Select Committee on European Union Sixth Report

CHAPTER 3: Provision of Services on a temporary basis

42.  In some Member States it is not possible to offer services other than on an "established" basis. Furthermore, the requirements for a service provider to become "established" in a Member State are different in each EU country. The Commission believes that this is one of the barriers to an effective internal market in services. The draft Directive on Services therefore distinguishes temporary provision of services in a host Member State from the provision of services on an established basis. Temporary provision of services in a host Member State according to the Services Directive would be permitted on the basis of the home country rules of the service provider.

43.  Traditionally, there has been a significant emphasis on manufacturing and manufacturing jobs in the Member States of the European Union. In this context, services are commonly seen as quite separate businesses from those involved in manufacturing goods. In fact, the production and supply of many goods requires the supply of significant service inputs[21]. The production of a motor car for example, requires many service inputs such as design, marketing, technical analysis and sales, just as the supply of the car requires services such as finance, insurance and training. Increasing the competitiveness of the service sector should therefore help the competitiveness of the manufacturing sector.

44.  The supply of some services can be subject to particular regulations pertaining to the country in which they are being supplied, or even to the region or locality of supply. In some cases it may be argued that these regulations exist as an indirect signal to consumers of the quality of the service (e.g. that the service provider has been trained to a particular standard). In other cases, the regulations serve primarily as a means of protecting those providing the services and shielding them from competition, for example the adoption of a standard fee, or a requirement that no competitor to a particular activity be allowed within a certain distance.

45.  Any action taken to reduce these barriers necessarily involves a judgment by the policymaker that it is beneficial to switch the balance more towards the individual consumer and away from established provider interests. It allows more competition. But it may require greater vigilance on the part of consumers and communities to ensure that greater competition does not compromise the quality of the services provided.

46.  The benefits to consumers from reduced restrictions on trade arise as a consequence of greater competition among suppliers, through reduction in barriers. As a result of greater competition, consumers, and some producers, benefit, and do so to a greater extent than the producers who suffer. There is a net gain,[22] because some consumption takes place that previously did not. For these reasons the Commission brought forward its draft Services Directive in January 2004.

47.  Since the EC Treaty already makes provision for a single market in services, one might ask why the Services Directive is necessary. The Commission's answer is that earlier elimination of various barriers has "been partly offset by the erection of new legal barriers or by the increasing impact of those barriers which were already there but whose effects became evident only gradually as trade between Member States developed." Moreover "one common feature of many … is that they derive not from national legislation but from other forms of intervention and regulation whose impact on the internal market is becoming more and more relevant."[23] For example, authorisation procedures may involve bodies made up of competing operators already present in the area concerned. Authorisation may also involve excessive formalities and procedures, coupled with a lack of transparency. In some cases it involves authorities at several levels, regional and local as well as national. Authorisation requirements which would allow the provision of services across a whole country may require manifold applications to local bodies.

48.  In other words, to an established local service provider, the provision of a particular service may seem quite straightforward, whilst a new operator coming from outside the area faces a jumble of requirements and little scope for redress to make these requirements easier to understand. The new operator faces no overt discrimination, but the effect is in opposition to the judgment of the European Court that "A Member State cannot make the provision of services in its territory subject to compliance with all the conditions required for establishment and thereby deprive of all practical effectiveness the provisions of the Treaty whose object is, precisely, to guarantee the freedom to provide services" (emphasis added)[24].

49.  For those service providers that wish to establish in another Member State, the proposed Directive includes a number of provisions requiring the simplification of national rules of establishment to address such implicit discrimination. However, such rules of simplification would not fully address the provision of services on a temporary basis.

50.  In the Services Directive, the Commission therefore has distinguished temporary provision of services from the provision of services in a host Member State on an established basis. This is because firms wishing to provide a service in another Member State may not wish, at least in the first instance, to establish there. For example, a firm may want to bid for a construction contract, but will not establish unless it wins the contract. Or it may establish only if, after working on that contract for some time, it decides to set up in business more permanently. An architect may journey to another state to supervise construction of a building for which he/she has won an open design competition. A firm may be very uncertain as to demand for its service in the other Member State, and therefore may go there on a temporary basis to test the market.

51.  It is clear that there are many instances in which a legislative base for temporary provision of services would be beneficial. The ability for a service provider to test the market of a host Member State on a temporary basis and without going through the regulatory hoops of establishing there is particularly important for Small and Medium sized Enterprises (SMEs). As SMEs are often seen as an important driving force of innovation and competitiveness, it is particularly apt that cross-border trade in services should be encouraged on a temporary basis as well as an established one.

52.  The draft Services Directive seeks to address this by applying the Country of Origin Principle which allows service providers to test the market of another Member State under the national provisions of their Member State of origin. We discuss this in greater detail in Chapter 5. The question that needs to be asked therefore is what does temporary operation, as opposed to establishment, mean?


53.  In the draft Directive "establishment" is defined as it is in the EC Treaty as, "the actual pursuit of an economic activity through a fixed establishment of the provider for an indefinite period"[25]. A clear definition of "temporary" on the other hand is not readily available.

