demand for the placement of performance artists".

A registration requirement applying to some service providers, whereby they are obliged to register with an administrative authority, a professional body, a chamber of craft trades or a trade association, is frequently encountered and could prove very expensive for operators who have a presence in several countries, particularly on account of the annual contributions to be paid, and where, moreover, membership of a specific sickness insurance scheme is involved.

The bureaucratic nature of authorisation and registration procedures, the long time they take to complete, the onus of proof, the certification of translations, the prices or fees to be paid, the less than constructive attitude taken by some authorities and the difficulties involved in lodging administrative appeals were very often singled out on account of their discouraging effect on service providers from other Member States [36], particularly SMEs and start-ups [37].

[36] For example, the difficulties encountered in opening retail outlets because of authorisation or registration requirements and the associated administrative formalities were identified in the OECD study cited above (section 39 et seq.) as being one of the chief restrictions on market access in the distributive trades sector. An Anglo-French study on the services sector in the United Kingdom and France underscores the negative effects on employment at the local level which are caused by licensing and numerus clausus systems applicable to some activities: "The service sector in the UK and France. Addressing barriers to the Growth of Output and Employment. An Anglo-French Report.", Department of Trade and Industry and Ministère de l'économie, des finances et de l'industrie (Ministry of Economic Affairs, Finance and Industry), 2000, page 89.

[37] A business survey attached as an annex to the November 2000 Internal Market Scoreboard shows that 91% of the companies interviewed attached the highest priority to a simplification of administrative procedures http://europa.eu.int/comm/internal_market/en/update/score/business.htm. See also "Report on the implementation of the European Charter for small enterprises", COM (2002) 68 final, which stresses in particular that "the total number of procedures for starting a business could be an important target for simplification"(section 4: Conclusions); "Report of the Business Environment Simplification Task Force- Best" volume 1, OPOCE 1998 ; "Etude comparative internationale des dispositions légales et administratives nécessaires pour la formation des PME dans six pays de l'Union européenne" (comparative international study of the legal and administrative provisions governing the creation of SMEs in six countries of the European Union, Logotech, European Innovation Monitoring System, EIMS Publication No 27, March 1996.

(iv) Restrictions on multi-disciplinary activities

A certain number of service activities are subject to rules designed to ensure independence and autonomy between different activities, preventing them from being exercised jointly. The disparity between national rules in this domain may have a particularly pronounced restrictive effect by preventing the exportation to another Member State of know-how consisting precisely of addressing in a multi-disciplinary, innovative and less expensive manner the different requirements of a customer. These restrictions may take several forms:

- requirements concerning the structure or management of service enterprises, preventing for example the formation of associations between different professions [38] ;

[38] For example, in numerous Member States lawyers are not allowed to enter into partnerships with non-lawyers, e.g. accountants, tax consultants or patent agents. Other forms of restrictions may also exist. In one Member State, for example, only tax advisers, tax consultants or tax agents may be shareholders or executives of companies providing tax consultancy services, Concerning the rules applicable in the United Kingdom, see for example a report entitled "Competition in professions", Office of Fair Trading, March 2001, section 30.

- restrictions on the exercise of multi-disciplinary activities - these lay down that the exercise of different activities is incompatible [39], oblige a service provider to exercise exclusively one particular activity [40], or stipulate that different activities may only be pursued in different locations [41].

[39] See, for example, studies on cases concerning incompatibilities between the activity of an auditor and that of an accountant in the above-cited survey carried out for the Commission entitled "Barriers to Trade in Business Services", appendices, case studies 6. See also the judgement of 9 February 2002 Wouters C-309/99, on the prohibition of multi-disciplinary partnerships between members of the Bar and accountants.

[40] In one Member State, for example, such a requirement applies to employment agencies.

[41] For example, in one Member State real estate services and insurance activities.

In one Member State, for example, estate agencies are prohibited from engaging in other professional activities such as property management, financial consultancy or cleaning.

(v) Legal form and internal structure of economic operators

The obstacles concerned are particularly restrictive for operators who are already established in one Member State and are not subject to this type of requirement in their country of origin. The divergence between the rules in question means that operators may be obliged to create a legal entity that is "made to measure".

Requirements regarding legal form may impose a particular type of company on a service provider or, conversely, prohibit him from having such a legal form [42]. The situation can become highly complex for some activities for which different legal forms are mandatory in different Member States.

