Brussels, 13/11/2007 (Agence Europe) - The controversial subject of reduced rates of value added tax (VAT) was the final tax question addressed on Tuesday 13 November by the EU27 finance ministers, and the negotiations extended over the final dinner. Germany and Denmark continued to express reservations and the EU27 were unable to reach unanimous agreement on extending the application of certain cut-rate VAT rates negotiated for a transition period by five new EU member states when they joined the EU in May 2004 (see EUROPE 9537). The extension of lower VAT until 2010, based on a document put forward by the European Commission in July 2007, would allow the member states in question (Cyprus, Malta, Poland, the Czech Republic and Slovenia) to ensure their derogations from EU legislation do not run out, thereby forcing them to raise VAT in January next year. It would also allow EU finance ministers more time to overhaul the EU system of cut-rate VAT. The issue will be on the agenda of the December ECOFIN Council and new draft legislation is expected to be unveiled in the second half of 2008 under the French Presidency.
The prolongation of the cut-rate VAT in the five member states covers: 1) the supply of building work on private housing at a reduced rate of 5% in the Czech Republic and Slovenia; 2) renovation at no less than 5% and 7% VAT respectively in Cyprus and Poland; 3) granting Malta a VAT exemption for food and pharmaceutical products. On Tuesday, Germany and Denmark officially maintained their reservations about the extension of the cut-rate VAT schemes, not wanting to prejudge the political debate on rationalising the entire EU VAT system. We gleaned from the European Commission in the evening that both delegations reportedly relaxed their position somewhat over dinner,.
Negotiations are set to continue on the option of levying cut-rate VAT on ecoproducts. French finance minister Christine Lagarde explained that there were a number of proposals on the table that would clearly need more discussion in December given the problems involved and the criteria to be drawn up. Laszlo Kovacs, EU Taxation Commissioner, said the application of reduced rate VAT to eocproducts should be part of the proposal to be unveiled under the French Presidency. At the end of October 2007, France and the United Kingdom published a joint letter calling for lower taxes on low-energy products (see EUROPE 9532), like white goods, insulation and solar panels. The question arises of whether the scheme would be optional or compulsory because an optional system could lead to an uneven playing field in the common market.
Early in July 2007, the European Commission re-opened political debate on simplifying and rationalising the EU's cut-rate VAT system (see EUROPE 9462), recommending the introduction of a two-tier system - vitally important goods and services, like food, to which VAT of between 0% and 5% could apply; along with the option of levying reduced rate VAT for environmental and/or cultural reasons on employment, energy and public transport. (M.B.)