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EU executive to suggest more flexibility on VAT

European Union member states would be freed to lower rates of value added tax (VAT) on items ranging from restaurant bills to haircuts under proposals to be unveiled by the European Commission next month.

But the proposals, outlined by EU Tax Commissioner László Kovács to the European Parliament Tuesday, make no specific provision for rates to be lowered on energy-efficient products as some member states have suggested. “This is aimed at giving more flexibility to member states with no real risk of distortion for the internal market,” Kovács said.

EU states have to levy the standard value-added tax rate on goods and services unless all countries in the bloc have agreed to give them an exemption, known as a derogation. Some of these derogations end around 2010, and states do not want to have to impost big tax increases for the goods and services involved. Under the proposals, which will need unanimous backing from all 27 EU states to come into force:

The option for introducing reduced rates would be extended to the whole housing sector with any reference to social policy deleted. It would also include renovation, repairing and cleaning;
Restaurants and catering services would be included – a long-standing demand of France;
Locally supplied labor-intensive services would be extended to include gardening, landscaping;
General cleaning, ironing, laundering would be included; and
Personal care, hairdressing, beauticians would be included.

No decision has been made yet on whether places of worship and historical monuments should be included.

The proposal would also have amendments to allow continued reduced rates on some goods – a step Hungary, Poland, Ireland and Britain will welcome – for example on children’s nappies, audio books and equipment, and appliances for the disabled. There will be no proposals for reduced rates for energy-efficient products such as light bulbs, as requested by Britain and France.

“I consider this file is not yet right for making proposals at this stage,” Kovács said. He said industry was “rather unanimous in suggesting some other fiscal incentive” to save energy. Kovács said that inheritance tax proposals were also “in the pipeline” but declined to elaborate. He still planned to make a formal proposal to introduce an optional common method of calculating corporate tax, a step big cross-border firms have asked for.

Ireland is firmly opposed and the anticipated proposal was referred to by those that successfully campaigned for a ‘No’ vote on the Lisbon Treaty this month, saying that it would be the first step to harmonized corporate tax rates. “We have no intention or ambition at all to harmonize tax rates,” Kovács said. If there is no unanimity among EU states for a common corporate tax base, a group of countries could press ahead and introduce it themselves and “do no harm to those outside the system”, Kovács said. – (Reuters)