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Tax- and duty-free sales

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Tax- and duty-free sales


To analyse means of tackling the possible impact on employment of the abolition of tax- and duty-free sales, including the possibility of a limited extension of the transitional arrangements.


Commission communication to the Council of 17 February 1999 concerning the employment aspects of the decision to abolish tax- and duty-free sales for intra-Community travellers.


The creation of the single market meant the elimination of tax frontiers, which in the short term, was liable to harm certain sectors.

Among the measures to help certain sectors adapt to the rules of the single market, the Council established until 30 June 1999 a transitional regime to allow duty-free shops to continue selling a set allowance of goods to be controlled by the vendor. Through decisions in 1991 (VAT) and 1992 (excise duties), the Council enabled Member States to apply an exemption from VAT and/or excise duties to goods bought by travellers on board ferries and aircraft and at airports. However, duty-free sales on trains or buses were excluded.

At the European Council in Vienna (11 and 12 December 1998), the Commission and the Council (Ecofin) were asked to examine by March 1999 the problems which could arise with regard to employment through the abolition of tax- and duty-free sales and to address, on the basis of proposals from the Commission, means of tackling those problems, including the possibility of a limited extension of the transitional arrangements.

Tax- and duty-free prices are often higher than those in ordinary shops since the tax exemption which duty-free shops enjoy enables them to apply higher mark-ups than is otherwise practised by the retail sector. The tax exemption benefits duty-free shops. However, goods can be sold duty-free only up to a certain value or quantity and items costing more than 90 cannot be sold duty-free.

Since 1991 the development of intra-Community sales shows clearly that, during the transitional period for duty-free shops, the sector has intensified its activities instead of gradually preparing for abolition, this being the intended purpose of the transitional period.

On the basis of the 1996 figures produced by the duty-free industry itself, that industry generates 140 000 jobs, of which 100 000 are linked to intra-Community duty-free business.

There are two indicators for the incidence on employment of the unanimous 1991 and 1992 Council decisions to abolish tax- and duty-free sales within the Community with effect from 30 June 1999:

  • according to the industry: the abolition of tax- and duty-free sales will affect 50 000 jobs directly and 140 000 jobs indirectly. This will be the result of lower sales and lower profits, forcing transport prices higher, dampening demand and leading to job losses. However, this evaluation is not entirely accurate. It gives rise to problems of methodology and takes into account only the negative effects of abolition without considering the benefits for employment, in particular in the non-duty-free retail trade. The loss of jobs in duty-free shops will be compensated by a corresponding increase in jobs in ordinary shops. Consumers are not attracted solely by the price of the product but also by the product itself; thus a smoker will not stop smoking simply because the duty-free arrangements stop. The overall demand of final consumers will simply be displaced to ordinary shops without reducing demand as a whole. Certain ferry lines may be affected and some of them, particularly the short-distance services between Germany and Denmark, may be reduced;
  • according to the studies carried out by Member States: the impact of abolition is likely to be of a specific and local nature, mainly in the maritime sector. Employment in the duty-free sector is linked primarily to transport. Most people travel because they need to, so that the growing demand for transport services is not likely to be significantly affected by the abolition of duty-free sales. It is only in the maritime sector that certain travellers may be inclined to travel to purchase.

From the standpoint of tax revenue, the Commission's 1996 calculations indicated that the duty-free regime could have cost Member States up to 2 billion. The tax revenue accruing as a result of the abolition of duty-free sales could be used to strengthen the public finances. It is for each Member State to decide how to use the funds released by the abolition of the present tax exemption.

Extension of the transitional period, allowing intra-Community duty-free sales to continue beyond 30 June 1999, could take several forms which are considered by the Commission in its communication:

  • an extension for a limited period;
  • an extension for a limited period and limited to certain sectors (for example, ferries);
  • the gradual introduction of excise duties (on alcohol and tobacco) and the immediate application of VAT. This would involve treating VAT and excise duties differently; VAT would be applied from 1 July 1999 and excise duties phased in gradually until they reached the average European rate (for tobacco and alcohol); between then and a future date, excise duties would be harmonised or, if harmonisation could not be achieved, raised by each Member State to its normal national rate.

The Commission therefore considers that an extension after 30 June 1999 of the current duty-free arrangements would not efficiently address the type of limited and specific employment problems it has identified. It is too broad an instrument and too costly, given the limited employment impact of the abolition of intra-Community duty-free sales. Moreover, experience has shown that the continuation of the duty-free arrangements does not encourage operators to prepare for the new tax situation.

The above approach would also prolong discrimination between comparable transport modes (i.e. air and sea transport and the shops at the two ends of the Channel Tunnel) and between operators, so that this issue might be challenged before the courts; it would jeopardise the credibility of all transitional periods incorporated in Community provisions.

The Commission's analysis, based on the information available to it, is that the abolition of duty-free sales would not produce micro- or macroeconomic effects. The Community must proceed coherently in order to combat all local, regional and social problems identified by Member States. Recourse to the Structural Funds, the Cohesion Fund and State aid might be helpful.

If the instruments mentioned above do not prove adequate, a new but separate instrument could, if the Council deemed it appropriate, provide specific and targeted support. The aim of this instrument could be:

  • to provide specific and targeted support to those areas particularly dependent on duty-free sales in terms of both employment and income;
  • to contribute to the conversion of the most heavily affected enterprises in the sector with a view to maintaining jobs through diversification (and creating alternative employment).

The solutions put forward by the Commission in its communication should be seen against the general background of European employment policy. The existence of the duty-free arrangements has an impact on the economy as a whole because it distorts competition. Indeed, the EU's approach to duty-free sales can be seen as a test case of the credibility of its determination to use tax coordination to fight harmful tax competition which, in the form of hidden subsidies, puts pressure on labour costs and so reduces job creation.

4) deadline for implementation of the legislation in the member states

Not required

5) date of entry into force (if different from the above)

Not required

6) references

Official Journal C 66 of 09.03.1999

7) follow-up work

8) commission implementing measures