Monti sneaks in piecemeal VAT reform

Date: 02/04/1998

By Tim Jones

THE European Commission is introducing reform of the EU's value added tax regime by stealth, but diplomats say it has little chance of making significant changes in time for its self-imposed January 2000 deadline.

Eighteen months after he announced plans to introduce a single place of taxation within the EU - the 'origin' system - Taxation Comissioner Mario Monti has still not come forward with a formal proposal.

Faced with apparently insurmountable political difficulties, Monti's staff are seeking to change the VAT system piecemeal.

The current system, which came in with the single market nearly four years ago, ensures that member states should have a minimum standard VAT rate of 15%. As this accord expired at the end of 1996 without agreement on a definitive regime to take its place, its basic formulae were extended until a deal could be reached.

Under the Commission's new approach, it is seeking instead to tackle the more blatant anomalies in the sixth VAT directive in the hope that this will establish the necessary conditions for the introduction of a true 'origin' system.

This would allow VAT to be levied only in the country where the product or service was bought and for tax revenues to be re-attributed based on calculated consumption in each member state.

Such a system was requested by finance ministers when they agreed on transitional reforms to the VAT system in 1991 in the belief that, in a true internal market, there should be no distinction between domestic and cross-border transactions.

When he introduced the reform proposals in 1996, Monti insisted that it was "essential" to have a new system in place by the beginning of the year 2000.

But diplomats from several member states involved in negotiating tax reforms say this will be impossible.

In the meantime, the Commission is trying to plug certain holes in the transitional regime and remove some of the exemptions from the system applying in various member states.

Yet even this has proved laborious. Since the sixth VAT directive was agreed 21 years ago, private telecommunication services have appeared to compete with formerly stated-owned operators. The Commission sought to introduce a common system for taxing these services and repatriating the revenues, but found it impossible to get agreement.

At the end of the Dutch presidency last year, the Commission gave up the fight and a compromise was reached. All member states were allowed a derogation from the regime to give them time to solve the immediate problem of dealing with cross-border telecoms services.

To complicate matters further, some member states are pressing for further exceptions to the rules rather than greater harmonisation. In February, the Dutch government requested reforms to allow cuts in VAT rates applicable to labour-intensive services to 6%.