Differentiated social security contributions in Norway
– Notification of a continuation of the system in zone V

1. Introduction

Reference is made to the letter of 25 March 2003, where the Norwegian authorities informed the EFTA Surveillance Authority of its intention to notify a continuation of the present scheme of differentiated social security contributions in zone V (Finnmark County and the municipalities Karlsøy, Lyngen, Storfjord, Kåfjord, Skjervøy, Nordreisa and Kvænangen in northern Troms County) in a separate letter.

We hereby notify the Authority of our intention to continue the current scheme of differentiated social security contributions in zone V as from 1 January 2004. The information contained in this letter is considered to meet the requirements referred to in Article 1(3) of Protocol 3 to the Surveillance and Court Agreement.

2. Legal basis

The Norwegian authorities acknowledge the EFTA Court decision of 20 May 1999 which states that the reduced contribution rates constitute aid within the meaning of Article 61(1) of the EEA Agreement. Nevertheless, we find the differentiation in zone V to be compatible with the derogation clause in Article 61(3)(c). This provision states that:

“The following may be considered to be compatible with the functioning of this Agreement: […]

3. aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest”

The Authority has used its discretionary power to develop guidelines on certain types of aid schemes that are to be regarded as compatible with the above-mentioned provision, such as the Guidelines on National Regional Aid. We recognise that the aid in question does not fall within the wording of the existing regional aid guidelines. However, the guidelines established by the Authority, not being legally binding as such, are not exhaustive with regard to which types of aid may be justified according to Article 61(3)(c). On the contrary, Article 61(3)(c) provides the Authority with a considerable discretionary power also to approve aid schemes that fall outside the wording of the guidelines. In the following, we will demonstrate why the Norwegian authorities consider the current aid scheme in zone V to be compatible with Article 61(3)(c).

3. Compatibility

3.1 The scheme constitutes aid to facilitate the development of certain economic activities or of certain economic areas.

The objective of Norwegian regional policy is to maintain the main features of current settlement patterns and to ensure equal standards of living throughout the country. The most important regional aid instrument in Norway is the system of regionally differentiated social security contributions. The measure is designed to promote employment in these areas in the least distorting way. It seems to have had an effect largely in line with its purpose, well illustrated by the fact that there are no substantial disparities in income/welfare and unemployment rates throughout the country, in spite of the vast variations in geographical conditions. Thus, the aid in question fulfils the condition of facilitating “ the development of certain economic activities or of certain economic areas”.

In 1990, Finnmark and the northern part of Troms were designated as an initiative zone due to the exceptional circumstances in this region. The objective of designating this particular zone is to maintain population and economic activities in this very fragile and vulnerable part of the country. The geographical differentiation of the social security contributions is the most important measure in the initiative zone. Employers pay no social security contribution for employees resident within this zone. As the general rate of social security contributions paid for employees resident in zone I is 14.1 per cent, the estimated gross tax concession to the private sector in the initiative zone will be NOK 810 million in 2004.

The circumstances in Finnmark and northern Troms are exceptional, both in a national and in a European context. The population density in Finnmark and northern Troms is below 1.7 residents per km ^2,>, cf. Annex 1. The overall average in Norway is 14.5 residents per km ²> and the EU15 average is 117.4 per km ²>. The total land area of Finnmark County exceeds the area of Belgium, Denmark or the Netherlands. The total population of Finnmark and northern Troms is 92 800 inhabitants. The distance between the administrative centre in Finnmark (Vadsø) and the largest centre in terms of population (Alta) is 494 km by road. There are no major cities in the zone, and the major centre is, without comparison, Alta, which has a population of 17 000. The population in the initiative zone has decreased by 8 per cent from 1980 to 2002 despite the substantial efforts that have been made to maintain the population density and the various regional policy incentives in the zone. Between 1995 and 2000 Finnmark County lost, on average, more than 1.2 per cent of its population each year due to migration. During this period, there were comparable losses of population in only three regions within the European Union, namely in the new German Länder.

Access to central markets is difficult. Travel distances from the initiative zone to other small centres, towns and villages in northern Finland and Sweden are long. The centre with the shortest travel distance to a centre in Finland or Sweden is Karasjok, a Sami centre with 2 850 inhabitants. The travel distance is about 20 km to the nearest village in Finland, a small place with 300 inhabitants (Karigasniemi). Elsewhere in the initiative zone the distance is at least 100 to 200 km by road between the centres on both sides of the border.

