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Luxembourg Stalling EU VAT Agreement

by Ulrika Lomas,, Brussels

16 November 2007

Luxembourg is continuing to hold up an agreement between European Union finance ministers on reforms to the charging of VAT on certain services traded within the EU.

According to a report by Thomson Financial, which cited a source close to the discussions between the member states on the issue, Luxembourg is refusing to sign up to a compromise deal agreed upon by most of the member states following June's Ecofin meeting, meaning that currently there is no end in sight to the dispute.

At issue is a proposed change in the VAT charging rules that would mean consumers who buy items from e-commerce firms would pay VAT at the rate of the country in which they are resident, instead of the rate charged in the jurisdiction where the vendor is registered.

VAT in Luxembourg is charged at 15% - the lowest rate permitted in the EU - and the current rules have led dozens of major e-commerce firms such as eBay, Skype and iTunes to set up in the jurisdiction. But if the new VAT system is put in place, the Luxembourg government stands to lose an estimated EUR220 million (US$320 million) annually in tax revenues, and, according to the report, its government is holding out for a new deal whereby the VAT revenue from the transaction would be shared between the two member states .

Other member states with low rates of VAT could also lose out under the new system. This includes Portugal, with a 15% rate which has helped to create a flourishing e-commerce industry on the Portuguese island of Madeira.

The proposals are part of a broader package of measures which are intended to simplify the tax system for businesses in the EU, as well as make it easier for governments to crackdown on fraud. But any change in EU tax legislation requires the unanimous support of all 27 member states.

Ecofin ministers had set a deadline for the end of the year to try and reach a compromise agreement that would be acceptable to Luxembourg, but this is looking like an increasingly remote possibility.

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