Kovacs Warns Of 'Race To The Bottom' Over VAT

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

17 February 2005

Speaking on Monday, following talks with German Finance Minister, Hans Eichel, European Taxation Commissioner, Laszlo Kovacs warned of a potential 'race to the bottom' with regard to VAT rates following the expiry later this year of the 15% minimum rate.

According to a Reuters report, Mr Kovacs revealed that he hoped the 25 European Union member states would agree to extend the minimum rate, but hinted that there are already divisions between EU governments on reduced rates of VAT allowed by some countries, such as Britain's zero rate on children's clothes, or Ireland's VAT reductions to 13.5% for many types of service.

"If there is no new agreement then member states will be free to apply any other rates lower than 15 (percent). It will go against rate discipline. It can result in a race in standard rates and result in a distortion of the single market," Mr Kovacs was quoted by the news service as observing, continuing: "We agreed the most feasible solution would be to prolong this 15 percent as the minimum standard rate."

The Taxation Commissioner went on to warn that the matter could become even more controversial when derogations granted to the 10 new EU member states, which allow them to keep some VAT rates below 15%, expire. However, older EU members, such as the UK and Ireland, can keep their reduced rates forever.

"I'm absolutely certain that if the 10 new members see that the old members are reluctant to give up their reduced rates -- I have good reason to believe there would be strong reluctance from the United Kingdom to give up the zero rate for children's clothing -- they will find it unfair," Mr Kovacs announced.

Stressing the need for equal treatment of all 25 EU members, the EC official explained that:

"We are seeking some compromise solution (on) how to extend the application of reduced rates in the case of the 10 new members."

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