The single market and the four freedoms II

The single market and the four freedoms II. EU-integration knowledges 1 st Semester, Academic Year 2010/2011 Written by Endre Domonkos

I. The freedom to provide services I. The acquis (Article 50 of the EC Treaty) defines services as activities provided for remuneration, insofar as they are not governed by the provisions relating to the freedom on movement of goods, capital and persons. This definition was necessary because services are often difficult to distinguish from other activities and thus from the other fundamental freedoms. The majority of self-employed persons are engaged in providing services, while the distribution of goods is also closely linked to related services (e. g. transport) and the free movement of capital can also involve services (see financial services). That is why Community law had to provide a clear and detailed definition of what fell within the scope of the freedom to provide services. For the sake of clarity, the freedom to provide services applies to those services which have cross-border element, i. e. when the provider and the recipient of the service reside in different Member States. This does not mean that the service provider cannot temporarily pursue his activity in the state where the service is provided, and in fact he may even open a permanent representation there, but his activity must be fundamentally related to another Member State. If he were to permanently relocate his activities into the state where the services are provided, he would fall within the scope of the freedom of establishment.

I. The freedom to provide services II. For the freedom to provide services the emphasis falls on the temporary (non-permanent) and cross-border nature of such activities. It is also important to note that the service is provided for remuneration, since – to a certain extent – the essence of the freedom to provide services is to embrace all those activities which are exercised for remuneration but which do not fall within the scope of the other three freedoms. The acquis stipulates that the remuneration must come from a private source, thus educational services paid by the state do not fall within scope of the free movement of services. In order to clarify the nature of services, Article 50 of the EC Treaty lists activities that – upon the fulfillment of the above conditions – are typically considered as services: activities of an industrial nature, activities of a commercial character, the activities of craftsmen and the activities of the professions. To ensure a harmonised liberalisation of services, Article 51 of the Treaty stipulates that the freedom to provide services in the field of transport shall be governed by the provisions of the Title relating to transport (EC Treaty Title V) and the liberalisation of banking and insurance services connected with capital movements shall be carried out in step with the liberalisation of capital movements (EC Treaty Title III Chapter 4).

II. The prohibition of discrimination, the question of educational qualifications and the exceptions to the freedom to provide services I. The prohibition on discrimination also applies to the free movement of services. This means that Member States may not impose different conditions on service providers who exercise their activities from another Member State or on recipients of services in another Member State. It is important to note here that recipients of services cannot be restricted or discriminated against, which means that they have the right to travel to another Member State to buy services. This is a standard practice for a number of services. The most general case is that of tourists or persons travelling for business purposes, but there also people who travel to another country to receive medical treatment. The Council Directive on the abolition of restrictions on movement and residence with regard to establishment and the provision of services grants the right of residence for persons providing and receiving services for the period during which the services are provided. In its judgements, the European Court of Justice has pointed out that not only is direct and indirect discrimination prohibited, but also restrictions that apply to both domestic and foreign providers (or recipients) of services where these in fact make it more difficult foreign providers (or recipients) to pursue (receive) such activities or services.

II. The prohibition of discrimination, the question of educational qualifications and the exceptions to the freedom to provide services II. With its rulings, the Court has also extended the Dassonville formula, first applied to goods only, to services as well. Similarly to the freedom of establishment, requirements relating to qualifications are a key issue. The application of different rules on qualifications to service providers by Member States would be able an obstacle to the freedom to provide services. Therefore, the Directives on the mutual recognition of qualifications and the harmonisation of educational and training conditions also apply to the freedom to provide services. Certain activities are exempt from the provisions on the freedom to provide services, as in the case of the freedom of establishment and the free movement of goods. These exceptions include activities which are connected with the exercise of official authority, and, as in the case of the other freedoms, restrictions on grounds of public policy, public security or public health as long, as they are justified and proportionate to the ends they are supposed to serve. This condition is very strictly interpreted by the Court of Justice, just as in the case of the free movement of persons and goods.

