Crossing borders: A tall order for SMEs

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The internal European market offers companies access to a market of 500 million people, yet a strikingly low number of small and medium-sized enterprises are making best use of the opportunities available.

Background

Based on Article 43 of the Treaty establishing the European Communities, the freedom of establishment principle allows entrepreneurs to set up a company in any EU country. 

In practice, more than 99% of EU companies are small and medium-sized enterprises with no more than 250 employees and a maximum turnover of €50 million. However, only 8% of them engage in cross-border trade and just 5% have subsidiaries or joint ventures abroad, according to the European Commission. 

High costs and various administrative requirements regarding taxation, invoicing or registration are preventing many SMEs from doing business across EU borders. The EU has taken various steps to address this issue - first and foremost, the adoption of the Services Directive - but at the moment, the EU's large internal market is still far from becoming a reality for the vast majority of SMEs. 

Issues

The Services Directive, which was adopted at the end of 2006 and was to be fully implemented by the end of 2009, is seen as the key tool to remove these hurdles for cross-border business. 

The objective of the directive is to achieve a genuine internal market for services by removing legal and administrative barriers to the development of service activities between member states. It obliges EU countries to simplify all procedures involved in starting and carrying out a service activity in the following areas: 

  • Most regulated professions (e.g. legal and fiscal advisers, architects, engineers, accountants, surveyors); 
  • construction services; 
  • craftsmen; 
  • business-related services (e.g. office maintenance, management consultancy, the organisation of events, recovery of debts, advertising and recruitment services); 
  • distributive trades, including retail and wholesale of goods and services; 
  • services in the field of tourism (e.g. services of travel agencies); 
  • leisure services (e.g. services provided by sports centres and amusement parks); 
  • services in the area of installation and maintenance of equipment; 
  • information services (e.g. web portals, news agency activities, publishing, computer programming activities); 
  • accommodation and food services (e.g. hotels, restaurants, catering services); 
  • services in the area of training and education; 
  • rental, including car rental and leasing services; 
  • real estate services; 
  • certification and testing services, and; 
  • household support services (e.g. cleaning services, private nannies or gardening services) 

The Directive officially came into force on 28 December 2009, although it is thought that more than half of all EU member states have not fully implemented it. 

By some estimates, around 11 countries have managed to complete all the legal steps set out in the Directive. More are likely to follow in the coming months but there has been a degree of frustration regarding the difficulty in guarnateeing implementation across the Union. 

Taxation rules main barrier to cross-border trade

When it comes to intra-EU trade of goods and services, different tax systems - which trigger high compliance costs - are seen as the main obstacle facing small businesses. European Commission figures from 2008 showed that cross-border taxation costs can make up to 2.5% of turnover for SMEs, as opposed to a mere 0.02% for larger businesses. 

Small businesses are placed at a competitive disadvantage, since they cannot resort to "fiscal engineering" or expensive "tax optimisation" services, stressed Andrea Benassi, secretary-general of SME federation UEAPME, at the European Commission's 2008 Tax Forum. "As far SMEs are concerned, the EU is indeed one single market, but it is burdened by 27 diverse and inconsistent tax systems. Despite some recent progress on VAT, much remains to be done in this area." 

On company taxation, EU member states have lacked enthusiasm so far for "home state taxation", which would allow companies operating across borders to calculate their taxable profits on the basis of their home country's taxation system. Not one pilot project has been started since the European Commission's tabled proposals in 2006, Benassi lamented: "SMEs have been left to deal with cross-border taxation and the associated high compliance costs on their own." 

The Commission's plans to introduce a Common Consolidated Corporate Tax Base (CCCTB) would be the ideal solution for company taxation in the EU, according to Benassi: "The CCCTB would provide SMEs with a set of simple and workable rules," he said, calling for it to be opened to all companies. 

Information: Getting through the regulatory maze 

Business lobbies often complain that busy SME owners have little time to research markets outside their local area, and that the variety of legal and taxation systems makes it expensive and time-consuming to expand across borders. 

