Commission proposes experimental job creation initiative through VAT cuts

In February 1999, the European Commission presented long-discussed proposals for a Directive which would allow Member States to apply a lower rate of VAT to labour-intensive services. This is aimed at creating jobs, particularly in services which are often performed in the underground economy.

On 17 February 1999, the European Commission presented a proposal for a Directive allowing Member States the option of applying a reduced rate of value added tax (VAT) on certain labour-intensive services for an experimental period of three years. The measure is designed to exploit the potential for job creation in businesses offering local services, which is seen as being substantial. It is also envisaged that the measure may assist in reintegrating some businesses which have drifted into the "informal" economy. The details of the proposal are as follows:

• Member States would be able to choose whether or not to introduce such a measure;

• the measure would be applied for three years only, between 1 January 2000 and 31 December 2002;

• a reduced rate should under no circumstances result in distortions of competition. The risks of this happening would be examined by the Commission both before and during the trial period; and

• to qualify, services must be highly labour intensive and, as a general rule, be supplied locally. In the Commission's opinion, the best opportunities could be offered by repair of movable tangible goods, renovation and repair of housing, entertainment parks, cleaning and laundry services, personal services and services such as home help and welfare services for young people, people with disabilities and older people.

Member States wishing to introduce such a measure would be required to provide the Commission with all relevant particulars before 1 September 1999, failing which they would not be authorised to take part in the experiment. Moreover, the Member States which applied this measure would be obliged to draw up a detailed report before 1 October 2002 containing an assessment of its effectiveness in terms of job creation and efficiency. On the basis of Member State reports, the Commission would make an overall assessment and put forward any proposals where necessary.

The idea of enabling a cut in VAT on labour-intensive services was initially tabled in the run-up to the "European Council" Employment Summit on 20-21 November 1997 (EU9711168F), on the initiative of Mario Monti, the member of the Commission responsible for taxation (EU9711161N). The proposed measure is seen as an integral component of the Commission's approach to fostering employment, as well as reducing the costs of unskilled labour through tax measures. According to Mr Monti, "taxation can and must be geared more closely to job creation. Work is already under way at European level, the package of measures to counter harmful tax competition is designed to rebalance the tax burden between labour and other, more mobile factors, while the proposal for a common system of energy taxation will make it possible to compensate for the reduction in non wage labour costs."

Although the idea did not receive the unanimous approval of the Member States (EU9803195N), the Commission was requested, in the light of the conclusions of the December 1998 Vienna European Council (EU9812141N), to present a formal proposal for a Directive on this matter.