III. The liberalisation of the free movement of services I. Community law guarantees the freedom to provide services and the abolition of provisions restricting the movement of various services through means of directives. According to Article 52 of the Treaty, the Council shall, on a proposal from the Commission and after consulting the Economic and Social Committee and the European Parliament, issue directives acting by a qualified majority in order to achieve the liberalisation of a specific service. Compared to the free movement of goods, the realisation of the freedom to provide services progressed rather slowly and the adoption of certain directives failed. Finally, parallel to the programme of the single market, the liberalisation of intra-Community services gained new momentum in the late ‘ 80 s and early ‘ 90 s. Consequently, most services (e. g. banking, financial, air transport and telecommunications services) had been liberalised by the turn of the millennium, but in few areas, particularly where state-owned service providers were involved (e. g. electricity and gas), only the initial steps had been taken. The enforcement of the freedom to provide services has increasing significance for the functioning of the single market and the success and competitiveness of the European Union. The reason is that, in the world economy and in the EU alike, services play an increasingly dominant role, both in term of the number of people employed and GDP produced.

III. The liberalisation of the free movement of services II. A large part of the Union’s active population works in the service sector, with commercial services and public services accounting for 70% of GDP (50% and 20% respectively). Due to their significance, services feature more and more noticeably in the EU’s economic policy and legislation. In the light of these developments, the Lisbon summit in March 2000 placed the so-called Internal Market Strategy for Services at the Centre of the Community’s new long-term economic policy. This new approach was needed because the traditional method of harmonisation and liberalisation, aimed at individual sectors, was no longer sufficiently effective. The reasons for introducing a new approach in the field of services were the followings: 1. The traditional sectoral approach involved cumbersome legal harmonisation, because it led overlapping and often contradictory legislation in various sectors. 2. In today’s economy, even manufacturers provide comprehensive services, the complexity of which makes it impossible to have clear overview using the sectoral approach. 3. Modern technology necessitates new directions in the liberalisation of services. The new Internal Market Strategy for Services thus strives to create a comprehensive horizontal regulatory framework applicable in all sectors and flexible enough to ensure that services based on new technologies can develop for the benefit of the single market.

III. The liberalisation of the free movement of services III. The new strategy consists of three elements: 1. identifying (listing) obstacles to the implementation of Community legislation in Member States and subsequently removing them (if necessary by bringing Member States before the European Court of Justice); 2. introducing non-legislative measures (e. g. developing Codes of Conduct, launching information campaigns); 3. developing harmonisation provisions based on a horizontal approach, i. e. adopting new pieces of Community legislation. With the latter, the strategy aims at establishing horizontal rules covering services in all sectors, focusing particularly on the following six areas: removing all obstacles to the establishment of service companies, and promoting cross-border services and purchases, distribution activities, promotional activities, sales activities (e. g. contracting and pricing rules) and after-sales activities. The Draft Directive on services in the internal market (in short, the draft Services Directive and also known as the draft Bolkenstein Directive, so called the former European Commissioner who introduced it), which the Commission presented in January 2004, is aimed at establishing a truly single internal market in services by dismantling any remaining unjustified and discriminatory administrative obstacles to crossborder service provision. This piece of legislation could potentially have a huge significance in improving the competitiveness of the services sector by removing the last obstacles that run counter to the freedom to provide services. The unnecessarily complicated and costly administrative burdens still deter many companies (mainly SMEs) from providing services in other Member States.

III. The liberalisation of the free movement of services IV. In essence, the Draft Directive introduced the principle of „country of origin” to cross-border services, according to which service providers would be subject only to the law of the country in which they were established rather than those in which they operate, and the Member State where the service is provided could only impose additional requirements in justified cases. The application of this principle would have made the country of origin responsible for controlling the service provider and his services, even when provided in another Member State (also known as the principle of „country of origin control”). The Draft Service Directive has been the centre of attention of stakeholders from the very beginning, provoking a great controversy, primarily due to the country of origin principle. The Draft Directive was severely criticised by the Member States with higher labour costs in the services sector, who were afraid of job losses caused by competition from (mainly new) Member States with cheaper labour. The other common fear was that the Draft Directive could have jeopardised the quality of services, by giving Member States with the lowest regulatory standards a competitive advantage. Because of the opposition of the Member States the principle of „Country of origin control” was withdrawn and the European Parliament adopted the Directive on 12 December 2006. The Commission hopes that this Directive will create a real competition among service providers in the Union, which will in turn lead to a wider range of services available, providing a greater choice, better quality and lower prices. The Commission main aim is to make better use of the growth and job-creation opportunities offered by the single market.

