EU finance ministers failed to agree Tuesday on a list of services to benefit from exceptionally low value added tax, with the incoming German government blocking a deal particularly important to France.
After two and a half years of talks on the list, the ministers decided to let heads of state and government work out at a summit next week such issues as whether hairdressers and restaurantiers should benefit from low VAT rates.
The European Union's current British presidency has been struggling to broker a deal on which industries should be included, but time is running out before the existing list expire at the end of the year.
"We will try our best to get an agreement on an important dossier which matters to a large number of states," said British finance minister Gordon Brown, who chaired the ministers' meeting.
Brown, who is known to have little appetite for lengthy negotiations with EU counterparts, was upbeat about the prospects for a deal at the December 15-16 summit in Brussels.
"We think there is a good chance of reaching an agreement at the council next week," he said.
Like all issues regarding tax harmonisation in the EU, the list must be unanimously accepted by the 25 member states. Exceptions aside, EU rules do not allow a minimum VAT rate of less than 15 percent.
The stakes are high for the sectors concerned and the current deadlock has left business leaders on the existing list - which includes activities like building renovation, hair cutting and window-washing - in limbo, wondering if they will benefit from a VAT tax break next year.
Hoping to pave the way for an agreement, Britain has put forward a compromise list taking up member states' main wishes for reduced VAT on services carried out at a local level and which, therefore, do not affect cross-border competition in the EU's single market for goods and services.
Germany's newly installed government is widely seen as holding the key to a deal because progress so far has been held up by opposition from Berlin.
"I think it's true to say that the new German government wants to look at its position on this matter and I think that it was right to leave this up to the council (summit) so that the German government, which has just come into the administration, can examine this in more detail," Brown said.
Paris has been working its close relations with Berlin - but with little success so far - in hope of breaking the deadlock and getting reduced VAT for building renovation prolonged and securing lower rates for restaurants as both industries are huge employers in France.
"Our German colleague, Peer Steinbrueck, the new finance minister, was not able at this point to offer his support," said French Finance Minister Thierry Breton.
However, Breton said he had the impression Germany was ready to make a gesture to help reach a deal
"The German minister is ready to embrace some of the British package, which he considers to be too broad. He is ready to make proposals," Breton said.