Presidency aims to pacify Luxembourg on VAT reform

The Portuguese presidency is trying to broker a deal on value-added tax (VAT) reforms by the end of this year.

A compromise paper prepared by the presidency aims to break the deadlock on the reforms, which require unanimous agreement among member states.

The paper, which will be discussed by finance ministers next week (12 November), proposes to amend rules on e-commerce which, in their original form, removed the incentive for digital companies to move to low-tax regimes by introducing levies at the point of consumption.

Amendments are intended to accommodate Luxembourg, which is reluctant to budge from the current system in which VAT is levied in the country of origin. Remote services such as Apple and Skype have benefited from the Grand Duchy’s tax regime, at 15% the lowest in the EU.

The paper suggests three options aimed at bringing Luxembourg on board. The first would maintain the existing country-of-origin rule, but ensure that countries where services are consumed receive a share of VAT collected through a "revenue-sharing mechanism".

The second option would give Luxembourg more time to adjust to the proposed rules on levying VAT at the point of consumption. According to an EU official, the new regime would only be introduced in 2013, three years after the rest of the VAT package comes into effect.

The third option would involve applying the proposed rules as of 2010, with the country of origin in charge of collecting VAT for the country of consumption. The country of origin could then retain an unspecified percentage "of the receipts collected through the one-stop scheme".

A Portuguese official denied that the proposals had been engineered in the sole aim of appeasing Luxembourg. "Luxembourg had the strongest views on this," he said. "But, too much has been said about that. It is not only about Luxembourg. We would have to find a solution accepted by everyone."

Germany, which increased its VAT rate from 16 to 19% this year, had also opposed the rules on e-commerce, but its motives were alleged to be less straightforward. Although the VAT package does not cover ways of tackling tax fraud, Germany had withheld its support in its bid to introduce a system for reducing VAT fraud known as reverse charging.

László Kovács, the European taxation commissioner, is to present options on fighting tax fraud at a meeting of finance ministers in December. The Portuguese presidency aims to secure final approval on the VAT package at the same meeting.

The Portuguese presidency is trying to broker a deal on value-added tax (VAT) reforms by the end of this year.

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