Seanad Éireann díospóireacht -
Wednesday, 1 Jul 1998

Vol. 156 No. 8

Duty Free Sales: Statements.

Mr. Cassidy

Following a successful lobby campaign by the duty and tax free industry, ECOFIN, which is the Economic and Finance Ministers Council, decided in November 1991 that rather than ending as planned by the Commission intra-EU duty and tax free sales on 31 December 1992, these sales would continue until 30 June 1999. In December 1992 the necessary directives were passed and unanimously agreed by the ECOFIN Council of the then 12 member states. As there would be no Customs barriers from 1 January 1993, the directives also required the industry to ensure passengers could only purchase up to the level of the allowances through the operation of the so-called vendor control system.

Changing the current legislation will require a unanimous decision of the 15 member states in the ECOFIN Council based on a proposal from the EU Commission, a simple majority within the Commission and a favourable opinion from the European Parliament passed by a two-thirds majority. It should be noted that unanimity in EU language means no country voting against and a majority in favour; member states can choose to remain silent, which is taken as assent.

In its opposition to intra-EU duty and tax free sales, the Commission often cites unfair competition with downtown retailers, discrimination against other forms of transport — rail and road — and a lack of transparency in duty and tax free pricing. However, non-compatibility with the Single Market is the Commission's core argument. This is based on a view of the intranal market as being the same as a national market and the expectation that rapid progress towards completion will provide intra-EU duty and tax free sales. The reality has proved to be very different, with excise and VAT rates remaining widely divergent. Agreement on a definite VAT regime and acceptance of origin/destination seems as far apart as ever. Many anomalies continue to exist. Equally, intra-EU duty and tax free sales have coexisted with the Single Market since 1993 without any apparent ill effects on either.

The industry, through the European Travel and Research Federation, has funded a wide ranging and comprehensive programme of independent research into the social and economic impacts arising from the proposed abolition of duty free sales. Major findings included between 3,500 and 7,500 job losses in Ireland in transport, retailing, manufacturing and tourism; increases between £10 and £14 in the cost of travel to and from Ireland; many ferry routes facing closure, including direct Irish routes to Europe; the Irish Exchequer will lose twice as much as it might gain; there will be no gain from abolition to the UK, Dutch, Belgian and French public exchequers; replacement duty paid airport retail sales will be no more than one-third of the current levels, with profitability reduced by 70 per cent; and possible job losses in Europe of between 127,000 and 147,000 jobs. The Irish Government's study on the direct impact of abolition confirms many of these findings and predicts in excess of 1,500 job losses in Ireland.

Progress to date indicates a clear demand by the people of Europe, expressed through their democratically elected representatives in the European Parliament. A great deal of political pressure has been brought to bear over the past number of months in this regard; I will return to this later.

I wish to make a recommendation to the House and the Government. Some Ministers at the recent ECOFIN discussions may have believed that by agreeing to a study or any change they would be overturning the original 1991 decision completely. This would have been a step too far for many and could be seen as trying to roll back the Single Market. It is not necessary to change the 1991 decision — only to change the date of its implementation. Accepting the principle that there should be no duty free sales in a completed Single Market but that now is not the right time to abolish it would allow other member states to accept a further extension of the time. Equally, if those involved in the campaign were persuaded to accept that this was the final extension of the time limit, the dissenting member states and the Commission might be more flexible.

It is very necessary for a political dialogue to get under way among supportive Governments on a possible solution. The acceptance of the principle of no duty free sales in a Single Market, with any solution being understood as final, might offer a key to the making of progress. The Irish Government can act as a facilitator in this process and, through bilateral contacts, create the necessary alliances for success. Full use could be made of our embassy network to build the necessary support.

There are precedents for a possible solution to the duty free issue in the agreement by Commissioner Monti and the Council to Sweden, Finland and Denmark restricting travellers' duty paid allowances to a 24 hour absence under Council Directive 96/99/EEC. These directives involve the following rationale and language: first, a further extension to an extension because circumstances have changed since the original decision was taken; second, acceptance that the time is not right because introducing abolition on the originally extended date would cause greater problems than had been envisaged; and, third, recognition that these provisions represent a derogation from a fundamental principle of the internal market.

This rationale can be fully applied to the duty free issue and may offer a model for a political solution. It appears that Commissioner Monti is being inconsistent by accepting further extensions to these derogations for such a fundamental freedom of the Single Market for the Nordic countries and yet being totally intransigent on the duty free issue. A further extension, similar to that granted to the Nordic countries, is surely not only reasonable and equitable but a pragmatic and honourable solution.

Mrs. A. Doyle

I support the case made by the Government on the retention of duty free sales and against the present proposals in this regard. Since Ireland began duty free shopping approximately 50 years ago it has become an important part of the travel and tourism business in many parts of Ireland. It is a vibrant business that makes a valuable fiscal contribution in Ireland and throughout Europe. The EU directives passed in 1991 and 1992 and agreed to by the then Minister for Finance, Deputy Bertie Ahern, allow intra-EU duty free sales to continue until 30 June 1999. We know that duty free sales were originally to end in 1992 but agreement was reached to allow inter-EU duty free sales a stay of execution on the grounds that its immediate abolition would have a serious effect on those involved in the industry. Ireland is particularly vulnerable as ours is a peripheral nation with a small open economy, and as such we are heavily dependent on our air and sea links with Europe. The loss of duty free revenue will have a heavy impact in many areas, such as the air and sea passenger sector, where it has helped carriers to control costs, to maintain competitiveness and to allow greater investment. Its abolition would affect the tourism sector through increased access costs and manufacturing costs through increased transport costs.

A major benefit of duty free revenue has been increased investment in equipment and facilities. Its abolition would lead to an increase in airport charges to compensate airports for the loss of duty free revenues, and that increase would then be passed on to travellers. The European Travel Research Foundation suggests that air fares within the EU would increase by 20 per cent on average per return journey.

The maritime sector would be affected by the abolition of duty free sales because there would be increased passenger fares due to reduced income for carriers. Certain low profit routes could be closed; routes out of Cork would be particularly vulnerable. There would be increased environmental damage because a reduced number of ferry routes would lead to increases in the length and number of road movements. Investment in new ships might be jeopardised if the numbers of passengers decreases.

