Opinion of the Committee of the Regions on 'The significance of the intra-EU duty free regime to the regions'
Date: 1998-09-17
Institutions: European Committee of the Regions
Subjects: duty-free sale, employment policy, intra-EU trade, single market, tourism policy

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14.5.
A considerable part of existing legislation, or at
least the principles underpinning it, is directly applicable
to electronic services in areas such as intellectual property
rights, privacy protection, etc. Similarly, consumer
protection requirements in electronic commerce do not
differ significantly from those governed by existing rules
in other areas.

14.6.
The Committee of the Regions considers a
combination of the first and second approaches to be
the best solution, namely to create the new framework
for many on-line and interactive services, to co-exist
with those currently applied and needed still to be built
on.

Brussels, 17 September 1998.

The President

of the Committee of the Regions

Manfred DAMMEYER

Opinion of the Committee of the Regions on ‘The significance of the intra-EU duty free
regime to the regions’

(98/C 373/06)

THE COMMITTEE OF THE REGIONS,

having regard to Council Directives 91/680/EEC (1) of 16 December 1991 and 92/12/ECC (2)
of 25 February 1992 as they relate to the abolition of the intra-EU duty free regime on 30 June
1999;

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

having regard to the EP’s Directorate General for Research’s Working Document of October
1997 on ‘The Economic and Social Consequences of Abolishing Duty Free with the EU’ (3);

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

having regard to the 3 April 1998 EP Resolution on the abolition of duty free sales (4);

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

whereas the Committee of the Regions has already drawn attention to the importance of
tourism and transport infrastructures to the regions, in for example, the following opinions:

(1) OJ L 376, 31.12.1991.
(2) OJ L 76, 23.3.1992.
(3) EP’s Directorate General for Research’s Working Document of October 1997 on ‘The Economic and

Social Consequences of Abolishing Duty Free with the EU’ (ref. PE 167.048, W-30).

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

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A policy for the development of rural tourism in the regions of the European Union —
CdR 19/95 (1); Commission Green Paper on the role of the Union in the field of tourism —
CdR 376/95 (2); Proposal for a Council Decision on a first multiannual programme to assist
tourism — Philoxenia (1997-2000) — CdR 302/96 fin (3); Cohesion policy and culture — a
contribution to employment — CdR 69/97 fin (4); Urban cultural tourism and its employment
impacts — CdR 422/97 fin;

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

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

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

1.

Introduction

of such products (‘movement of excisable goods Direc-
tive’) (6).

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

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

1.3.
The abolition of the intra-EU system required
amendments to the common system of value added tax
and new legislation on excise duties arrangements.
Accordingly, in 1990, the Commission came forward
with two proposals, the first concerned transitional
arrangements for taxation with a view to establishment
of the internal market (the ‘Fiscal Frontiers Directive’) (5).
The second laid down general arrangements for products
subject to excise duty and on the holding and movement

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

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

1.6.
In November 1991, in a general decision on both
the Commission’s proposals, the ECOFIN Council
agreed that an extension until 30 June, 1999 would be
appropriate in order to allow for the necessary measures
to be taken ‘to deal with both the social repercussions
in the sector affected and the regional difficulties, in
frontier regions in particular ....’. The ‘Fiscal Frontiers’
Directive was adopted as amended at this meeting, the

(1) OJ C 210, 14.8.1995, p. 99.
(2) OJ C 126, 29.4.1996, p. 24.
(3) OJ C 42, 10.2.1997, p. 22.
(4) OJ C 379, 15.12.1997, p. 21.
(5) Council Directive 91/680/EEC — OJ L 376, 31.12.1991.

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

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‘movement of excisable goods’ Directive was adopted,
also with the amended deadline, in February 1992. Thus
the transitional regime for duty (i.e. VAT and excise)
free was introduced. In order to facilitate the discontinu-
ation of border controls, a vendor control system was
later introduced by political agreement on 14 December
1992.

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

This was not considered satisfactory by the Parliamen-
tary Committee and its Chairman instructed the Parlia-
ment’s research services to review the available indepen-
dent economic data, to produce an assessment of the
consequences identified and to suggest further areas of
research to be undertaken by the Commission. This
study (1) was completed in early October and was used
as the basis for an EP public hearing on duty free, held
on 29 October 1997. The report concluded that ‘at a
time of high unemployment in much of the European
Union, the possibility that ending intra EU duty free will
result in substantial job losses cannot be taken lightly.
The Commission should carry out its own study, paying
particular attention to regional and local effects’.

1.8. On 3 April, 1998, the European Parliament
unanimously adopted a Resolution which notes: ‘there
is considerable concern and apprehension about the
consequences of abolition on jobs, regions and transport
sectors, especially in peripheral regions and in the sectors
of ferry services and regional airports’ and calls on the
Commission ‘to carry out and publish an independent
study into the social, economic, regional and revenue
consequences of the abolition of duty and tax free sales
in the EU as a matter of absolute urgency and no later
than 30 September 1998 to ensure that a clearer picture
of the situation is available’ (2).

At the ECOFIN Council meeting of 19 May 1998
1.9.
several Member States expressed their support for a

review of the future of
intra-EU duty free trade.
These countries represent approximately 85,5 % of the
population of the EU.

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

2. General Comments

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

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

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

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

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

(2) European Parliament Resolution of 3.4.1998 (ref. PE

268/23).

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

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

and are intended for final consumption. In order to
enforce these two preconditions, a set of indicative
allowances have been retained for duty paid.

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

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

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

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

3. Duty Free and the Single Market

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

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

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

the system of

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

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

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

4. Employment (1)

4.1.
It has been estimated that as many as 140 000
EU citizens may see their jobs placed in severe jeopardy
should intra-EU duty-free trade be abolished. This figure

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

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takes into account: direct job losses, defined as those
jobs at actual duty-free outlets in airports, on board
airlines and on ferries; indirect losses, defined as jobs
lost in the supporting industries such as harbours,
transport links, manufacturers and distributors; and,
induced job losses, defined as jobs lost due to a reduced
net wage income in the local economy from loss of
direct and indirect jobs.

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

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

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

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

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

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

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

5. Tourism

Should the abolition of intra-EU duty free give
5.1.
rise to increased travel costs, within the EU, cost

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conscious travellers may well choose non-EU desti-
nations in order to minimise travel costs. Countries
most likely to benefit from this shift would include
North African resorts at the expense of Spain, Portugal
and Italy and Cyprus and Turkey at the expense of
Greece.

6. Conclusions

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

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

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

particularly in relation to the impact on the peripheral
regions of the EU; the COR is not convinced that even
if such measures were in keeping with EU competition
rules, that they provide the best solution.

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

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

6.3.1.
Pending the presentation by the Commission
of its working document on the Community funds and
national subsidies which may be made available to
relieve any difficulties arising from duty-free abolition,

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

Brussels, 17 September 1998.

The President

of the Committee of the Regions

Manfred DAMMEYER