EU leaders called to rule on sales tax spat

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By Huw Jones

BRUSSELS (Reuters) - European Union finance ministers failed again on Tuesday to agree on prolonging reduced rates of sales tax on local services, leaving the bloc's leaders to arbitrate as Germany dug in its heels.

EU Tax Commissioner Laszlo Kovacs has proposed extending the system that is due to expire in 2010 and which allows 18 of the 27 EU members to levy value-added tax (VAT) rates below the 15 percent standard level on a variety of labour-intensive local services, from bicycle and home repairs to haircuts.

All EU states would be allowed to introduce reduced rates on the same services, if they wanted to, but several meetings of finance ministers have ended in stalemate as unanimity is needed in EU tax matters.

"On reduced rates of value-added tax, it is something on which we agreed we disagreed," Christine Lagarde, economy minister of EU president France, told a news conference.

"A broad majority of member states is convinced such a reduction is useful in certain sectors but sadly not all states are convinced," Lagarde said.

The use of reduced rates of VAT was part of an economic stimulus plan proposed by the European Commission that EU leaders will discuss at a summit on December 11-12.

France is keen for a deal so President Nicolas Sarkozy can fulfil an election promise of reduced rates on restaurant meals.

Germany, though, is unconvinced about the economic benefits of reducing VAT.

"Germany will not agree to it," Finance Minister Peer Steinbrueck told reporters.

He accused the Commission of using "salami tactics" with a further proposal for reduced VAT on energy-saving products such as lightbulbs early next year, an initiative called for by Britain and France.

Lagarde said the French presidency had made efforts to ease the concerns of those who opposed reduced rates. It proposed that states must justify them on economic and budgetary grounds and show they would not distort the bloc's internal market.

Reform of the EU's patchwork of reduced VAT rates also forms part of the Commission's Small Business Act aimed at helping smaller firms flourish and create jobs.

EU industry ministers endorsed the principles of the SBA on Monday.

Separately, EU finance ministers agreed they would not collectively introduce a general cut in VAT rates as Britain has done from Monday in a bid to kick-start its economy.

The European Commission suggested in its stimulus plan that EU states could ease VAT rates, though not below the 15 percent minimum.

(Additional reporting by Ilona Wissenbach; Editing by Dale Hudson)

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