Cross-border Impact Assessment 2018
Dossier 1: Increase of Dutch low VAT rate
Exploration of the cross-border impact of an increase in the low VAT rate in the Netherlands
Prof. dr. Frank Cörvers
Kars van Oosterhout, MSc
The coalition agreement of the Rutte-III government sets out the intention to raise the low VAT rate from 6% to 9% with effect from 1 January 2019. The rate increase relates to sales of products including fruit, vegetables, and many other foodstuffs, medicines, books, and repair services for clothing, footwear, and bicycles. Such a VAT increase would make the low VAT rate in the Netherlands higher than the lowest VAT rate in Belgium (6%) and the low rate in Germany (7%). In this dossier, we explore the potential cross-border impact of this proposed VAT increase. Our main focus is on an ex ante assessment of the economic consequences, and the consequences for the EU’s integration of regulations and Euregional cohesion are also discussed though to a lesser extent.
At the insistence of the European Parliament and the European Council, the European Commission is currently developing plans to switch to a system of taxation in the country of purchase instead of the country of sale. This change of direction will make it possible to liberalize the existing rules on VAT harmonization and will give national governments more scope to set their own rates in the future. It is therefore to be expected that decisions on VAT rates will increasingly be considered national issues. This may result in greater VAT rate differences between countries, whereby, as promised by the current Dutch context, little account is taken of the cross-border impact.
In order to estimate the cross-border impact of the planned increase in the low VAT rate, the scientific literature on cross-border impacts and the consequences of previous changes in indirect taxation in the Netherlands were first examined. The focus then shifts to the specific case in hand, the situation in the Dutch border regions. For example, we discuss some key data on the number of inhabitants and entrepreneurs in the Dutch border region and their contributions to VAT revenues. We also discuss the current price differences, both between the Netherlands and its neighbouring countries and the differences within the Netherlands between border regions and non-border regions. We use secondary data sources supplemented with our own analyses. On the basis of purchase behaviour studies and additional information from a discount chain, we look at the extent to which residents in the Dutch border region are currently prepared to do their shopping abroad, partly because of price advantages. On the basis of this information, we will then make an ex ante assessment of the specific consequences of the VAT increase on the economic situation in the border region, including the competitiveness of businesses, price levels, tax revenues, and cross-border purchase behaviour.
The literature review shows that the question of how entrepreneurs and consumers respond to an increase in indirect taxes cannot be answered unambiguously, especially in the case of border regions. The question is: to what extent the VAT increase will lead to higher prices for consumers and consequently to reduced sales and turnover for businesses? The Netherlands Bureau for Economic Policy Analysis (CPB) assumes that three quarters of the tax increase for the Netherlands as a whole will be paid by consumers and one quarter by companies. If the increase in the low VAT rate is passed on in full to consumers, it will lead to price increases of almost 3%. However, studies of previous rate changes show that such a price increase is very uncertain and highly dependent on the type of product or service concerned. In some cases there may be hardly any price increase for consumers, while in other cases there may be a price increase greater than that justified by the increase in VAT.
The impact of the forthcoming VAT increase on border regions is particularly uncertain. The literature studied shows that price increases in border regions could be both greater and smaller than national price increases. On the one hand, existing literature suggests that price increases at the border will be smaller than in central regions because competition on the other side of the border does not have to pass on any VAT increase to the consumer. On the other hand, competitors in the border regions of Belgium and Germany currently apply higher prices to a number of products and services, which may give the Dutch border regions more scope to raise prices. In other words, there are extra major uncertainties for consumers and businesses in the border regions compared to the rest of the country due to the VAT increase. This relates not only to the prices that consumers will have to pay, but also to the impact on the turnover and profits of businesses, the incomes of entrepreneurs, and employment and economic growth in the border regions.
The scale of the cross-border impact depends on the differences in prices between regions on either side of the border and on the willingness to travel greater distances to make purchases. It appears that the willingness to make purchases further afield in another country is greatly dependent on the context. Factors that play a role in this include the geographical conditions at the border in question, the perception of price differences by consumers, and the degree of substitutability between goods abroad and Dutch goods, which is more pronounced in the case of identical goods that have a long shelf life and are easy to transport. As consumers like to buy goods from a single location, a change in indirect taxation may also affect goods not affected by this rate but sold in the same shops or locations. All this may mean that traders in the border region have more scope in some cases or less scope in other cases to pass on an increase in indirect taxes to consumers.
For 13% of the Dutch population, the border is a stone’s throw away, within 10 km, while almost a third of the Dutch population lives within 30 km of a national border. Despite the lack of precise data, we estimate that the planned increase in VAT will increase tax revenue from the low VAT rate by more than €800 million to €2.4 billion in the wider border region, of which almost €1 billion will be generated in the region up to 10 km from the border. Because of the large number of people living in border regions in a general sense, even a relatively small deterioration in competitiveness and a small shift in spending could lead to the loss of many millions of euros in turnover for entrepreneurs and in tax revenues for the Dutch state. There are extra major uncertainties for consumers and businesses in the border regions compared to the rest of the country due to the VAT increase.
In the case of foodstuffs, which account for a large proportion of the revenue under the low VAT rate, price differences between the Netherlands and other countries appear to vary considerably between products. On average, however, the price level for food is considerably lower in the Netherlands than in Belgium (more than 10% cheaper). The price difference with Germany is smaller, but again the Netherlands seems on average to be cheaper (approx. 5%). It is possible that prices in the border region are somewhat higher than in the rest of the Netherlands due to relatively little competition from abroad. For example, the Jumbo supermarket chain charges relatively high prices in branches close to the border and lower prices in municipalities far away from the border.
Purchase behaviour studies show that price differences in the border region are large enough to trigger crossborder purchase behaviour. For instance, a quarter of Dutch households spend an average of €50 euros a month on grocery shopping abroad, which amounts to a total of €1 billion a year. Conversely, Belgians and Germans spend even more in the Netherlands. In Limburg, the region with by far the most cross-border purchasing, people from outside the Netherlands spend much more in the Netherlands (€473 million) than Limburg citizens spend abroad (€228 million). Additional information from one of the discount supermarkets shows that it is primarily Germans (and to a lesser extent Belgians) making cross-border purchases in Limburg, possibly because of certain store preferences and geographical circumstances.
If any cross-border impact is seen anywhere, it is clear that Limburg – especially on the border with Germany – will be the most affected because the most cross-border purchases take place here due to the geographical circumstances. The cross-border impact is usually much greater right at the border than further away. Very locally along the border, especially along the border with Germany, there may be small and medium-sized enterprises (e.g. supermarkets, drugstores, bakers, butchers, and greengrocers) that are greatly affected by the VAT increase due to a loss of turnover in response to price increases, and a loss of profit or income if they do not raise prices. Moreover, Dutch and European VAT policy means it is likely that national VAT rates will diverge further in the future, and the resulting cross-border impact will increase. For entrepreneurs and citizens in European border regions, this means that the national border remains a relevant dividing line, especially for everyday activities such as shopping.