By Huw Jones
BRUSSELS, Nov 3 (Reuters) - A deal on prolonging the use of reduced rates of sales tax on a range of local services in the European Union, from haircuts to bicycle repairs, largely hinges on winning round Germany, diplomats said on Monday.
EU Tax Commissioner Laszlo Kovacs has proposed prolonging a 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.
EU finance ministers will discuss the proposal on Tuesday at their monthly meeting but no deal is expected.
"There will be several weeks of negotiations on this subject and the presidency's aim is to try and reach unanimity here by the end of the year," an EU diplomat said on condition of anonymity.
"Some member states feel that reduced rates of VAT are a good economic policy instrument but others feel that VAT is a tax that finances public spending and reduced rates will reduce the level of income and there is also the question of the proper functioning of the internal market," the diplomat said.
Germany so far sees no real case for reduced VAT rates, even though they are only optional for states, diplomats said, but France, which holds the rotating EU presidency, has put forward a compromise it hopes will win support from the bloc's biggest economy.
France has proposed that states which want reduced rates on labour intensive services must justify them on economic and budgetary grounds and show they would not distort competition in the bloc's internal market.
A further review would be done after three years.
The environmental aspect of the supply of certain services should also be taken into account, France has proposed.
France is keen for a deal so that President Nicolas Sarkozy can fulfil an election promise to introduce reduced rates on restaurant meals, a move which requires backing from all EU states.
Only 11 of the bloc's 27 states are currently allowed to levy reduced rates on restaurant meals.
The VAT proposal is the first in a wider review of sales tax but some member states, sensing an opportunity to horse-trade, have dusted down longstanding requests.
Portugal, for instance, would like reduced rates on tolls for domestic road bridges as so many people commute to work over bridges in Lisbon, diplomats said.
Britain has said that as renovation of monuments is already on the list, the construction of new monuments should also qualify for reduced rates. Cyprus has requested special treatment for liquified petroleum gas containers.
Kovacs wants to reform the system to enable all states to apply reduced rates on the same range of local services if they wish.
His proposal is a core plank of the EU's draft measures aimed at helping smaller companies which typically offer local, labour-intensive services. (Reporting by Huw Jones, editing by Victoria Main)