Opinion of the Economic and Social Committee on the "Proposal for a Council Directive amending Directive 77/388/EEC as regards the possibility of applying on an experimental basis a reduced VAT rate on labour-intensive services"(1)

(1999/C 209/06)

On 31 March 1999 the Council decided to consult the Economic and Social Committee, under Article 99 of the Treaty establishing the European Community, on the above-mentioned proposal.

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 5 May 1999. The rapporteur was Mr Lustenhouwer.

At its 364th plenary session (meeting of 26 May) the Economic and Social Committee adopted the following opinion by 108 votes to two, with four abstentions.

1. General comments

1.1. The Committee welcomes the proposal and is pleased that the Commission has heeded so swiftly the European Council's call (11 and 12 December 1998) for such a proposal.

1.2. The proposal satisfies the similar request made by the Committee in its opinion on the European employment summit(2). As the Committee indicated at that time, the employment climate is the reason some Member States want to be allowed to set a reduced VAT rate as a means of creating jobs. Moreover, the Commission has indicated that the proposal also reflects the desire to achieve greater balance between taxation on the labour factor and taxation on other (production) factors.

1.3. According to the Commission, an important consequence of the introduction of a reduced VAT rate in these labour-intensive sectors will be that it will help to combat the black economy, since it will considerably narrow the price differential between undeclared and declared labour. The ESC, which recently called for renewed efforts at Community and national level to combat the black economy(3), feels therefore that the Commission proposal is worthy of support from this perspective too. Although the impact on job creation will probably be limited, moving labour out of the "black" economy into the "white" economy is in itself sufficient reason to endorse the proposal.

1.4. Moreover, the Commission states that the proposal is underpinned by the fact that a reduced VAT rate will result in lower consumer prices and thus stimulate demand for labour-intensive services.

2. Specific comments

2.1. The Commission has opted for a system whereby the Member States can request Council authorisation to apply - under certain strict conditions - a reduced VAT rate on labour-intensive services which are not currently listed in Annex H of Regulation 77/388/EEC. The Council can only give such authorisation unanimously, and for a fixed period, i.e. from 1 January 2000 until 31 December 2002 at the latest.

2.2. The Committee endorses this approach. Indeed, it enables the Member States to use this option where the employment climate and the specific situation in the relevant sectors offer the prospect of implementing such an instrument effectively. However, any possible benefits must be carefully assessed in each individual case against additional administration and monitoring costs, and any distortions of competition. It should also be remembered that the resulting tax shortfall will have to be made up either by raising taxes elsewhere or by means of appropriate expenditure cuts. The Committee therefore feels it is important that, prior to drawing up the list of services to which a reduced VAT rate can be applied, the Member States should consult employer and employee representatives in the sectors concerned, and listen to their version of the possible effects of such a measure. The Committee feels that the optional nature of the approach - subject to the strict conditions set out below - as opposed to a blanket implementation of the system, makes a more flexible, targeted implementation possible. Moreover, the safeguard provided by the unanimous decision-making process would prevent it from being applied in an undesirable way.

2.2.1. The Commission imposes strict conditions on the types of services to which a reduced VAT rate can be applied. The Committee believes that these restrictions are wholly warranted. Indeed, job creation will be particularly successful if the services concerned are of a labour-intensive nature, and the VAT rate has a direct impact on the final price the consumer has to pay. By limiting these services to local services, distortions of competition can be largely prevented (although substitution effects can never be ruled out completely, and there may be some limited cross-border impact in border regions), and the operation of the single market will not be hampered. With reference to distortions of competition, the Committee calls on the Member States to ensure that the tax discrepancies which currently exist in some Member States between private sector firms and non-profit sector activities do not grow even further with the introduction of a reduced VAT rate.

2.2.2. The Committee realises that it will always be possible to argue about what constitutes a labour-intensive service, and how the expression should be interpreted. There are no hard-and-fast criteria, although it clearly refers to services where wage costs account for the lion's share of the final price paid by the consumer. Accordingly, the Committee feels that services of a social nature or which fulfil an important role in the community should not be excluded from the services to which a reduced VAT rate can be applied. Services such as care for the elderly, handicapped persons and children, and those of an environmentally-friendly nature, for example, should not be excluded from the scope of this instrument. In this regard, the unanimity requirement in the Council decision-making process could also ensure there is a realistic, socially-useful interpretation of the term.

2.3. The Committee endorses the fact that Article 1(b) of the proposal makes certain requirements of the Member States who wish to introduce such a measure. When applying, Member States must be able to say what impact they expect the measures to have on job creation, and what back-up measures they might introduce to prevent distortions of competition, for example.

2.4. Article 1(c) introduces a corrective mechanism about which the Committee has some reservations. Under this mechanism, the Council, acting by qualified majority and on a proposal from the Commission, would be able to withdraw the derogation from the standard VAT rate if distortions of competition should arise. Whether this corrective mechanism is really necessary is a moot point. The "experimental" application of the reduced VAT rate will only, in the first instance, be possible for three years, which is a very limited period, thus making significant distortions of competition unlikely. All things being equal, the Committee concludes that the Commission was right to include this corrective mechanism. Some monitoring to prevent or counter serious distortions of competition is called for here, as it is not possible to foresee all the effects. Bearing in mind the need for legal certainty for the firms and associations which will be able to apply the reduced VAT rate from 1 January 2000, the Committee wonders whether it should not be possible to correct the list to include other reduced VAT rated activities or to delete certain activities within a fixed deadline, i.e. 1 January 2001. Any distortions of competition, whether domestic or in border areas, should in any case have materialised after a year.

2.5. Article 1(d) requires the Member States to approve the application of a reduced VAT rate, and to prepare a detailed assessment report by October 2002 at the latest. Since June 2002 would appear to be a more appropriate deadline, in view of the time needed to draft a definitive regulation for this area, the Committee feels that the proposal should take into account the impact on Member State budgets. By bringing the budgetary impact into the equation, it will be possible to get an idea of the effectiveness of the measure in terms of the cost per job created. Moreover, the Committee wishes to see the Member States' assessment reports, and to be consulted before the Commission and the Council reach their conclusions in the future.

3. Conclusions

In conclusion, the Committee generally endorses the Commission proposal, which takes on board the Committee's conviction that use of the VAT rate should also be an option in the fight against unemployment. It also meets the calls from numerous craft industry and SME organisations for a weapon to combat the black economy. It is of course possible to level several criticisms at this proposal. As mentioned earlier, the interpretation of "labour-intensive" is open to criticism and it is not always fully clear which services are of a mainly local nature; there could be apprehension about the impact in border regions, and scepticism about the job-creation impact of the measure, etc. All these criticisms were expressed in the debate which preceded the presentation of the proposal. Nevertheless, the Committee concurs with the European Council's view that the need to stimulate employment is so great that no stone should be left unturned. Consequently, the proposed measure deserves the benefit of the doubt and will have to prove itself as an experiment.

The Committee therefore calls on the Council to adopt the proposal as soon as possible, so that it can enter into force on 1 January 2000 [cf. Article 2(1)] as planned.

Brussels, 26 May 1999.

The President

of the Economic and Social Committee

Beatrice RANGONI MACHIAVELLI

(1) OJ C 102, 13.4.1999, p. 10.

(2) OJ C 355, 21.11.1997.

(3) Commission communication on undeclared work -OJ C 101, 12.4.1999.