Malta keeps VAT-free food and medicine

Malta has won an intensely-fought battle at the EU to keep foodstuffs and medicine free of VAT in what is being seen as a major victory for the island.

A deal was secured yesterday during a meeting of EU Finance Ministers in Brussels that allows Malta to retain VAT exemption on these important consumer items even after the expiry of a temporary derogation at the end of 2010.

After that date, a minimum VAT rate of five per cent would have had to be imposed if agreement were not reached.

Negotiations on the issue had been ongoing for two years before all the other 26 member states and the European Commission finally relented to Malta's request.

A satisfied Finance Minister Tonio Fenech said after the meeting that Malta had managed to win the deal despite very tough negotiations and strong initial resistance. "This was a very tough one and we have managed to succeed despite the initial opposition of some large member states," he said. He said the negotiations had even involved direct contact between Prime Minister Lawrence Gonzi and German Chancellor Angela Merkel but Malta had finally managed to convince its partners that the deal was necessary for the island.

"This agreement will now put our minds at rest that our consumers will still benefit from VAT-free food and medicines for the coming years," he said.

In the EU, VAT is normally paid on all foodstuffs and medicinal products. The only exceptions to the rule are the UK and Ireland, which had both obtained a permanent derogation, and Malta, which had been given a temporary derogation until the end of 2009, later extended by a year.

Under the new arrangement, Malta is now assured it can keep its current zero-rated VAT regime as long as the UK and Ireland keep theirs.

EU Council sources said Malta had been making the argument that equal treatment between member states on VAT and taxation should be maintained.

"Malta's main argument was that as long as the UK and Ireland were allowed to have a VAT-free regime on food and medicine, Malta should also be permitted to do the same. Although some member states, including heavyweights like Germany, were at first contrary to Malta's request, they finally gave in and a compromise was reached," the sources said.

In its Accession Treaty, Malta had insisted on the inclusion of a unilateral declaration stating that "Malta agrees to this (VAT) arrangement on the premise that by the end of the transitional period no other country would still apply an exemption on these two items".

EU sources had said that, despite this declaration, the Irish and the British situation was different as their derogation was permanent and could only be changed if they agreed to. In Malta's case, the island's consent was not necessary as the derogation was only transitory.

Mr Fenech said yesterday the deal again proved that, despite being small, Malta could still persuade the large member states to support its requests, even if these initially seemed difficult to achieve.

The agreement in Malta's case came within a larger deal at Ecofin, which includes the possibility for EU member states to start charging reduced VAT rates on certain services such as at restaurants and for elderly health care.

Asked whether Malta would now consider introducing a lower VAT rate on restaurant meals, Mr Fenech said he would soon be having talks with interested parties on the matter. The VAT rate on such services stands at 18 per cent.