IV. The free movement of capital I. Article 56 of the EC Treaty prohibits all restrictions on the movement of capital, both between Member States and third countries. This general prohibition was not characteristic of the acquis in the beginning. The Treaty of Rome originally dealt with the movement of capital and payments as supplementary freedom linked to the free movement of goods, services and workers. The EC Treaty includes provisions not only on the free movement of capital, but on the free movement of capital and payments as well. This distinction between capital and payments no longer made sense following the general liberalisation necessitated by the economic and monetary union; thus, nowadays, we only talk about free movement of capital. It should be noted that the category of capital includes not only traditional elements of the capital market, such as money, securities, etc. , but also real estate, land capital assets. According to ex Article 67 of the Treaty of Rome, the free movement of capital and payments only had to be guaranteed to the extent required by the „proper functioning of the common market”.

IV. The free movement of capital II. The free movement of goods, services and workers would not have made much sense without, for example, allowing companies/people to take their profits/earnings back to their home state. For a long time, the acquis mainly dealt with the free movement of capital connected with such crossborder activities. The wish to create a single market and, later, an economic and monetary union brought major changes in this field, and legislation hampering capital movements was quickly removed. The decisive moment came with the adoption of a Directive in 1988, which liberalised capital transfers by abolishing all restrictions on movements of capital. This Directive entered into force on 1 July 1990, except for Greece, Ireland, Portugal and Spain, where the full application of the Directive was postponed for a few years. The realisation of an unrestricted, free movement of all elements of capital was reinforced by the Maastricht Treaty, which set the free movement of capital as a precondition for joining the economic and monetary union. Thus, by the beginning of the second phase of the EMU on 1 January 1994, all payments and capital movements had been fully liberalised.

V. Exceptions to the free movement of capital There are general exceptions to the free movement of capital. The free movement of capital cannot encroach upon a Member State’s right to prevent infringement of national legislation on taxation or to ensure the supervision of financial institutions and, in relation to reporting obligations, the collection of information serving administrative and statistical purposes. In addition, just as in the case of the free movement of goods, persons and services, the free movement of capital may be restricted on grounds of public policy or public security. The principle of a restriction being in proportion to the objective to be achieved applies here as well, which means that such restrictions are not permissible if the objective could be achieved by less restrictive means. This principle is strictly enforced by the European Court of Justice. Exceptionally, and strictly vis-à-vis third countries, the free movement of capital can be limited for a maximum period of six months if capital movements to or from a third country posing serious difficulties to the functioning of the economic and monetary union. Such restrictions may also be imposed against third countries as an element of measures taken and instruments used within the framework of the Common Foreign and Security Policy (for example in the form of economic sanctions).

VI. The single market and taxation I. In order to ensure the four fundamental freedoms, certain rules on taxation are necessary, pursuant to Articles 90 to 93 of the EC Treaty. It must, however, be made clear that the aim is not to harmonise taxes or create a single system of taxation; these do not even appear as objectives for the distant future. It should also be emphasized that the Treaty makes a clear distinction between rules on indirect and direct taxation. While significant progress has been made in harmonising indirect taxes, little has been achieved in relation to direct taxes as the Member States remain reluctant to give up their national sovereignty and share competences with the Union in this area. Since indirect taxes are closely related to the free movement of goods and the freedom to provide services, a certain degree of tax harmonisation is necessary in these fields. To that end, Article 93 of the EC Treaty empowers the Council to adopt provisions for the harmonisation of legislation concerning turnover taxes, excise duties and other forms of indirect taxation, to the extent necessary to ensure the establishment and the functioning of the internal market. The Council adopts such harmonising measures acting unanimously on a proposal from the Commission and after consulting the European Parliament and the Economic and Social Committee. Article 93 has helped to create very detailed common rules on value-added tax and excise duties.

VI. The single market and taxation II. Value-added tax (VAT) was first introduced in the Community in 1970 with the aim of replacing the various different forms of consumption and turnover tax in the Member States. The creation of the single market in 1992 brought about the elimination of ‘tax borders’, which necessitated even closer harmonisation of VAT rates. The significant differences in VAT rates hindered the free movement of goods and services. According to a Directive adopted in 1992 on harmonising tax rates, the Member States have to apply a standard rate of VAT of a minimum 15%, with one or two reduced rates of no less than 5% applied for certain goods and services, serving primarily cultural and social purposes. Lower rates (e. g. 0%) of value-added tax may only be applied in cases specified in the Directive. In order to guarantee the free movement of goods and services, in addition to harmonising certain tax rates, the place where tax liability arises (the issue of where taxes are payable) also has to be defined. The EU’s long term objective is to establish an origin-based Community VAT system. Nevertheless, it will probably take a few more years before that goal is realised, and until then the destination-based transitional system remains in place. For private individuals, the rule applies that VAT is payable at the place of consumption or purchase.

