Keep your low VAT rates, says Kovács

By Anna McLauchlin

Date: 31/03/05

Member states should be allowed to keep their reduced rates of value added tax (VAT), the Commissioner for Taxation, László Kovács has said.

Extension of an agreement that allows some member states to apply reduced VAT to 'labour intensive services' such as house renovation.

Only nine member states - Belgium, Greece, Spain, France, Italy, Luxembourg, the Netherlands, Portugal and the UK - are currently permitted to apply reduced rates under an experiment designed to see whether reduced rates might boost employment.

Despite the fact that studies have subsequently shown that the scheme had little or no impact on job creation, Kovács said that it should be extended.

"I am personally in favour of a new impact study and the prolongation of the experiment," he told the European Parliament's economic and monetary affairs committee. "It could also provide a window of opportunity for other member states to join on an optional basis."

And he said that new member states should also be allowed to continue to apply their lower rates of VAT. Under their accession treaties, the ten states are supposed to adapt to EU rules between 2007 and 2010, but the commissioner told European Voice afterwards that he was concerned that this could lead to unacceptable price hikes.

"On heating for example, the rise could be enormous," he said.

The commissioner also supported zero rates in UK and Ireland on children's clothes and shoes, which were supposed to be transitional until the EU executive came up with definitive pan-EU rules on reduced VAT.

"You cannot abolish zero percentage rates in countries where they have been used for decades," he said.

Kovács' comments are a departure from the line taken by his predecessor, Dutch liberal Frits Bolkestein.

The Dutchman begrudgingly extended the VAT on labour intensive services scheme, which was originally supposed to run in 2000-03, until the end of 2005, but it was not extended to other member states.

And in discussions over pan-EU rules, Bolkestein refused to allow the continuation of zero rates, arguing that price savings were never passed on to the consumer.

He argued that the reduced rate of VAT was a barrier to the single market and an unfair subsidy to manufacturers and retailers. The reduced rate did not have the effect of giving consumers cheaper clothes and shoes, he said.

• Kovács said he also "fully supports" a group of member states wanting to create a common corporate tax base to make it easier for companies to work across borders and said he had already carried out a consultation with EU finance ministers to this effect. He backed the current trend for flat tax rates in the new member states, saying that they require less red tape, more people are willing to pay them and that they meet the needs of small and medium sized enterprises. "It is a good tax solution and I can only encourage member states to use it," he said.

EU Member States should be allowed to keep their reduced rates of value added tax (VAT), the European Commissioner for Taxation, László Kovács said. He said he would support the extension of an agreement that allowed some Member States to apply reduced VAT to 'labour intensive services' such as house renovation.