EU ministers agree to lower VAT

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The financial and economic crisis pushed EU finance ministers to agree on a deal to apply reduced sales tax on local services such as meals, haircuts and home repairs yesterday (10 March), ending a decade of haggling to help local businesses.

“We managed to speak a common European language even if strong national interests are at stake,” said Czech Finance Minister Miroslav Kalousek on behalf of his country’s EU presidency.

The deal is part of a wider package to help the EU’s smaller businesses, which tend to be local. 

Unanimity is required in all EU tax matters, which led to a decade of negotiations which ended up with key concessions to several countries in return for their support. Cyprus was allowed to continue levying reduced rates on liquid gas cylinders, Portugal on its bridge tolls in Lisbon and Sweden was successful in extending reduced rates to audio books from printed books. Britain won backing for a two-year extension to use a so-called reverse charge mechanism for tackling VAT fraud. 

The standard rate of VAT in the EU is 15 percent and countries will have the right to cut this to five percent on the list of services agreed in the deal. France has long wanted to apply rates below the standard 15 percent on restaurant meals to fulfil an election pledge by President Nicolas Sarkozy. 

“The result is that the restaurant sector can benefit from reduced VAT, according to the wish of each state,” French Economy Minister Christine Lagarde told a news conference. France’s UMIH labour union for hotel workers said 112,000 restaurants, 24,000 hotel-cafe-restaurants and 41,000 cafés will benefit from lower VAT. 

Royal Bank of Scotland analysts calculated that it would lower French inflation by 25 to 40 basis points relative to other countries like Germany, who will not apply reduced rates. 

Red line on Green Products

The deal effectively vetoes further negotiations on reduced rates of VAT on any goods and services in the EU. Germany, along with Bulgaria, Denmark, Estonia, and Lithuania signed a joint statement calling on other EU states to show restraint in applying reduced rates “in order to avoid contagious effects” and that reductions will strain public finances. 

Germany also won backing from France to stop similar measures in future. “After bilateral talks with my colleague Christine Lagarde, it is clear in the German-Franco relationship there will always be support that this barrel will not be reopened,” Steinbruck told reporters. 

France and Britain have been pushing Kovács to propose reduced rates of VAT on energy-efficient goods this year, but he said the Commission would now have to think very seriously about whether to go ahead. 

“Today, it was evident that a large number of member states consider this is the end of the road, that they do not want to have any further discussion on reduced VAT rates,” EU Tax Commissioner László Kovács said. Finance ministers from three countries, Hungary, Austria and Latvia, said they would need final approval from their governments for Tuesday’s deal, but the Czech Republic’s Kalousek expected no problem.

Czech Finance Minister Miroslav Kalousek said six states wanted a declaration added to a green VAT deal specifying that there will be no more discussions on VAT cuts. 

On the crisis, he said: "Maybe the agreement would have taken more time to be sealed without the crisis. Now we are in fact looking for ways to support employment. Indeed, the sectors that can be subject to VAT reductions are often labour-intensive, such as restaurants, hairdressers, housekeeping, house repairing, etc."

Taxation Commissioner László Kovács noted that "with the agreement we put an end to an unfair situation". As for the effect of the deal on potential VAT cuts for green products, Kovács said: "For many member states, this is the end for VAT reductions. Many said there will be no further discussions on the issue."

UK Conservative MEP John Purvis, vice-chairman of the Parliament's economic and monetary affairs committee, said EU member states should take advantage of this flexibility to set their taxation rates on services that are local and are unlikely to be provided remotely or across borders, such as building renovations, cleaning, hairdressing, restaurants and gardening.

French MEP Jean-Paul Gauzès (EPP-ED) welcomed this decision, saying it "will bring a breath of fresh air and will help, hopefully, to safeguard employment in the impacted sectors, in particular the catering sector". 

The European Builders Confederation said reduced rates of VAT were the best tool to fight undeclared work and foster job creation in the construction sector.

Current EU rules on value-added tax (VAT), set out in the 2006 VAT Directive external  , specify that member states must subject supplies of goods and services to a rate of at least 15%. 

However, they also allow countries to apply reduced rates as low as 5% to a broad range of areas deemed essential, like medicines or labour-intensive services, including renovation of private dwellings, cleaning and hairdressing (EURACTIV 27/07/06).

But for local services, not all countries can levy reduced rates on the same products. EU Taxation Commissioner László Kovács proposed last July that countries should levy reduced rates on the same services to avoid big price hikes, as the current system operating in 18 of the bloc's 27 states expires in 2010.

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