[42] In one Member State, for example, trade fair organisers must be non-profit-making.

For example, a lawyer who wishes to become established in a different Member State must dissolve his or her one-person company in the Member State in which he or she is already established because in the other Member State lawyers are allowed to operate limited-liability companies only [43].

[43] Other activities are also affected by this type of problem, e.g. auditors.

In addition to the (above-mentioned) discriminatory rules affecting shareholders, the capital of service enterprises is subject in some Member States to restrictions such as a minimum amount of capital for companies providing private-security services and employment agencies [44].

[44] Restrictions may also include a maximum investment, as in the media sector, or an obligation to find other shareholders or co-investors for certain areas of activity. It should be noted that the Anglo-French report cited above also identified (page 36) minimum-capital requirements as being one of the main obstacles to service activities.

A minimum number of employees may be required for some service companies [45].

[45] In one Member State, for example, employment agencies must have at least 12 employees per 100 contracts concluded in the previous year. In other Member States, companies providing private security services must employ a minimum number of staff depending on the activities and territory covered.

(vi) Professional qualifications

Disparities between different countries' regulations governing professional qualifications may give rise to various kinds of difficulty for service providers wishing to become established in another Member State, particularly where qualifications for the profession concerned are not automatically recognised [46].

[46] It should be noted that, quite apart from problems concerning the recognition of professional qualifications, differences in rules governing the professional training of employees may cause certain difficulties, as in the case of companies providing private-security services, which are subject to specific requirements in some Member States.

Differences between Member States regarding activities considered to be "regulated professions" may cause difficulties, as there are many services [47] which are not regulated in all Member States, while some may be regulated in one Member State only [48]. For example, a service provider from a Member State with no requirement for a professional diploma wishing to become established in another Member State that does have such a requirement will not find it easy to have professional qualifications recognised.

[47] For example, engineers and consulting engineers, tax advisers, estate agents, surveyors, landscape architects, managing agents of blocks of flats, consultants, craftspersons.

[48] For example, one Member State has established a specific vocational title for services consisting of drafting labour law documents which does not exist in any other Member State and which is subject to authorisation and an obligation to be entered in a national registry specific to this new profession.

Aptitude tests required by some Member States for activities not covered by arrangements for automatic recognition of qualifications could be are a source of difficulties, particularly for SMEs [49] owing to a lack of transparency and predictability.

[49] See the already cited "Report of the Business Environment Simplification Task Force", page 65, which states that, in some fields, the aptitude-test requirement "has tended to become the rule rather than the exception".

Differences regarding the fields of activity covered by a particular professional qualification may give rise to difficulties, and it may also happen that different professional qualifications are required for one and the same activity if different designations are used [50].

[50] For example, a carpentry diploma obtained in one Member State does not authorise the holder to exercise the profession of a "carpenter/joiner" in another.

For example, chartered building surveyors may be allowed to draw up plans for a building in one Member State, while only architects are allowed to do so in another.

(vii) Conditions governing the exercise of service activities

A decision as to whether or not to become established in a particular Member State may be influenced by differences not only between the respective conditions governing access to the service activities concerned but also between conditions relating to the way they are exercised, such as professional liability insurance regulations, rules on shop opening hours - which affect strategies for the establishment of retail outlets [51] - and rules on taxation and use of infrastructures, which may affect the establishment of telecommunications operators [52].

[51] This type of restrictive effect was also identified in the OECD study already cited, sections 49-51.

[52] For example, taxation in respect of GSM transmission masts, or the setting of electromagnetic emission thresholds.

The different company tax regimes result in obstacles which penalise cross-border establishment of service providers [53]. Although business would like to consider the Internal Market as just one market, numerous problems result from the fact that companies must conform with 15 different fiscal regimes. This situation undermines the economic efficiency of business strategies and structures. The multiplicity of fiscal laws, conventions and practices leads to significant compliance costs and constitutes a barrier to establishment which particularly affects SMEs.

[53] See the study "Taxation of companies in the Internal Market" SEC(2001)1681, which, inter alia, examines in detail the principal fiscal provisions likely to constrain cross-border economic activity in the Internal Market. On the basis of this analysis the Commission presented a strategy to remove such obstacles. Communication from the Commission: "Towards an Internal Market without tax obstacles - a strategy for providing companies with a consolidated corporate tax base for their EU-wide activities" (COM(2001)582 final).

