Bulgaria Rejects European Plan For Reduced VAT Rates

by Ulrika Lomas, for LawAndTax-News.com, Brussels

07 November 2008

The Bulgarian government has said that it will not support a European Commission proposal that would allow European Union (EU) member states to lower rates of value-added tax on certain labour-intensive services.

Following Tuesday's meeting of the European Council of Finance Ministers (ECOFIN), the Bulgarian Ministry of Finance issued a statement arguing “practice has shown that the reduction of the VAT rate does not result in a reduction of the end prices for consumers but to a market distortion and artificial reorientation of investment from some economic branches to others.”

"Bulgaria supports the application of a uniform standard VAT rate as a guarantee for attaining neutrality and avoiding any economic distortions related to the application of reduced VAT rates for certain branches or categories of goods and services," the ministry stated.

Bulgaria is one of several EU member states which oppose the Commission's idea, including Austria, Denmark and most notably, Germany.

Speaking after the ECOFIN meeting, Germany's Finance Minister Peer Steinbrueck reiterated his hostility to the plan, asserting that it seems nonsensical to allow member states to choose different VAT rates at a time when the EU is moving towards more harmonised tax systems. He has also expressed concern over the impact of the lower VAT rates on national budgets.

France, which currently chairs the six-month rotating presidency of the EU, is keen for the plan to go ahead as this will allow the government to follow through on a long-standing pledge to reduce VAT on restaurant meals. The French government is attempting to broker a compromise that will see the system reviewed after three years, although Germany remains to be convinced.

Under the EC's proposal, unveiled by Taxation Commissioner Laszlo Kovacs in July, the EU VAT directive would be amended so that member states could reduce VAT on labour-intensive services and locally supplied services on a permanent basis, such as restaurants and hairdressers.

Most of the services in question are already eligible for a reduced rate, but only 18 member states have permission to levy VAT rates below the 15% standard EU level on labour-intensive local services, and only for a limited period, running until 2010.

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