Plan to cut tax on local services under threat

Date: 08/07/1999

By Renée Cordes
CHAMPIONS of a plan to allow EU governments to introduce lower value add tax rates for labour-intensive local services to boost job creation fear opponents are using delaying tactics to try to kill the measure.

Some governments are calling for a decision on the proposed scheme to be postponed until member states have agreed a detailed list of businesses to be included.

Germany, Austria and Spain will lead the call for such a list to be drawn up at next Monday's (12 July) meeting of Union finance ministers, putting a potentially large spoke in the wheels of the Union's jobs programme.

But Denmark, Finland, the Netherlands and other supporters of the plan fear that the move may be designed to derail the measure altogether. "If there is a decision that we need such a list, then it will be very difficult to get unanimity on this," said one diplomat.

The dispute centres on a European Commission proposal launched earlier this year which 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 proposal came in the wake of intense lobbying by the Netherlands and seeks to deliver on a pledge given at the Luxembourg 'jobs summit' in November 1997.

Although it did not single out any particular services, the scheme was widely expected to apply to sectors such as home decorating, building renovation, hairdressing and fun parks.

But some Union governments have been sceptical about the scheme all along, fearing that it could undermine the single market as consumers flock from one member state to another to take advantage of lower tax rates.

The Dutch argue that lower tax rates for these services could not possibly have a cross-border effect as Belgians and Germans would be unlikely to flock to neighbouring countries to get their hair cut, for instance.

Any tax reduction schemes introduced would be monitored by the Commission, which would seek to ensure that they did not have any cross-border impact which could distort the single market.

Small and medium-sized enterprises (SMEs) in the EU are urging member states to press ahead quickly. "If one or two member states propose their own list, the other countries should not stand in their way," said Gary Parker, spokesman for SME lobby group UEAPME/ EUROPMI.