Brussels, 07/07/2008 (Agence Europe) - On Monday 7 July, the European Commissioner for taxation presented the European Commission's draft directive to change the Directive on applying reduced value added tax (VAT) rates (EUROPE 9696). László Kovács outlined the Commission's three-fold aim in this area: immediate action to resolve the most urgent problems, such as authorising the application at the end of December 2010 of transitional provisions authorising the application of reduced indirect taxation for certain labour intensive services and locally supplied services, including restaurant services; carrying out a number of studies concerning the possible use of reduced rates for energy saving materials or energy efficient goods, and continue the reflection expected, in the long term, to provide a rationalisation of reduced VAT rates at a European level.
The legislative proposal aims to provide Member States with more flexibility to apply reduced VAT rates beyond 2010 for labour intensive sectors (bicycle repairs, private housing cleaning services, home helps, hairdressing). By including these services in the list of products and services benefiting from reduced rates permanently, it grants member states greater choice of what labour intensive services should benefit from such a measure. Previously, member states could only apply these rates to two services (three in exceptional circumstances) in Annex 4 of the 2006/112/EC directive. If the proposal is adopted as it stands, this restriction will be removed. So far, seventeen member states apply transitionary provisions on these services (EUROPE 9302).
The Commission is also suggesting that the whole of the housing sector and restaurant services benefit from reduced indirect taxes. Reduced rates are now allowed for building and housing regeneration as part of national social policy. The draft directive removes this reference. It also introduces restaurant services to the list of products and services that can permanently benefit from reduced VAT. Kovács explained that eleven member states (Austria, Cyprus, Spain, Greece, Ireland, Italy, Luxembourg, Netherlands, Poland, Portugal and Slovenia are already applying reduced rates to restaurant services, which were generating many distortions.
The Commissioner indicated that the Commission had ordered several external studies for analysing the feasibility of applying reduced VAT rates on energy saving services and products, the results of which would be available in the autumn. The difficulty resides in constituting a stable list of products and services affected. The most energy saving fridge in 2008 will certainly not be the same five years later. Some people in the industry are asking how can a system be invented that will easily manage constant technologic developments? At Tuesday's Ecofin Council, the French presidency submitted a road map on oil prices that called on the Commission to study measures, particularly fiscal, which would help reduced the impact of increased crude oil prices (EUROPE 9697). In the autumn, the Commission may also impose heavier taxes on environmentally harmful products, such as pesticides.
Asked about the opposition of some member states (Germany, Denmark etc.) to extend reduced VAT rates, Kovács pointed out that their position was the same at the end of 2005 when transition measures where discussed then extended till the end of 2010. The Commissioner therefore would like to know why they said yes then and would say no now. Sometimes confronting delicate budgetary situations, these member states are afraid of internal pressures that demand reduced taxation for certain sectors.
Reactions. Organisations representing Small and Medium-sized Enterprises (SMEs) welcomed the Commission initiative positively. Speaking on behalf of the European Association of Craft, Small and Medium-sized Enterprises (UEAPME), Gerhard Huemer stated in a press release that the draft directive is valid and “likely to put an end to years of uncertainty and patchy solutions on VAT rates”. David Croft, the president of the European Builders Confederation (EBC), affirmed, “reduced VAT is the best tool at our disposal to fight undeclared work and foster job creation in the construction sector”. Croft also said that, “When the VAT rate is around 5%, the client does not hesitate: he chooses to have his work carried out by a qualified professional, receive a receipt and thereby have the work guaranteed by the contractor”. The European Federation of Publishers was delighted that the proposal would extend the reduced rates to talking books, on the conditions that these were identical to their paper equivalent. The British SME Federation is calling on its government to, “take advantage of these proposals to ensure our high street can survive the economic downturn”. (M.B./trans. rh)