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4th Mar 2024

Germany blocks deal on reduced VAT

Finance ministers on Tuesday (December 6) failed to extend deadlines on reduced value-added tax (VAT) rates in services like house renovation or bikes repairs after a German-led move against the proposals.

"There has to be unanimity [on VAT]," commented British finance minister Gordon Brown after the meeting, adding that the new German government wants more time to examine the issue.

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According to diplomats, the German finance minister Peer Steinbrueck made clear at the meeting that Berlin sticks to its opposition, but can consider some flexibility if the issue is debated at the European Council, the summit of European heads of states and governments due on 15-16 December.

"Nobody was quite sure what kind of 'flexibility' he had in mind, but Mr Brown had jumped at the idea and suggested to postpone the final discussion until next week," a diplomat told the EUobserver.

Under current EU rules, member states can apply VAT rates as low as 5 percent instead of their national standard rates on a list of "labour intensive" services.

The list includes some construction services, such as renovation of private houses, as well as areas such as bike repairs, hairdressing and window cleaning.

Eleven countries (nine "old" member states plus the Czech Republic and Poland) currently take advantage of the derogation scheme, with the European Builders Confederation (EBC) saying 250,000 jobs could go if VAT and prices suddenly jump up.

Emergency plan

The VAT holiday will end in just three weeks' time, on 1 January 2006, unless EU leaders agree to prolong it.

Whilst Germany stressed on Tuesday that its position might not change significantly even at next week's summit, Austria, which is to chair the EU in the first half of 2006, suggested that it would organise a new meeting of economic ministers to deal with the problem in early January.

On the other hand, the tax and customs commissioner Laszlo Kovacs promised he would try to secure a "gentleman's agreement" within the EU executive to wait and not take legal action against countries who keep the low rates for a few weeks after the deadline, according to sources.

Germany has led opposition against extending VAT relief, fearing domestic firms might push for tax cuts if it gives permission for other member states to do so.

For its part, the European Commission supports extending the deadline or including the listed services under the chapter of permanently reduced rates.

However, it has admitted there is no proof that lower indirect tax rates will help create jobs.

The proposed package also covers plans to extend VAT derogations to the ten new EU member states until 2015.

Moreover, it adds a small number of new services that can be taxed at the reduced rate, including restaurant meals, which will be lobbied for by French president Jacques Chirac in next week's summit.

Bitter reaction

The stakeholders have reacted with dismay over the deadlock.

According to UEAPME, the small businesses lobby, ministers have shown their inability to overcome national rivalries.

"This perpetual procrastination and the uncertainty it creates is damaging for consumer confidence and for small businesses", said the group's secretary general Hans-Werner Muller.

According to the European Builders Confederation (EBC), "the fact that some member states restrict the freedom of others in a field that would change nothing in their territory does not make sense at all."

"Those countries that are in favour of a restriction are not forced to apply reduced VAT rates, and neither are they threatened by unfair competition in local services concerning housing," stated the EBC president Jean Lardin.

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