Malta pushing to retain zero VAT

Malta is pushing to remain exempt from charging VAT on food and medicine if other EU member states such as the UK and Ireland are allowed to retain their own zero rates.

The island is taking this stance in the context of EU negotiations on whether to allow reduced VAT rates on certain services to be extended to other sectors such as catering.

The main thrust in this direction is coming from France, which wants to be allowed to cut VAT on restaurants to five per cent from the EU's minimum rate of 15 per cent.

The French request has encountered resistance but Germany, the main objector, seems to have recently changed tack and is now more likely to give in to the demand if an overall package on VAT is agreed by the EU.

EU Council sources said that this is good news for Malta as it increases its chances of negotiating a new extension to its non-permanent derogation that allows it to apply a zero-rate VAT on food and medicine.

Malta argues that equal treatment between member states on VAT and taxation should be maintained. It holds that as long as the UK and Ireland are allowed to have a VAT-free regime on food and medicine, it should be permitted to do the same.

It has already asked for a declaration that commits the EU to extend Malta's current derogation, the sources said.

Malta had managed to negotiate a transitional period on VAT-free food and medicine before it joined the EU in 2004. Originally, the derogation would have expired at the end of this year but in 2007 it was extended to the end of 2010 in view of the ongoing negotiations.

Sources said the Irish and British situation is different to Malta's as their derogation is permanent and can only be amended with their agreement. In Malta's case, the island's consent is not necessary for such an amendment to be made.

However, according to sources, it seems "Malta is on the right track".

"Malta's equal treatment argument is well appreciated by other member states and the change in Germany's position should make its demand more acceptable. However, it's still a long way to go and an uphill struggle," the sources said.

The issue is expected to be tackled again at next week's meeting of EU Finance Ministers in Brussels, although no final decision is expected to be taken there.