While supporting the extension of some temporary measures allowing specific Member States to impose lower than standard rates of VAT on certain goods and services, a report adopted by Parliament argues that all Member States should be able to use lower rates, if they wish, for locally supplied services and for basic goods and services where there is a clear social, economic or environmental benefit from doing so.

For many years, the EU has been aiming to introduce a common system of VAT based on taxation in the country of origin, but the Commission now accepts there is no prospect of the Council reaching unanimity on this in the foreseeable future. What were originally seen as transitional arrangements (essentially the system as was in place in 1993, with goods and locally supplied services taxed in the country of the consumer) now look likely to remain in force for some time.

Existing derogations should be extended

With the long term structure undecided, some Member States have derogations allowing them to charge lower rates of VAT on certain goods and services which apply indefinitely, while others - countries which joined the EU in 2004 - have time limited derogations which are about to expire. On an experimental basis, some Member States have also been allowed to apply lower rates on certain labour intensive services. This experiment runs to 2010, when the current minimum standard rate of 15 per cent also expires.

Pending a new assessment by the Council of the application of lower rates of VAT, due in 2010, the Commission is proposing to extend most of the existing derogations due to expire this year until 2010. In adopting by a large majority the consultative report by Ieke van den Burg (PES, NL), Parliament gave its approval to this plan. The final decision - as usual with taxation matters - is for the Council, acting unanimously.

Member States should be able to set lower rates on local services and basic goods

MEPs also supported the rapporteur's proposal to use this consultation procedure to send a message to Council and Commission on the wider issues. Given that the "country of origin" approach seems to be indefinitely stalled, they say the Council should decide whether to abandon this goal altogether. They say that, on VAT rates, the EU should not go beyond what is needed to ensure the internal market functions properly.

Member States, says Parliament, should therefore be allowed to apply reduced rates (or possibly even zero rates in particular circumstances) to basic goods and services, such as food and medication, for clearly defined social, economic and environmental reasons for the benefit of the final consumer. Given that locally supplied services, including services linked to education, welfare, social security and culture, which do not involve cross-border activities, have in principle no impact on the internal market, Member States should also be able to apply reduced rates to them.