New plan for ceiling on VAT rates

Date: 21/12/1995

By Fiona McHugh

IN a bid to deflect criticism for its failure to draw up tax harmonisation plans on schedule, the European Commission has proposed a maximum 25&percent; level of standard VAT for all member states from the beginning of 1997.

The move comes just two months after Peter Wilmott, a top official in the Commission's taxation department, was sacked by Single Market Commissioner Mario Monti in a dispute over when and how the EU should move to a definitive and common VAT regime.

A comprehensive new regime was supposed to come into force on 1 January 1997, but due to internal problems it is now unlikely to do so before 1998.

According to sources close to Monti, the Commission wants to adopt a softly-softly approach, testing the waters with a statement of intent early next year before putting a legislative proposal on the table.

“Depending on the reaction of member states, the legal text would follow shortly afterwards or not,” explained one official.

The current draft measure can be seen as an attempt to sweeten the postponement of the definitive regime proposal, a delay which has prompted outcry in the EU's business community.

“Taxation is one of the biggest remaining obstacles to the single market and so to increased competitiveness,” explains Hans Glatz of Daimler Benz.

Monti is acutely aware of the need to harmonise taxes and has made that his priority task for next year. But, with unanimity in the Council of Ministers required on all fiscal proposals and enormous sensitivity in some member states about national sovereignty in this area, his hands are, to a large degree, tied. Hence the diplomatic approach.

As long as the unanimity condition is required, progress towards Monti's goal of a single harmonised tax system is bound to be slow and marked by political wheeling and dealing. Without a proposal, however, horse trading cannot begin.

“If the Commission would get on with it and produce a proposal, then at least we could begin to argue,” explained one diplomat.

At the moment, member states must impose a minimum standard rate of 15&percent;, but there is no maximum rate. By getting member states to agree to a ceiling, Monti hopes to take a first shaky step on the long, difficult road to tax harmonisation.

Differences between member states' tax rates cause huge distortions in the single market, tempting shoppers to cross borders in search of low-tax bargains.

Putting such a 25&percent; lid on the amount of VAT which can be charged is, according to tax experts, a step in the right direction. But, given the fact that rates already fall within that band, the measure is unlikely to cause any dramatic improvement in single market conditions.

“A 10&percent; band is still far too wide. Member states would have to agree to at least a 5&percent; margin to avoid distortions in the single market,” explains one official.

Under the definitive regime, VAT would be charged in the country in which goods or services are bought and not that in which they are consumed. The problem with the origin system is that it favours exporting countries and penalises importing countries.

To solve that problem, the Commission is likely to propose setting up a central clearing house which would redistribute money between member states.