The Enterprise Europe Network was established to help firms find information on developing their businesses and finding partners in other countries. It offers support and advice to SMEs keen to expand their activities. 

Another online resource, Your Europe – Business, gives practical advice on starting a company, paying taxes, mergers, intellectual property and even bankruptcy in each of the 27 EU member states. 

The Services Directive: The cornerstone of a cross-border business approach

By the transposition deadline, it was to be possible for companies and individuals providing services to complete all necessary formalities, such as authorisations, notifications, environmental licences, through points of single contact. 

These points of single contact should help service providers to get all relevant information and complete all administrative procedures through one entry point - from a distance and by electronic means - without having to contact a series of competent authorities in the respective member states. 

To date, not all national governments have fully implemented the Directive but member states are slowly completing implementation and the picture is beginning to look more complete. 

Equal treatment for foreign service providers and recipients

In line with the 'freedom to provide services' principle, EU countries are obliged to abolish unnecessary or disproportionate authorisation schemes, remove discriminatory requirements based on nationality or residence, and eliminate particularly restrictive requirements, such as "economic needs" tests, which require businesses to carry out market studies to prove to the authorities that there is a demand for their services. 

Certain requirements can still be imposed under very limited circumstances if they are deemed necessary for one of the following reasons: 

  • Public policy, 
  • public security, 
  • protection of public health, or; 
  • protection of the environment. 

Furthermore, there are certain general derogations to the 'freedom to provide services' clause, including the posting of workers abroad and the recognition of professional qualifications. 

The directive also enhances the rights of service recipients: consumers and businesses should be able to use the services of providers based in other EU countries without the need to obtain prior authorisation, and without facing discriminatory requirements based on the recipient's nationality or place of residence. National authorities are required to provide general information and assistance on consumer rights and redress procedures. 

Eight member states unlikely to meet transposition deadline

Despite the overall support for the Services Directive, almost one third of member states - Belgium, the Czech Republic, Estonia, Finland, France, Greece, Slovenia and Spain - are expected to fail to transpose it into national law by the end of 2009, according to a BusinessEurope survey conducted among national business federations in 2008. 

Setting up a business across Europe

Amid the current crisis, small and medium-sized enterprises have been hit extremely hard, with many struggling to survive. In such times, setting up a business is even more challenging, mainly due to the lack of financing options as banks are preoccupied with their own survival. 

Against this background, the Commission's European Economic Recovery Plan, which EU leaders approved at their summit on 12 December 2008, called for a further lowering of restrictions on starting up a company. The new targets are: 

  • Costs for starting up a company must be reduced to zero; 
  • time for starting up a company must be reduced to three days (previous target: one week);
  • countries must have a one-stop-shop for new businesses, so entrepreneurs can carry out all the required procedures (e.g. registration, tax, VAT and social security) via a single administrative contact point, either physical (an office), virtual (web), or both. 

Business federations such as UEAPME, which represents 12 million small and medium-sized businesses, have repeatedly called for the adoption of "one-stop shop" procedures in the EU, under which cross-border service providers would be subject to a single set of obligations for VAT registrations, declarations and payments in their home country. 

EU finance ministers gave the green light to such schemes in December 2008, but limited their use only to services provided electronically. UEAPME called for extending the application of one-stop shops to "as many sectors as possible". 

Although compliance has improved, the level of achievement varies considerably from one EU country to another. 

A European private company statute

Another step into this direction is the Commission proposal for creating a European Private Company Statute (EPC), as part of the Small Business Act (SBA), which EU leaders adopted at their summit in December 2008. 

The EPC would simplify the legal framework and allow businesses to be established and run across borders under the same rules and principles in all member states. The minimum amount of capital required to set up a European private company has been set at a symbolic €1. 

In February 2009, the European Parliament gave its green light to the EPC, but some member states still have their reservations about it for fear that it could threaten national company statutes. 

The Commission considers the EPC to be a key tool for fully implementing the internal market, especially for SMEs, but businesses dismissed the idea of the EPC as the sole SME tool. Luc Hendrichs of UEAPME told EURACTIV it could be useful only for a limited number of small businesses, but "is not opening the internal market world" to SMEs. 