54.  "Temporary" would seem not to be a solely temporal concept, such as a period less than a particular number of weeks. "Temporary" has been "defined" in the case law of the European Court of Justice in the context of determining whether a business is established. The "temporary" nature of activities has to be determined not only by reference to the duration of the provision of the service but also to the "regularity, periodicity, or continuity". Further, the fact that the provision of services is temporary does not mean that the service provider may not have some form of infrastructure in the host Member State (e.g. an office or consulting rooms) if needed to perform the service in question[26].

55.  In their evidence session with us, Clifford Chance expanded on these necessary attributes: "you need to look at all the factoral circumstances surrounding the particular business concerned to decide whether this business is participating in the economic life of the host Member State and is therefore providing services on an indefinite basis". The European Court of Justice case law considers whether the service provider has a permanent infrastructure in the host Member State. For example in the case of a nursing home which has patients, the service provider requires the infrastructure of a building with carers who are on duty all the time. By its nature this is indefinite and the service would therefore be considered established. A travelling hairdresser who goes to a Member State once a week and maintains a salon in that Member State, on the other hand, need not be established, as the existence of a salon in which he or she works one or two days a week is not an indication of a permanent presence. (Q 526).

56.  Although testing whether a service activity has these attributes provides some guide, it is clear that it does not provide a straightforward answer to the question most important for a SME which is whether the business will be treated as established or not. This is of great importance because if the service the SME provides is considered by the local legal representative to be established, the business will have to comply with all the rules for establishment in the host Member State. If on the other hand, the service is considered temporary such regulatory burden does not apply and the SME's home country rules apply.

57.  Such uncertainty could also offer opportunities for service providers operating in their own country to fight competition from temporary service providers from a different Member State.

58.  The significance of this uncertainty is difficult to estimate precisely, although it is clear that this question is proportionately more significant for small firms, which might be ruined by the expenses of litigation should the basis of their operations in another Member State be challenged, than for larger concerns. Also, SMEs may well decide that it is not worth offering their services in a host Member State if they must be established. The uncertainty of no clear definition for "temporary" is a further barrier to intra-EU trade in services for some service providers.

59.  This last point was taken up by the Federation of Small Business (FSB) who told us that they would like to see "a clear definitive set of guidelines" to determine "temporary" as at the moment "the legislation and the interpretation of the legislation is unclear and there are unclear sets of principles." (Q 138) The FSB witnesses suggested there could be "a grey black list or a grey list so that nothing is definitive, but you have a guide in principle so people have something to work towards" (Q 145). The FSB suggestion of a "grey black list" further indicates how difficult it is to achieve clarity in the definition of "temporary".

60.  Despite this difficulty, establishing certainty about the meaning of "temporary" is particularly important if the Services Directive is going to be effective in encouraging SMEs to trade their services across EU borders. As the Minister, Douglas Alexander told us, "up to 90% of service providers are SMEs" (Q 483). To ensure there is a wider opportunity for services to be triggered across the European Union, the EU must ensure that SMEs are able to test the market in another Member State on a temporary basis, without having to fully commit to permanent establishment. "At the moment SMEs are often deterred from providing a service in other Member States because of lengthy and costly authorisation procedures" (Q 483).

61.  SMEs in particular find the legal uncertainty created by the lack of a positive definition of temporary operation a major barrier to exploring entry to a market. We therefore urge the Government to push for greater clarity on the meaning of "temporary".

62.  Some witnesses would prefer a positive definition of "temporary". On the other hand, it is possible that producing a clear definition of "temporary" could itself introduce inflexibilities in the marketplace. At the moment the position appears to place the onus on the relevant authorities to justify the need for a business to become "established" in a Member State. Producing a clear definition of "temporary" could result in a business being required to prove that its operations are "temporary" otherwise the presumption is that it will need to become "established" in the Member State. There is a fine balance to draw here if the objective is to secure maximum market flexibility. Those who are concerned about "temporary" provision of services under a country of origin principle may favour a restrictive definition of "temporary". If establishing a positive definition of "temporary" remains elusive, we recommend a set of clear guidelines is established in order to ensure that freedom to provide services on a temporary basis is made more predictable and involves fewer obstacles.

21   To take an example, the Commission in its Impact Assessment on the Services Directive quotes a lift (elevator) manufacturer's estimate that soon only 8% of its labour force will be engaged in manufacturing with the remainder associated with providing related services. Back

22   To see this, take the example of an airline that introduces a new low cost service in place of an existing higher cost service. The airline's profits (and many other elements, such as staff wages) are lower, but consumers benefit on their existing flights through lower fares and, in particular, some journeys are made that would not have been undertaken at the previous higher prices. Back

23   Report from the Commission to the Council and the European Parliament on the State of the Internal Market in Services, COM (2002) 441. Back

24   Case C-43/93 Raymond Vander Elst v Office des Migrations Internationales [1994] ECR I - 3803, at
para. 17. 

25   Article 43 of the EC Treaty Back

26   Case C 55/94 Gebhard [1995] ECR I - 4165, at para. 27. Back

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