Germany Slams New EU VAT Plan

by Ulrika Lomas, Tax-News.com, Brussels

10 July 2008

German Finance Minister Peer Steinbrueck indicated that Germany would be unlikely to back a plan proposed by the European Commission earlier this week that will allow EU member states to reduce VAT on certain goods and services.

The EC's plan, announced by Taxation Commissioner Laszlo Kovacs on Monday, would amend the EU VAT Directive so that member states could reduce VAT on labour-intensive services and locally supplied services on a permanent basis, such as restaurants and hairdressers.

However, speaking out on the proposal on Tuesday, Steinbrueck complained that member states had not been adequately consulted, and suggested that the Commission had not thought through the idea thoroughly enough.

"It's not a good thing that Kovacs has come forward with so wide-ranging a proposal without having a discussion in this forum on the whole issue of reduced rates," Steinbrueck said, according to Reuters.

He also warned that cutting rates of VAT to as low as 5% on these services - as has been proposed by the EC - would deprive his government's treasury of more than EUR3.5bn in tax revenues, remarking "that's not something that you could ever describe as peanuts."

As with any other tax proposal, the EU's idea will need the backing of all 27 member states to become reality, but individual governments can choose not to lower their own rates. Steinbrueck is of the view however, that governments not choosing to lower VAT rates would soon be under pressure to do so to match those rates in neighbouring countries.

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. The aim of the EU plan is to make these reduced rates permanent and open to all member states.

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