Better Start Hoarding Those Duty Free Goodies

A scheduled EC ban on tax-free shopping is sparking outrage

The cross-channel ferry between Dover, England, and Calais, France, takes an hour and a quarter. But for most of the passengers who board the P&O Stena Line every day--2,200 people per trip--it's time well spent. Before the ship even leaves port, the massive duty-free store on board is packed with shoppers. Since smokes and spirits are taxed at rates of up to 89% in places such as Scandinavia and Britain, most travelers stock up wherever the taxes don't apply. On the channel ferry, a carton of Dunhills costs $45 less than in London.

Smokers had better start hoarding. As of June 30, 1999, the European Commission will abolish duty- and tax-free shopping on travel within the 15 European Union member countries. By removing the only bastion of tax equality in the EU, whose member nations still impose widely different internal tax rates, the EC wants to encourage competition, forcing high-tax countries to lower their rates. Ultimately, the commissioners hope, the individual nations will standardize their tax laws. "When duty-free is removed, all business will operate on a level playing field within the EU," says John Whiting, a tax partner at PricewaterhouseCoopers in London.

That's a bit of a stretch. Eliminating duty-free is only a gesture toward making the EU's tax rates more consistent. Europe's finance ministers, who unanimously approved the ban in 1992, claim they want to remove an unfair advantage for the ferry operators and airports that steal customers from domestic retailers forced to impose national taxes. But so far, they have shown no willingness to give up their national fiscal authority. And by banning duty-free sales, they will take a big bite out of business for the transport operators.

Duty-free shopping contributes a big chunk of change to those companies. With $13 billion in annual duty-free sales, Europe accounts for more than half of the $22 billion worldwide total. Over 50% of the British Airport Authority's (BAA) total revenues for 1997-98 came from retail sales, of which duty-free represents by far the largest portion.

The BAA estimates that it will lose $200 million, or 30% of its total retail profits, annually once duty-free shopping is abolished. International airports such as Heathrow and Gatwick will be hurt less, since transatlantic passengers, for example, will continue to visit their retail shops. But regional airports that handle mostly intra-EU traffic will be hard hit. Many are likely to reduce service or eliminate routes entirely, and some may eventually be forced to shut down.

Duty-free purchases account for half of many shipping companies' revenues as well. But because the profit margin on duty-free is so high, its economic significance for the bottom line is even greater, says Viking Line Chief Executive Nils-Erik Eklund. Cruise and ferry operator Viking and its main competitor, the Silja Line, anticipate that fares on certain routes may increase by as much as 1,000%.

HIDDEN AGENDA. Retailers, suppliers of alcohol and tobacco, and airport and ferry operators are lobbying for an extension. But Brussels shows no sign of wavering. Only a unanimous vote by the EC's Council of Finance Ministers to repeal the decision could reverse it--a highly unlikely prospect. Maintaining duty-free, the EC reasons, would perpetuate the present tax advantage transportation companies currently have over EU retailers. And behind closed doors, the bureaucrats believe that national governments will now have no choice but to standardize their tax rates.

Until they do, the tax differences among EU nations will be all the more glaring. Ending duty-free retail before aligning taxes would give countries such as Greece, where cigarettes cost as little as $1.50 a pack, an even bigger advantage over high-tax countries such as Britain, where the same pack goes for around $6.15. As high-tax countries lose revenues to low-tax neighbors, they will be forced to consider reducing rates to stay competitive. But if the discord over duty-free shopping is any indication, it will be a long time before the EU takes the last step.