Brussels, 05/07/2007 (Agence Europe) - The situation with regard to reduced value added tax (VAT) rates is “very, very complex”. For this reason, there was a real need for a simplification and a rationalisation, said Taxation Commissioner László Kovács on Thursday 5 July as he presented the Commission communication on VAT rates other than the normal rate (see EUROPE 9460). He said that this document opened a “political debate” involving the Council, the European Parliament and the European Economic and Social Committee since it was about the most effective way of bringing forward a balanced legislative proposal in the course of next year.
Based on the results of an independent study on the impact of VAT reduced rates on employment and the operation of the internal market, the Commission suggests a possible way to simplify European rules, something the Commission desperately wants to do. This is not the only way, Mr Kovács said. Here are the main points: - a very low rate for essential goods and services, such as foodstuffs and a very difficult debate on the scope of this rate so as to restrict it to citizens' real basic needs (should medical treatment and social housing be included or not?); - a second rate for goods and services which do not constitute basic needs, but which are deemed to merit preferential treatment, particularly in the areas of culture and education, public transport, employment, energy and the environment. The Commission believes that this second category should be optional to preserve the political choices of member states, Mr Kovács said, indicating, however, that political choices should be balanced between ensuring the proper working of the internal market and the costs of compliance for European businesses. In addition, the Commission says that categories of goods and services subject to different reduced rates have to be clearly specified and member states should only be able to apply a reduced rate to the entire category, and not to a part of it.
What are the chances this time of achieving more than at the Commission's last attempt which, at the start of 2006, ended with the renewal of the transition measures in force for some labour intensive services? Mr Kovács, showing caution, pointed out that Council unanimity was required for any decision to be taken and he said he wished to involve all stakeholders to achieve a compromise. He said he expected a shift of political position in this very sensitive issue. The 2010 deadline for the repeal of the transitional measures will no doubt force member states to negotiate.
Catering services. Did the Commission think that catering services should enjoy a VAT reduced rate, as France wants? Currently, there is no legal basis that would allow France to introduce such a rate, the commissioner said, but he hoped that the French authorities would be in a position to be able to apply a VAT reduced rate on these services by 2010 at the latest. He added that he could give no more encouragement at this point. On catering, the independent study called for caution because of the cross-border impact a reduced rate could have, given that these services were sometimes part of the widest (and most competitive) sector, tourism. At the same time, the study showed that a VAT reduced rate could also be effective. The commissioner said that the study had found that reduced rates in catering had a positive impact for the least qualified workers, even though, on a more general level, VAT reduced rates did not seem to have a significant impact on employment.
Draft directive. In order to allow time for political dialogue, Mr Kovács also presented a draft directive to extend until the end of 2010 the VAT reduced rates which some member states negotiated on their 2004 accession to the EU, and which are due to expire at the end of 2007 or in 2008 (see EUROPE 9461). This draft was unlikely to raise any dissension among member states, he felt, since it was a matter of ensuring equal treatment while a comprehensive agreement is reached. For example, the Czech Republic should be able to continue to apply a 5% VAT rate on building works in the area of private housing which does not derive from a social policy, catering services in Cyprus and Poland will be able to apply a reduced rate of 7% and 5% respectively until the end of 2010. However, the draft does not renew the validity of other reduced rates. This is the case, for example, of Hungary which decided to no longer apply a reduced rate of under 12% to the supply of coal, wood for heating and catering services. (mb)