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29th Mar 2024

EU capitals set for clash over taxes

The European Commission has indirectly backed a Franco-British proposal to make environment-friendly products cheaper with value added tax cuts, saying it will make it part of its wider overhaul of reduced VAT rates to be tabled next year.

On Tuesday (13 November), French finance minister Christine Lagarde and UK finance secretary Jane Kennedy reaffirmed their ambition to make a reduced VAT rate for eco-products mandatory across the EU.

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The two countries argue the cuts would stimulate consumers to buy green goods as well as producers to invest in developing such products, although the list of products has not yet been drafted.

It would be left up to EU governments to determine what the exact tax rate should be, however.

According to EU taxation commissioner Laszlo Kovacs, the idea should become a part of the commission's wider plan to "simplify and rationalize" the use of reduced value added tax in the 27-nation bloc - something to be presented during France's stint at the EU's helm in the second half of 2008 and ideally coming into force in 2010.

Currently, EU states must apply a single VAT rate of at least 15 percent, but they have the possibility to introduce two reduced rates set no lower than five percent, while many also enjoy individual derogations.

However, tax debates traditionally belong to the most difficult ones in the EU bloc, as every change requires unanimous agreement of all member states.

Clash over current exemptions

This difficulty was highlighted during Tuesday's meeting when EU finance ministers failed to agree on extending a lower-tax-regime in five EU member states - Cyprus, Malta, Poland, Slovenia and the Czech Republic - granted to them when they joined the EU in 2004.

The exemptions - related to for example certain books, construction work or restaurant services - are to expire at the end of this year, with the countries fearing the move will translate into steep price hikes.

Germany and Denmark refused to approve the extension, claiming the conditions laid out at the countries' accession treaties must be fully respected.

At the same meeting, ministers failed to convince Luxembourg to agree to a reform on taxation of electronic commerce, which is aimed at shifting the place of taxation from the country where the supplier is located to that where the customer is located.

Luxembourg currently applies the lowest VAT rate set at 15 percent, with the VAT revenues on e-commerce annually bringing in 220 million euros to the state coffers.

The contentious issues will be again discussed on 4 December, but according to various media reports Luxembourg prime-minister Jean-Claude Juncker has already said he will not bow to pressure from his counterparts.

"No finance minister would give up one percent of his gross domestic product to make others happy", he was cited as saying by AFP.

Passenger car taxation

Meanwhile, the ministers also rejected a proposal by the EU's executive body to replace car registration tax with a mechanism levying tax according to how much a vehicle pollutes.

Under the commission plan, at least 25 percent of the total tax revenue from registration and annual circulation taxes should be linked to the CO2 element by the end of 2008. This figure should rise to 50 percent by 2010.

However, a bulk of member states are "not sure" that this is the way to reduce CO2 emissions, with some questioning the need for an EU initiative in this area.

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