Living conditions in the northernmost part of Norway are harsh, with temperatures below zero degrees Celcius for about 200 days a year, and in some places – 40 degrees Celcius at the lowest, and with total darkness (polar nights) for two months during the year. Combined with the challenging topography, these factors increase the distance-related costs. The above-mentioned handicaps may explain why the overall profitability of the companies situated in this region is very low compared with the national average, despite the aid provided to all firms in the area through the system of regionally differentiated social security contributions. (Figures produced by Statistics Norway and based on companies’ annual reports for 2001 indicate that the return on total assets for companies registered in zone V was 3.7 per cent compared with the national average of 7.4 per cent, cf. Annex 2.) Since 2001, the situation has deteriorated. An increasing number of bankruptcies due to increased indirect wage costs will undoubtedly accelerate the process of de-industrialisation.

The initiative zone is the core area for the Sami population in Norway. Out of the total population of 92 800 in this zone, 30-40 000 are of Sami origin. The Norwegian Sami Parliament (Sametinget) is located in Karasjok, Finnmark. The Sami population falls under the definition of indigenous people (the only indigenous group within the EEA area) and is protected under ILO Convention No. 169 concerning Indigenous and Tribal People in Independent Countries, and Article 27 on the rights of minorities of the UN International Covenant on Civil and Political Rights.

Also in the initiative zone, the most important regional aid instrument is the system of regionally differentiated social security contributions. However, despite of the zero tax rate, Finnmark was the only county with an unemployment rate notably beyond the national average during the last decade. In 2002 the registered unemployment was 5.1 per cent increasing to 6.1 per cent in March 2003, compared with the national average of 3.2 per cent and 3.9 per cent in the same periods. If the differentiation system is abolished in zone V, this will certainly increase the unemployment rate, also in comparison with other regions.

Because the tax measure is applied to all firms employing persons resident in the region and has been practised for so many years, all firms are adapted to it. Elimination of the differentiation may raise serious difficulties, not only for individual firms, but for all firms located in the zone and thus for the employment situation in the whole area. 1Calculated on the basis of the 2001 accounting figures. This would truly accelerate the depopulation of the area. If the population continues to decline, many communities may no longer be viable or able to provide necessary private services.

An alternative measure would be to introduce direct transport aid. Such a measure would, however, mainly benefit traditional export-oriented industries in the zone. Direct transport aid could increase the use of transport and favour firms and industries that have high transport costs. Thus, this would be a substantially less efficient means of stimulating employment. Another alternative would be to apply the zero rate within the threshold of the de minimis amount. However, only half of the workforce in the private sector would then be subject to the reduced rate. In addition, this would significantly reduce the positive incentive effects of the scheme. Schemes granting investment aid to compensate for market failure in the national capital market are already in force. An increased use of investment aid, may lead to an excessive use of capital, cf. inter alia the low return on total capital in this zone compared with the national average.

To conclude, it is not possible to find alternative measures having comparable positive effects on employment. In addition, most alternative measures would have distorting effects, which would give rise to concern.

3.2 The aid does not adversely affect trading conditions to an extent contrary to the common interest

It would be in the common interest to develop less-favoured regions by supporting job creation in a sustainable context. The objective of the reduced rate (zero rate) is to promote employment in this area, which has permanent handicaps, in the least distorting way. Therefore, the tax concession is given automatically to all firms, even those in the public sector, that employ persons resident in this disadvantaged area, without the authorities possessing any discretionary power. The tax concession is directly linked to gross salary payments to employees and is not dependent on any other criteria than employing persons resident in the region. The decisive factor is solely the residence of the employee. The measure is transparent, predictable and has a clear incentive structure.

The aid does not adversely affect trading conditions. As it is uniform and fixed for all employees resident in the region, both in the public and the private sector, the measure cannotbe used in any way to favour specific industries within the area. The total number of persons employed in the initiative zone is 37 440. A large proportion is employed in the public service sector. Most of the persons employed in the private sector are employed in the service sector. For a substantial part of the private service sector, the high distance costs reduce the possibility for competition across the border. (In this connection, it should be mentioned that the most important export-oriented industry in the area, fish and fish processing, is outside the scope of the EEA state aid rules.)

Consequently, the continuation of the aid scheme of differentiated social security contributions in zone V is, in our view, in line with recognised Community objectives.

IV. Final remarks

In light of the above, the Norwegian Government is of the firm opinion that the exceptional circumstances in zone V entirely justify the use of the derogation clause in art 61 (3)(c). Thus, the Government would call for the Authority’s approval of the continuation of the scheme on social security contributions in zone V after 31 December 2003.

Yours sincerely,

2 enclosures