Luxembourg offers member states low VAT rates reprieve

By Anna McLauchlin

Date: 04/05/05

Member states will be able to widen the application of reduced VAT rates under a new compromise proposal from the Luxembourg presidency, European Voice has learned. The compromise will be presented to a Council of Ministers working group on 12 May.

By its own admission in the paper, Luxembourg has tried to create "a period of stability" during which the Council can calmly discuss VAT rates. The move follows a series of failed talks last year on a July proposal from the European Commission that aimed to limit the scope of reduced rates to promote the single market.

As a result of the debacle, the presidency's compromise would allow the continuation of the status quo for those states that have demanded it and in some cases extend those rights to other member states.

All member states would have until 1 January 2006 to ask the Council for permission to take advantage of what was initially a tax experiment to try to reduce the black economy and create jobs. The experiment, currently only taken up by nine member states, allows reduced VAT rates to be levied on 'labour intensive services' such as shoe and bicycle repair, hairdressing and home help.

France would also get its way and, along with all the other member states, be allowed to ask for permission to apply reduced rates on restaurant services, a particularly sensitive point as it was included in President Jacques Chirac's election pledge.

The compromise would extend the list of sectors where reduced rates including, among others, house renovation, domestic services and waste recycling in its scope. And exceptions already granted on reduced rates such as 0% on children's clothes and shoes in the UK and Ireland or a reduced rate on letting property in Austria would be renewed.

VAT talks have been further complicated by the fact that the new member states already have reduced rates on certain goods but they will be forced to phase them out in line with current EU rules beginning at the end of this year and the latest in 2010.

But, in the light of failure to agree on an EU-wide list of goods and sectors where reduced rates could apply, exceptions granted to the 15 older EU members have been repeatedly extended, an injustice that has not escaped the notice of the new EU countries.

Under the compromise, new member states may retain their rates until 31 December 2015 as well as the minimum standard VAT rate of 15%.

The presidency insists that the compromise will not jeopardise the internal market as all the measures suggested concern local sectors rather than cross border ones. The proposal would oblige the Commission to publish a report on the application of reduced rates every five years and adopt a directive if necessary.

If and when the proposal reaches ministerial level it will require a unanimous vote to be passed. A French official said that the proposal "clearly goes in the right direction" but that it had not yet taken a firm position.

The Danes, which were opposed to exceptions on rates during last year's talks, might be harder to convince. A Danish official said that there was no final decision yet but added: "Generally we support harmonisation in this field at as high a level as possible."

According to the author the Luxembourg EU Presidency was to present a compromise proposal to a Council of Ministers working group on 12 May which would allow Member States to widen the application of reduced VAT rates. The application of reduced VAT rates had been initiated as a tax experiment to try to reduce the black economy and create jobs. The experiment, at that time only taken up by nine Member States, allowed reduced VAT rates to be levied on 'labour intensive services' such as shoe and bicycle repair, hairdressing and home help.

European Commission: DG Taxation and Customs Union: VAT: How VAT works http://ec.europa.eu/comm/taxation_customs/taxation/vat/how_vat_works/index_en.htm

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