ETRA, the European professional association for independent bicycle dealers, recently announced that it has asked the Belgian Prime Minister, Guy Verhofstadt, for a general reduction of VAT on all bicycle products and services. The request was made in the framework of the Belgian presidency of the European Union.

Since January 1, 2000 the Benelux countries have applied the reduced VAT rate to the cost of labour for repairing and servicing bicycles. The measure is part of a European experiment that runs until the end of next year. It is aimed at examining whether VAT reduction results in job creation and the discouragement of moonlighting. The European Twowheel Retailers' Association (ETRA) has always taken the view, however, that as far as VAT is concerned, more issues are at stake than job creation.

In ETRA's view it is unacceptable and illogical to apply the same rate to an environmentally friendly means of transport that causes no external costs, as to a polluting means of transport that brings about huge external costs. ETRA is now lobbying for a general application of the reduced VAT rate to all bicycle products and services. Currently, the standard VAT rate applies, differing from 16% in Germany and Spain to 25% in Denmark and Sweden. For the reduced rate, the European Union has set a minimum of 5%.

Greening the tax system

At the moment, DG Taxation of the European Commission, which would have to draft the relevant proposal, seems to pay little attention to the idea of promoting the use of environmentally friendly products in general, and bicycles in particular, through VAT reduction. According to ETRA, the idea to boost the use of environmentally friendly products by means of VAT reduction has mainly seemed to gain ground within other European bodies. During the Green Week, organized last April by DG Environment, Commissioner Wallstrom pled for the integration of environmental protection in all other European policy areas. Thereupon, officials from different DG's suggested that in this framework there is a need for fiscal incentives such as VAT reduction.

However, the most important reason for ETRA to raise the matter of VAT reduction on bicycles is the Belgian presidency of the European Union that began from the first of July. The Belgian Prime Minister drafted a priority memorandum that contains six main lines for the presidency, one of which is the promotion of sustainable development and quality of life. In that framework, the green coalition partner, AGALEV, has developed a fairly detailed programme concerning the "greening" of the tax system. AGALEV expressly states that during its presidency, Belgium must certainly work towards the application of the reduced VAT rate to bicycles.

Costs and benefits

The trickiest problem is the financial implications of VAT reduction. Due to a lack of statistical data, it is not really possible to calculate exactly how much treasuries would lose on lowering the VAT. It would certainly be dozens of millions Euro. Take Germany for example, Europe's largest national bicycle market, and assume that the average selling price per bicycle is approximately 300 Euro. Last year 5.32 million bicycles were sold at a VAT rate of 16%. If the rate were lowered to 7%, this would result in a tax income loss of 123.83 million Euro. On the other hand, the benefits of a reduced VAT rate are plentiful but even more difficult to calculate.

More cycle usage may diminish the use of motorised means of transport, as a result of which the external costs of motorised traffic will decrease. More cycle usage and less motorised traffic could enhance traffic safety, hence lessening costs resulting from traffic accidents. More bicycles will also result in an improvement of public health, not only because people get more exercise, but also because of lower emissions, thus less medical expenses. Within reason, one can expect that VAT reduction will boost turnover in the bicycle business. As a result, revenues from VAT and direct taxes will increase. Finally, VAT reduction may well create new jobs in the bicycle business, hence increasing revenues from social security. Unfortunately, it is virtually impossible to make an exact calculation for all of this. Consequently, a decision will mainly depend on the political will to introduce the concept of environmental protection in fiscal policy.

"In our opinion, the requested reduction of the VAT rate would be conclusive proof of the fact that the European Union is actually doing something about the integration of environmental protection in fiscal policy. It would also give the initial impetus to recognizing and sustaining for the first time and at the European level the valuable role the bicycle can play in solving traffic and environmental problems," concludes ETRA Secretary General, Annick Roetynck.

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