• International Travel Retail Confederation

International Travel Retail Confederation
Submission to the
Public hearing on the
Framework Convention on Tobacco Control (FCTC)
Scope and mandate.
The International Travel Retail Confederation (ITRC) is the umbrella
organisation that represents, at the EU institutional level, the interests of
companies operating in the European Travel Retail trading environment that
emerged upon abolition of intra-EU tax and duty free sales on June 30th 1999.
It is also represents the interests of the same and other companies trading in
the remaining EU duty free trade to non-EU countries and between those
countries not members of the EU, including countries in accession
negotiations.
The ITRC is a confederation of national associations whose members are the
individual companies operating in European Travel Retail and duty free
markets and includes membership from all EU Member States, excluding
Austria and Sweden, plus Switzerland, Norway, Bulgaria and Malta. It is
anticipated that a number of countries in accession discussions with the EU
will become members in the near future, i.e. Cyprus, the Czech Republic, etc.
The funding of the ITRC is through annual subscription from the national
associations, who themselves are funded through direct membership
subscriptions from individual companies operating in the Travel Retail and
duty free trade, including airports, scheduled and charter airlines, ferry
companies, retail shop operators, suppliers, distributors and their agents.
Interest in the FCTC process.
The FCTC includes a proposal calling for the global abolition of duty free sales
of tobacco products. This would adversely affect our members interests
across this broad industry, which has already been seriously damaged by the
decision to abolish intra-EU tax and duty free sales from June 30th, 1999.
We therefore submit the following argumentation that this proposal is
unnecessary within the WHO’s overall tobacco control objectives.
The Duty Free trade.
Travellers duty free allowances were first introduced in the 1944 Chicago
Convention on aviation, and ratified by both the 1954 New York Convention
concerning customs facilities for touring and the 1973 World Customs
Organisation Kyoto Convention concerning customs facilities applicable to
travellers.
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It was the New York Convention that established the allowances that could be
admitted by tourists “free of import duties and import taxes”, provided they
were carried on the person or in their hand luggage. This was one regular size
bottle of wine and one quarter litre of spirits, plus one quarter litre of toilet
water and a small quantity of perfume. Today, most counties accept one litre
of spirits plus a quantity of wine as the maximum duty free allowance for
alcohol.
For tobacco products, the allowance was 200 cigarettes or 50 cigars or 250
grammes of tobacco. In most countries, this remains the accepted allowance
today.
Duty free allowances, however, were part of the travel experience long before
these conventions formalised arrangements. Travellers on long sea voyages
were permitted to land residual quantities of alcohol, and later tobacco, carried
on board for their personal consumption, without being taxed by the customs
authorities at their destination.
Duty free sales of products subject to import or excise duties and other taxes
tax have been part of the modern travel experience since the first duty free
shop for travellers to the United States opened at Shannon Airport in 1949.
Today, global tax and duty free sales are valued at US$ 20 billion. Of this
total, tobacco sales account for approximately US$ 2.5 billion, or 12.5% of
turnover. This compares with 21.3% for wines and spirits, 22.8% for perfumes
and cosmetics, 35.7 % for luxury goods and 7.7% for confectionery and fine
foods.
Of this total, airport shops, airlines and ferries accounts for 65% of the trade,
with downtown and other shops accounting for 35%.i
Abolition of intra-EU tax and duty free sales.
In 1987, the European Commission introduced, as part of the then EEC’s
Single Market package, its White Paper on the harmonisation of value added
tax and excise duty systems and rates, together with procedures for the
warehousing and movement of products subject to excise duty.
A consequence of these proposals, according to the Commission, was that,
as the concept of import and export between Member States was no longer
applicable, tax and duty free allowances for travellers within a European
Community without customs borders were inconsistent with Single Market
principles and therefore should be abolished.
The duty free industry, at both a national and EEC level, formed trade
associations to politically oppose this proposal. The International Duty Free
Confederation (IDFC), the forerunner of what is now the ITRC, was
established in 1988 as the EEC umbrella organisation to co-ordinate the
campaign to retain intra-EEC tax and duty free sales.
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The industry eventually persuaded Member State governments that this move
was unnecessary and indeed, the Council of Ministers unanimously agreed in
late 1991 to allow these sales to continue, albeit only until June 30th, 1999.
As the EU tax and duty free trade has always been included within the fiscal
portfolio, all legislative decisions require unanimity. Even though the proposed
abolition in 1992 was advanced as an inconsistency within the principles of a
Single Market without frontiers, it was as a consequence of the tax package
that the issue was dealt with. Tax and duty free sales have never been
officially part of the EU’s health agenda.
The industry maintained throughout its campaign that intra-EU tax and duty
free sales were not inconsistent with the principles of the Single Market and
argued that, as a minimum condition for abolition, there should be a fully
harmonised tax regime within the EU, including tax and duty rates. This has
still not been achieved as of today.
Economic and social impact of abolition.
A second Industry campaign in the late 1990’s, to gain a further extension to
the 1999 deadline, failed at the final hurdle. A proposal to delay abolition by a
minimum of a further three years, supported by the majority of Member State
governments, was vetoed at the June 1999 Heads of Government meeting
during the German Presidency.
