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Law360 (June 15, 2020, 12:39 PM EDT) -- Austria plans to slash value-added tax for restaurants, cultural establishments and tourism in an effort to help those sectors bounce back after rules enacted to stop the spread of COVID-19 shut them down, the country's finance minister said.
Gernot Blümel said the government will introduce a reduced VAT rate of 5% for cinemas, museum visits, music events, the publishing sector and delivery of food and drinks to restaurants, according to a statement published Friday. The reduction is valid from July 1 until Dec. 31 this year.
"It's pleasing that the economy is slowly gaining momentum again," said the minister, who also acknowledged that "there will still be sectors for which the new start stutters and comes late."
The announcement marks the latest use of the VAT system by a country to help the economy rebound from shutdowns and restrictions on movement that were put in place to stop the spread of COVID-19.
Earlier this month, Germany announced a general VAT cut for the second half of the year. Last month, Austria announced it was lowering the VAT on nonalcoholic beverages in restaurants, and earlier in the COVID-19 crisis, it said it would eliminate the VAT on medical masks.
From an economic point of view, the move makes sense, specialists said.
"Cutting VAT on the hardest-hit sectors is certainly part of the first round of recovery fiscal measures as the lockdown eases," said Richard Asquith, vice president of global indirect tax at Avalara, a tax-filing software company. "It is particularly effective as it targets businesses that are now open and trading, as opposed to other grants, which can end up with firms headed for liquidation anyway."
He warned, however, that these targeted VAT cuts "have a habit of becoming long-term" and therefore could erode a country's tax base.
Margit Schratzenstaller-Altzinger, an economist at Vienna's Wifo institute, said that given the uncertainty of the economic recovery, limiting the VAT cut for the second half of the year is reasonable. The measure could be extended if the government believes it is necessary, she added.
The government's plan to establish a 5% VAT rate on some items could hit a roadblock in that under current European Union law, countries are only allowed to have two reduced rates of VAT. Austria currently has a regular VAT rate of 20% and reduced rates of 13% and 10%. A third reduced rate of 5% thus would seem illegal under EU rules.
The Austrian finance ministry didn't respond to requests for comment.
The European Commission, which enforces the EU's treaties, said through a spokesperson that it doesn't comment on legislative proposals, but that it us in "close contact with all member states regarding taxation, including Austria." The spokesperson said that while under current law EU states can't apply more than two reduced rates, under a 2018 proposal, which is not yet law, countries could apply three reduced VAT rates as well as an exemption from VAT.
Without being more specific, Blümel is quoted in the statement as saying Austria and the EU are working together on what he called a "temporary exception," though it wasn't clear to what law an exception was sought.
"In this special situation it should also be possible that especially hit sectors exceptionally get short-term help to get back on their feet," he said.
After quickly announcing strict lockdown rules in mid-March, Austria was one of the first European countries to begin reopening its economy, beginning in mid-April to lift some of the lockdown rules.
Austria has clashed with the EU executive before in the COVID-19 crisis. The finance minister said in April that in exchange for Austria's support to other EU countries, the commission should temporarily waive rules on state aid to allow countries to support struggling sectors.
Though the commission relaxed state aid rules in March, it has said that state aid controls remain necessary to preserve a level playing field in the EU's single market.
--Editing by Vincent Sherry.
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