Full dossier
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Exploring the cross-border effects of an increase in the low VAT rate in the Netherlands
Prof. dr. Frank Cörvers
Kars van Oosterhout, MSc
The Rutte-III cabinet’s coalition agreement states its intention to increase the low VAT rate from 6% to 9% from 1 January 2019. The tariff increase covers sales of products such as fruits, vegetables and many other foods, medicines, books and repair services for clothes, 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 implications of this proposed VAT increase. We focus mainly on an ex ante assessment of economic impacts, and impacts on EU regulatory integration and Euroregional cohesion are also addressed, albeit to a lesser extent.
At the urging 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 rather than the country of sale. This change of direction allows for the liberalisation of existing VAT harmonisation rules and gives 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 seen as national matters. This could lead to greater differences in VAT rates between countries, with little consideration of the cross-border effect, as the current Dutch context promises.
To estimate the cross-border impact of the planned increase in the low VAT rate, we first reviewed the academic literature on cross-border effects and the impact of previous changes in indirect taxation in the Netherlands. The focus then shifts to the specific case in question, the situation in the Dutch border regions. For example, we discuss some key data on the number of residents and entrepreneurs in the Dutch border region and their contributions to VAT revenues. We also discuss current price differences, both between the Netherlands and its neighbours and differences within the Netherlands between border and non-border regions. We use secondary data sources supplemented by our own analyses. Based on studies of buying behaviour and additional information from a discount chain, we examine the extent to which residents of the Dutch border region are currently willing to do their shopping abroad, partly because of price advantages. Based on this information, we then make an ex ante estimate of the specific effects of the VATincrease on the economic situation in the border region, including the competitive position of companies, price levels, tax revenues and cross-border shopping behaviour.
The literature review shows that the question of how entrepreneurs and consumers react to an increase in indirect taxes cannot be answered unequivocally, especially in the case of border regions. The question is: to what extent will the VAT increase lead to higher prices for consumers and thus lower sales and turnover? The question is: to what extent will the VAT increase lead to higher prices for consumers and thus lower sales and sales for businesses? The Central Planning Bureau (CPB) assumes that three quarters of the tax increase for the Netherlands as a whole will be paid by consumers and one quarter by businesses. If the low VAT rate increase is passed on in full to consumers, it will lead to price increases of almost 3%. However, examination of previous rate changes shows that such a price increase is highly uncertain and depends heavily on the type of product or service. In some cases, there may be hardly any price increase for consumers, while in others the price increase may be greater than justified by the VAT increase.
The impact of the upcoming VAT increase on border regions is particularly uncertain. The literature reviewed shows that price increases in border regions can be both larger or smaller than national price increases. On the one hand, the existing literature suggests that price increases at the border will be smaller than in central regions because competitors on the other side of the border do not have to pass on VAT increases to consumers. On the other hand, competitors in the border regions of Belgium and Germany currently charge higher prices for a number of products and services, which may give the Dutch border regions more room to raise prices. In other words, there are additional major uncertainties for consumers and businesses in border regions compared to the rest of the country due to the VAT increase. This relates not only to the prices consumers will have to pay, but also to the impact on companies’ sales and profits, entrepreneurs’ incomes and employment and economic growth in border regions.
The extent of the cross-border effect depends on price differences between regions on either side of the border and the willingness to travel greater distances to make purchases. It appears that the willingness to make purchases further afield in another country is highly dependent on context. Factors involved include geographical conditions at the border in question, consumers’ perception of price differences and the degree of substitutability between goods abroad and Dutch goods, which is stronger in the case of identical goods that have a long shelf life and are easy to transport. Since consumers like to buy goods in one location, a change in indirect taxes may also affect goods not covered by this rate but sold in the same shops or locations. All this may mean that traders in the border region may in some cases have more and in others have less room 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 land border. Despite the lack of precise data, we estimate that the planned VAT increase 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 in the region up to 10 km from the border. Because of the large number of people generally living in border regions, even a relatively small deterioration in competitiveness and a small shift in spending can result in a loss of many millions of euros in turnover for entrepreneurs and in tax revenue for the Dutch state. There are additional major uncertainties for consumers and businesses in border regions compared to the rest of the country due to the VAT increase.
In the case of foodstuffs, which account for a large share of revenue under the low VAT rate, price differences between the Netherlands and other countries appear to vary widely by product. On average, however, the price level for food in the Netherlands is considerably lower than in Belgium (more than 10% cheaper). The price difference with Germany is smaller, but even here the Netherlands seems to be cheaper on average (around 5%). Prices in the border region may be slightly higher than in the rest of the Netherlands due to relatively little competition from abroad. The supermarket chain Jumbo , for example, applies relatively high prices in branches close near the border and lower prices in municipalities far from the border.
Shopping behaviour research shows that price differences in the border region are are large enough to trigger cross-border buying behaviour. For example, a quarter of Dutch households spend an average of €50 a month on groceries abroad, totalling €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 purchases, people from outside the Netherlands spend much more in the Netherlands (€473 million) than Limburgers abroad (€228 million). Additional information from one of the discount supermarkets shows that it is mainly Germans (and to a lesser extent Belgians) who make cross-border purchases in Limburg, possibly because of certain shopping preferences and geographical conditions.
If there is a cross-border impact at all, then it is clear that Limburg – especially at the border with Germany – will be most affected, because this is where most cross-border purchases are made due to geographical conditions. The cross-border effect 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 strongly 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 increase prices. Moreover, due to Dutch and European VAT policies, it is likely that national VAT rates will diverge further in the future, increasing cross-border effects. 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.