Bolkestein bids to plug the gaps in Union’s VAT regime

Date: 10/02/2000

By Tim Jones

THE European Commission is calling for sales taxes to be imposed on postal services and for banking, insurance and Internet shopping loopholes to be closed as part of an ambitious programme to patch up the EU's outdated value-added-tax regime.

The far-reaching plans, outlined in a paper prepared by Internal Market Commissioner Frits Bolkestein's officials for a meeting of national tax experts early next month, are designed to plug gaps in the Union's seven-year-old 'transitional' VAT system as the prospect of agreeing a definitive regime ebbs away.

The move marks a significant change in the Commission's approach following its failure to get agreement on proposals drawn up by Bolkestein's predecessor Mario Monti to overhaul the levy, which accounts for one fifth of the €3 trillion raised annually in taxes in the Union.

Monti's 1996 'origin-based' reform plan would have established both a single place of registration for companies paying VAT and a redistribution mechanism to ensure revenues went to the country where the good or service was consumed.

Most governments resisted these radical changes, regarding them as an attack on their fiscal sovereignty, and only reluctantly agreed to renew their pledge to keep standard VAT rates between 15% and 25%.

In light of this foot-dragging, Bolkestein's paper states that the Commission now "recognises that the current conditions mean it is unlikely any significant progress towards an origin-based definitive system will be made in the immediate future".

In the meantime, argues the Commissioner, glaring loopholes in the current regime should be closed. One of these, he says, is the exemption from VAT granted by governments to national postal services in every EU country except Finland and Sweden - even though many of them, led by the Netherlands' TNT Post Group and Deutsche Post, have long since become aggressively commercial logistics companies involved in everything from mail delivery to cargo transport.

"Because public postal services are increasingly operating in competitive markets, confining VAT exemption to the public sector inevitably distorts competition," states the paper.

The privatisation of Deutsche Post, which was due in the autumn, ran into problems after advisers warned that the new listed company could be hit with a €2-billion VAT bill for tax-exempt loan services.

Bolkestein is keen to revamp the VAT regime generally to take account of the erosion of the public sector in Europe. Since the transitional system was established in 1993, EU governments have privatised assets worth close to €300 billion. "The increased privatisation of activities which were traditionally the exclusive reserve of the public sector has led to increased distortion of competition between exempt, non-taxable and taxable services," states the paper.

It adds that this review should include "examining the possibilities" for ending VAT breaks for banking and insurance services and following up on plans unveiled last summer to make digital services offered over the Internet subject to the tax.

The paper concludes that the current regime cannot ensure that tax is paid on remote cross-border services such as mail order, telephone sales or Internet shopping. To address this problem, the Commission advocates setting minimum taxation thresholds to ensure that the EU-wide system only applies if there is a "genuinely significant activity" in the member state where the service or good is to be consumed.

EU employers' organisation UNICE, which has long campaigned for Monti's proposal to be adopted, nevertheless welcomed Bolkestein's move. "The only consistent system would be a final system but, if member states think that is too politically difficult, then a line has to be drawn and energies should go into improving the current system," said deputy secretary-general Daniela Israelachwili.

But she warned that this approach could only be a stop-gap. "A lot can be done with simplification and modernisation. But harmonisation of rates and a redistribution mechanism are the only real solution in a single market," she said.

The European Commission is calling for sales taxes to be imposed on postal services and for banking, insurance and Internet shopping loopholes to be closed as part of an ambitious programme to patch up the EU's outdated value-added-tax regime.