In particular, it seems that service providers are especially affected by problems linked to the fiscal treatment of intra-group transfer pricing, cross-border flows of income, cross-border loss relief and cross-border restructuring operations. These difficulties present a risk of double taxation and increased compliance costs.

2. Difficulties relating to the use of inputs necessary for the provision of services

The cross-border use of inputs by service providers can take two forms. In order to offer its services, an enterprise already established in one Member State may have to move to another Member State and mobilise its own inputs there: i.e. its staff, equipment or the business services of which it usually avails itself on its domestic market. On the other hand, an enterprise may need inputs from other Member States. In both cases, the contributions to the consultation revealed difficulties. In particular, the cross-border recruitment or posting of staff could be problematical [54], which runs counter to the aim of facilitating the mobility of workers [55].

[54] While human resources are one of the most important inputs for the provision of services, contributions also showed the cross-border deployment and posting of staff continue to cause service providers major difficulties which are hardly encountered at all by manufacturers of goods. Concerning the low level of worker mobility in border areas, see a study carried out for the Commission entitled "Scientific Report on the Mobility of Cross-border Workers within the EEA", MKW Wirtschaftsforschung GmbH, November 2001, section 1.3.

[55] Concerning this, see the Communication from the Commission to the Council, the European Parliament, the Economic and Social Council and the Committee of the Regions - Commission' Action Plan for skills and mobility, COM (2002) 72 of 13 February 2002.

(i) Posting of workers (employees or temporary staff) to another Member State

The provision of services between Member States often means that the service provider has to post staff temporarily to another Member State. Some difficulties may be encountered in this context. It should be noted that Directive 96/71/EC [56] sets out a common list of rules providing for minimum protection which must be observed in the country where the service is supplied by the employer which posts the worker in the framework of the provision of services.

[56] Directive 96/71/EC of the European Parliament and of the Council of 16 December 1996 concerning the posting of workers in the framework of the provision of services (OJ L 18, 21 January 1997 p1). This Directive aims to guarantee observance of the fundamental freedoms of the Treaty while at the same time protecting workers. The Directive also obliges Member States to establish co-operation between national administrations and to designate liaison offices.

The requirement to make a prior declaration, applying in several Member States to the cross-border posting of staff (permanent employees or temporary personnel), particularly in the construction sector [57], may result in difficulties for operators from other Member States on account of the administrative burdens which they may impose [58]. Compounding these in some Member States is the obligation, on expiry of a certain period (generally three months), to register posted workers with labour authorities, administrative bodies or the police [59].

[57] These formalities have to be completed for each individual site. A service provider who regularly posts personnel for short periods cannot obtain an authorisation valid, for example, for one year. In one Member State, the obligation to make a prior declaration has to be met, before work on each individual site commences, for each temporary worker provided by an employment agency established in another Member State.

[58] For example, the costs of translating certain employment documents into the language of the host country.

[59] For example, the obligation to apply for a residence permit.

The burden and complexity of administrative formalities [60], the stringent and quasi-systematic checks which some posted workers may have to undergo, excessive paperwork and the associated delays (stoppage of work), could result in difficulties in the case of regular and short-term postings.

[60] For example, the obligation to draw up certain social and employment documents and make them available for the inspection authorities, or to keep such documents on file with a social representative in the host country for a certain period of time, and to translate these documents in their entirety into the language of the host country.

For example it was indicated that, for the installation of a lift by two workers on a ten-day posting, a company had to complete a series of administrative formalities (in particular the submission to the labour inspectorate of data on the posted workers and safety measures, and an obligation to keep documentation in the language of the host country) although the company considered that it had already met similar requirements in its country of establishment.

The application to posted workers [61] of the host country's labour-law provisions, without account being taken of the obligations and charges already met by the employer in the country of establishment, could lead to amounts being levied twice and to additional administrative costs and burdens having to be borne by service providers from other Member States. Such cases of duplication, notably as regards the minimum wage [62] or paid leave [63] could have particularly restrictive effects in the case of short-term service provision and with regard to SMEs and service providers established in border areas who would like to post workers to several Member States on a regular basis in order to provide their services there.

[61] Whether they are nationals of a Member State or a non-EU country.

