Germany likely to block low VAT deal

By Anna McLauchlin

Date: 02/06/05

Agreement on EU-wide reduced rates of value-added tax (VAT) looks unlikely, as Germany, Sweden and Denmark are still holding out on a compromise deal presented by the Luxembourg presidency to be discussed by finance ministers on 7 June.

The three are opposed to any widening of reduced rates allowed under the text or exceptions from EU rules such as zero rates for children's clothes currently applied in the UK and Ireland.

Sources say that Austria, Estonia, Slovakia and Slovenia may also refuse to back the compromise, but that the issue is likely to hang on whether Germany finally supports it.

"The question is whether Germany will move and if it moves whether others will follow," one said. "Any move will come at ministerial level so it's too early to say exactly what will happen, but an agreement looks unlikely at this stage."

Another EU source said that he was still hopeful of an eventual positive outcome. "This is a temporary solution and the only one that is acceptable to everybody, even if some claim to have problems with it."

A Swedish official confirmed that his government supported a limited possibility for derogation but that it would work towards finding a compromise, since it wants to make sure there is no discrimination between member states.

A Danish official said: "Our position hasn't changed, we are still not happy with the text."

Luxembourg's compromise aims to please everyone by allowing exceptions for reduced rates to continue and allowing other member states to join those exceptions if they so wish.

The compromise would also allow the new member states - some of whom will be forced to phase out their reduced rates from the end of this year in line with their accession agreements - to keep their rates until 2015.

The European organisation of small- and medium-sized enterprises (SMEs), UEAPME, warned that Europe's SMEs would suffer if no agreement was found.

UEAPME supports the extension of reduced VAT rates for labour-intensive services - currently taken up by only nine member states - which allows reduced rates to be applied to services such as hairdressing or building repairs.

Introduced as a temporary tax experiment in 2000 to see whether it would boost employment figures, the scheme is to run out at the end of this year. But under the Luxembourg compromise it would be extended and other member states could join. Poland and the Czech Republic are particularly keen to apply low rates in this area.

"If the scheme ends abruptly at the end of the year, there will be a chaotic situation in which small firms will be forced to apply increased VAT rates, placing them at serious disadvantage to the shadow economy," said Gerhard Huemer, director of economic affairs and fiscal policy at UEAPME.

"It is crucial that member states reach agreement as soon as possible to allow time for the new arrangements to be worked out before coming into force next year," he said.

Preview of discussions at the EU's Economic and Financial Affairs Council meeting on 7 June 2005 on EU-wide reduced rates of value-added tax (VAT) . An agreement looked unlikely because Germany, Sweden and Denmark were opposed to any widening of the reduced rates which were suggested under a compromise proposal from the Luxembourg Presidency or exceptions from EU rules such as zero rates for children's clothes currently applied in the UK and Ireland.