VI. The single market and taxation III. Since the introduction of the single market on 1 January 1993, excise duties have been payable at the place of consumption. Excise duties on alcoholic beverages, tobacco products and mineral oils are payable in the Member State of final consumption. Minimum rates of excise duties are also set at Community level. Unlike for indirect taxes, the EC Treaty includes no specific provisions for direct taxes, which – following from the principle of subsidiarity – have traditionally fallen under national competence. The only condition concerning direct taxes is that national tax systems must respect the four fundamental freedoms. As a practical consequence, Community legislation adopted in this area is aimed at avoiding double taxation and facilitating cross-border business activities. The only area of direct taxation where there has been a substantial will for harmonisation is company (or corporate) tax.

VI. The single market and taxation IV. The European Commission has proposed the harmonisation of the tax base (and not the actual tax rate), as it could put an end to the current practice of tax evasion through internal accounting mechanisms by companies with subsidiaries in several Member States. This proposal however does not enjoy the unanimous support of all Member States, which only goes to show anxious the Member States are to hold on to their national independence in this field, where they demonstrate the least willingness to give up national competences. Tax harmonisation is clearly one of the most sensitive issues of closer integration. Several Member States are understandably reluctant to pool their national sovereignty, as tax policy is the key fiscal instrument and a major component of each government’s political programme. As a result, unanimity has been maintained in the area of tax harmonisation. Replacing unanimity is so unrealistic that even the Treaty of Lisbon did not attempt to extend qualified majority voting to taxation; thus the Member States preserved their right of veto. Concerning taxation, it is worth mentioning several proposals designed to introduce some kind of Community tax, which would reduce the dependence of the Community budget’s sources of income (socalled own resources) on national budgets. These proposals have never been backed up by a majority of the Member States, and thus have always been put off the agenda.

VII. Decision-making related to the single market Harmonising measures for the single market and decisions related to the free movement of workers and their right of establishment and the free movement of Union citizens and their right of residence, are adopted jointly by the Council and Parliament in the co-decision procedure. An exception to that rule is legislation on the social security of migrant workers, where – instead of the general rule of qualified majority voting applied for co-decision – the Council acts in unanimity. Harmonising measures that do not have the internal market as their object but which affect the functioning thereof, are adopted by the Council acting in unanimity and through the consultation procedure. For the liberalisation of a specific service, the consultation procedure is applied as well, but the Council acts by qualified majority. The free movement of capital is affected by the provision that, in special circumstances when capital movements to or from third countries pose a threat of causing a serious disturbance in the functioning of the EMU, the Council, acting on the Commission’s proposal and after consulting the European Central Bank, may adopt protective measures with a qualified majority vote. The consultation procedure and unanimity also apply in relation to tax.

VIII. Provisions of the Treaty of Lisbon in relation with the single market I. According to the provisions of the Treaty of Lisbon the following changes should be highlighted: For the free movement of goods there were not substantive amendments. For the free movement or persons, the scope of application of harmonising measures in the field of social security was extended to include employed as well as self-employed persons. In the field of social security of migrant workers, the unanimity was replaced with qualified majority voting, and a special emergency brake clause was introduced to allow the Member States to use their right of veto under certain conditions and to a limited extent. For the freedom to provide services, the Treaty of Lisbon took on board the provisions of the current EC Treaty, and extended the ordinary legislative procedure to two new areas: it extended the freedom to provide services to service provision by third-country nationals established within the Union; and it adopted measures to achieve the liberalisation of a specific service.

VIII. Provisions of the Treaty of Lisbon in relation with the single market II. Provisions for free movement of capital: For the free movement of capital, the Treaty of Lisbon introduced the ordinary legislative procedure for capital movements to and from third countries. In order to improve the efficiency of the fight against terrorism, the Treaty of Lisbon creates legal base for the Union to freeze the funds and financial assets of natural or legal persons. Provisions for taxation: For taxation, the Treaty of Lisbon took on board all the provisions of the EC Treaty with one amendment, which enabled the Union to establish measures for the harmonisation of legislation, concerning taxation, provided that such harmonisation is necessary to ensure the establishment and functioning of the internal market and to avoid a distortion of competition. During decision-making however, without exception, the Council acts unanimously after consulting the European Parliament and the Economic and Social Committee.

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