[62] As regards wages in particular several contributions show that restrictions result from disparities in the methods of calculating wages. Some contributions, for example, highlight difficulties linked to a failure by the host country to take account of all the components making up remuneration in the country of establishment (e.g. 13th or 14th month's salary) which may mean that remuneration is higher than that imposed by law in the host country.

[63] For example, the obligation to contribute to a third party institution (such as a paid leave fund) despite the fact that the posted workers already enjoy a comparable benefit by virtue of national provisions guaranteeing holiday pay. In one such instance, payment for the contract was withheld until the matter had gone through the courts.

For example it was highlighted that it proved economically unattractive for a small craft enterprise to carry out work in another Member State on account of an obligation to make a quarterly provision for all social security contributions for its posted workers. Even though the amount would later have been reimbursed to the company concerned, this would have tied up too much cash [64].

[64] See "Artisanat, Petites entreprises et zones frontalières - Analyse de cas particuliers d'entreprises travaillant en pays limitrophes (seconde action expérimentale)" (The crafts sector, small enterprises and border areas - Analyses of specific cases of enterprises working in neighbouring countries [second experimental scheme], Inter-regional Council of the Saar-Lor-Lux Chambers of Craft Trades, 1996.

These restrictive effects are exacerbated by the existence of severe sanctions [65], including criminal penalties, the application of which is sometimes perceived as being discriminatory by service providers who do not meet obligations to make a prior declaration or fail to observe labour-law provisions.

[65] In one Member State, for example, the minimum fine is EUR 1,000, including for simple material errors, and can range up to EUR 26,000.

Procedures and conditions applying to the posting of third-country nationals in several Member States are tantamount to authorisation requirements [66]. This fact and the slowness and cumbersome nature of the procedures concerned were also highlighted [67] as being liable to render the provision of services difficult or even impossible in some cases. [68] Such difficulties could primarily affect high-tech sectors in which operators seek the skills they need by using staff, e.g. software designers, from non-EU countries.

[66] These range from an obligation to obtain a work permit in the host country, the granting of which depends on an assessment of the labour market there, to a "work visa" or residence permit, without which no posting can take place.

[67] Concerning this, see in particular a study entitled "Managing mobility matters - a European perspective", PriceWaterhouseCoopers, 2002, section 2.5, as well as the "Report of the High Level Panel on free movement of persons" chaired by Mrs Simone Veil and presented to the Commission on 18 September 1997, "(the Veil Report), chapter 6.

[68] Moreover, the fact that third-country nationals who are insured in one Member State are not, in principle, covered by the provisions of Regulation (EEC) No 1408/71 of the Council of 14 June 1971 on the application of social security schemes to employed persons and their families moving within the Community, is also liable to make it more difficult and costly to post them to another Member State. A proposal from the Commission seeking to extend the field of application of regulation 1408/71 to third country nationals was agreed by Ministers at the Council of 3 June 2002.

In several Member States, the posting of personnel from third countries is subject to the condition that the staff concerned have been employed by the posting enterprise for at least a year. In some cases they must even have a contract of indefinite duration. Moreover, it can take a long time for the document(s) required for a posting to be issued (up to six months in some cases).

(ii) Use of employment agencies or temporary workers from other Member States

Enterprises which may need to use an employment agency established in another Member State or to deploy temporary workers in another Member State [69], could face a series of difficulties.

[69] For example, in order to make up skills shortages, cope with a heavy workload, particularly on account of seasonal factors, or manage their resources with a degree of flexibility.

Prior-authorisation rules [70] and establishment requirements [71] applying to employment agencies could prevent operators from availing themselves of an agency that is established in another Member State and does not have such authorisation. This has the effect of limiting operators' access to temporary workers from other Member States [72]. This could also prevent a company from calling on workers provided by an agency in its home state to supply a service in another Member State where such an authorisation is required. Such regulations could moreover delay the performance of a contract or make it impossible to meet a deadline [73].

[70] The conditions and procedures for authorisation, the length of time they take, as well as the associated guarantees and deposits, can likewise exacerbate the restrictive effects of these authorisation rules. The granting of an authorisation may be linked to the quality or the structure of the service provider or to the agency having a minimum capital stock. It may also be conditional on guarantees or securities being deposited or on the payment of duties. In one Member State, a user enterprise that had to cope with a temporary rise in its workload was unable to use an agency established in a Member State on account of the time it would have taken for the requisite licence to be granted (four months). Moreover, the obligation imposed in some Member States to first consult trade union organisations, even in urgent cases, is also liable to slow down the procedure appreciably.

