Power struggle over duty-free sales

Date: 04/07/1996

By Rory Watson

A BATTLE over duty-free sales is creating a legal precedent and providing the European Parliament with an unexpected opportunity to increase its influence over future EU fiscal policy.

Eurotunnel, the builder and operator of the Channel tunnel, has turned to the Parliament in its campaign over duty-free sales. It claims that the current arrangements - which allow such sales on ferries between the continent and the UK, but not on trains - give shipping companies an unfair advantage.

It also maintains that the Union's Value Added Tax and excise duty legislation allowing duty-free sales should be declared void on the grounds that MEPs were not properly consulted on their contents.

Eurotunnel's case has now been referred to the European Court of Justice by a French national court. The ECJ has asked the Parliament if it wants to make a submission and its legal affairs committee is unanimously recommending that the institution should do so.

“This is a precedent-setting case. It is the first time a third party, rather than the Parliament itself, has raised the question of the Parliament's prerogatives before the Court. It also shows the Parliament is being taken more seriously by outsiders,” explained one senior official.

The case could have far wider implications for the balance of legislative power between MEPs and member states in deciding Union measures to harmonise turnover taxes, excise duties and other forms of indirect taxation.

Under EU law, the Council of Ministers must consult the Parliament on such proposals. Eurotunnel, however, backed by the Parliament's legal affairs committee, argues that the legislation finally adopted was so different from the draft version considered by MEPs that proper consultation did not take place.

“If it can be established that the Council of Ministers made substantial changes to the texts after Euro MPs had given their opinion, then this could open up a grey area of considerable potential for the Parliament,” predicted one MEP.

Eurotunnel, which generates some 25&percent; of its turnover from duty-free purchases at its land-based terminals, is arguing that the 1991 VAT legislation was substantially altered after leaving the Parliament. The original text examined by MEPs contained just two paragraphs on duty-free sales, but by the time it was adopted by the Council, this had expanded to five pages.

“The arrangements on which the Council took a decision were substantially different from those on which the Parliament had been consulted. It is a basic principle of European law that procedural requirements must be followed or else the process is invalid,” said one European lawyer.

Similarly, the company maintains that governments, by deciding to allow duty-free sales to continue until the end of June 1999, failed to take on board the Parliament's view that they should be allowed only until the end of 1995.

“From the Parliament's point of view, this is really less about duty-free sales and more about an inter-institutional battle. The Parliament is looking to expand or define its powers in fiscal areas where governments take decisions unanimously,” said one observer.

The final decision on whether the Parliament should enter the legal battle rests with its President Klaus Hänsch, but there is little doubt he will follow the legal affairs committee's advice.

The European Commission is taking a different line and - to the annoyance of MEPs - has argued that the changes were merely “ancillary” to the thrust of the original proposals.

Lawyers are reluctant to speculate on whether Eurotunnel's arguments will carry the day. If they do, it could remove the legal justification for intra-EU duty-free sales. But they suggest that even if the firm wins its case, the ECJ will probably rule that the disputed legislation should remain in force pending measures to remedy the procedural defects.

“We can understand the institutional issues which have led the Parliament to take this course. But we maintain that as a matter of law, MEPs were consulted on the question of continuing duty-free sales and voted for its continuation,” said a spokesman for the International Duty-Free Confederation.

A Eurotunnel victory, however, would strengthen the Parliament's argument that it should be consulted again if draft fiscal legislation is substantially amended by governments after MEPs have given their opinion.