This decision was taken even though it was acknowledged by many national
authorities that the current fifteen individual fiscal regimes in place throughout
the EU would not be able to cope with the retail sale of taxed and duty paid
products across borders, particularly on mobile shops, such as ferries and
aircraft.
The full consequences of the economic and social impact of intra-EU duty free
abolition are still emerging, and will not become fully evident for some time.
Overall job losses are still being evaluated but are expected to be in the many
thousands. However, some economic effects have already been noted.
Certain operators have reported substantial reductions in turnover and
earnings, together with decreases in shareholder value.
As a result of the substantial reduction in commercial revenues, some
governments have even allowed changes to previous policies on at what level
airports can charge airlines for their services. An example is the UK, which
has allowed BAA to increase landing and passenger charges by 15% over the
two years 2000 / 2001. Prior to duty free abolition, landing charges were
pegged at below the rate of inflation.
Cross Channel ferries and on Eurotunnel fares have increased by some 40%
with a resulting substantial reduction in passenger traffic (estimated at 20%).
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The closure of ferry lines on the Baltic Sea between Germany and Denmark
were an additional end product with the loss of in excess of 600 jobs and the
launch of legal claims for compensation in the European Court of Justice.
Furthermore, serious concern is mounting over the threat to some public
service ferry routes, particularly in Scandinavia, which now face severe
difficulties and even closure. Although the EU Commission advised that State
Aid or Structural Funds would be available, these funds have either not been
provided as expected or have been inadequate to replace the guaranteed
viability that these public service routes derived through allowing duty free
sales.ii
Emergence of Travel Retail.
In April 2000, the IDFC was reformed formally as the ITRC, with the remit to
seek to redress the commercial and administrative chaos that has ensued
since the abolition of tax and duty free sales in 1999. Its additional remit is to
defend the remaining duty free trade between and to third country destinations
within Europe. This is particularly important for those countries in accession
negotiations with the EU.
Travel Retail within the EU, the sale of taxed and duty paid goods to
consumers travelling between Members States by air and sea, has emerged
primarily as a result of the ongoing desire of travellers to continue to purchase
products available in this unique shopping environment.
The difference in excise duty and VAT rates between southern and northern
countries of the EU has enhanced the offer for many consumers. For
example, tobacco products in the UK are 250% more expensive than the duty
and tax paid retail price at Spanish airports. VAT rates also vary between 15%
and 25%.
Therefore, Travel Retail shop operators in many southern countries are now
at a far greater commercial advantage than their northern competitors.
However, due to the different national language requirements for the labelling
of products and the different tax collection systems in place, such as tax
stamps and fiscal markers, it is currently not possible for airlines and most
ferry companies to provide the full retail shopping environment that their
customers expect.
It is within this environment that the ITRC submits that a further erosion of its
members interests, resulting from the proposed abolition of global duty free
tobacco sales, would merely create further fiscal and administrative chaos. It
would most likely result in changing trading patterns so that travellers would
purchase in markets with low duties and taxes at every opportunity.
It would not succeed in delivering the WHO’s apparent objective of reducing
consumption.
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Duty Free and tobacco consumption.
The sale of duty free tobacco products does not increase consumption. Pre-
abolition, duty free sales of tobacco products accounted for approximately 1%
of total tobacco sales within the EU.
It is acknowledged that tourists travelling by sea and air may increase their
consumption whilst on holiday due to the less restrictive environment that they
find themselves in away from the workplace.
The consumer may also change brands in a duty free environment but overall
consumption does not increase.
With the abolition of duty free, it has been noted that many consumers are
purchasing in the lower taxed domestic destination market for consumption
whilst on holiday, particularly those taking vacations to southern Europe, i.e.
Spain and Greece.
With the advent of Travel Retail, some retail operators are using a pre-order
arrangement to provide the traveller with duty paid products upon arrival at the
lower taxed destination. A similar arrangement is available upon departure,
either at the airport or on board the airline or ferry, with no restrictions on
quantities as long as the product is for personal consumption.
The European Commission itself notes in its Communication on the
employment aspect of duty free abolition (see footnote) that “smokers will not
quit just because they will no longer be able to buy cigarettes duty free”. This
EU opinion reinforces the analysis that duty free, which sets controlled limits
on sales, is not a catalyst for increased consumption.
Conclusion.
As has been seen by the abolition of duty free tobacco sales for intra-EU
travellers, this measure, adopted on the grounds of the requirements of the
EU’s Single Market, has had little impact on consumption and merely changed
trading patterns. It has also seriously damaged the commercial viability of
many of those companies operating in the EU travel market.
It has led to administrative chaos and confusion with the fiscal authorities, at
both an EU and national level. The result is that many companies are no
longer able to trade equally in the competitive market for retailing to the
travelling consumer within the EU, as promised with the advent of the Single
Market, and has undermined public passenger services.
Abolition of duty free tobacco sales on a global basis is a measure that will do
nothing to reduce consumption but will create further widespread
administrative chaos and confusion and merely lead to a change in the
travelling consumers purchasing habits.
i
Source: Best and Most in Duty Free.
ii
Communication from the Commission to the Council concerning the employment aspects of the
decision to abolish Tax and Duty Free sales for Intra-Community Travellers. Jan.1999