THE GOVERNMENT and consumers alike breathed a sigh of relief after news that zero VAT is to be levied on pharmaceuticals and foodstuffs until the end of 2010.
Cyprus had been due to introduce value-added tax on medicines and foodstuffs and raise VAT on restaurant services to 15 per cent up from the current five per cent.
Before accession, the island had negotiated a zero-rated VAT on food and medicines with the derogation set to expire on January 1, 2008.
Imposing VAT on the above basic goods and services would have driven prices upward, coinciding with the switch to the euro. For obvious reasons, the government was anxious to delay imposition of the tax.
Late on Tuesday and after some of the toughest negotiations, EU finance ministers agreed to extend to 2010 the derogation dealing with VAT on food and medicines granted to five new member states, including Malta and Cyprus.
The decision was made in view of a wider debate that will start in the middle of next year aimed at harmonising VAT rules across the EU.
Under current EU law, food and medicine should be charged VAT at least at a reduced rate of five per cent. However, by way of exception, Ireland and the UK do not apply VAT on food and pharmaceuticals. Instead, they have an indefinite transitional period that can only end once they agree to it.
Finance Minister Michalis Sarris, who attended the ECOFIN Council meeting in Brussels, told the Mail that Cyprus had to push hard to keep its current regime in place.
He said some countries, most notably Germany and Denmark were dead-against the Cypriot demand, but eventually came around.
“Their position was based on a matter of principle; namely, that having previously agreed to the VAT increments, it was not right for us to go back on that commitment. But we were able to get our point across that raising taxes now would have a real and adverse impact on the economy.
“Imagine the tax was levied now. Experience has shown that prices of commodities in Cyprus never go down, only up… it’s a one-way street.
“It would have been the worst possible timing for the VAT,” added Sarris, referring to the imminent introduction of the euro.
By procedure, ECOFIN decisions must be unanimous.
“It was a cliff-hanger. We were talking many hours, adjourning, coming back. But our side managed to get the support of Laszlo Kovacs [EU commissioner for taxation and customs], and that’s extremely important,” said Sarris.
The views of other EU members also came into play.
“The Maltese, who had an extension for VAT until 2009, stated that if the EU agreed to lift the derogations for all countries, they would then have to follow a level playing field. But otherwise, they wouldn’t accept a different treatment.”
Sarris said it was not a foregone conclusion that the VAT hike would come at the expiry of the next extension.
“It all depends on the outcome of the review for the VAT package next time around,” he noted.
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