Low VAT rate extension
BRUSSELS – The European Union’s Austrian presidency has proposed that reduced value-added tax rates on labor-intensive services such as home repairs should be extended for five years, a document showed yesterday. EU finance ministers meet on Tuesday and are under pressure to reach a deal on whether to extend reduced VAT rates on a range of services in nine old member states to avoid legal action by the EU Commission and sharp price rises for consumers. The reduced rates were introduced six years ago as a temporary experiment to see if they would boost jobs, and their legal basis expired on December 31 after being extended twice. «In order to prolong the experiment of reduced VAT rates for labor-intensive services… the related authorizations shall be extended as from January 1, 2006,until December 31, 2010,» the presidency document said. Earlier, an Austrian official had said the extension would be for one to two years, but the time period was clarified in the document. EU Tax Commissioner Laszlo Kovacs has told ministers that next week’s meeting would be their «very last chance» to reach a deal, otherwise he would start legal proceedings against the nine member states that levy the reduced rates. Without a third extension, consumers would be forced to pay VAT at a standard rate of at least 15 percent on services such as home repairs, window cleaning, domestic care and haircuts in the nine member states, instead of around 5 percent at present. The Commission has called for a permanent solution to reduced VAT and a spokeswoman for Kovacs said the proposal phased out the experimental reduced tax system. «If member states are able to find a compromise, I think the Commission will take a very constructive approach. The important thing is to arrive at a decision and not have a legal vacuum,» the spokeswoman said. The presidency also proposed reduced VAT on home repairs in new member states for five years to the end of 2010. New member states that applied before they joined the EU to levy reduced tax on labor-intensive services should be allowed to do so until the end of 2010, the document said. A deal on services eligible for reduced VAT has been made more difficult by a long-standing request from France to add French restaurant meals to the list. The Austrian proposal makes no mention of the French request but French President Jacques Chirac made an election pledge to introduce reduced VAT rates on restaurant meals and Paris seemed determined to fight for it to the end. «The decision has not been taken yet, we are waiting for the Ecofin on Tuesday. We are going to defend our position,» said a source in the office of Prime Minister Dominique de Villepin. Austria also proposed that an independent economic think tank assess before the end of 2006 whether reduced VAT rates have created jobs and helped economic growth. The Commission has said in the past that reduced rates have not created jobs, but agreed to previous extensions as they do not distort competition in the wider EU internal market. The nine member states with reduced rates are Belgium, the Netherlands, Luxembourg, Britain, France, Italy, Portugal, Spain and Greece.