[71] An agency may be required to have a local representative, or to be "active" in several regions of one and the same Member State.

[72] Particular mention was made of "niche" sectors (such as high-tech activities and civil aviation), but also the building and construction sectors, as well as the tourism, hotels and health sectors.

[73] For example, an air transport company was unable to use the services of an employment agency specialising in providing airline transport pilots because the agency in question was not established in the same Member State as the air transport company.

The prohibitions imposed on certain sectors and restrictions on the use of temporary staff [74] (such as the requirement to prove a specific need to use temporary workers) vary from one Member State to another. In the context of cross-border service provision, this is liable to hamper the posting of temporary staff employed by an enterprise [75].

[74] Such prohibitions affect several sectors (construction, the merchant navy, the public sector, removals and low-skill activities) but may also be limited by particular considerations (increased workload at an enterprise, performance of specific and exceptional tasks, replacement of seasonal employees or activities, launching of a new activity).

[75] This is compounded by tax and social provisions specific to temporary employment which have the effect of making staff provided by an employment agency established in another Member State more expensive. For example, the user enterprise may be subject to double taxation from the first day of providing its service or to higher social security contributions. In some Member States, it may also be required to pay end-of-contract compensation.

(iii) Other difficulties relating to the cross-border deployment of workers

Some contributions showed that operators encounter difficulties [76] when seeking to recruit or employ staff in one or more Member States particularly with a view to making up skills shortages [77]. This is especially the case for enterprises which are established in several Member States or which employ cross-border workers. These difficulties derive from obstacles to the cross-border mobility of workers within the Internal Market.

[76] It should be noted that the difficulties relating to nationality, residence and professional-qualification requirements which were raised in the section concerning the establishment of service providers are likewise a restriction on worker mobility.

[77] Particularly in the information-technology, communications, construction, health and tourism sectors.

Disparities between national regulations governing remuneration, taxation [78] and social protection are perceived as a source of major difficulties [79] for enterprises employing or seeking to recruit migrant or cross-border workers [80], and could give rise to additional administrative costs and paperwork.

[78] Disparities concerning taxation (level and structure of taxes) were cited in several contributions as being a major obstacle to the mobility of labour, as migrant and cross-border workers are often more heavily taxed in spite of bilateral agreements on double taxation (see the Veil Report as well as the study entitled "Managing mobility matters - a European perspective" both op cit.).

[79] Disparities relating in particular to income tax and pension rights were identified in the above-cited studies entitled "Barriers to trade in Business services" (section 4) and "Managing mobility matters - a European perspective", as having a negative impact on an operator's ability to exercise its activities in several Member States and, in particular, to recruit personnel locally in another Member State.

[80] For example, an enterprise that wishes to recruit qualified personnel will not always be able to inform candidates of the exact amount of taxes and contributions which they will have to pay, even though matters have been simplified by the introduction of the euro.

For example, pension contributions paid by migrant workers to pension schemes in the Member State of residence are not necessarily deductible from taxes payable in the Member State in which they exercise their activities.

The complexity of social security regulations in all Member States may discourage enterprises from employing migrant or cross-border workers [81] and also cause additional administrative burdens.

[81] Contributions highlighted, above all, problems encountered in the application of the Regulation (EEC) No 1408/71 relating to the co-ordination of social security schemes (difficulties in determining the applicable scheme, in particular to border workers, non-application of the provisions of the regulation to benefits under collective agreements, e.g. in the case of occupational pensions. Moreover, some problems of double deduction of contributions have occurred in spite of the implementation of forms E101 and E128 used in case of a posting. The Commission has made a proposal to simplify this regulation.

Diversities between pension schemes and obstacles to the transfer of supplementary pensions [82], may have a restrictive effect on the mobility of cross-border and migrant workers and give rise to high administrative and financial costs, preventing for example operators who are established in several Member States from centralising their pension management systems.

[82] The difficulties concerning the transferability of supplementary pension rights acquired by migrant workers are highlighted in particular by the above-cited Commission Action Plan on Skills and Mobility.

(iv) Cross-border use of business services

In order to engage in its particular activities, an enterprise normally requires the input not only of manpower but also of a variety of "business services". These may range from legal assistance and accounting services, through marketing services, website design, equipment leasing or hire, to transport and after-sales services.

