Little concern shown over end of tax regime

Date: 21/11/1996

By Tim Jones

AS TIME runs out for the EU's common value added tax regime, the European Commission is warning that the existing minimum rate will no longer apply from January.

Unless finance ministers can reach a compromise at their next meeting on 2 December, they will be technically free to start cutting their countries' standard VAT rates below 15&percent; from the beginning of next year.

However, while it believes the legal basis for the 15&percent; floor would vanish, the Commission has warned member states that they would still be treaty-bound to avoid VAT-slashing measures which might endanger the single market.

Finance ministers have so far shown little concern at the prospect of entering 1997 without a new regime. “That is because there is little chance of any government cutting VAT below 15&percent; at the moment,” said one official.

The current VAT system, which came in with the internal market nearly four years ago, ensures member states have a minimum standard rate of 15&percent;, with exemptions for specific products. But this agreement expires at the end of the year, with no definitive regime in place to take over the fiscal baton.

To plug the gap between the end of the transitional and beginning of the final regimes, Internal Market Commissioner Mario Monti has proposed a second interim scheme for 1997-98 but, along with the 15&percent; base rate, he has also slipped in a proposed maximum rate of 25&percent;.

Monti's reasoning is thoroughly communautaire: he is obliged by the Single European Act to seek the harmonisation of indirect taxes, and allowing rates across the Union to vary by more than ten percentage points is not in keeping with this mandate.

However, his proposal has sparked fierce objections from several member states and the European Parliament. Sweden and Denmark are the only EU countries to apply rates of 25&percent; and the Swedes, in particular, want the right to be able to increase them if they so wish.

As things stand, it seems certain that the 25&percent; VAT ceiling will fall by the wayside, given the stance being taken by the Nordic governments and the opposition in principle of the UK government to any attempt to extend tax harmonisation. Any changes in the system must be agreed unanimously.

The Irish presidency is attempting to broker a compromise under which the 15&percent; minimum rate would remain and a declaration would be attached committing member states to do their utmost to keep their rates between 15&percent; and 25&percent;.

If they did set higher rates, member states would be expected to notify the Commission and explain the reasons for their action.