VAT deal secured

A Promise to review tax exemptions granted to new Member States by June 2007 has helped secure an extension to the directive allowing reduced rates of value-added tax (VAT) in Europe. The Council of Ministers agreed to the review in order to gain the extension of the &VAT Directive' from the Czech Republic and Poland.

Approval for the extension were gained from 22 of the 25 Member States at a meeting of the Council's Economic and Financial Affairs committee (ECOFIN) on 24 January 2006 (see February edition). Approvals from the three remaining countries were eventually gained before the 3 February deadline following further negotiations and additional terms.

The agreement was signed by both Cyprus and the Czech Republic on 29 January. Czech Prime Minister Jiri Paroubek said, “The end compromise represents 90%, or perhaps 95%, of what we called for.” The Czech Republic signed after it was agreed that its current practice of charging reduced VAT rates for district heating and refurbishment of private houses could be reviewed in 2007. The Czech Republic first negotiated this right to reduced rates when it joined the EU but, the agreement is set to expire in December 2007.

Polish Deputy Prime Minister and Finance Minister Zyta Gilowska had threatened to veto the extension proposal, but also signed it on 2 February. Ms Gilowska's agreement was secured following promises that Poland could continue charging less that the EU standard 15% VAT rate on a variety of housing and construction services.

Poland had previously objected to the extension because it allowed the original nine Member States to have lower VAT rates for a variety of services, including construction. Ms Gilowska argued that allowing Poland to use lower rates of VAT would help it to address its nationwide lack of proper housing.

The Council officially adopted the extension of the existing legislation until the end of 2010 on 14 February. However, the Council has asked the Commission to present a report on the impact and efficiency of reduced VAT rates applied to locally provided services by the end of June 2007. This is in addition to the review of tax exemptions granted to new Member States.

European Construction Industry Federation (FIEC) director for economic and legal affairs, Domenico Campogrande said, “We are very pleased that the extension has been secured for a further five years. We estimate that around 250000 construction jobs could have been at risk if an agreement was not reached.

“However, the assessment called for by the Council must be considered carefully as it is likely that the results from this will be used to decide whether to extend the legislation beyond 2010. A previous assessment of the system was carried out three or four years ago, based on figures provided by Member States, and gave very negative results of the impact. But we believe that the study period was too short and did not look at the benefits for individual sectors, so we will be campaigning for a more in-depth, longer study this time.”

Mr Campogrande also added that the issue of different VAT rates levied by different countries had been side-stepped on this occasion but would need to be properly addressed in the future. “Derogation needs to be eliminated to create a harmonised rate of VAT across the EU,” he said. “But this is likely to present big problems as the rate will need to be approved by all 25 Member States.”

Member States now have until 31 March 2006 to apply for reduced rates of VAT for the labour-intensive industries listed in Annex K of Directive 77/388/EEC.