Dutch tax-cut plan hits German buffers

Date: 04/06/1998

By Tim Jones

DUTCH plans for early tax cuts to generate jobs in labourintensive and traditionally 'black' areas of the economy have foundered in the run-up to the German general election in September.

Bonn has refused to temper its opposition to this centrepiece of a tax reform programme outlined by the Netherlands' 'purple' Labour-Liberal government before it was re-elected last month.

National tax negotiators were due to meet today (4 June) to try to break the impasse between the Dutch and Finnish governments, on one hand, and Germany, Denmark, Austria, Greece, Spain and the UK on the other.

But officials are certain that no progress can be made until uncertainty over the future of Germany's Christian Democrat-led government has been lifted.

The proposal is of key importance to the government of Dutch Premier Wim Kok, which wants to shift nearly 5 billion ecu from direct taxation on to value added tax by 2002 by raising the standard rate from 17.5% to 19%, while cutting the rate applicable to labour-intensive services to 6%. However, it needs the approval of all EU governments and the European Commission to do so.

In February, the latter came up with a plan to allow member states to cut VAT rates on certain labour-intensive services, including hairdressing, bicycle repairs, house renovation, fun parks, cleaning and laundry services, home-helps and unqualified social work, as long as they were supplied locally.

"We want to recover some of these services from the black economy and aid employment," said Taxation Commissioner Mario Monti.

The new regime would be subject to a three-year review to examine whether it was disrupting the single market, but this has failed to win over a sceptical German government.

Diplomats believe Bonn's tough stance stems from its fear that the opposition Social Democrats will call for a similar scheme in Germany, which could prove expensive in lost VAT revenues.

Officials say Danish opposition to the reform is less about principle than implementation. Copenhagen wants to ensure the categories of services which can benefit from the lower rate are tightly ring-fenced. "We don't want disruption in EU border areas," said an official.

Several member states are, for example, worried about tax breaks for fun parks since many of them, like the famous Efteling fairytale park in the Netherlands, are close to open land borders and could lure away valuable tourist income.

However, the European Parliament recently threw its weight behind the idea in reports by Italian Forza Europa MEP Roberto Mezzaroma on the needs of the construction sector, and Spanish Liberal member Carles-Alfred Gasòliba on growth and jobs.