Commission assesses impact of abolition of duty-free on employment

In response to a request by the European Council and the support by the UK and German governments for calls to safeguard the future of duty-free sales, in February 1999 the European Commission issued an assessment of the impact of the abolition of EU duty-free sales on employment. The Commission's analysis, based on national studies, argues that the loss of duty-free would not have a significant impact on employment.

On 17 February 1999, the European Commission responded to a request made by the European Council at its December 1998 meeting in Vienna to examine the impact on employment of the abolition of intra-EU duty-free sales on 1 July 1999, as well as to consider how to minimise potential employment problems, including the possibility of a limited extension of duty-free. The German and UK governments in particular called for the future of duty-free sales to be safeguarded.

The decision to abolish duty-free sales was taken unanimously in 1991 by the Council of Ministers, as part of the taxation measures to further the functioning of the single market by eliminating artificial fiscal frontiers. A seven-and-a-half-year transitional period, lasting up to 30 June 1999, was granted in order to allow duty-free operators to adapt to the situation and minimise the impact on employment. However, according to the figures available from the duty-free industry, total duty-free sales in the EU have not fallen but increased during the transitional period, from EUR 3.6 billion in 1991, to EUR 5.8 billion in 1996.

On the basis of the Commission's analysis of the situation, which is based upon national studies carried out in five Member States (Denmark, France, Ireland, Sweden and the UK), it considers that the abolition of intra-EU duty-free will not have a significant negative impact on employment overall, with possible consequences being of a specific and local nature. The Commission's conclusion is based on the following grounds:

• overall sales will continue as the growing demand for transport services, stimulated by the existence of the single market, is not likely to be affected by the abolition of duty-free, as people will still be able to shop in those Member States with lower excise duties;

• the price advantage of duty-free is often not significant, particularly in the case of goods other than tobacco. Consequently, a significant impact on aggregate sales is not expected, as demand will be reorientated to other products, such as luxury goods or regional specialties;

• only a proportion of personnel involved in duty-free is dependent on the volume of sales, as personnel selling duty-free also undertake normal transport-related activities. For example, in the case of flight attendants, safety regulations determine their numbers, rather than sales productivity;

• employment will increase in ordinary shops, as any potential reduction in sales in airports, aircraft and ferries is likely to be compensated by a corresponding rise in ordinary shops. It is therefore unlikely that the abolition of duty-free sales will have measurable negative employment effects on the manufacture of goods; and

• there will be a gain in national tax revenues, as the duty-free regime currently costs Member States at least EUR 2 billion a year in lost revenue. It is argued that this could be used more effectively in funding job-creation strategies - for example, financing a reduction in social security contributions.

In addition to the above analysis, in line with the European Council's mandate, the Commission has also considered the employment impact of extending the transitional period, and assessed ways to minimise potential employment problems.

The conclusions from this process are that none of the various possibilities for a limited extension of intra duty-free sales would act as an efficient tool to address transitional employment problems, and that any further extension would create an environment of legal uncertainty for business and citizens. Moreover, it would disadvantage both other retailers and other means of transport not included in the duty-free regime, which would suffer from the distortion of competition, as well as encourage operators to delay investment in alternative activities such as duty-paid retail outlets.

The Commission has outlined how the existing Structural Funds can be utilised more effectively to offset and minimise the impact on employment levels in specific areas. It has urged Member States to submit specific funding proposals to which it would give the highest priority.

In response to the Commission view on this matter, the Federation of Transport Workers' Unions in the EU expressed its disappointment: "the Commission has ignored the wishes of EU leaders in Vienna in December by providing an incomplete picture of the impact on jobs and by refusing to seriously consider the possibility of an extension"

The Commission has remained firm on this issue as it attaches the highest priority to employment, and considers that an extension of duty-free sales is not an appropriate solution. Moreover, the Commission believes that it would be inconsistent with the ongoing process of tax coordination.