Member states set to back VAT reforms

Date: 04/05/2000

By Peter Chapman

EU FINANCE ministers are set to signal their broad support for a scaled-back reform of the Union's value added tax regime when they meet next week.

Diplomats say ministers will welcome Internal Market Commissioner Frits Bolkestein's decision to delay plans for root-and-branch reform of the VAT regime in favour of more modest modernisation plans at their meeting on Monday (8 May).

The linchpin of Bolkestein's proposals is a plan to fill in some of the gaps in the Union's existing seven-year-old 'transitional' VAT regime by, for example, extending the tax to postal services and closing loopholes in the rules on banking insurance and Internet shopping.

Under the current rules, member states are allowed to exempt postal services from VAT altogether, even though many post offices have entered commercial markets such as parcels and logistics. Bolkestein is also keen to revamp VAT regulations governing other public services which have been privatised since the current regime entered into force.

However, his proposals fall far short of the plans unveiled in 1996 by his predecessor Mario Monti for reforming the VAT system, which accounts for one fifth of the €3 trillion raised annually in taxes in the Union.

Monti called for a new regime to be set up under which VAT would be levied in the 'country of origin' - i.e. the member state where the goods were made or the manufacturer was based - with a 'redistribution mechanism' put in place to ensure revenues went to the country where the goods were consumed, as at present. Monti also proposed establishing a single place of registration for companies paying VAT.

Most member states resisted these radical changes, regarding them as an attack on their fiscal sovereignty, and only reluctantly agreed to renew their pledge to keep standard VAT rates between 15 and 25%.

EU diplomats say the less ambitious reforms now being proposed by Bolkestein will find favour with sceptical member states, although they stress that ministers will need further details of his plans - particularly those related to the politically sensitive postal sector - before taking any decisions.

"The main message will be a welcome for the general change of direction from the Commission and the modification of existing rules rather than trying to go down the road towards country of origin," said one.

A spokesman for Bolkestein admitted that the Commissioner had opted for a less ambitious approach because there was little hope of convincing member states to agree to more radical reforms. "I imagine member states will be delighted," he said.

EU finance ministers are set to signal their broad support for a scaled-back reform of the Union's value added tax regime when they meet on 8.5.00.