Erasmus for Entrepreneurs

As part of the push to encourage small businesses to embrace the internal market, the European Commission launched Erasmus for Young Entrepreneurs to encourage young business people to spend time shadowing an experienced entrepreneur in another EU member state. 

Under the pilot scheme, the Commission will pay up to €1,100 per month to 870 aspiring business start-ups to learn from an established SME for between one and six months. 

Positions

European Commission Vice-President Günter Verheugen, responsible for Enterprise and Industry, and EU Trade Commissioner Catherine Ashton stated: "Trade policy is there to help businesses of all sizes, including the small and medium-sized firms which are the lifeblood of our economy. We need to ensure that SMEs can benefit from the new trade opportunities. We are determined to help open new markets and to reduce the barriers that many SMEs are confronted with when trying to do business outside the internal market." 

László Kovács, the European commissioner for taxation and the customs union, told a European Policy Centre briefing on 'Taxation and the Competitiveness Agenda' that the double taxation companies face when they invest abroad is one of the major obstacles to greater EU competitiveness. He said reforms are needed to enable companies to make choices that are not distorted by economic costs. 

The xommissioner highlighted the problems involved in getting agreement on proposals to harmonise taxes at EU level because of the requirement for unanimous decisions and the sensitivity of this issue in some member states – notably, the UK and Ireland – on national sovereignty grounds. However, he insisted that Europe must adopt measures to enhance its competitiveness if it is to succeed in a globalised world. 

Andrea Benassi, secretary-general of UEAPME, the European craft and SME employers’ organisation, has said inconsistencies between taxation systems are a barrier to companies interested in capitalising on the internal market. 

"As far SMEs are concerned, the EU is indeed one single market, but it is burdened by 27 diverse and inconsistent tax systems. Despite some recent progress on VAT, much remains to be done in this area. With the present tax situation being far from satisfactory, it is little wonder that only 8% of Europe's SMEs regularly operate cross-border. A friendlier tax environment is possibly the biggest contribution that politicians could make to promote growth and competitiveness in the European Union," he said. 

BusinessEurope has said compliance by member states with the internal market rules is essential, as are sanctions for non-conformity. "Important enforcement problems remain in areas such as application of the mutual recognition principle, market surveillance and border controls, accessibility of information or means of redress," it says in a briefing document on the internal market. 

"These problems represent direct costs for Europe (e.g. the costs of redundant product conformity assessment in several countries are estimated to range from 2% to 15% of enterprises' entire annual turnover), deprive citizens and businesses of their rights under the internal market, and undermine their confidence in and perception of Europe. Enforcement needs to be improved and must be a priority when implementing the EU Single Market Review Package. EU and national governments must step up their efforts to ensure a better enforced internal market and continue to reduce the transposition deficit." 

Arnaldo Abruzzini, Eurochambres' Secretary General, said it was paramount to defend the Internal market principles while deepening its scope. "Internal market legislation needs to be implemented punctually and fully by member states. This is not the case today as it is clear, for example, from the member states' record in implementing the Services Directive. The strengthening of the internal market for services can be instrumental in relaunching Europe's growth in the coming years. The creation of a European Private Company Statute is also an element which will greatly help making the Internal market a reality for businesses."

Timeline

  • 12 Dec. 2006: The Services Directive aimed to remove barriers to an open market for services. 
  • 25 Jun. 2008: Small Business Act proposed greater cooperation on transnational cooperation.
  • 26 Nov. 2008: European economic recovery plan called for removal of barriers to setting up companies. 
  • 12 Dec. 2008: EU leaders adopted European Private Company Statute, simplifying the rules for cross-border business. 
  • Feb. 2009: The European Parliament gives the green light to the European Private Company Statute. 
  • 20 Feb. 2009: Erasmus for Young Entrepreneurs launched to encourage young people to spend time in another EU member state. 
  • 28 Dec. 2009:  The European Services Directive comes into force

Further Reading

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