The use of cross-border business services may be affected by difficulties which can prevent an enterprise from using providers from other Member States whose services are more attractive in terms of quality or price. They may also prevent a company, when supplying services in another Member State, from using service providers with which it has long had dealings.

For example, a waste-transport enterprise may be prevented, in the context of its cross-border activities, from drawing on the assistance of its environmental consultant because the latter is not entitled to provide services in other Member States.

Where such difficulties affect providers of business services, they will be dealt with from the perspective of the distribution of services.

(v) Cross-border use of equipment and material

Problems relating to the use of technical equipment in the cross-border provision of services were highlighted by contributors to the consultation. [83]. Service providers are liable to be seriously hindered, and their ability to benefit from the freedom of service provision compromised, by measures imposing restrictions on the use of equipment or material specifically required for the exercise of their particular activities. Such difficulties may relate in particular to the technical equipment of laboratories, the use of business vehicles, exhibition-stand materials, road-mending machinery, construction-site equipment, security vans or technical standards for electronic signatures. In some cases, Member States require the use of infrastructure and materials which cannot be transported into the country in which the service is provided [84].

[83] For example, equipment used by analysis laboratories, trade-fair exhibitors, certifying veterinary officers, opticians, chiropodists and construction enterprises (who have to cope with divergent legislation regarding construction equipment and undergo multiple inspections of hired cranes, with serious consequences in terms of additional costs and delays). Difficulties may also include the requirement for SMS companies to connect up with each operator involved in the cross-border transmission of messages.

[84] For example, requiring a chiropodist who is established in another Member State to have non-transportable equipment and a permanent infrastructure in the country of service provision is tantamount to imposing an establishment requirement in order for services to be provided.

For example, the introduction of the euro has led to a sharp rise in demand for the cross-border transport of notes and coins, with central banks having an increasing proportion of their cash produced in other Member States in the euro-zone. Commercial banks as well as retailers may also find it worthwhile to have cash transported to and from other Member States. However, differences between national rules on the transport of cash, including technical requirements in relation to equipment and vehicles, are a hindrance to the provision of this type of service between Member States.

3. Difficulties relating to the promotion of services

This is a key stage, particularly for the cross-border provision of services, it being imperative that operators promote their services if they are to penetrate a new market in another Member State. It is essential to advertise know-how and specialist capability, as these are the chief factors that differentiate operators in this field. However, communication of numerous service activities [85] is governed by strict and complex rules whose variations between Member States may make it difficult for service providers to promote their know-how across borders and virtually impossible for them to undertake a pan-European promotional campaign.

[85] A wide range of sectors (the regulated professions, distribution, telecommunications, press, publishing, cinema and financial services) are affected by bans or limitations on the use of commercial communications.

(i) Authorisation, registration and declaration procedures

Prior authorisation may be required for communications concerning certain services. Such authorisation mechanisms may cause delays and additional administrative burdens in the context of cross-border promotional efforts.

In the case of financial services, prior approval is required in some Member States for some or all forms of advertising of some or all types of financial services.

In the distribution sector, authorisation is required for the promotion of certain products [86], for certain forms of promotion [87], and for the use of certain media [88].

[86] For example, the advertising of medicines available without a medical prescription may require prior authorisation, and the advertising of fruit and vegetable prices outside the point of sale may be subject to the existence of a multi-sector agreement. See OECD study entitled "Assessing barriers to trade in services: retail trade services", 2 October 2000.

[87] For example, some Member States stipulate that prior approval is required for promotional lotteries and games.

[88] For example, for mobile poster campaigns, particularly for the deployment of vehicles carrying commercial messages for each district of a city.

A declaration may also have to be made to a specified body in respect of certain types of sales promotion or advertising for certain services [89], which may cause delays and additional administrative burdens for cross-border activities.

[89] In some Member States, for example, organisers of a promotional lottery or game have to make a declaration to the public authorities. In other Member States, any advertising on the part of a teaching establishment has to be notified in advance to the national ministry of education.

(ii) Bans on commercial communications

Bans on commercial communications for certain types of services, certain categories of recipients or certain media affect service providers from other Member States as they, unlike national operators, have hardly any other means at their disposal for making their products and services known.

