VAT legal threat looms over Poland

By Peter Chapman

Date: 29/04/04

POLAND is under threat to be taken to the European Court of Justice over its "illegal" VAT regime, before it even officially joins the EU.

Frits Bolkestein, the commissioner for the internal market, believes the biggest new member state, due to join the Union on 1 May, has fallen foul of EU law with the VAT rates that it plans to charge for two vital economic sectors - the fruit market and internet access.

On fruit, the Polish authorities have put in place a regime which allegedly discriminates in favour of domestically produced fruit, such as apples, pears and cherries on which a "super-reduced" 3% VAT rate will be levied.

In contrast, Bolkestein noted, other fruits, such as "kiwis, papayas and other southern fruit . . . which are not grown in Poland and which are imported into that country from some member states, in particular citrus fruits" will face the full force of the VAT regime, with the maximum 22% rate.

Ironically, the Polish regime directly harms exports from citrus fruit producing Spain - one of its biggest allies until the recent change in leadership in Madrid.

The commissioner is awaiting a final text explaining the Polish system before pressing ahead with court action.

However, he believes the scheme could fall foul of the EU's VAT regime and of Article 90 of the EC Treaty - which forbids discriminatory policies against other member states.

"According to this article, no member state may impose on products coming from other member states higher taxes than those imposed on similar or competing national products," he said.

Under the EU's 6th VAT directive, member states have to apply a standard rate of VAT not lower than 15% and may apply one or two reduced rates of not lower than 5%.

However, Poland was granted the right to charge a super-reduced rate of 3% on some products, which will be raised to 7% by April 2008.

Poland's previous tax rules had already upset fruit producers elsewhere in the EU, as citrus fruits were charged at 7%, compared to 3% for locally-grown fruit.

On the internet tax regime, Brussels has warned Warsaw to apply the full rate of VAT rather than a reduced rate - a move designed to boost citizens' access to the information society.

Bolkestein's spokesman Jonathan Todd said there is no evidence to show that charging the full VAT rate will deter internet usage.

"You cannot apply reduced rates to internet access. But if you look at countries like Finland, higher rates of VAT have not prevented them from having high use of the internet."

A Polish tax official claimed the Commission "has made a mistake" concerning the legality of the fruit regime.

"In our view it is not a problem. It is probably a misunderstanding. The situation in Poland . . . will not change," he said.

But the official pointed out that his government accepts that the internet rules could be in breach of EU law - and that changes are afoot. "We are working on this problem. We think it will be solved," he added. However, the official said the changes would not be made in time for his country's entry into the EU, this weekend.

That means the European Commission may press ahead with legal action before the new Polish regime enters into force.

The European Commission may take Poland to the European Court of Justice over aspects of its VAT regime concerning the VAT charged on fruit and internet access.

• Primary Source

http://ec.europa.eu/comm/taxation_customs/taxation/vatindex_en.htm http://ec.europa.eu/comm/taxation_customs/taxation/vatindex_en.htm

---