28th Oct 2021

Brussels pleases France with proposal on reduced VAT

  • France has lobbied hard to get permission for reduced sales tax on restaurants (Photo: EUobserver)

The European Commission has opted to allow reduced sales tax for housing, local restaurants and some small services in a move welcomed by France but poised to spark opposition in other countries, mainly Germany.

The proposal, unveiled by EU tax commissioner Laszlo Kovacs on Monday (7 July), enables the bloc's member states to apply lower VAT rates for some specific sectors on a permanent basis.

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Up until now, national capitals could use a scheme of temporary exemptions from regular VAT rates on a number of so called "labour intensive" services, such as bike and shoe repairs, house renovations or hairdressers.

The experimental scheme was originally applied by 11 countries and after strong discussions among national finance ministers, it was prolonged in 2006 until the end of this decade.

While goods and services are generally subject to a minimum 15 percent VAT in the EU, member states may apply reduced rates of not less than 5 percent to some sectors, as set out in a restricted list.

The commission argues the system is too complicated and unfair as it leaves only some countries with the possibility to have exemptions, as the exemption list had been negotiated before a deal on the key VAT directive adopted in 1992.

"The current proposal is aiming at offering more flexibility to member states and to apply reduced VAT rates proving a level playing field for member states without any real risk of distortion of competition in the single market," Mr Kovacs told reporters.

As an example, he referred to reduced VAT rates on restaurant services which are currently allowed in 11 out of 27 countries, "so there is a great level of inequality."

In a bid to change such practices, the EU executive suggested that apart from a wider range of housing and labour intensive services, the new list of VAT exemptions should also include catering and restaurants, and products such as children's nappies and all equipment specially designed for the disabled.

France, which had previously lobbying for lower sales tax on restaurants, has praised the proposal.

"I'm delighted that the commission has heard our arguments and I hope we will be able to convince our German and Danish friends," said French economy minister Christine Lagarde.

Berlin and Copenhagen previously opposed attempts by France to introduce lower VAT on restaurants and it is expected that they will remain critical of the idea.

Last year, Brussels tried to overhaul the system on derogations on VAT rates which expires in 2010 but failed to achieve a consensus on the issue. All tax decisions are subject to unanimity in the 27-nation bloc.

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