This is part of the EU Fact File
Verdict: OUT – The EU rules are very complicated and favours mainly large companies and penalises SME’s due to complexity. Large businesses are able to move their facilities to Eastern Europe to save on salaries and other costs as proven below. Government procurement seems to be overly complex and results in many of the contracts awarded abroad thanks to UK high level of compliance
This subject is often forgotten as we normally talk about employees rights and right of free movement.
In reality – rights and free movement of persons (person as in a legal entity) also applies to businesses.
This is a bit harder to gauge compared to Employment; although the Commission do have a small business website (1) but this site does just send you around in countless other EU websites where many of these apply to larger corporations as well.
To recap SME how important SME’s are for the UK economy when reading the next chapters:
In 2015 the UK SME’s account for 99% of UK business employing 60% of the total UK workforce and brings in 48% of the UK economy.
When talking about peoples and employees rights the EU seems very approachable but when it comes to business it gets very complicated.
So lets looks at advantages for businesses in the EU as such:
What I have been able to pick-up3:
- Freedom to conduct a business – which leads to:
- Freedom to exercise an economic or commercial activity
- Freedom of contract
- Free competition
- which again leads to:
- Freedom of movement (of a businesses)
- Freedom of establishment (anywhere)
- Freedom to provide services (anywhere)
- Freedom to export (goods to other EU countries)
Freedom to Conduct Business
The essence of the freedom to conduct a business is to enable individual aspirations and expression to flourish, and to promote entrepreneurship and innovation, which in turn is indispensable for sustainable social and economic development
Sounds great but the paper also uncovers the reality:
The freedom to conduct a business in accordance with Community law and national laws and practices is recognised
This means that if you want to do business in Spain for instance you still need to obey the national laws and practices of Spain.
In reality it is vary hard for small business to establish themselves in other countries due to local regulations especially for small business. Large businesses can do it easily as they have access to lawyers and accountants but this would also apply to a non-EU based establishment.
So for business the EU is not one big country but 28 individual countries with very different national laws and practices.
Freedom of Contract
This one is hard to explain but essentially is to have a even playing field for contract law6.
In reality each country still has it’s own laws and it is down to this to justify the contents of the contract.
Essentially in a contract it is not good enough to refer to “EU law” but it needs to refer to a specific law of a country.
Compared to the US where there is only one law this is a very weak area of the EU.
This is another complex area5:
Free competition is a key element of an open market economy. It stimulates economic performance and offers consumers a broader choice of better-quality products and services and at more competitive prices
In reality this has become another layer of laws on top of the national ones7.
One element of competition is public procurement.
Any public procurement above a threshold must to sent out to EU-wide tendering9.
The EU tendering process is regulated8:
The design of the procurement shall not be made with the intention of excluding it from the scope of this Directive or of artificially narrowing competition. Competition shall be considered to be artificially narrowed where the design of the procurement is made with the intention of unduly favouring or disadvantaging certain economic operators
Practically this means that a local authority may need to hire consultant to help them forming a proper EU compliant tendering9.
Additionally reporting is required on awarded contracts for statistical and control purposes12.
The EU procurement rules are created in parallel with a similar one under WTO that include countries like US and Japan. I will not look at what that implicates except surely rules and regulations around government procurement must be getting quite complicated.
Statistical amounts on public procurement are interesting11:
The UK provide 24% of all contracts totalling more than France and Germany together!
Several countries are very low so only conclusion is that these countries are not doing as they preach.
Worst case is the UK contracts worth EUR 85 Billion to foreign companies without UK based companies get the same chance elsewhere in the EU.
In a way confirmed by Francis Maude1:
In the same 12 month period while British companies won £432m of EU contracts, French firms won £911m and German firms £3600m.
The UK awards 3% of public procurement by value to foreign suppliers, compared to 1.9% in Germany and 1.5% in France
In a way it makes sense as contracts in English are easier to approach by other EU countries than for instance a Spanish contract (in Spanish!).
The EU is not one country and does not act as one country even with a massive amount of legislation and directives.
Freedom to Provide Services
This is a very complex area4:
This whole field of ‘provision of services’ in the internal market – which has been said to ‘constitute the engine of economic growth and account for 70% of GDP and employment in most Member States’ – has, since the date for implementation of Directive 2006/123/EC on services in the internal market, been the subject of detailed regulation in respect of the activities spelled out in Article 2(2) of that Directive
Freedom of Movement for Employers and Employees in the European Union European Labour Law Journal, Volume 4 (2013), staggering 118 paragraphs, to realise that this instrument reflects a plethora of political compromises, and that no simple framework governing the provision of services throughout the European Union has been achieved through its enactment
So one of the most important areas in the EU is so complex that it is unlikely that small business trying to provide services elsewhere can do this without problems.
