Berlin set to block EU’s reduced VAT scheme

Germany looks set to take the blame for the expected collapse of a six-year experiment allowing lower VAT rates in labour intensive sectors.

The voluntary scheme, set up in 1999, allows member states to impose VAT at the lower rate of 5.5 per cent in a number of sectors, such as construction, home-help and hairdressing.

Although it was designed to run for just three years, the scheme has been extended twice following fierce lobbying from the sectors concerned.

Business claims lower rates have helped boost employment and reduce the number of black market workers, and has called for the scheme to be made permanent.

But attempts to extend the scope of the scheme to other sectors appear to have brought the experiment to an abrupt end.

French President Jacques Chirac made the extension of the lower rate of VAT to the restaurant sector a key pledge during the 2002 elections.

And French insistence that any agreement on a permanent derogation for labour intensive services be linked to a deal on the restaurant sector has proved too much for sceptics such as Germany.

Berlin has opposed the scheme from the outset, arguing that tax regimes in one member state can have a major impact on competition in other countries.

Plans by the new government to increase German VAT levels have made it all but impossible for Berlin to agree to an extension of the lower-rate schemes in other countries.

“We were opposed to the scheme even before our planned VAT increases,” a spokesman for the German government told this website

“This experiment has not yielded any concrete results in terms of job creation or the suppression of the black market.”

A report by the commission in June 2003 concluded that “it was not possible to find solid evidence of [VAT] reductions boosting job creation”.

The pressure is now on the Austrian EU presidency to broker a deal on this sensitive dossier – not least because the nine countries currently running reduced rate VAT schemes are technically in breach of EU rules.

The last extension of the scheme officially expired at the end of 2005.

EU tax commissioner László Kovacs said in December that he was willing to overlook the technical breach of the rules if an agreement looked likely at the first meeting of EU finance ministers on January 24.

But with Germany hardening its position, even a compromise proposal extending the scheme for one year could fail, leaving nine member states – Belgium, Greece, Spain, France, Italy, Luxembourg, the Netherlands, Portugal and the UK – facing the threat of sanctions.

This threat has given an added urgency to the diplomatic manoeuvrings ahead of the ECOFIN meeting next week.

French prime minister Dominique de Villepin will meet with new German Chancellor Angela Merkel on Wednesday to try and widen the “narrow margin” of compromise signalled by Berlin.

The two countries finance ministers will continue the discussions on Thursday, and the outcome of their talks is likely to have a major impact on the proposals of the Austrian presidency, expected on Friday.

European business are in no doubt of the urgent need for an agreement, insists Hans-Werner Mueller, secretary general of UEAPME, which represents Europe’s small and medium-sized companies.

“Failure by the finance ministers to reach an agreement on continuing the reduced rates would be gravely irresponsible,” he said.

“With no legal framework for prolonging the reduced rates, there would be instantaneous rate hikes of up to 15 per cent on January 25, with resulting price increases of up to 14 per cent overnight.”

Mueller also contested German claims that the reduced-rate scheme had had no beneficial effect.

“The reduced VAT scheme has been an effective tool in combating the threat of the shadow economy in labour-intensive sectors,” he claimed.

“Abruptly imposing massive rate hikes would play into the hands of black market operators and place tax compliant, law-abiding firms at a major disadvantage.”

He cites data that claimed up to 200,000 jobs could be lost across the EU if the scheme is scrapped.

• Previous article
• Next article