Cyprus has until March 31 to request lower VAT rates on a small range of labour-intensive sectors, following a deal struck with EU finance ministers on Tuesday.
Under the directive adopted by the Council of (Finance) Ministers, all member states, including the ten new members, can apply reduced VAT rates for certain labour-intensive services until 2010.
This directive enacts an agreement reached at its meeting on January 24.
Reduced rates are applicable to district heating, as long as it does not distort competition and two (or in exceptional cases three) of the following services: small repair services, the renovation of private dwellings, window cleaning and private household cleaning, domestic care services and hairdressing.
In order to qualify, member states request authorisation to do so by March 31, 2006.
“This is a success for Europe,” Austrian Finance Minister Karl Heinz Grasser told reporters in Brussels. Austria is current president of the 25-nation EU.
Although we were unable to contact finance ministry officials late on Tuesday, we assume that the government will want to take full advantage of the deal.
The VAT deal was held up in January when Poland, partly backed by the Czech Republic and Cyprus, objected to a the unequal treatment of a proposal put forward in January which would have seen new member states having to raise their reduced rates at the end of 2007 while old member states would have bee allowed to continue to apply lower rates until 2010.
The EU first began what it terms its “experiment” in 1999, to allow reduced VAT rates for certain locally provided, labour-intensive services.
Nine EU states – Belgium, Greece, Spain, France, Italy, Luxembourg, the Netherlands, Portugal and the UK – slashed their VAT rates in a limited number of sectors.
However, the legal basis for the derogations under “Annex K” ran out on January 1, 2006. Without the new agreement extending the 1999 pact, the nine states would have had to either raise their VAT levels to a minimum level of 15% or face EU legal action.
The experiment has now been extended until December 31, 2010 and will include all member states.
Permanent reduced VAT rates for a number of goods and services are also allowed for under annex H of 77/388/EEC.
The Council has also invited the Commission to present a report by the end of June 2007 to assess the impact of reduced rates applied to locally supplied services in terms of job creation, economic growth and the internal market.
The impact will include restaurant services, which France had wanted to include in the list of reduced rates.
The study will be carried out by an independent economic think-tank.
