Phase-out plan aims to avoid tax battle

Date: 16/05/1996

By Fiona McHugh

THE European Commission looks set to propose that Sweden, Denmark and Finland be allowed to phase out - rather than abolish in one go - limits on the amount of alcohol and cigarettes that their citizens may bring back from other member states.

The plan represents an attempt on the part of the Commission to avoid an embarrassing legal wrangle with the three Nordic countries over the duration of tax derogations granted to them during accession negotiations.

Such a dispute would coincide uncomfortably with the publication later this year of the Commission's long-awaited tax harmonisation proposals, and might further jeopardise Internal Market Commissioner Mario Monti's already slim chances of brokering a deal.

Under Union rules, citizens are allowed to import an unlimited quantity of duty-paid goods from other EU countries, provided the products in question are intended for their own consumption.

However, as part of an overall package to entice Sweden and Finland into the EU club, the Commission agreed in 1994 to allow the two countries to continue to impose importation limits.

Denmark also won a derogation in exchange for its approval of a broader tax deal signed in 1992 after years of wheeling and dealing in the Council of Ministers.

According to the Commission, the three derogations will automatically become invalid once they pass their sell-by date in December.

But the Nordic countries claim they can only be lifted with the unanimous agreement of finance ministers.

“As far as we are concerned, Finland may continue to apply its system until the Council decides unanimously to change the tax rules. If the Commission wants to challenge that interpretation, then it will have to go to the court,” said one Finnish official.

To avoid a protracted legal battle in the European Court of Justice, the Commission is expected to suggest a compromise which would allow for the phasing out of the limitations over a fixed period of time.

Excise duties have long been a source of discord between member states. The fact that all tax proposals must be agreed unanimously by ministers has made it virtually impossible for the Commission to reconcile the bloc's radically different systems.

Huge gaps currently exist in the levels of excise duty charged, with certain northern countries levying the equivalent of up to three times the actual cost of some alcoholic spirits, while southern members impose little or no duty on competing products such as wine.

Since customs checks were dropped in 1993, consumers from high-tax countries such as Denmark, Austria, Holland and the UK have flocked into low-tax countries such as France, Italy, Spain and Luxembourg to shop.

While that is what the single market is about, there are also fears that large quantities of goods are being smuggled illegally across borders for sale on black markets in high-tax countries.

Governments on both sides of the divide acknowledge the need to inch closer to one another, but none yet appears willing to concede ground on this most sensitive of issues.

To do so, they fear, would be to relinquish national fiscal sovereignty to Brussels.