EU ministers reach deal on lower VAT rate on certain goods & services

After years of wrangling on the issue, EU finance ministers on Tuesday agreed on a deal partly unifying VAT rates, allowing individual countries to reduce value-added sales tax on some goods and services. The move comes against the backdrop of the continuing economic crisis, which has left many businesses struggling. Soon they could be somewhat better situated to weather the downturn.

Joaquin Almunia, Miroslav Kalousek, Laszlo Kovacs (left to right), photo: CTK

For years EU officials have haggled over value-added tax, some, like France, pushing for key reductions, others, like Germany, opposing them. In short, it took a global economic crisis for all 27 members to see eye to eye. A meeting on Tuesday by EU finance ministers – including Miroslav Kalousek on behalf of the Czech EU presidency – proved fertile ground for reaching a deal: now individual states will be allowed to drop VAT rates on some goods and services to as low as 5 percent (as opposed to the EU minimum of 15). Czech Finance Minister Miroslav Kalousek:

“Until now a number of states were unable to lower rates even if they wanted to, and that was unfair. The agreement affects highly labour-intensive services, where there is no risk of unfair competition between states. No one is going to fly to Vienna to have their shoes repaired just because they have a lower VAT rate.”

What goods and services are eligible for a lower rate? Restaurants, hairdressers, item repair, apparel, the hiring of domestic help and more. Now, it will be entirely up to individual states on whether to implement lower value-added tax. Finance Minister Miroslav Kalousek said that as far as the Czech Republic is concerned he would propose lowering the VAT rate on restaurant services. Hairdressers and item repairs could also be affected. Analysts say lower VAT in certain services could make a difference, even if it remains a minor step in the face of the recession. At the same time, it is not clear whether consumers themselves will feel any benefits since it is likely that many businesses will keep prices as they are to better shoulder the recession. Petr Dufek is an analyst for ČSOB Bank:

“I am not sure that consumer will benefit from these changes. I think that above all it is support of businesses, so therefore I don’t really expect any really visible changes in prices in the service industry.”

The Czech Republic could see a drop in the VAT rate for some services as early as this summer, but the lower rate will still have to be approved in parliament. There the opposition Social Democrats could play a key role, although they too have been described as not being against.