Conference highlights controversy over abolition of duty free

A conference held in September 1997 highlighted the continuing controversy over the abolition of duty-free sales within the EU. Abolitionists argue that duty free distorts competition, while representatives of European retailers state that it adversely affects other retail outlets. Trade union representatives are worried about the impact on jobs.

In 1991, the Council of Ministers decided unanimously to abolish duty-free sales for travellers within the EU, as part of the taxation and excise measures to make the single market a reality. A seven-and-a-half year transitional period was granted to allow duty-free operators to explore alternative ways of carrying on business in order to avoid job losses.

This issue was the subject of debate at a conference entitled "Duty free in Europe" organised on 24 September 1997 by three European Parliament (EP) committees. The official European Commission viewpoint has changed very little, as the commissioner responsible for taxation and the single market, Mario Monti, warned duty-free shop operators: "The time has come for the airlines, airports and ferry operators, as well as suppliers of tobacco and alcohol products, to face up to reality and invest their money wisely to get ready for 1999."

Concern was expressed about the exceptionally large amount of time, money and effort that has been spent so far on trying to persuade the Council, the EP and the Commission to revise the decision, as opposed to actually preparing for the end of duty-free sales to travellers within the EU.

The abolitionist viewpoint is based on the argument that the current ECU 2 billion subsidy for duty-free sales to travellers within the EU distorts competition. Within the travel industry, the subsidy from duty-free sales favours international air and sea travel over international road and rail. Profits from duty-free sales may also be used to offer lower fares for cargo transport, and the European Court of Justice is currently considering several cases based on this alleged distortion of competition.

The European retailers' organisation EuroCommerce has expressed concern, as the subsidy for duty-free sales is seen to affect adversely retailers which do not benefit from duty-free status. Lastly, the subsidy is argued to be regressive as it brings disproportionate benefits to people who travel regularly by air and sea and who are normally better off than the average taxpayer. It is argued that this state aid could be used in other areas rather than subsiding those who travel regularly (such as business people).

An alternative view is taken by representatives of the ferry and airport industry and trade unions in this sector. They claim that the abolition of duty-free sales will lead to the loss of up to 140,000 jobs. It is also argued that fares would have to rise substantially and that some routes would become unviable.

In response, it was argued that it is more efficient and more transparent to subsidise unviable air or ferry routes directly, rather than through duty-free sales. The predictions for job losses were argued to be questionable, as the impact upon employment is difficult to assess as they are highly contingent upon a range of factors, such as:

• the extent to which operators choose to convert duty-free facilities to tax-paid retail outlets to take advantage of "captive" customers;

• the extent to which conventional retail outlets, which currently employ fewer people because of the existence of duty-free shops, benefit from a shift of demand, notably for tobacco and alcohol products, away from duty-free sales outlets; and

• how governments choose to spend the extra tax revenue (reduced employers' social security contributions, for example, would benefit employment considerably).

The EP rapporteur on duty-free sales, Ricardo Garosci concluded that the abolition of duty-free sales by 1 July 1999 will not be stopped, but added that he would do everything to seek a logical solution.