EU finance ministers yesterday agreed to extend by the end of 2010 the derogation dealing with VAT on food and medicines granted to five new member states, including Malta.

The decision was made in view of a wider debate that will start in the middle of next year aimed at harmonising VAT rules across the EU. The agreement practically gives an added year to Malta's derogation on applying a zero-rated VAT on food and medicines. Originally, Malta's derogation, negotiated prior to the country's EU accession in 2004, would have expired at the end of 2009.

The Parliamentary Secretary at the Finance Ministry, Tonio Fenech, who attended the Ecofin Council meeting in Brussels, told The Times the decision means Malta will now only have to introduce a five per cent VAT on food and medicines from January 1, 2011 onwards.

However, not even that is a foregone conclusion because Malta will only do so if all EU countries implement the same measure.

"During our negotiations on this issue we made it clear, and this is supported by a declaration in the Accession Treaty, that Malta will only do this if similar derogations granted to other EU member states are also removed," Mr Fenech insisted.

Ireland and the UK apply the same VAT regime as Malta, excluding VAT on food and medicine.

Asked what will be Malta's position if the EU agrees to lift the derogations for all countries, Mr Fenech said the island will then have to follow a level playing field. "If that will be the case, we will follow suit. But we won't accept a different treatment."

Negotiations on the Maltese zero-rate package on foodstuffs and pharmaceuticals were one of the toughest that Malta and EU member states had prior to accession. The final agreement was only reached at the eleventh hour, on the final day of negotiations held in Copenhagen in December 2002.

According to the deal reached, Malta could continue to apply a VAT zero rate on food and medicines for a seven-year transitional period until the end of 2009. In addition, however, it was also agreed that a declaration is attached to the Accession Treaty stating that Malta agrees to this arrangement on the premise that, by the end of the transitional period, no other country would still apply an exemption on the two items.

Under current EU law, food and medicine should be charged VAT at least at a reduced rate of five per cent. However, by way of exception, Ireland and the UK do not apply VAT on food and pharmaceuticals. Instead, they have an indefinite transitional period that can only end once they agree to it.

In the negotiations, the Maltese government had declared that should VAT at a reduced rate of five per cent be introduced on food and medicines it would be prepared to extend cost of living compensation.