Cheap access fares have fuelled the growth of Irish tourism, and duty free sales have been a factor in the development of certain regions, such as Shannon. However, that airport would be proportionately less affected as it has a higher proportion of extra EU duty free sales. However, 50 per cent of its duty free sales are from intra-Community trade, and that is an important factor. Regional airports would also be vulnerable.

Certain sectors of Irish manufacturing would also suffer, as duty free facilities are a vital shop window and retail channel for many Irish goods. We do not have to list the range of goods from crafts to those of Irish Distillers; we know the importance of duty free sales as a shop window for these goods. The European duty free lobby suggests that over 140,000 jobs in the EU depend on duty free sales and that 30,000 would be lost if it is abolished. Depending on the report one reads, from 2,000 to 4,000 jobs could be lost in Ireland.

Ironically the Irish EU Commissioner, Mr. Pádraig Flynn, is responsible for Employment and Social Affairs. The European Parliament recently voted unanimously for a study of the effect of the abolition of duty free sales to be conducted. The Government is kicking to touch on this issue and I ask Government Senators to ensure that the Minister for Public Enterprise, the Minister for Finance and the Taoiseach are concentrating on this. They have an important input regarding the resolution of this issue.

The Government now wants the abolition of duty free sales to be put on hold until that study is completed. One can understand the conflict of interest when one considers that the present Taoiseach was instrumental in agreeing to the abolition of duty free sales; he is now compromised in dealing with the matter as Taoiseach. Last 17 March, the Minister for Public Enterprise came under pressure on this issue at the Council of EU Transport Ministers. I hope that, with the help of Fine Gael lobbying and the network of contacts made during our successful EU Presidency, she will be successful. This is not a party political issue; all parties, to my knowledge, want the same outcome to this debate.

The Minister for Public Enterprise's proposal to the Council for an impact study was supported by her colleagues at the Council of EU Transport Ministers. On 3 April the European Parliament called unanimously for an impact study of the socio-economic and regional impact of the abolition of intra-Community duty free sales. This decision was then sent to all member states and the Commission, but a reply has yet to be received. Our Minister for Finance requested another impact study at the ECOFIN meeting, and eight countries, including France, Germany, Italy, Spain, Belgium, the United Kingdom and Greece, supported us. Germany is overtly supporting us and is the only other country that, apart from supporting an impact study, has called for the maintenance of intra-Community duty free sales.

An important issue has arisen in this debate on whether postponing decisions creates a precedent for overturning decisions made in Europe. Senator Cassidy alluded to it and there have been many debates here and in the Dáil on the democratic deficit and on the people's voice in member states in relation to the European Parliament. The views of the people in relation to duty free sales are clear, as are those of European trade unions, the European Parliament and eight members of ECOFIN, including France, Germany, Italy and the United Kingdom — some of the major players in Europe. Yet there is a refusal to countenance revision of the original decision, taken in the late 1980s and put into directives in 1991 and 1992.

As this debate gets more frustrating the less logical it becomes. The initial decision on the abolition of duty free sales was taken on the need to harmonise tax and excise rates within the Single Market. The policy of harmonising excise rates has long since been abandoned, so there is no logic in persisting with the abolition of duty free. We can defend our revision of the decision taken on the directives of 1991-2 by saying that the Commission has abandoned that planned harmonisation. Given that that was the plank for the abolition of duty free sales, logic dictates that we can revise the decision to abolish duty free. The Government should put all its efforts into this.

If we abolish duty free sales at ports of exit, there is nothing to stop a ferry company going from Ireland to the Netherlands — through three territorial waters — and selling goods at three different tax rates at sea. A ferry company going through international waters could sell at the duty free rates we now have at our ports of exit. There will be fiscal chaos if duty free sales are abolished. The abolition was to help with the harmonisation of excise rates, as per the original reason, but if it results in fiscal chaos and the loss of the vendor control we now have at duty free shops in the EU, we are on a hiding to nothing. To remove duty free facilities would result in extra chaos because of people travelling through international and territorial waters and airspace, all of which have different tax rates. There would be nothing to stop on-flight or on-board sales of goods at different rates and this would cause chaos.

"If it ain't broke, don't fix it,"; it is not broken and duty free sales have been extremely successful. Ireland introduced this concept 50 years ago that other countries adopted very successfully. The Government must make every effort to ensure that this very successful industry, which accounts for £68 million in sales in Ireland alone, is preserved, despite its difficulty in being party to the original proposal to abolish it. It can use the political and popular support across the board to ensure abolition is not proceeded with.

Mr. Finneran

I am pleased to have the opportunity to speak on tax and duty free shopping post 1999. It is argued that Ireland is particularly vulnerable to the negative impacts of abolition due to its island and peripheral status. We are a small open economy which is heavily dependent on air and sea transport links with its trading partners as a result of having no land boundary with Europe. The loss of intra-EU duty free revenue, it is argued, will have a significant impact for both air and sea passengers as well as on tourism and the manufacturing sector because of the potential need to increase access costs. Historically, the benefits of duty free have allowed carriers control fares thus allowing Ireland remain competitive. In addition, investment in equipment and infrastructure has been made possible by using revenues generated by duty free sales.

It is argued that the abolition of duty free is against the Treaty of Rome's objective of free movement of people between member states as fewer people will be able to afford to access parts of Europe due to higher air and sea fares as a result of increased airport charges being passed on to passengers. Further effects of abolition would be reduced revenue to airlines due to lower on board sales, increased staff costs for airlines where an element of cabin crew pay is a share of in-flight duty free revenue, further pressure on regional airports to survive and charter traffic switching to non-EU destinations.

Aer Rianta has publicly indicated that airport charges could increase by up to 50 per cent and that, should it not be in a position to generate similar profits to those likely to be foregone, it would have to turn to alternative sources of business to fund urgent investment in new runways and facilities. To date, improvements in infrastructure have been funded from its own resources, much of which has come from duty and tax free sales.

The maritime sector has indicated that the loss will mean reduced income to carriers thus requiring higher passenger fares to retain existing profitability, and increased environmental damage as fewer ferry routes and higher freight charges lead to more and longer road movements and increased congestion. For the ferry business in particular abolition will come at a time when the maritime industry will have to respond to increased pressures on costs as a result of agreed improvements to safety requirements. New investment in modern ships crucially depends on the number of people travelling in order to make investment worthwhile. Should the costs of air travel increase too significantly, the ferry business may well benefit from a transfer of air passengers.

