# CE2004084EN.01021701.xml

| 3.4.2004 | EN | Official Journal of the European Union | CE 84/217 |
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3.4.2004

EN

Official Journal of the European Union

CE 84/217

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(2004/C 84 E/0261)

WRITTEN QUESTION E-2688/03

by Toine Manders (ELDR) to the Commission

(10 September 2003)

Subject:   Reduction in VAT rates for labour-intensive sectors

Subject:

During the period 1 January 2000 to 31 December 2003 the European Commission reduced VAT in a number of sectors to 6 %, by way of an experiment. In the Netherlands, this applied to hairdressers, painters and plasterers of housing over 15 years old, bicycle repair services and shoe and clothing repair services. The aim of the reduction in VAT was to increase employment.

The experiment with a lower rate of VAT on labour-intensive services proved a success. A study by the Central Planning Office (CPB) based on Netherlands statistics shows that the reduction in the VAT rate clearly had a positive effect on employment. The report speaks of a ‘significant impact on employment’. For example, employment (full-time equivalent) rose by 14,5 % in the hairdressing sector during the period 1999 to 2002, compared with a total average rise in employment during this period in the Netherlands of only 4 %.

Despite this, the Commission announced on 16 July that it did not intend to continue with the experiment involving reduced VAT on labour-intensive services.

| 1. | Does the Commission recognise the importance of the aforementioned labour-intensive sectors for employment and the economy in the Netherlands? |
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1.

Does the Commission recognise the importance of the aforementioned labour-intensive sectors for employment and the economy in the Netherlands?

| 2. | Is the Commission aware of the positive effects on employment resulting from the reduction in the VAT rate for the above-mentioned labour-intensive services in the Netherlands? |
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2.

Is the Commission aware of the positive effects on employment resulting from the reduction in the VAT rate for the above-mentioned labour-intensive services in the Netherlands?

| 3. | Does the Commission agree that its conclusions are based on a possibly incomplete and one-sided analysis of the effects of the experiments to date? If not, why not? |
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3.

Does the Commission agree that its conclusions are based on a possibly incomplete and one-sided analysis of the effects of the experiments to date? If not, why not?

| 4. | Does the Commission intend to reconsider its decision to end the experiment involving a low VAT rate on labour-intensive services, taking account of the current economic situation? If not, why not? |
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4.

Does the Commission intend to reconsider its decision to end the experiment involving a low VAT rate on labour-intensive services, taking account of the current economic situation? If not, why not?

Answer given by Mr Bolkestein on behalf of the Commission

(20 October 2003)

(20 October 2003)

| 1. | On 23 July 2003 the Commission adopted a proposal for a Directive on reduced rates of VAT (1). Since the Commission's aim was to improve the operation of the internal market it was important to give all Member States the same rights in deciding whether they applied reduced rates, and for the same sectors.
  The proposal for a Directive does not provide for reduced rates for labour-intensive services as such. In its evaluation report on the experiment with reduced rates for such services (2), the Commission concluded that, from the information supplied by the Member States and given the limitations of the methods of analysis used, it was not possible to find solid evidence of such reductions either boosting job creation or having an impact on the black economy.
  For the purposes of this report the Commission used its QUEST macro-economic model to carry out a an analysis of the effects of a reduced rate of VAT compared with the effects of reduced labour charges. The results showed that even in the most favourable hypothesis, namely that the entire reduction of VAT rates was passed on in domestic prices, a reduction in charges on labour creates 52 % more jobs, calculated for the EU as a whole, for the same budgetary cost.
  However, it should be noted that some sectors currently covered by the experiment (work on private housing and home care services) have been included in Annex H because many Member States already apply reduced rates or exemptions for these services under specific derogations which they have been granted. This is not the case for small repairs and hairdressing, since only a minority of Member States currently apply reduced rates to those services. |
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1.

On 23 July 2003 the Commission adopted a proposal for a Directive on reduced rates of VAT (1). Since the Commission's aim was to improve the operation of the internal market it was important to give all Member States the same rights in deciding whether they applied reduced rates, and for the same sectors.

1

The proposal for a Directive does not provide for reduced rates for labour-intensive services as such. In its evaluation report on the experiment with reduced rates for such services (2), the Commission concluded that, from the information supplied by the Member States and given the limitations of the methods of analysis used, it was not possible to find solid evidence of such reductions either boosting job creation or having an impact on the black economy.

2

For the purposes of this report the Commission used its QUEST macro-economic model to carry out a an analysis of the effects of a reduced rate of VAT compared with the effects of reduced labour charges. The results showed that even in the most favourable hypothesis, namely that the entire reduction of VAT rates was passed on in domestic prices, a reduction in charges on labour creates 52 % more jobs, calculated for the EU as a whole, for the same budgetary cost.

However, it should be noted that some sectors currently covered by the experiment (work on private housing and home care services) have been included in Annex H because many Member States already apply reduced rates or exemptions for these services under specific derogations which they have been granted. This is not the case for small repairs and hairdressing, since only a minority of Member States currently apply reduced rates to those services.

| 2. and 3. | The Commission has indeed seen the Centraal Planbureau study sent to it by the Netherlands Government. Although the Netherlands report did not reach the Commission until after the evaluation report was adopted, it did not alter the general trend which had emerged from the reports received from the Member States participating in the experiment and all the other information available to the Commission when it drew up its report. |
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2. and 3.

The Commission has indeed seen the Centraal Planbureau study sent to it by the Netherlands Government. Although the Netherlands report did not reach the Commission until after the evaluation report was adopted, it did not alter the general trend which had emerged from the reports received from the Member States participating in the experiment and all the other information available to the Commission when it drew up its report.

| 4. | The Commission proposal of 23 July 2003 is currently being examined by the Council. It will be up to the Council to decide, on a unanimous basis and in the light of Parliament's opinion, the future scope of reduced rates of VAT. |
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4.

The Commission proposal of 23 July 2003 is currently being examined by the Council. It will be up to the Council to decide, on a unanimous basis and in the light of Parliament's opinion, the future scope of reduced rates of VAT.

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(1)  COM(2003) 397 final.

1

(2)  COM(2003) 309 final.

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