Berlin and Paris close to VAT deal

The VAT holiday scheme ran out on 1 January this year, with EU leaders in December failing to reach agreement over a prolongation.

Germany leads the opposition against extending VAT relief, but France is demanding it be prolonged as well as an extension of the rules to restaurant meals – an election promise made by French president Jacques Chirac.

The German finance minister Peer Steinbruck on Thursday (19 January) indicated he is willing to compromise over the issue, according to press reports.

The "rigid" position of the German government so far had become more flexible, Mr Steinbruck said.

After meeting Mr Steinbruck on Thursday, his French counterpart Thierry Breton indicated "I have noted with satisfaction that Germany has now also started to look for a compromise," according to Reuters.

But Mr Steinbruck also indicated the "room for manoeuvre" for his government is "narrow".

The governing coalition in Germany led by chancellor Angela Merkel will increase its national standard VAT rate from 16 to 19 percent in 2007, in a bid to clamp down on the country’s budget deficit.

It fears that domestic service sectors will push for reduced VAT rates, if permission is given for other EU member states to do the same.

The rapprochement between the French and the Germans comes ahead of an EU finance ministers meeting scheduled next week, where the issue is set to dominate the agenda.

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.

Commission ups pressure

Meanwhile, the European Commission has upped pressure on member states to reach a compromise fast, now that the derogation scheme has already run out by almost three weeks.

Member states are still applying the reduced rates, which is technnically illegal according to EU law.

European tax commissioner Laszlo Kovacs earlier this week sent a letter to member states announcing legal procedures against member states still running the reduced rates, if finance ministers fail to reach a deal next week.

The possibility of applying a reduced VAT rate on labour-intensive services was introduced in 2000 as an experiment to boost employment.

But the European Commission has admitted the plan does not work.

"All the studies we see from the Commission are showing us that reduced rates are not helping us with employment," Austrian finance minister Karl-Heinz Grasser said in December.

The Dutch government found in a study in 2003 that its lower VAT rate on bike repairs had not resulted in more jobs.