The advent of cheap access fares has fuelled the growth in tourism and passenger numbers. A reversal of this would put such growth at risk. The greatest adverse impact is likely to be experienced in local economies and premier tourism destinations which are located in the remoter areas of the country. The duty free business has played a significant role in regional development — for example, Shannon Duty Free — and continues to play a role in ensuring the economic viability of regional airports such as Cork, Knock, Kerry, Galway and Donegal. Furthermore, it is claimed that duty free shops provide an important shop window and unique distribution channel for Irish manufactured goods and are seen as a vital element in the world market success of many of Ireland's leading brands. For a small number of Irish suppliers duty free outlets are their only sales outlets.

In particular, the duty and tax free industry is seen by industry as a generator of employment and any reduction in its scale will have an employment impact. This is at odds, it is argued, with the objectives of the European Commission which has consistently espoused job creation and retention. The duty free lobby suggests that over 140,000 jobs, directly and indirectly, in the EU are dependent on the industry and that these jobs are at risk should abolition occur. Unions argue that the reduction in employment will mean the aviation sector will be a less attractive industry for workers as salaries are reduced and the industry becomes casualised, with the main impact being on females who account for 90 per cent of duty-free employees.

It is argued that the benefits of duty free are being sacrificed for the sake of a principle of harmonisation while the reality of the internal market is significantly different. It contains many exceptions and anomalies with widely divergent excise duty and VAT rates ranging from zero to 25 per cent.

The continuing statements by the European Commission confirming the abolition of duty free late next year have generated much discussion and concern about the effects of the decision on the Irish and other EU economies. A number of national and EU wide organisations have been established to argue the case for retention of duty free and they have published a range of reports predicting significant job losses, a reduction in tourism numbers and an increase in air and sea fares.

Because of the general concern of the many interested parties on the impact of the EU proposal, including airlines, ferry companies, airport and port operators, tourist interests and industry, the Department of Finance decided to commission an independent study to establish the precise impact of the potential abolition of duty free sales on direct employment, travel costs and the Exchequer. The key findings were that total intra-EU duty and tax free sales in 1997 were in excess of £100 million, including £64 million by Aer Rianta which contributed significantly to the financing of major transport infrastructure. In 1996, Aer Rianta generated a contribution of £38 million from duty and tax free sales. By the turn of the century this figure could reach £60 million.

Nevertheless, the study found that not all duty and tax free sales will be lost as they will continue in the context of non-EU destinations. Counter arguments to the negative effects of abolition include reference to the fact that some passengers will continue to purchase duty and tax paid goods while the opportunity exists to increase sales on certain tax paid goods such as perfumes and cosmetics by absorbing VAT. Also there will be an opportunity and incentive for the authority to introduce new forms of retail sales.

It is agreed that airport charges will have to increase to replace some of the lost contribution made by duty free. A 50 per cent increase on the current discounted average passenger charge by Aer Rianta will mean an increase of £1.58. Of course, the actual allowable level of increase will be a matter for the Government. Airlines which sell duty and tax free goods generate a contribution in excess of £1 per passenger, a figure which is verifiable.

Taking all factors into account, including the loss of in-flight duty and tax free sales as well as any contribution to cabin crew salaries, and assuming a 50 per cent increase in current airport discounted charges, the impact of abolition corresponds to an average increase in air access fares of up to £10 per return journey on intra-EU routes. Airlines have indicated they will have to pass on any increase to passengers given their tight profit margins. However, airlines strongly argue that Aer Rianta, and presumably the authorities of other affected airports, should absorb all if not some of these increases through improved operational efficiencies. Air freight rates are unlikely to increase materially because of the keen competitiveness of the freight sector.

Duty free income is particularly important for regional airports all of which operate in difficult economic circumstances and most of which are already in receipt of some form of subvention. In the aviation sector the total number of full time equivalent jobs directly associated with the duty free sector is 466 of which 444 relate to the airport sector. Not all these jobs are at risk and few may be lost in airlines. Most of the potential jobs at risk in the air sector are part-time, contractual and seasonal, although I am not sure I agree with this finding by the investigative study. I am not sure I agree with that finding.

I am bothered by the impact this move will have on the Exchequer. It has been said — there are figures to back up this point — that there could be an inflow of funds of up to £30 million to £45 million into the Exchequer. I hope people in the Department of Finance are not considering receipts which may be helpful to them as against the overall impact on the country which will be expansive in terms of jobs and the commerciality of duty free.

Mr. Chambers

May I share my time with Senator Moylan?

Acting Chairman (Dr. Henry)

Is that agreed? Agreed.

Mr. Chambers

I support the call for the retention of duty free status after 1999. Duty free was first introduced in Shannon Airport, generated substantial business and was an important part of the financial development of that airport and Aer Rianta. We are members of the EU and the reason for the removal of duty free is to simplify and regulate the Single Market in which we have agreed in principle to participate. The transition period of seven years will end in 1999 and we must make the changes recommended by the Commission and the European Parliament. These changes will create many difficulties for those involved in the duty free sector.

Duty free is a substantial business and comprises 1 per cent of trade and sales within the European Union. It is a strong and growing sector and employs somewhere in the region of 150,000 people. There is a huge dependence on duty free and it plays an important part in the economy of the State, particularly in the semi State sector in the areas of air and ferry travel. The Government along with other EU member states must find a way to alleviate the difficulties which will be faced when this decision is implemented.

Recently, the Irish Retail Newsagents Association made a submission to the General Assembly in Athens in support of the retention of duty free status after 1999. It outlined the importance of duty free and made a strong case for its retention. The association was supported by the Stena Line ferry service which is hugely dependent on profits made from duty free sales. It is essential to retain these profits in order to implement the reinvestment programme necessary to retain the service. As an island economy, we depend very much on the services provided by air and ferry companies and by our airports. The ferry companies must reinvest in order to meet recently introduced safety regulations. A change of this nature and magnitude would place a huge financial strain on these companies.

I come from a regional area and have firsthand knowledge of the dependence on duty free of airports such as Shannon, Knock, Donegal and Cork. These changes would have a massive impact on the long-term and, indeed, the short term viability of these airports and would pose a serious financial challenge to their sustainability. The seriousness of the situation was strongly outlined at recent meetings with the Government and the Minister for Finance. Up to 40 per cent of the turnover at Knock Airport is as a result of duty free sales.

