Call for cuts in taxation to boost jobs

Date: 04/02/1999

By Tim Jones

THE European Commission will call on finance ministers next week to allow governments to introduce special low sales tax rates for labour-intensive local services as part of the Union's 15-month-old jobs programme.

The draft legislation, which is set to be approved by Commissioners next Wednesday (10 February), comes in the wake of intense lobbying by the Netherlands and delivers on a pledge given at the Luxembourg 'jobs summit' in October 1997.

The Dutch left-right coalition's long-term tax reform plans include a reduction in the rate of value added tax (VAT) levied on services such as shoe repairing, house-cleaning, and decorating from 17.5% to 6%.

However, The Hague could not press ahead with its plan without a proposal from the Commission and the agreement of every other member state.

The new Commission proposal would allow governments 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 be applied to services supplied locally.

The Dutch, supported by the Finns, have argued since the jobs summit that lower tax rates for these services could not possibly have a cross-border effect as Belgians and North Rhine-Westphalians were unlikely to flock to the Netherlands for services like hair cuts.

The previous centre-right German government fiercely opposed the plan, arguing it would undermine the market.

But the new centre-left administration in Bonn quickly gave its blessing to the move as long as it was time-limited, and EU leaders gave it the go-ahead in principle at their summit in Vienna in December.

The Commission has promised to monitor any low-tax schemes which are introduced to ensure that they do not have any cross-border impact which could distort the single market.