EU Ministers Reach Agreement On Reduced VAT Rates

by Ulrika Lomas, Tax-News.com, Brussels

12 March 2009

European finance ministers finally reached an agreement on the application of reduced rates of value-added tax on certain goods and services at the latest Ecofin meeting, held in Brussels on March 9 and 10.

The ministers reached agreement on a short list that includes mostly labour-intensive local services, which would allow all member states to permanently apply the reduced VAT rate. These services include small repair services of bicycles, shoes, leatherware, textile furnishings and clothes, window cleaning and household cleaning, hair salons and the provision of home nursing services. In an important concession to the French, the agreement could allow the reduced rate to apply in restaurants.

In housing, member states could opt for the reduced VAT tax on renovation and repair of private dwellings. In addition, the agreement allows for the application of the reduced VAT rate to all types of books. The agreement also allows Portugal to apply the reduced rate to the toll collected on Lisbon bridges and Cyprus to apply the reduced rate to bottled gas supplies, while the Council has directed the Commission to draw up plans allowing Malta to continue applying its zero-tax rate to foodstuffs and pharmaceuticals. However, the agreement stipulates that the reduced VAT rate will not apply to the other items contained in the Commission’s proposal presented last July.

While EU VAT rules are harmonized to some extent, they are the outcome of a variety of initiatives over the years and have been complicated by various derogations given to acceding member states. The current minimum standard rate of VAT in the EU is 15%, but member states are currently permitted to lower rates on certain labour intensive services to 5% on an experimental basis until 2010. Initially this was intended to help stimulate employment in certain vocations, but the proposal has been given added impetus by the deepening recession sweeping across the EU.

The Commission has proposed that application of reduced VAT rates should continue indefinitely and also incorporate some additional labour-intensive or locally supplied services where there is no risk of distorting the single market. But, unsurprisingly for EU tax proposals, not all member states agreed (unanimity in the Council is required for tax proposals to pass). Last November, the Bulgarian government said that the reduced VAT plan would not result in lower retail prices for consumers and would merely distort the free market. Germany has argued along similar lines, but is also worried about its revenue base at a time of severe economic pressure. Austria and Denmark have also been opposed to the Commission's plan. But with national governments staring down the barrel of a potentially long and deep recession even the most ardent opponents on the plan, including German finance minister Peer Steinbrueck, have recognised that allowing taxes to rise might not be a good idea, even if Germany itself has no plans to take advantage of the reduced rates.

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