As regards Aer Rianta, duty free sales help to subsidise reasonably priced landing charges at airports which has an effect on the development of the tourism sector. A long-term investment plan is in place in the tourism area. According to studies carried out, there is no doubt but that the tourism sector is dependent on reasonably priced air and ferry fares which are subsidised by profits made in the duty free sector.

There has been a transition period of seven years and the Commission will argue that the retention of duty free is not in line with the purpose of a single market. The Commission believes we have had sufficient time to make the necessary changes. Approximately 150,000 people are employed in this sector and while I accept we have had a transition period, it should be extended. If not, serious decisions will have to be made by Governments to sustain and help companies which will face difficulties and which have developed this area of business which is important to them.

Aer Rianta has been a pioneer in terms of the development of duty free in America, Russia and elsewhere. It has developed a huge business and has provided much employment. It will face great difficulties diversifying and finding ways to replace this business. I accept we agreed to the seven year period ending in 1999. However, given the importance of duty free to the economy and the companies involved in the provision of air and ferry services, it is important the Government pursues a strong position and works with our European partners to bring about a positive change — perhaps through the study proposed — extending the transition period thus enabling companies to make changes which will alleviate the difficulties which will arise in 1999.

Acting Chairman

Senator Chambers was very eloquent and there is only one minute of his time left. May I call Senator Ryan next and then Senator Moylan? Is that agreed? Agreed.

Mr. B. Ryan

I am ambivalent about this matter for a variety of reasons. Beyond doubt, the duty free provision is an anomaly. However, an eminent free market economist from UCD with whom I seldom agree asked me once what is wrong with anomalies? There is nothing wrong with them. The continued existence of the Irish language is probably an anomaly. It should have been wiped out 100 years ago if one was to work on the principles of free market economics because it serves no purpose. Anomalies distinguish human beings and their behaviour from that of animals, which do not have the capacity to reason, although I am unsure we have that capacity to any great extent.

While the fact that something is anomalous should not mean that we should retain it, I have another reason to be hostile to the abolition of duty free. The driving force for its elimination are the ideologues of Brussels, who have a peculiar view of what constitutes a single market. In some cases they are for protection while in others they favour the maximum exposure to competition. One would have great difficulty in working out the tax breaks available to many of the officials working in Brussels vis-à-vis both their national taxation regimes and any others. It would also be difficult to establish the highly anomalous position of many of them in terms of taxation of their incomes and various other benefits because of the extraordinary opaqueness of the Brussels bureaucracy when it comes to any exposure of its activities. It is perhaps the least transparent institution of supranational Government in the world and it does a great job in covering its tracks.

The EU Commission meets and does its business in private, claims to itself the right to initiate legislation, gives lectures about anomalies and says that because something is anomalous we should not have it. As a democrat, if I was to eliminate anomalies the first to go would be the EU Commission because it is anomalous in a democracy to have an appointed body with so much exclusive power unaccountable to the electorate.

However, although I was one of the Members of the Oireachtas who was against the Single Market, it was approved. I have never believed and still do not believe in free trade. Many economists have concluded that free trade often disadvantages underdeveloped countries and that varying degrees of protection are needed behind which countries can develop. The development of south-east Asia, to the extent it happened and was not a fiction, occurred behind various forms of trading barriers, much to the fury of the US. Japan developed by protecting its industries and by making space for itself to grow behind protection barriers while at the same time using relatively free access to the US to build its export industry. One of Japan's current problems is that it could export its way out of its present crisis, but that would upset the US so much that it has voluntarily refrained from exporting at the rate it could following the effective collapse of the yen.

Anomalies are part of trade and we should not, therefore, believe that there is a perfectly smooth free trade area. They are also the backbone of the development of many of the countries that have succeeded in catching up with the west over the last 30 years. Korea has used protectionism very effectively, as has Taiwan. So did Hong Kong. Japan continues to do so. Given this, we should not worry about duty free from the point of view of anomalies, rather we should worry more about the fact that, yet again, we are in the process of surrendering one of the instruments of policy that a peripheral country often needs to develop.

I do not believe in protectionism per se, nor do I believe that there can ultimately be a well developed economy behind protection barriers. However, in many instances there is a case for different regimes at different levels of development. I also have a sentimental attachment to the fact that it increasingly appears the things we invented which have been very useful in assisting development are most under threat. We invented duty free at Shannon and the rest of the world copied us. We will have to abolish it, at least as far as travel within the EU is concerned. We also invented a very favourable tax regime for multinational corporations, but to judge by many of the pronouncements from the President of the European Central Bank, that anomaly may be in his sights in the not too distant future.

While I have no problem with duty free per se because it is an anomaly, I have a problem with the things that are most available and attractive in duty free. I must declare an interest. My partner in life smokes and one of my sacred duties if I am travelling abroad is to acquire the maximum number of legal cigarettes at the minimum price.

On the most extreme estimate, the allegedly horrific — in many cases correctly described as such — illicit drugs kill 200,00 people on the planet annually. According to the UN, alcohol and tobacco between them kill five million people annually. Explain the logic of a system which makes the two substances which are 25 times more hazardous to human life cheaper than the substances against which there is a worldwide war? I enjoy whiskey enormously and I like buying it in duty free shops. I like the selection. My wife, who is important in my life, likes the fact that we can buy cheap cigarettes. However, what is the rationale facilitating their cheap purchase?

Cigarettes and alcohol are the only two things that are spectacularly cheaper in duty free shops. On the couple of occasions I could make a comparison, I found that electrical goods offered at tax free prices at Heathrow Airport were not cheaper than those in many of the downtown cut throat competitive electrical goods shops in London. I am not convinced that there is anything significantly cheaper in duty free shops other than drinks and tobacco. There no logic in making these two commodities, especially tobacco, cheaper all over the world. The health aspect of duty free shops is one we do not advert to very often. However, it is very difficult to justify making commodities such as alcohol and tobacco cheaper than they are.

I have wrestled with myself over the years and have concluded that, notwithstanding the health issue, I would prefer if duty free was preserved because I like the eccentricities and anomalies of life. I do not believe its abolition would close down Cork Airport, Knock Airport or any other airport. It might close down Ryanair. If so, I would not be too sorry. Apart from that I do not hold strong views on the issue. However, I will sign the petition, but do not expect me to be on the barricades on 1 January 1999 defending the duty free system.

