Broad support for new EU VAT proposals

EU finance ministers have given cautious backing to plans to ensure that VAT on cross-border services is charged in the country of consumption.

Meeting in Brussels on Friday, the ministers discussed new proposals put forward by the Austrian EU presidency aimed at kickstarting VAT talks stalled since 2004.

Under current EU rules, VAT on cross-border services is charged in the country of origin, not consumption, making low-VAT countries attractive to service providers.

Other countries, fearful of losing valuable tax revenues as the market for cross-border services – especially those delivered electronically – continues to grow, have pushed for the loophole to be closed.

“We need to adjust the VAT system to take account of the modern era of electronic trade,” said Austrian finance minister Karl-Heinz Grasser, who chaired the meeting.

“It doesn’t make any sense that VAT rates can be used to distort competition – how can this be fair? Services should be taxed in the place where they are consumed, not where they are sent from.”

Grasser explained that the current complicated rules stipulate that companies selling products across borders must inform the tax authorities in the country of destination so that they can collect the relevant taxes.

“But in practice, this doesn’t happen,” he said. “This is an area ripe for simplification.”

Grasser downplayed suggestions that three low-VAT countries - Portugal, Luxembourg and Germany - had expressed concerns about the proposals.

“There were no surprises, and the reaction was very positive. We received a lot of support for our proposals, and have been encouraged to continue our efforts.”

“All tax issues are difficult, but we can make progress. We will be holding bilateral discussions with all member states before the next Ecofin council in June to clarify a few issues.”

EU tax commissioner László Kovács also backed the proposal. “We support the change to the country of consumption, at least until we move towards closer harmonisation of EU VAT regimes,” he said.

“It avoids unfair tax competition – without it, businesses would simply establish in lowest VAT country.”

Kovács stressed that no decision on the new regime had been taken at the meeting, which was primarily a chance to test the political waters.

“But we hope that a political agreement can be reached by the June Ecofin meeting,” he added.

All 25 member states must agree to the proposals – which are part of a broader VAT package – for them to become law.

The other elements of the VAT package are less controversial – they concern the simplification of cross-border obligations and refunds and arrangements for collecting VAT on digital downloads from outside the EU – and received broad backing.

Ministers also discussed a variety of other issues, including the commission’s proposed budget for 2007, new internal audit measures and a package of measures aimed at improving cross-border financial services such as banking and insurance.

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