Derogation on food and pharmaceuticals extended permanently
After heated discussions on reduced VAT rates at the EU Finance Ministers meeting (Ecofin) in Brussels yesterday, Malta secured a permanent extension for zero-rated VAT on food and pharmaceuticals, a derogation which Malta enjoyed since accession but which was due to expire at the end of this year.
Furthermore, the union of ministers agreed to grant member states the flexibility of reducing VAT from full rates (in Malta’s case 18 per cent) to reduced rates (in Malta’s case 5 per cent) on labour-intensive services.
This means that upon Finance Minister Tonio Fenech’s return from Brussels, government will be expected to lower VAT rates in the restaurant industry, among others. This move could see a downward trend in the prices of restaurant meals – thus making the hospitality industry in Malta more competitive and more accessible to the end consumer.
“Malta’s derogation on food and pharmaceuticals would have ended at the end of this year,” Fenech told Business Today soon after his meeting in Brussels came to a close. “Had this permanent extension failed to pass through, we would have had to apply a VAT rate on foodstuffs and pharmaceuticals at 5 per cent.” negotiations to extend the derogation were long and cumbersome, especially since Germany – the EU’s top financial contributor, was opposing the decision. Fenech explained that Malta’s participation in the discussions went as far as the setting up of a meeting between Prime Minister Lawrence Gonzi and German Chancellor Angela Merkel.
With regard to the possibility of VAT reduction on labour intensive services, which has been granted across the board at Ecofin, Fenech said he would be ready to support the introduction of lower VAT rates.
“We said we will support it in our electoral programme,” he said. “We are very satisfied to have agreed on this issue. Our next step is to discuss the idea with the sector and identify the best ways with which labour intensive services in Malta may become more competitive.”
Restaurateurs in Malta were critical of the way the country’s EU package had been negotiated, since hotel restaurants catering for package holiday tourists applied a reduced VAT rate, whereas independent restaurateurs were obliged to charge the full rate - on food which at ingredient stage would have been purchased at a zero-rate. Restaurateurs claimed that this not only rendered Malta less competitors vis-à-vis other destinations where restaurant meals were sold at reduced rates, but also hindered level playing field within the tourism sector and detached restaurant meal prices from home-cooked meals by too high a rate for sustainability.