Mr. Moylan

If we heeded the points raised by Senator Brendan Ryan there would be no need for doctors. Similarly, if we did not drive cars there would be far fewer crashes. However, unfortunately, people both smoke and drink.

I am delighted to have an opportunity to highlight the serious consequences of the European Commission's proposal to abolish duty free sales within the EU. The determination of every Member of the Oireachtas is necessary to ensure this issue is kept to the forefront of debate and people allowed to express their opposition to this pointless course of action. It is estimated that if duty free were abolished, Aer Rianta would stand to lose in the region of £40 million per annum. That would have serious effects on the airlines' profitability and would also have a detrimental effect on shipping companies, particularly those who offer economy rate fares. The abolition would also result in serious loss of employment in Ireland and the EU in general. The jobs which would be lost are not confined to the retail trade in the airport and ferry duty free shops; many distributors, manufacturers and others are also involved in this £4 billion business.

The consequences of duty free abolition would be particularly serious for Ireland as a peripheral country which has no land link with the rest of the EU. Transport costs would inevitably rise to make up the loss in income which would be experienced by many air and ferry companies, a significant part of whose income derives from duty free sales. Ireland, as a tourism destination and exporting island nation, could not afford an increase in transport costs.

We are told duty free is being abolished in the interests of tax harmonisation. However, there is no tax harmonisation among EU states, neither are there any substantial proposals before the Commission to promote it. If there is unlikely to be tax harmonisation, why is it proposed to abolish duty free sales?

The popularity of the duty free trade stands as a formidable defence against any criticisms which may be levelled at it. It represents good value as well as a very effective shop window for many fine Irish products. It is indicative of the democratic deficit which exists within the European Commission that it seeks to abolish this very popular business which has recently gained support for its retention from a number of European countries. I hope the highlighting of this issue will encourage cross-party support for the retention of duty free throughout Ireland and the EU. We must publicise the issue as often as possible in order to convince some of our European neighbours who do not appreciate the severity of the proposed action.

Duty free sales commenced at Shannon Airport more than 50 years ago and great strides have been made since then. In Germany, both Houses of Parliament have passed resolutions seeking the continuation of duty free sales. The economic and monetary affairs and transport committees of the European Parliament have held a joint public hearing on the issue. The Taoiseach raised the matter at the EU summit on employment. Major demonstrations have taken place in Brussels on this issue and we must compliment worker directors throughout the EU who ensured that in excess of 6,000 people protested. Aer Rianta workers and others were to the fore in supporting those demonstrations which served to make people aware of the very real problems faced from an employment point of view.

We compliment the highly successful initiative taken by the Minister for Public Enterprise at the Transport Council on 17 March where she called for a study to be completed on the matter by September 1998 and sent to ECOFIN. That resolution was passed unanimously by the plenary session of the European Parliament on 12 April. The finance commission of the Italian Parliament also passed a resolution calling for the postponement of the abolition of duty free and the Italian Government accepted the resolution.

The Taoiseach has received letters of support on this issue from a number of heads of government. Chancellor Kohl stated the abolition is no longer cogent at this time and Spain is fully supportive of the Irish stance on the issue. France is of the opinion that the battle is not yet over and stresses the need for the possible effects of abolition to be addressed. The British Prime Minister, Mr. Blair, regretted the lack of consensus on the issue at ECOFIN and suggested further talks.

There are a number of good reasons duty free should be retained. Duty free shopping is one of the EU's most successful and dynamic industries, having commenced in Shannon more than 50 years ago and with a current annual turnover of more than £4.5 billion, of which £100 million is generated in Ireland. More than six million people avail of duty free and tax free shopping at Irish outlets alone each year. Duty fee and tax free shopping directly generate more than 140,000 jobs in the EU and 2,000 jobs in Ireland alone. As a former board member of Aer Rianta, I want to put on record the importance of duty free to its development. Many other excellent companies also depend on duty free and we will work together to ensure duty free sales continue into the future.

Mr. Costello

I welcome the opportunity to contribute to the debate on duty free status. The Labour Party has had a motion on the Seanad Order Paper for some time calling on the Government to support the European Union campaign for the retention of the duty free status at airports and ferry terminals.

Unlike Senator Ryan, I am unambiguous in my support for the retention of duty free status. I do not see it as an infringement of tax harmonisation. The abolition of duty free status is a measure which discriminates against small countries, island nations in particular.

Ironically, we recently discussed the Air Navigation and Transport (Amendment) Bill. This legislation enabled Aer Rianta to change its statutory structure from that of semi-State body to that a commercial enterprise operating with the Minister as the sole shareholder. That had already happened in practice. Since its foundation, Aer Rianta has been one of our most successful commercial enterprises. It was one of the first Irish multinational companies, establishing a structure for duty free shopping and selling that structure to the world. Aer Rianta runs duty free operations in 14 countries. Duty free accounts for 50 per cent of Aer Rianta's profits. Aer Rianta was targeted for commercial status because it has been the most successful of our semi-State bodies.

We have to do more to ensure we maintain the duty free status at our airports and ferry ports. We are an island state with a huge number of exit and access points by air and sea. Regional airports also have duty free sections.

The pass was sold in November 1991 when, at a meeting of the European Union Council of Ministers, Ireland did not see fit to send a single representative. Not only was the then Minister for Finance, the present Taoiseach, not in attendance, but there was not a single Irish representative to argue the point.

Mr. Moylan

The Senator is wrong on that point.

Mr. Costello

That is the information I have. Maybe the Minister can correct me. If there was someone in attendance, the point was not argued and the Minister responsible was not there to pitch for Ireland and argue the case.

The pass was sold in 1991 and there is no use in the Minister for Public Enterprise shedding crocodile tears and getting all the EU Transport Ministers to agree that they will retain duty free status when there is no such activity from the Minister for Finance or the Taoiseach. There has been a lethargic approach to this issue.

It was Deputy Quinn who, as Minister for Finance, first decided to do something about it. He commissioned a report from KPMG, in association with Fitzpatrick Consultants and MDS Transmodel, to examine the implications for Ireland of the abolition of duty free status. That report, published in March 1998, was very damaging. It showed that 466 jobs would be lost in the aviation industry with a resultant spin-off loss of employment in production and associated activities. At the ferry ports 700 jobs would be lost. The potential number of job losses will have grown since then as the tourist industry has grown.

