EU split over VAT overhaul

Luxembourg, Portugal and Germany have opposed reform of the EU’s VAT regime on cross border services and e-commerce.

Meeting in Luxembourg, EU finance ministers remained divided on Wednesday over an overhaul of the system on cross-border services aimed at charging VAT in the country of consumption.

Luxembourg and Portugal, which both enjoy low VAT rates, did not embrace proposals because the current system makes those countries more attractive for service providers.

Germany, where VAT is to rise from 16 per cent to 19 per cent, has claimed on its part that the new system would make it too difficult for the countries of consumption to monitor and collect the tax.

The reform was put forward by the Austrian EU presidency to overcome perverse effects of the current regime which pushes enterprises from the services market – boosted by e-commerce - to settle in low-VAT countries, bringing about unfair tax competition.

In Luxembourg, the island of Madeira, part of Portugal, the VAT is no higher than 15 per cent, while it reaches 19.6 per cent in France and 18 per cent or more in other member states.

“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,” said Austrian finance minister Karl-Heinz Grasser when the proposal was mooted for the first time last May.

But unanimity, which is the rule in taxation affairs, is set to obstruct VAT reform as approval of every one of the EU’s 25 member states is needed for the proposal to become law.

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