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VAT on Labour Intensive and other Locally Supplied Services in the EU: Possible Implementation of Privileged Treatment in Croatia

The newest proposed EU tax directive extends the reduced VAT rates to the set of locally supplied services in the broader sense and makes them permanent. Besides the existing labour intensive services they should cover also restaurant and catering services, whole housing sector and some additional similar locally supplied services. The research tried to simulate the introduction of such a broader scope of the reduced VAT rate to Croatian small business applying the reduced rate not only to labour intensive and locally supplied services but also to the sectors that do not have the reduced VAT rate now and could introduce it based on the list of reduced rates in Annex III (mostly food production and agriculture and fishing). The pass through to prices is very moderate as well as other effects. The reduced VAT rate could be recommended for the restaurants only. Perhaps construction of housing and construction services related to housing and some other labour intensive services could be added to the list, but the further research is needed. Surprisingly, this is in line with the later decision of the EU Council, that accepted the proposed directive only partially, adding only restaurant services to the labour intensive (and locally supplied services) list.

VAT; reduced rate; labour intensive services; locally supplied services; Croatia

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