The report also indicated that abolition would result in increases in air fares when we are trying to work toward decreases in fares to improve passenger mobility. It noted that this would damage regional airports, which operate on a shoestring budget and need as much business as possible. They require weekend business and short hops. Journeys of that type are more attractive with duty free available.

The ferry routes could be endangered by the abolition of duty free status. Aer Rianta stated that it would have to increase landing charges if duty free status was abolished. There has been criticism of landing charges as they stand. That is another factor which could damage our tourist industry.

The majority of our air traffic is to and from the United Kingdom. Short term visitors to and from there are offered an extra incentive to travel by the availability of duty free products. The abolition of duty free status would damage this section of the market.

The argument has been made that this is an anti-competition measure by the European Union and that duty free status opposes all standard approaches to tax harmonisation. There is no tax harmonisation in the European Union. Duty free is an opportunity for us to display our wares at the point of entry or exit. We are an island nation and harmonisation of tax would militate against us. The greater transport costs for goods because of our island status have to be balanced with attracting people to the island and enticing them to spend more in it.

Duty free status is one of this State's most important inventions. The notion was exported throughout the world and it is relished by all consumers. It is of considerable material and employment advantage and only someone indulging in sour grapes would seek to have it abolished.

Minister of State at the Department of Health and Children (Dr. Moffatt)

I would correct Senator Costello on one point. There was no Minister for Finance in November 1991 at the time of the ECOFIN meeting. It was an interregnum period and Ireland was represented by a permanent representative, which is usual in the absence of a Minister.

I would like to remind the House that the Programme for Government set out our commitment to resist the EU plans to abolish duty free shopping after June 1999 and we remain fully committed to that aim. Like most Senators and Deputies, I have received a number of representations from people who are likely to be affected and I am also supportive of the extensive campaign being mounted by the duty free industry to reverse this decision.

Unfortunately, the efforts by Irish Governments in this regard have not yet been echoed in all EU states. Ireland has made all the running on this issue, apart from one early intervention by Finland at Council level. No other member state has brought the matter on to the Council agenda. Finland now seems to have lost interest in discussing this matter at EU Council level. Only the Irish have pushed this topic at EU level and we have pushed it hard, although it will affect all 15 member states.

Ireland was the first into the fray on the duty free issue. We were also probably the first to seek to assess the direct impact of ending duty free, by a study undertaken by independent consultants which we have since published. The danger is that this subject is being seen in Europe as a peculiarly Irish problem and is presented as one which only the Irish wish to see discussed. Some other states are still assessing in detail the likely implications for them of the ending of duty free. The impact of ending duty free in all member states is not identical. States bordering the Baltic Sea and Germany are likely to be disproportionately affected if the volume of ferry traffic on those routes is reduced as a result of increasing fare prices.

A number of countries have taken the view that the decision has already been taken; it has been enacted into law; the issue is past and no purpose would be served by re-examining it or undertaking a study. They further argue that to conduct such a study would only raise the expectations of the industry that a further postponement of the day when it ends might be considered, at a time when the duty free industry and the carriers should be devoting their efforts to minimising the consequences of a long announced decision. They do not want any further study or any reconsideration of the decision.

The efforts by the Taoiseach at the European Summit and the Ministers for Finance and Public Enterprise are well known. Minister of State, Deputy Flood, also raised the issue at the EU Tourism Council of Ministers meeting in Brussels, given the concerns about the possible impact of the proposed measure on the development of the tourism industry generally.

In recent times we have had a little more success in getting other states to ask questions. At ECOFIN in May, France and Germany were supportive of a study, but a large number of member states still oppose it, as does the Commission. The position has now improved notably with France and Germany coming on side, but further support from workers in those countries still opposed is needed if any change is to happen. Two years ago only Ireland supported the call to save duty free.

I assure the Seanad that the Government is using every opportunity to raise this issue at political level in the appropriate EU fora and to suggest the need for reconsideration by the member states and the European Commission of the implications of the abolition of intra-EU duty free. There is something of an inconsistency in holding summits on Europe's appalling unemployment problem and then condemning the duty free trade. We do not want to add to the EU jobless statistics. The Minister for Finance is maintaining close contact with the interest groups, including trade unions, who are particularly interested in the topic and he met with them as recently as last Friday to consider future options that may be available.

It may be useful to give some background to the decision already taken to end intra-EU tax free and duty free shopping in 1999. Although it may seem like a facility that has always been widely available to Irish travellers within the EU, duty free and tax free sales were not available to travellers between Britain and Ireland until 1978 — the facility was confined to continental and third country destinations before that date. The extension of the concession to Irish Sea routes, both air and sea services and the duty free shops at airports serving passengers travelling to those UK destinations, was undoubtedly made in response to the difficulties faced by the tourism and travel sectors at that time. The decision undoubtedly arose from consideration of the frightful situation in Northern Ireland which had knock-on effects on our tourist business. In that matter things have substantially improved and recent developments give grounds for optimism that apparently impossible problems can be solved.

According to the EU Commission there is no good reason why one should be able to buy duty free goods when travelling by plane from Paris to Rome or Hamburg to Marseilles. One cannot buy duty free goods if one takes a train or drives between the same two places. What is so special about air or sea travel that it requires special tax concessions?

The Commission has consistently argued that duty free sales are not appropriate for a single market without internal frontiers and has set its face on getting rid of this option for air and sea travellers. It asks why such facilities should be available for persons using air travel but not for those who cross frontiers by car or take a train to another country within the EU?

This inter-modal fiscal distortion problem, as the Commission would describe it, is of particular relevance on the Continent with the development of high-speed rail links in competition with air services on journeys such as Amsterdam to Paris. Journey times have fallen dramatically and competition is strong between rail and air services.

I mention this because it would be unfair to the Commission to give the impression that its negative attitude to duty free is based on purely dogmatic views relating to duty free shopping or that its prime objective is to make people more miserable, as some form of perverse commemoration of the single market.

