Market Newsletter : ‘ EC ’92 ‘: A Report Card on Rules, Regulations : * A unified, single European market may not be fully in operation by the end of 1992, but it is surely well on its way.

A single European market all of a sudden at the end of 1992? Not a chance!

It doesn’t matter. With glacier-like inevitability, the European Community is doggedly tearing down barriers to the movement of people, goods and services among its 12 member nations.

It all adds up to “EC ‘92,” the phrase coined by the European Community in the mid-1980s when it established the end of 1992 as the goal for completing the single market.

“EC ‘92” was always more of a slogan than a deadline. Part of EC ’92 happened in 1991 and even earlier. Some will happen in 1993 and beyond. What matters is that it is happening--and that it has had and will continue to have enormous impact on the economies not only of Western Europe but also of the United States and everyone else that Western Europe does business with.

193 DOWN, 89 TO GO

Back in 1985, the EC identified 282 regulations as essential to creating a single market. Some 18 months before the end-of-1992 “deadline,” the report card reads as follows:

* 89 regulations are still grinding their way through the EC bureaucracy in Brussels.

* The other 193 have been approved by the EC.

* 127 of those had implementation dates no later than May 31 of this year and are supposed to be in force.

But they take force only when enacted into law by the 12 member countries. To date, Denmark, the most diligent, has enacted 108 of the 127. Italy, the most laggard, has enacted but 52.

The measures already in effect tend to be those with the least political baggage. One directive in this category regulates toy safety; another abolishes customs charges at national frontiers.

The toughest decisions--both politically and technically--lie ahead. The EC has not completed the task of equalizing--at least approximately--the different value-added tax rates in the 12 countries. Nor has it reached accord on the highly complex matter of setting EC-wide standards for the host of products that cross Western European borders every day.

Nor are the 282 regulations identified in 1985 the only ones that matter for EC ’92. Hundreds of others--more than 400, by the American Chamber of Commerce’s count--have been initiated since then.

“EC ‘92” has proved an effective public relations slogan, but the unwinding of the EC ’92 process will continue long after the end of next year. Here is just a sampling of the regulations that are making waves on both sides of the Atlantic:

VAT AND ALL THAT

One of the highest hurdles to a single market, the widely varying value-added tax rates in the 12 EC countries, was lowered several notches late last month.

Finance ministers from the 12 EC countries agreed on a minimum VAT--effectively, a sales tax paid by consumers--of 15%. That means that Luxembourg and Spain, which levy a 12% VAT, will have to raise their rates.

Without such an accord, shoppers from Belgium, whose 19% VAT is one of Europe’s highest, might have looked forward to bargain-basement shopping in Luxembourg. With no border controls after 1992, Belgian tax authorities would no longer be able to check shoppers returning from Luxembourg to make sure they did not buy more than an allowable quantity of low-tax goods.

As long as Belgium holds to its 19% rate, Belgians will still save money by shopping in Luxembourg. Consequently, the new accord could put pressure on Belgium and other high-tax countries to move down toward 15%. These include Denmark (22%), Ireland (21%), Italy (19%), France (18.6%) and the Netherlands (18.5%).

The accord by the finance ministers would allow EC countries to retain their low (or zero) tax rates for such essentials as food and medicine. Still unsettled is how to level out widely different national excise taxes on whiskey, wine and cigarettes.

U.S. BUSINESSES, EUROPEAN TAXES

Other tax issues wrapped into the EC ’92 framework have generated less heat in Europe, but they will matter a great deal to American companies that do business here. Such is emphatically the case with directives governing European tax treatment of American businesses.

“This is inspiring a host of reorganizations by American companies in Europe,” said Howard M. Liebman, a lawyer here with the Minneapolis-based firm of Oppenheimer Wolff & Donnelly.

As of now, U.S. companies doing business in the 12 EC countries pay an income tax that ranges from 33% to 50%, depending on the country.

When the remaining profits are paid out to shareholders in the form of dividends, they are also taxed, both when they cross borders from one country to another and when they leave the EC for the United States. In most instances, U.S. companies with income in several EC countries channel the dividends directly back to the United States.

One of the EC ’92 directives, scheduled to take effect Jan. 1, 1992, will eliminate the tax on dividends from qualified holdings that cross borders between two EC countries.

That might make it pay for U.S. companies to channel dividends to one of the European countries whose tax treaties with the United States include relatively low tax rates on dividends sent across the Atlantic from that country--a practice called “treaty shopping.” The EC countries with generally the most favorable tax treatment of dividends are the Netherlands and Luxembourg, Liebman says. France is not far behind.

So U.S. companies are exploring the possibility of establishing holding companies in one of these countries and channeling their dividend payments through that country on their way to American shareholders.

THE JAPANESE CAR CONUNDRUM

Individual EC countries have limited Japanese car imports ever since the end of World War II, when Japan and Italy reached an accord based--it sounds strange to say it today--on Japan’s fear that cheap Italian cars would flood the Japanese market.

Italy now tightly limits Japanese cars. It allows Japan to sell no more than 3,300 cars a year in Italy itself and another 11,500 elsewhere in the EC for import by Italy.

Spain, which uses a similar system, limits the Japanese to 1,000 cars for direct import and another 5,460 for indirect import.

France limits Japanese cars to 3% of its market. Then come Britain at 11% and Portugal at 12%. The seven other EC countries impose no limits.

A single market implies a uniform EC position on this politically charged issue. In the absence of controls at the frontiers between EC countries, says Geoffrey Oliver, a lawyer with the Los Angeles firm of O’Melveny & Myers, national authorities will have great difficulty in enforcing their own limits.

So EC officials in Brussels are negotiating with representatives of the 12 countries. They have reportedly agreed on instituting an EC-wide 11% limit in 1993, rising to 17% in 1998.

Particularly difficult is the question of how to count cars made by Japanese manufacturers outside Japan. Should Mazdas made in Britain with mostly British-made parts count as Japanese or British? Should Hondas from the United States be considered Japanese or American? The questions remain unanswered.

Jacques Calvet, chairman of French car maker Peugeot, has his answer: A Japanese car is a Japanese car, wherever it is assembled. He has led the European industry’s demand for tighter restrictions on Japanese vehicles.

The Brussels-based Assn. of European Car Manufacturers, a lobbying group that represents 15 European car makers (but not Peugeot), says the EC is going to have to pay billions of dollars to unemployed auto workers if it lets Japanese cars flood the European market.

“The European car industry suffers from a work force that is too old and insufficiently trained,” says Raymond Levy, president of the association and of the French car manufacturer Renault. “Restructuring will be necessary and will take place. But a greater or smaller amount of blood will flow depending on the amount of aid we obtain.”

The Pace of the 12 As part of creating a single market, the European Community has approved 127 regulations that were supposed to have taken effect by now in the 12 member countries. Here is the number actually enacted into law by each country’s Parliament.

Belgium: 90

Britain: 97

Denmark: 108

France: 102

Germany: 95

Greece: 87

Ireland: 75

Italy: 52

Luxembourg: 82

Netherlands: 86

Portugal: 97

Spain: 84

Source: European Commission