Some regulated professions are subject to a total advertising ban, imposed either by law or by codes of good conduct, limiting the opportunities for developing their client base beyond the borders of their Member State of residence.

Some Member States prohibit all forms of advertising for certain professions, such as physicians, accountants and engineers, preventing the communication even of factual information.

With regard to other services, such bans may be imposed in respect of specific communication media [90] and recipients [91].

[90] For example, television advertising may be completely prohibited for certain sectors, as is the case in one particular Member State in respect of the distribution, press, publishing and cinema sectors.

[91] Some communication bans are often designed to protect minors. In some Member States, for example, television advertising aimed at children is completely banned at certain times. In other Member States, television advertising for toys is prohibited between 7 a.m. and 10 p.m.

(iii) Content of commercial communications

The type of message which operators are allowed to communicate may also be subject to restrictions, causing difficulties in a cross-border context. In some Member States, not only are commercial communications by regulated professions limited to factual information, but this information itself is subject to restrictions [92]. For example, in some Member States, certain types of information, such as prices or a comparison between services rendered and their prices must not the subject of a commercial communication.

[92] Numerous professions are affected by these kinds of restrictions: auditors, physicians, pharmacists, architects, accountants, notaries, lawyers.

In some Member States professionals such as lawyers are not allowed to mention their particular specialisation in their communications to the public, which limits their scope for attracting new custom from other Member States.

Content restrictions in respect of the target audience, which vary markedly from one Member State to another, may also exist for certain services, particularly for communications aimed at minors [93].

[93] In one Member State, for example, a regulation on sales promotions provides that the value of prizes offered in promotional lotteries and games must not exceed EUR0.7.

Restrictions in respect of the arguments used may, in some Member States, prohibit for example the use of certain arguments, such as those of an "ecological" nature [94] or those extolling the virtues of a product or service in terms of its positive effects on health.

[94] In one Member State, for example, it is prohibited to refer to a solarium as "biolarium".

Restrictions on the language used in commercial communications exist in some Member States, e.g. in the form of an obligation to use the official language(s) of the Member State concerned [95].

[95] These restrictions may cover all advertising or just advertising messages relating to certain services (such as investment services) and may even apply in cases where the advertising concerned is aimed specifically at nationals of other Member States, such as foreign tourists.

(iv) Form of commercial communications

Some regulations restricting scope for sending commercial communications without prior consent may make it difficult to canvass for business if they also apply to messages addressed to professionals [96]. Regulations may relate to specific forms of canvassing, such as telephone [97] postal or door-to-door canvassing.

[96] Where regulated professions such as auditors are concerned, for example, some Member States prohibit the unsolicited promotion of services, which may prevent such professionals from sending newsletters or brochures. For instance, a gravestone distributor was formally threatened with prosecution in another Member State for having faxed to undertakers in that country unsolicited (price) information about its activities.

[97] In some Member States, for example, the making of telephone calls to potential customers with a view to offering financial services is authorised only if the canvasser has obtained the prior consent of the client. In others, telephone canvassing is prohibited even if the persons targeted have been informed in advance in writing.

(v) Non-commercial communications

The compilation and circulation between Member States of independent information on the quality of services, based in particular on trials and comparative testing, are an essential means of enabling users of services to become aware of quality services in other Member States. In this regard, the application of certain rules relating to unfair competition [98], parasitic behaviour , disparagement, counterfeiting, defamation, the right of reply and the citing of comparative tests [99] could give rise to legal uncertainty which may be detrimental to the cross-border dissemination of this type of information.

[98] For example, consumer associations have been taken to court for violation of honest trade practices following the publication of comparative tests.

[99] In one Member State, for example, it is forbidden to cite comparative tests in advertising.

4. Difficulties relating to the distribution of services

The difficulties set out below are not those affecting the distributive trades sector proper but those encountered in the cross-border provision of all services. The distribution of services can come up against a much more complex set of barriers than does that of products. In contrast to products, the quality of a service is gauged not only by the inherent quality of the service itself but also by the provider, particularly the professional qualifications of staff, capacity, capital and the internal structure of the enterprise. Numerous requirements, varying considerably from one Member State to another, are therefore imposed on the cross-border provision of services.

More particularly, Member States tend to subject services supplied by providers established in other Member States to some or all of the requirements applicable to operators established on their territory. This explains why the inventory of difficulties affecting this stage often includes those identified as affecting the first stage, the establishment of the service provider.