As part of the package of single market measures adopted unanimously in 1991 and 1992, the 12 EU member states decided to allow the continuation of duty free and tax free sales for intra-Community travellers only until 30 June 1999. This was agreed as part of a comprehensive series of Single Market tax measures, including substantial changes to the entitlements of travellers to bring in tax paid goods more freely. From 1 January 1993, travellers from EU countries benefited from enhanced entitlements to import items tax paid from other EU states and easier border controls, including the elimination of routine customs checks on incoming travellers.

The duty free operators were made aware of the proposal to end duty free in 1992 and for many years before that they were active in lobbying for the extension of time. The suggestion, sometimes made, that an indefinite retention of duty free could have been negotiated as part of an agreed solution allowing the Single Market to go ahead at that time, is too fantastic to be credible.

The strategy of seeking extra time was fully supported by Ireland, but was only reluctantly accepted by the EU Commission and some member states who wanted an immediate end to EU duty free. The extension to the end of June 1999, set out in Directives 91/680/EEC and 92/12/EEC, was agreed, not because the EU Commission was ambivalent about the decision to end duty free and tax free sales or was willing to accept permanent retention, but to allow the duty free operators, including those Irish operators who are very active in this sector, time to diversify their activities. This agreement to defer was generally welcomed in Ireland, as it had been originally planned that duty and tax free sales would end in January 1993 for EU travellers.

It is only intra-EU travel which will be affected by this decision. Duty free facilities will still be available after 1999 for travel to destinations outside the EU. This is a point of particular importance, not only to Shannon Airport, which has long served the needs of transatlantic travellers, but also to Dublin Airport, which has a reasonable amount of business with non-EU destinations, including the USA. In this regard I welcome the strong growth of traffic on north Atlantic routes this year. A new and welcome operator is Continental Airlines, which now provides service to Newark from Dublin and Shannon. Aer Lingus is also offering more capacity on the North Atlantic services this year than ever before. This should help sustain the duty free operations at Shannon and at Dublin.

The duty free industry has progressed considerably from its effective beginnings in a small shop at Shannon Airport in 1947. It is business which is now widespread, which is influential in promoting brands to travellers and which is of great importance to certain carriers and airport operators. From that shop at Shannon, a large industry has grown. In 1996 over 700,000 bottles of liquor were sold in the duty free shop at Heathrow Terminal Two alone, together with 83 million cigarettes. Some asked what that was doing for people's health. However, these are the statistics. According to some indicators, the worldwide total of duty free sales through all channels is estimated to exceed $20 billion. Of this, the volume of activity is estimated to have reached a level of almost six billion ECU in Europe in 1996 alone and in Ireland is now estimated to be well in excess of £100 million. At this kind of level, it is easy to appreciate the significant contribution which the profit from duty free sales makes towards the overall viability of the travel industry.

The income from duty free sales has long been recognised as playing a key role in the commercial plans of some transport operators. Operators have been using the profits from duty free sales to cross-subsidise other activities. For example, the cost of airport landing charges is lower as a result of profits from duty free sales in airport duty free shops and basic ticket prices paid by travellers are consequently lower. The study conducted for the Department of Finance by KPMG, which was published some months ago, made this point clear. The extent to which fares will have to increase after 1999 can be argued but everyone accepts the fact that operators are able to offer lower ticket prices as a result of the profit that they make from duty free sales.

Additionally, the profits from duty free have been used to help finance capital investment projects at Irish airports. Aer Rianta recently opened fine new terminal facilities at Dublin which will help reduce congestion at the departure gates during busy periods. Last year a record number of over ten million passengers used Dublin Airport alone. Airports are major job creators and are seen as powerful regional economic generators which help to create prosperity and employment in the regions. It is ironic that it is these regional airports which will be hard hit by the negative effects following on the abolition of intra-EU duty and tax free sales.

The cross channel ferry industry has been able to use such profits to help its investment program. New ships are expensive and the cross-channel trade is still seasonal. Not only does the profit help the investment programme for some marginal routes and some of our regional airports which have a hard time getting by, but the availability of duty free sales is a key element in their survival. I know this is the case with Knock Airport where duty free sales represent about 50 per cent of profits.

A key argument for retention is that it helps to keep the cost of travel down, and of particular significance for an island nation like ourselves is that it keeps access costs down generally. The number of people who choose to visit Ireland has been steadily increasing over the years and the numbers are expected to continue increasing. All this activity underpins employment opportunities, not only in the duty free stores themselves but also in the supply and distribution chain. By keeping the cost of access down, the employment in the tourist industry generally is maintained.

It is partly the scale and volume of the industry now that creates the problem we face; yet it gives me grounds for hope for a change of heart and of opinion among those opposed to the retention of intra-EU duty free and tax free shopping after June 1999. This is a decision affecting many people and places, from Finland to Greece. It is not just an Irish problem and I wish more people in Europe would recognise that it is an issue on which they must make their feelings known. However interesting an additional debate in the House may be to us all, I would prefer to see first debates on the topic in the other parliaments throughout Europe.

As one travels about Europe one cannot but notice the "keep duty free" logos at airports and on ferries. To publicise the issue, Britannia Airways, the UK based charter carrier, has large produty free slogans on some of its aircraft. As it has business in Germany, the text is in German as well as English. It all helps to put across the message. This campaign to keep duty free is being undertaken across the EU but there is no need to convince the Irish. Any decision to change this decision must be unanimous. The problem is not to convince the Irish people or Government — we are already on side — but to convince the EU Commission and other member states.

We are now within the final year. The renewed debate about duty free in Ireland is of a long duration. Previous Ministers for Finance raised the matter at the ECOFIN Council as long ago as 1996 during the Irish Presidency. It is only recently that the issue has received much attention in other countries. As the seven and a half year transitional period up to 30 June 1999, which was agreed to allow duty free shop operators and suppliers to explore alternative ways of carrying on business, began to tick away, people across Europe began to sit up and take notice. I and my colleagues will continue to keep the issue of duty free on the agenda.

Mr. Bonner

I welcome the Minister of State. Coming from the constituency of Mayo, which has a regional airport in Knock, he more than any Minister appreciates the importance of the issue.

