EU to propose returning some VAT-setting powers to states: draft

BRUSSELS (Reuters) - The EU might hand back powers to cut some VAT sales tax rates, a draft plan seen by Reuters shows, a move especially resonant for Britain, where complaints about centralized control from Brussels have prompted a referendum on EU membership.

A Union Jack (R) flies next to other flags outside the European Parliament in Brussels January 29, 2016. REUTERS/Yves Herman

The draft underlined that Britain would retain its right to apply a zero rate of VAT, an entitlement that it shares with other older member states but which London is unusual in using so widely, notably on food and medicine. It may also solve a row over “tampon tax” there.

Expected to be made public next week, the EU document said: “VAT needs to be modernized and rebooted.”

Among a number of legislative actions it proposes for this year and 2017, the document says states might be given the power over what is taxed at reduced rates. That is now set up to a minimum of 5 percent and the Commission has the say on an EU-wide list of items eligible for such low rates.

If approved, the new rules would give governments either greater say in drawing up that EU list or the list would simply be scrapped. The more ambitious option would grant EU states “greater freedom on the number of reduced rates and their level”, the draft said.

This may allow Britain to reduce below 5 percent the VAT on sanitary products, which existing rules prohibit.

The document also ends doubts over the future of zero-rate VAT after Economics Commissioner Pierre Moscovici, a former French finance minister, said in January he disapproved of it. In any case, governments have a veto on EU tax matters.

The Commission warned that governments, already strapped for cash, could hurt revenues by yielding to pressure to cut VAT. The tax raises nearly 1 trillion euros ($1.1 trillion) a year in the 28 EU countries, amounting to 7 percent of EU GDP.

To counter widespread VAT fraud on trades between EU countries, the Commission also proposes that countries where goods are produced collect tax on behalf of the countries where they are sold.

That would require more cross-border cooperation and might add to red tape but could cut by 80 percent an annual 50 billion euros lost to fraud in cross-border trade, the EU Executive estimates in the document.

Editing by Alastair Macdonald and Louise Ireland