(i) Monopolies and other quantitative restrictions on access to activities

The monopolies and other quantitative restrictions listed in relation to the first stage (establishment of the provider) can represent an insurmountable barrier when applied to providers of cross-border services established in other Member States. The application of a monopoly system has the effect of depriving these providers of any opportunity to supply their particular service, even on a temporary or occasional basis. It is clear that the existence and application of monopolies can have severe effects on consumers.

(ii) Nationality or establishment requirement

In addition to instances of discrimination based on nationality [100], the requirement that a provider be established [101] in the Member State or region in which the service is delivered is one of the main difficulties faced in a large number of economic activities [102] in several Member States. This type of requirement represents the very negation of the freedom of provision of services which enables operators to pursue their activities in a Member State other than the one in which they are established.

[100] These still exist in some Member States for certain professions, such as notaries and surveyors.

[101] This requirements comes in various guises: an operator may be required to have its head office, a secondary establishment, a residence or a permanent presence etc. in a particular country.

[102] For example, wine transport and storage enterprises, building construction enterprises, patent agents, employment agencies, private security services, clinical analysis laboratories, boiler inspectors, enterprises handling the transport of deceased persons.

For example, in some Member States certification bodies for biological products are not allowed to provide their services unless they are established in the particular country concerned. This prevents the cross-border provision of a highly specialised service and also has the knock-on effect of hindering the sale of biological products.

The obligation to have a local representative almost amounts to an establishment requirement [103].

[103] A local representative is sometimes compulsory for the purpose of completing administrative formalities or for tax reasons.

(iii) Authorisation, registration and declaration procedures

Some Member States try to subject cross-border service providers who are established in other Member States to the authorisation, registration or declaration procedures applicable to operators established on their own territory (see stage 1).

Prior authorisation in various forms (such as having to obtain a permit, licence, or other approval) is required [104] in numerous Member States, even in cases where a service is rendered on an occasional basis only. The application of such requirements to cross-border services can have particularly restrictive and discouraging effects, especially as severe sanctions, even criminal penalties, are frequently applied to those who do not have the requisite authorisation [105].

[104] For regulated professions, for example, including tourist guides, mountain guides, craftspersons, trade-fair organisers, providers of telecommunications services, certification bodies, drinking water testing laboratories, patent agents, employment agencies, performers' agents, private security services, waste transport, importation and treatment companies, ambulance companies, leasing enterprises, enterprises providing cross-border electronic installation services. Several cases were also identified where national approval is regarded as being a de facto prerequisite for participation in public contracts. See study entitled "Barriers to Trade in Business Services" cited above.

[105] For example, this was identified by estate agents and by tourist guides of certain nationalities.

The failure of authorisation regimes to take account of requirements already met in the Member State of establishment can, moreover, exacerbate the restrictive effects and leads to a duplication of the rules to be complied with and of the burdens to be borne.

Entry (or enrolment or accreditation) in a register (which might be kept by the national professional bodies or tax or social authorities) in the country in which the services are provided is also very often required and may cause not only a great deal of paperwork but also major costs [106].

[106] In some Member States, for example, construction enterprises have to register with a professional body, landscape architects with that profession's national association; craftspersons have to be entered in the national register of artisans (including for activities of an exceptional nature and of limited duration), and numerous regulated professions are subject to a requirement to register with a professional body or trade association. What is more, cross-sectoral obligations may exist, such as the regulation in one particular Member State which requires any foreign enterprise whose activity exceeds 30 working days to register with the chamber of commerce.

For example, a general requirement for electricians in a particular Member State to register with a national trade association means that one particular professional who occasionally provides services there has to pay an annual contribution of around EUR 776 in that country (three times the contribution he pays in his country of establishment).

A declaration is sometimes required [107]. While imposing less of a constraint than the requirement to obtain an authorisation or to register with a chamber of trade, this obligation may nevertheless give rise to a considerable amount of paperwork and significant costs, given the difficulties involved in obtaining the requisite certification and the obligation to have documents translated and certified.

[107] In one Member State, for example, a separate declaration has to be made for every construction site.

Providers of cross-border services have to meet a whole series of requirements associated with authorisation procedures: e.g. the obligation to register with a professional body, provide proof of a minimum amount of capital, deposit a guarantee [108] or to keep special accounts [109]. The overall result of these requiremen