The decision made by the European Commission in 1992 to abolish duty free sales was derogated until 30 June 1999 from the initial date of 1 January 1993 when free trade in the Union was introduced. The reason given for the abolition was tax harmonisation within the Union. The European Commission also promised an impact study on the social and economic factors affecting the Union. They also promised an impact study on the effect throughout the European Community of the social and economic factors affecting the region. Neither has happened so I cannot understand why we must plough on and not be given a further derogation. Very little was done in the five years between 1992 and 1997, especially by the industry here, to prepare for the event which is to take place on 30 June 1999. However, I must exonerate Aer Rianta from this because they have carried on developing their overseas businesses to try to create further income to counteract the expected loss at Dublin and Shannon Airports.

The impact study carried out by the Centre of Economic Business Research in London on behalf of SIPTU last year showed a potential loss of between 6,500 and 9,000 jobs by the year 2005. The tourism industry would also be affected with a loss of approximately 121,000 visitors by 2005. Overall, European jobs lost due to abolition throughout the Community would amount to between 112,000 and 147,000. The number of job losses here has been variously estimated.

The SIPTU report stated that ferry services would be particularly badly hit. The viability of year round ferry routes to and from Ireland would be questionable. The loss of employment would be most serious and one wonders at the seriousness of the Amsterdam Treaty effort and the EU commitment to job creation being a high priority. The report also stated that there would be fare increases of at least £17 for outgoing passengers and up to £14 for incoming passengers. The drop in tourism numbers will be particularly serious for those in the hotel and tour operation businesses.

The EU Commission should rethink this issue not alone because of the issues raised in the SIPTU report but for its own future. In the recent Amsterdam Treaty referendum 68 per cent of those over 50 years of age voted for the Treaty but 45 per cent of those under 30 voted against. Young people are the future of any organisation or country. Our young people are obviously alienated from European affairs yet the Commission is trying to abolish the most popular consumer orientated initiative in the world. This is not the way to endear the EU to the ordinary consumer.

I congratulate the Minister for Public Enterprise, Deputy O'Rourke, for raising this important issue early this year, for winning support from her fellow European Transport Ministers and for highlighting the need to carry out an impact study. Unfortunately, the meeting of the ECOFIN Ministers on 19 May did not unanimously support the efforts of the Minister for Finance, Deputy McCreevy, to have the impact study carried out. Despite the KPMG report presented by Minister McCreevy to that meeting on the impact of the abolition of duty free in this country, he only received support from eight other Ministers. This report which was referred to earlier by Senator Costello stated that the abolition would lead to fare increases and would undermine the viability of regional airports, many of which depend on duty free sales for their survival. It would also undermine the viability of the ferry routes. The loss to the economy would amount to £65 billion and would be offset by a small gain of approximately £30 million to the Exchequer.

However, I do not believe all is lost. The Commission undertook to prepare a working document clarifying the instruments available to member states for addressing the consequences of the abolition of intra-EU duty free sales on 1 July 1998. The Commission also invited member states to carry out socio-economic impact studies at national level and to submit their findings. There was no final decision on reaffirmation by the Council of Finance Ministers that duty free would be abolished. Indeed, the issue will be back on the ECOFIN agenda when the Commission presents its working document.

On 3 April last, the EU Parliament overwhelmingly voted for a resolution calling on the Commission to carry out a socio-economic regional and revenue impact study of duty free abolition. This resolution was not acted upon at the ECOFIN Ministers meeting. However, the Commission should note that the Parliament is the only democratically elected body in the EU and I trust they will reverse their decision at a later date.

The Commission and Commissioner Monti also agree that regional airports would not be viable without duty free and they have acknowledged that they may have to authorise subsidies to regional airports. Both reports predict substantial job losses. I do not believe the matter is as serious in the large airports such as Dublin and Shannon as has been claimed. Travellers who shop in duty free facilities do not buy essential items. The goods bought are mostly gifts and are often bought on impulse. Many of the jobs in the larger airports will be saved because that market will remain. A serious situation will develop for the regional airports. Like the Minister of State at the Department of Health and Children, I have a regional airport in my area which is barely surviving. More than 50 per cent of its gross profit comes from duty free sales. I can vouch for that because I am the company's accountant.

I would like the Minister of State to clarify the question of duty-free fuel sales. The provision of this service to incoming flights is very important for regional airports. If it is abolished our regional airports will become white elephants. Even if duty free sales are abolished something must be done for our regional airports.

Mr. Norris

I am impelled to speak because this is an important motion. As a frequent traveller through Dublin Airport I make use of the duty-free facility there. Due to my indifferent health I tend to avoid the alcohol and nicotine counters but I buy presents for friends, aftershave and so on. I must pay tribute to the efficient and courteous manner in which the duty-free shop in Dublin Airport is organised. I have always been dealt with well there and I have a great deal of sympathy for the employees. It would be scandalous if they were needlessly thrown out of work. There is an important employment element in this issue.

We must recognise the fact that the concept of duty free is an Irish idea. Dr. Brendan O'Regan, who is still with us as an elder statesman of Irish public life, came up with this ingenious idea 50 years ago. It is one of those good Irish ideas which have been copied all over the world. Ireland, as the originator of this good idea, has a particular interest in it. Like other speakers I pay tribute, not just to the Minster of State, but particularly to the Minister for Public Enterprise, Deputy O'Rourke, who had the temerity to continue to try to reopen this issue when the bureaucrats of the European Union thought they had it nicely sorted out. This was another example of how the game is played according to rules that favour the big boys and girls in Europe. As a small nation we should continue to network with other small nations in this area. I hope the issue will be properly reopened and that duty free shopping can continue. There are jobs involved and its abolition could lead to an increase in fares, which would be most regrettable.

I accept that the EU is anxious to standardise and homogenise all aspects of the Union. Having completed the Customs Union there is an apparent logic in abolishing duty free shopping but that fails to understand the human element and the requirements and needs of small nations, particularly the nation that had the ingenuity to invent the concept. I strongly support the efforts of this Government to retain duty free shopping.

The duty free shopping facilities in Dublin Airport are among the best I have seen. In some large airports they are pathetic. It depends to a large extent on one's destination. Heathrow Airport, for example, is a bagatelle. One needs to draw a lucky country to go through a decent duty shopping zone. Until recently, the one that catered for passengers travelling from the United Kingdom to Ireland was one of the worst in the airport. However, that is in keeping with the way Heathrow Airport authorities treat passengers to Ireland.

An Leas-Chathaoirleach

When is it proposed to sit again?

Mr. Moylan

At 10.30 a.m. tomorrow.