Money talks

It was at the end of May that we covered a report retailing concerns expressed by the International VAT Association (IVA). They were worried that proposed simplification of EU VAT rules for cross-border trading of services would undermine the battle against fraud, already costing billions of pounds a year.

Well, the one thing about the VAT system is that any changes must be agreed unanimously by all 27 member states. One country alone can block a proposal and, this time, one was enough – nearly the smallest member state in the community, the Duchy of Luxembourg.

This was the outcome of the Ecofin meeting just concluded – conveniently in Luxembourg. To the disgust of EU taxation and customs commissioner Laszlo Kovacs, the country's prime minister, Jean-Claude Juncker (pictured), is refusing an agreement – although this has nothing whatsoever to do with the fraud problem. In fact, it is because Luxembourg is the major beneficiary of the current rules, standing to lose at least €300 million in revenue each year if they change.

By way of background, VAT is the sales tax system which, when it was launched in April 1967, was recommended to members because – in the words of the recital to the First VAT Directive - "…a system of value added tax achieves the highest degree of simplicity…".

Such was that "highest degree of simplicity", however, that it has now been replaced by the VAT Sixth Directive (77/388/EEC). And to ensure it was made even simpler, that Directive since has been further amended by Directives 80/368/EEC, 84/386/EEC, 89/465/EEC, 91/680/EEC, 92/77/EEC, 92/111/EEC, 94/4/EC, 94/5/EC, 94/76/EC, 95/7/EC, 96/42/EC, 98/80/EC, 1999/49/EC, 1999/59/EC, 1999/85/EC, 2000/17/EC, 2000/65/EC, 2001/4/EC, 2001/115/EC, 2002/38/EC, 2002/93/EC, 2003/92/EC, 2004/7/EC, 2004/14/EC, 2004/66/EC, 2005/92/EC, 2006/18/EC, 2006/69/EC and 2006/98/EC.

This list, as you will fully appreciate, omits the accompanying EU Regulations and, of course, the full list of the other simplifying proposals in the pipeline - all to make the VAT system even simpler of course.

However, for the EU commission, mere perfection is never enough. So, intent on giving the system an even higher-than-highest degree of simplicity, on 29 October 2004, it published a proposal for yet another directive amending Directive 77/388/EEC.

This was to provide for "detailed rules for the refund of value added tax ... to taxable persons not established in the territory of the country but established in another Member State."

So simple is this proposition that it scarce needs any explanation but for those who have difficulty keeping up with the crystal clarity of the Commission's thinking, this simply allows for VAT on supplies of services between VAT registered persons ("business to business") to be applied in the purchaser's country rather than in the supplying country. Furthermore, it was also intended to reduce the administrative burden on businesses by harmonising VAT rules currently applicable to services supplied to businesses and private individuals.

The proposal has special application to electronic services, like internet, telecommunications systems, satellite and media services where cross-border trading is the norm. But it was also one fraught with danger, making it easier for criminals to milk the system.

As it happens, though, Luxembourg – at 15 percent - has kept its service tax at one of the lowest levels in the EU, well below neighbouring Germany, which recently raised its to 19 percent. This has been a deliberate ploy to attract lucrative service businesses. The tax advantages have attracted iTunes, Skype, eBay, Amazon.com, AOL and other big internet companies to set up shop in the Dutchy. The government is not anxious to see them go.

Thus, even when the ultra communautaire Luxembourg is involved, national interest will always prevail. "We have not made ourselves extremely popular in Europe," says prime minister Juncker, but he then adds: "Here, an essential interest of Luxembourg was at stake and therefore today I had no other possibility than to say no."

Kovacs is now looking to an end of year deadline to reach a compromise with Luxembourg, adding that he was optimistic that it would be done. Optimistic he might be but there is big money at stake – and money talks.

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