Practically in my own business this very true thanks to various tax agreements; vat laws and local regulations. A company cannot provide a service in a country using the same person for more than 183 days a year without getting into complex tax issues, which again is easily solved if you are a large business. Another problem is just to issue a VAT invoice where some countries require specific notes and details on this invoice. Filling out a VAT form in a country varies significantly from country to country and reporting requirements vary also like France requires special reporting for employees from other countries providing services there.
So in theory it is a great idea but practically is is not happening….
The EU will not work until national laws and practices are all the same.
Freedom of Establishment and Movement
Nothing stops a business from closing down in one country and re-establish in another.
What did happen then2:
This shows that offshoring to Eastern Europe was bigger than the offshoring to India.
Many businesses have been moving from the UK to former eastern Europe now part of the EU for lower salaries and same access to market 2:
Figure 2 shows that the United Kingdom experienced the greatest number of relocated jobs (26 per cent), followed by Germany (10 per cent), and France (10 per cent). Many of these jobs were back room telephone call rooms that went to India. The rest of Europe proved to be a good location for these jobs because of the need to have perfect fluency, without any ‘accents’. In one instance, some telephone call room jobs were relocated to Estonia, but were subsequently moved the following year for because of the need to have fluency. Only 8 per cent of the jobs relocated from eastern Europe, mainly because these countries are close in geographic proximity, have a high level of education and wage levels are much lower than most of their west European counterparts.
In case of a business moving elsewhere the employee can always follow thanks to the freedom of movement for employees – but it will likely be to lower salary…
Freedom to Export (goods)
This allows any company to freely export goods from any EU/EEA country to another EU/EEA country without paperwork.
This applies to most goods but naturally some goods like weapons requires paperwork.
Having said that it is not that simple either14:
- Separate EU vat returns section on VAT reporting – meaning you have to split your VAT into domestic, non-EU export/import, EU export/import registered party, EU export/import non-registered party
- Intrastat Supplementary Declaration
- Sales listing
- VAT confusion – just try to read and understand the referred page14 on this topic
Questions to be asked:
- Is growth in the former Eastern Europe fuelled by companies moving there from wealthy countries?
This even applies to the EEA zone as well – as I worked in a Norwegian company that was essentially closed and moved to Slovakia!
- How can SME’s survive in the EU as the EU laws are so complicated and in addition to this national laws and practices still prevail?
- The solution is that the EU becomes one country (like USA) with one sets of laws only – without national laws – but due to cultural differences will that ever be possible?
Even the USA has got state specific laws – how can the EU overcome this?
Good Articles (subscripted)
- SME – http://ec.europa.eu/small-business/index_en.htm
- Offshoring –http://www.etsg.org/ETSG2009/papers/knell.pdf
- Article 16- http://fra.europa.eu/sites/default/files/fra_uploads/fra-2015-freedom-conduct-business_en.pdf
- Free Competition – http://eur-lex.europa.eu/summary/chapter/competition.html?root_default=SUM_1_CODED%3D08,SUM_2_CODED%3D0804&obsolete=false
- Contract Law – http://ec.europa.eu/justice/news/consulting_public/0052/contributions/333_en.pdf
- Free Competition – file:///E:/Cloud/Dropbox/Temp/9096813.pdf
- Free Competition – http://publicsectorblog.practicallaw.com/what-role-do-competition-law-principles-play-in-public-procurement/
- Free competition – https://en.wikipedia.org/wiki/Government_procurement_in_the_European_Union
- Free competition – https://www.apm.org.uk/sites/default/files/open/EU%20Procurement%20Guide_May%202012.pdf
- Free competition – http://ec.europa.eu/internal_market/publicprocurement/docs/implementation/20140820-staff-working-document_en.pdf
- Free competition – https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/436210/ppn-1015-eu-stats-annual-return-2013-and-2014.pdf
- Free competition – http://www.out-law.com/articles/2011/november/public-sector-disadvantaging-uk-businesses-in-procurement-of-contracts-cabinet-office-minister-says/
- Export – https://www.gov.uk/guidance/trading-in-the-eu
- SME – https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/467443/bpe_2015_statistical_release.pdf
- 20/03/2016: Created page partly moved from main fact file “Employers” subject