EN Official Journal of the European Union CE 78/533

(2004/C 78 E/0555)

WRITTEN QUESTION P-3376/03

by Christine De Veyrac (PPE-DE) to the Commission

(10 November 2003)

Subject: Reduced rates of VAT — hairdressing

Since 1999, on a trial basis, the European Union has authorised the application of reduced rates of VAT to ‘highly labour-intensive services’. An exhaustive list of eligible sectors was drawn up. Three EU Member States (Spain, Luxembourg and the Netherlands) decided to apply the lower rate in the hairdressing sector and would now seem to be willing to continue the experiment. However, in its most recent proposal for a directive concerning VAT the Commission proposes that hairdressing should be removed from the list of services eligible for a reduced rate. That measure is based on a study carried out by the Commission which concludes that the reduced rate has had no favourable impact on employment and that its impact on prices is unclear.

The Commission's standpoint is regrettable in that the conclusions of the study reflect statistics drawn up over only two or three years, depending on the country concerned. Such an assessment would seem to be far from adequate as the basis for a definitive economic judgment.

In the light of the above, can the Commission state whether it regards two (or three) years' statistics as sufficient to assess the economic effectiveness of a tax measure and whether, accordingly, it would not make sense to continue the current experiment by retaining hairdressing on the list of ‘highly labour-intensive services’ eligible for reduced rates of VAT?

Answer given by Mr Bolkestein on behalf of the Commission

(4 December 2003)

The reduced rate of VAT for hairdressing was introduced by Directive 1999/85/EEC of 22 October 1999 which allows a reduced VAT rate to be applied on an experimental basis to labour-intensive services (1). This experiment was introduced for a specific period and evaluation reports have to be presented by both the Member States taking part in the experiment and the Commission.

The Commission adopted its evaluation report on 2 June 2003 (2). This concluded that in the view of ‘information supplied by Member States and the inherent limitation of analytical methods applied, it was not possible to find solid evidence of such reductions in VAT boosting job creation. For the effect on the reduction on the black economy the same observation can be made’.

Under this evaluation exercise the Commission carried out a comparative analysis using its macroeconomic QUEST model, of the effects of reducing VAT rates and the impact on labour costs. This exercise showed that, even under the best assumption that the reduction of VAT rates would be passed on in full to domestic prices, a reduction in labour costs would create 52 % extra jobs within the European Union at the same cost to the budget.

The evaluation period was originally set by the Council at three years (and then extended for one year) and is sufficiently long to determine whether the anticipated economic mechanism (reduction in prices, increase in demand and ultimate increase in jobs) works correctly. One of the important lessons learned from this experiment is that, in many cases, the reduction in VAT rates is not passed on, or if it is, only partially, in the selling price to the final consumer. If it is passed on, it is usually only temporarily and there is a catching-up effect in the sectors concerned (prices rise more than the rate of inflation). It is therefore concluded that the economic mechanism does not work as had been anticipated and the impact on employment is often unpredictable, even in the longer term.

On 23 July 2003 the Commission adopted a proposal for a Directive on reduced rates (3). As the Commission's objective is to improve the functioning of the internal market it is essential that all Member States are able to apply reduced rates if they wish in the same sectors. The proposal does not include reduced rates for hairdressing services.

The proposal is being examined by the Council. It has to decide by unanimity, and in the light of Parliament's opinion, on the future scope of reduced VAT rates.

(1) Council Directive 1999/85/EC of 22 October 1999 amending Directive 77/388/EEC as regards the possibility of applying on an experimental basis a reduced VAT rate on labour-intensive services, OJ L 277, 28.10.1999).

(2) COM(2003) 309 final.

(3) COM(2003) 397 final.