UPDATE 2-EU ruling on illegal VAT to hit Spanish health firms

Thu Jan 17, 2013 12:38pm EST

* Rates of 4-10 pct to revert to 21 pct

* Health companies owed 2.3 bln euros by regions

* EU Court of Justice rules VAT rate breaches EU law (Adds potential cost to local authorities, effect on patients)

BRUSSELS/MADRID, Jan 17 (Reuters) - Spain's decision to cut VAT on some medical products was ruled illegal by Europe's highest court on Thursday, a fresh blow to health companies already struggling to get local authorities to pay their bills, who will now have to raise product prices.

The ruling means that cuts made two years ago to bring value-added tax to between 4 and 10 percent will have to be reversed to the standard level of 21 percent.

Fenin, an association that represents health technology companies in Spain, warned a VAT hike would increase costs for local governments by at least 1 billion euros and lead them to rack up even more debt with pharmaceutical companies.

"This ruling is unfair for citizens and could create difficulties for patients to access products that play an important part in the prevention, diagnosis and treatment of illnesses," Fenin said in a statement.

Spain's cash-strapped local authorities, which control health budgets, have racked up billions of euros in unpaid bills for medical goods, missing budget targets set by central government as it grapples with a national economic crisis.

Central government settled 6 billion euros of outstanding bills by the end of the 2011 but the regions still owed 2.3 billion euros as of last September.

Pharmaceutical companies in Spain have warned their future could be jeopardised if the government does not stop over-spending regions from racking up debts.

Spain's Treasury said it would work with the European Commission to identify which products would be affected by the court ruling.

Brokerage Banesto Bolsa said the EU ruling was "very bad news" for companies that provide medical products like syringes for hospitals, estimating that their earnings before interest, tax, depreciation and amortisation could fall 15 percent.

Lobby group Farmaindustria, which represents pharmaceutical companies, said the decision would have little effect on laboratories that produce new medicines, given that tax on raw materials used in the process was a very small part of total expenditure.

"Of course there will be impact but it won't be major," said Julian Zabala, spokesman for the group.

Spain found itself in the dock after the European Commission said it had breached EU rules.

"By applying reduced rates of VAT beyond what is authorised under the VAT Directive, Spain has failed to fulfil its obligations under EU law," the Luxembourg-based EU Court of Justice ruled.

The court said Spain could not set lower taxes for medical substances, which are normally used in making medicines, or for medical products used to treat illnesses. ($1 = 0.7521 euros) (Reporting by Foo Yun Chee in Brussels and Rodrigo De Miguel in Madrid; Writing by Clare Kane; Editing by David Cowell and Sophie Walker)

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