The European Union (EU) finance ministers reached a compromised deal on Tuesday to reform the 27-nation bloc's value-added tax (VAT) rules.
"Today we have reached an agreement on the VAT package, which means we have been able to introduce a significant change into the taxation system for VAT," Portuguese Finance Minister Fernando Teixeira dos Santos, whose country holds the EU presidency, said after a monthly regular meeting with his counterparts from other member states.
Among those changes, the most controversial one is to switch VAT payments for those services such as electronic commerce and telecommunications to the country where the service is supplied, rather than the country in which the service originates.
Although most EU member states backed the change, Luxembourg had blocked the move for years, saying it would cost the country around one percent of its total tax revenue, or around 200 million euros a year.
The tiny Grand Duchy, which has one of the lowest VAT tax rates in the EU at 15 percent, has attracted a number of big electronic service companies, including internet telephony company Skype and Apple's iTunes, to base their European headquarters in the country.
Under the compromised deal reached Tuesday, the switch will be phased in from 2015 to 2019, which means the country in which the service originates will initially be allowed to retain 30 percent of the VAT revenues in 2015, with the amount gradually being lowered to zero by 2019.
"It is a five-year issue, which has been always on the agenda without having a agreement. Now, finally the agreement was reached, and that certainly shows that even under very difficult circumstances, when we need consensus it can be achieved when serious community interest is at stake," said EU Taxation Commissioner Laszlo Kovacs.
EU finance ministers also agreed to renew temporary derogations which currently allow the Czech Republic, Cyprus, Malta, Poland and Slovenia to apply reduced VAT rates on certain services.
For example, under the EU's current VAT regime, member states can only choose their own VAT rates between 15 percent and 25 percent, but the Czech Republic is allowed to apply a reduced VAT rate of five percent to construction work for residential housing under the derogation arrangement.
The derogations, which were introduced when the five countries joined the EU in 2004, would otherwise expire at the end of this year but were extended for another three years.
"If we let the derogations expire, then the differences between old and new member states will be even wider than today," Kovacs said.
As part of the reform package, EU finance ministers endorsed a plan from the commission to improve the administrative cooperation in the fight against VAT fraud, in particular missing trader fraud, which occurs when somebody imports high-tech goods such as chips and mobile phones free of VAT from other EU member states and then sells it with the VAT added.
Kovacs said he would present legislative proposals on the relevant issues early next year.
Source: Xinhua
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