Poland on Monday rejected the proposal on VAT that would have seen lower VAT rates for nine old member states continued until 2010.
Unless a last-minute deal is found, these member states must apply the standard rate of VAT immediately or face fines.
The lower-rate scheme expired on December 31. Since there was disagreement among member states about how to proceed (France wanted to add lower rates on restaurant bills too) the European Commission allowed three weeks to find a deal before it took legal action.
Poland, the Czech Republic and Cyprus initially opposed the deal because it allowed old member states an extension until 2010, whereas new member states’ derogations expire in 2007.
A Cyprus Ministry of Finance spokesman told the Financial Mirror that earlier proposals would have allowed new member states to apply the lower rates for longer.
However, under the Austrian proposal, from the end of 2007 Cyprus is due to increase VAT on food and pharmaceuticals from zero to 5%, on restaurants from 8% (the lowest possible is 5%) to 15%. Certain categories of individuals will also have to pay 15% VAT on land purchases, although the ministry of finance says that this may only apply to persons subject to VAT. Developers already pay VAT on land purchases.
The Czech Republic and Cyprus caved in under pressure over the weekend but Poland, the largest of the three, has stood its ground.
France’s prime minister, Dominique de Villepin cited the VAT row in a speech last Friday as an excuse to stop further enlargement after the accession of Bulgaria and Romania, which due is in 2007 but may be delayed until 2008.
The Cyprus government had already hinted that it would try to make up for the increased VAT from 2008 in other ways. Referring to the increases due, the finance ministry spokesman said “We will see how and where we will address the effects on lower income classes.”
Under the overall proposal put forward by the Austrian presidency, an expert study would be undertaken to research which labour-intensive goods and services across the EU could benefit from lower rates.
Fiona Mullen
