Agreement close on reduced VAT plan

Date: 09/09/1999

By Renée Cordes

EU governments are close to a deal on plans to allow individual member states to set lower value added tax rates for labour-intensive local services in a bid to boost job creation.

They are expected to approve a broad list of services which could benefit from the plan within weeks, despite last-minute wrangling over details of the scheme.

While Europe's small businesses have welcomed signs that a deal is imminent after lengthy negotiations, they are warning that the scheme could cause some cross-border tax distortions and urging the European Com-mission to monitor closely the way governments implement it.

The progess comes months after the Commission came forward with a proposal earlier this year to allow member states to cut VAT on labour-intensive services for an experimental three-year period - as long as this did not distort cross-border trade. This means that the lower rates could only apply to services provided locally.

The plan, which was drawn up in response to intense lobbying by the Netherlands, seeks to deliver on a pledge given by EU leaders at the Luxembourg 'jobs summit' in November 1997.

Although particular services which could be eligible for lower tax rates were not singled out in the Commission's proposal, the scheme was widely expected to be applied to sectors which traditionally only do business locally, such as home decorating, building renovation, hair dressing and fun parks.

But a group of member states including Spain, Germany and Austria argued against the move, fearing that it could undermine the single market as consumers flocked from one member states to another to take advantage of lower tax rates.

They insisted that a decision on the proposed scheme be put off until member states agreed on a detailed list of businesses to be included, prompting concern that the measure might never be approved.

Significant progress has, however, been made since July and diplomats say Union governments are now almost ready to agree a list of broad categories of services where the lower rates could be applied. These would include, for example, repair work to items such as clothing, shoes and bicycles, and house cleaning.

But Gary Parker, a spokesman for UEAPME/EUROPMI, a small and medium enterprise lobby group, cautioned that there would still be a threat to the single market if neighbouring countries did not all introduce lower tax rates simultaneously for the same kinds of businesses, with people living near borders crossing them to take advantage of lower tax rates. "Member states must be keen to ensure that this does not happen," he stated.