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May 22, 2004

VAT Harmonisation in the EU

Via Tyler who will understand the difference, who got it from 2blowhards who will also, who were discussing this which is from Newsweek International and they definately don't get it. You might want to take this post as an example of not believing what you read in the papers, or perhaps the blogosphere, once again, correcting big media.
The point at issue ?

Consider the value-added taxes that were "harmonized" all over Europe during the 1990s. They benefit fast-food chains, since the tax on takeaway is only 5.5 percent, while they penalize sit-down restaurants, whether humble bistros or haute cuisine, which pay 19.6 percent. When President Jacques Chirac ran for re-election in 2002, he promised to reduce the tax, but such is the nature of the new Europe that all 25 countries will have to approve the measure for it to take effect—in 2006.

This is wrong. Incorrect. An error of fact. No, not simply spin, not a difference of interpretation, it is an egregious error which someone employed by the mighty Newsweek should know is incorrect. If I were wearing my tinfoil hat today and in conspirazoid mood I might even suggest that it is deliberate. For there is no tax harmonization in the EU. None, not a scrap, for things like VAT rates, income taxes nor corporate taxes. We do have harmonised import tariffs, as we are a trading bloc that seems pretty obvious. Tax harmonisation is the next political battle, the one just coming up over the horizon. For reporters to start stating that it has already happened is to handicap those against such a move. Those like me of course.
The whole thing is important becasue we are seeing a playing out of the two main economic ideas within Europe. The statist, Govt knows best idea, exemplified by France and Germany, and the more free market, classically liberal ideas of places like the UK and the new Eastern European members. Tax harmonisation would lead to the high corporate taxes of the former (39.4%), while what is referred to as "harmful tax competition" would lead to the lower rates such as in Ireland (12.5%), Lithuania(19%) and Estonia (0%). To state that harmonisation has already occured in one area of taxation is to hamstring those arguing for it not to happen at all.
So, what did actually happen, what is it that those highly paid reporters have misunderstood?
VAT rates are not harmonised in the EU. 17.5% in the UK, 19.6% in France, 19% in Portugal ( which raised it from 18% a year ago), no these rates are not the same. VAT rates on take-away food? 0% on cold food in the UK, 17.5 % on hot food, 5.5 % on take-aways in France. No, don't see any harmonization there at all.
Every country in the EU is free to set its VAT rate at whatever it wishes. There are also a number of, for historical reasons, tax breaks. In the UK these have been books and newspapers, food, children's clothes and new housing. Other countries have other priorities such as the above French break on taxation of take-aways.
Such tax breaks (usually called VAT exempt or VAT zero rated or reduced rate) lead to some fun at the margin: what is the definition of children's clothes, a question answered by reference to their size. The definition of food has led to many a court case, there being a presumption that basic foodstuffs (in the UK at least) should not be taxed. So what is a basic foodstuff? One answer was that plain biscuits (cookies to Americans) were basic, while chocolate covered ones were luxury and thus paid VAT. This led to the makers of Jaffa Cakes, which are chocolate on one side only, fighting to have their product regarded as basic, a fight that went all the way through the court system to the House of Lords. Took so long I cannot remember who won but it does show some of the burdens and costs that slicing and dicing the tax base leads to: think of the lawyer's fees on both sides as it spent a decade in the courts. The same principle, of basic and non basic foods led Nigel Lawson when Chancellor to distinguish between hot take-away food and cold, the former paying VAT: it actually became the defining moment of that budget, that fish and chips went up by 17.5% overnight.
So if each country has this freedom to set its own VAT rates, why this problem that darling Jacques has? It's all to do with the European Single Market, not harmonisation of taxes. You do not have to get 25 countries to agree to your changing the VAT rate. JC can make VAT on everything in France 5.5% if he so wishes. He can also raise the 5.5% rate on take-aways to any number higher than the current one, for that is the diminishing or abolition of a tax break. What you do need permission from everyone else to do is to introduce a new tax break, like, for example, giving restaurant meals the same break as take-aways. This is something very much at the heart of the open market that the EU is internally. Brussels, via the bureaucracy and the Council of Ministers (thus the 25 country problem) has to approve each and every tax break. On a large scale this means things like aid to specific industries: France has been a particularly egregious flouter of these rules over Groupe Bull, Air France, France Telecom and Electricite de France.
On a more minor scale the VAT rules have led to the UK taking two years to pilot through the removal of VAT from tampons and similar hygeine products.
As an example of why such care and attention is paid to who and how such tax breaks are granted. In the early 1980's CSF Thomson was the major European manufacturer of video machines and facing high competition from the Far Eastern manufacturers. So Mitterand, who was not allowed under the rules to increase import duties, decided that all videos imported into France must come through Poitiers. That would be OK if it were not for the fact that Poitiers is a river port, cannot handle either containers or ocean going ships, had a tiny warehouse and was staffed by two men and a dog. This was quite obviously discrimination in favour of the French domestic producer. So, ever since, the granting of state aid or tax breaks has been something that must be agreed by all of the participants in the EU. Things like the UK tampon VAT removal take time but do happen. Granting tax breaks to the restaurant industry probably will not.
The bottom line, as Tyler is so fond of saying, is that there is no tax harmonization in the EU. There is, however, harmonization of who to and how you can grant a tax break, a very different thing.

May 22, 2004 in European Union | Permalink


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Actually, there has been tax harmonization in the EU. Harmonization does not only concern the rates, you can also harmonize the tax bases and this has been done for both VAT and excise duties. The rates are indeed left to the country although the convergence process implemented in the 1990s somewhat restricted the possible dispersion of rates.

Posted by: Claire | Jan 18, 2005 11:56:34 AM