EU close to deal on reduced VAT rates

Malta is close to winning the right to start charging lower VAT rates on certain "labour-intensive" sectors of the economy until the end of 2010, although this does not mean the government will necessarily exercise this right.

Currently, only nine EU member states have the right to impose lower VAT rates in a handful of sectors such as construction, home improvements, hairdressing and a few others as stipulated in an EU schedule. This right will now be extended to all the 25 member states, putting them on an equal footing, under a compromise agreement reached last night at a marathon session of EU finance ministers in Brussels.

However, it is up to each member state to decide whether to make use of the extension. Countries which already apply the reduced rate charge between five and 10 per cent VAT on the selected services.

The agreement is still partial however. It has been approved by 22 member states but is yet to be given the green light by Poland, the Czech Republic and Cyprus. These three countries have been given up to the end of the week to come in line with the others.

Prime Minister Lawrence Gonzi, who represented Malta at the meeting, said Malta had expressed itself in favour of the deal.

"We still have to wait for the decision of three member states, however I think that the compromise reached is a fair one as it puts all member states on an equal footing," he said last night.

Asked whether Malta would be implementing any lower VAT rates as stipulated by the agreement, the Prime Minister said no decision on the matter had been taken as yet.

"We now have until March to declare our intentions to the European Commission. Obviously, this is not a decision to be taken rapidly and we will undertake the necessary studies and discussions to decide whether to use this new right or not."

If finally approved, the agreement reached yesterday will replace a similar one that expired at the end of last year and will now last until the end of 2010, this time with the new member states on board.

The new member states were also hoping that the discussion would lead to an extension of their temporary rights, acquired before accession, giving them transitional periods to charge reduced rates on other sectors.

In the case of Malta this transitional period, which expires in 2010, covers VAT exemptions on food and medicine.

This extension, however, was not agreed to.

France's request to extend reduced VAT rates for restaurants was also turned down.