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No. 55

More Flexibility on VAT Rates

The European Commission is trying to overhaul the VAT system across the bloc. As a result, a relevant step was made towards a proposal that allows EU Member States to be more flexible regarding their VAT rates settings, in a bid to encourage business growth and compliance.

Purpose

According to the European Commission’s press release, published on 18th of January, the new rules are amending the Directive 2006/112/EC (also known as the "VAT Directive"), which is outdated and restrictive. The current legislation allows Member States to apply reduced VAT rates to only a few sectors. At the same time, EU countries consider VAT rates as a useful instrument to pursue some of their political objectives.

This is the reason why the European Commission has proposed new rules to give Member States more flexibility to set Value Added Tax  rates and to create a better tax environment that may help businesses to flourish.

Currently, Member States can apply a reduced rate of as low as 5% to two distinct categories of products. There are also a number of EU countries which also apply specific derogations for further reduced rates.
Current VAT Rates

New Rules

Pierre Moscovici, the European Commissioner for Economic and Financial Affairs, Taxation and Customs, said about the proposal: ‘These proposals will give EU countries greater freedom to apply reduced VAT rates to specific products or services. At the same time they will reduce red tape for small businesses operating across borders, helping them to grow and create jobs. In short: common rules where necessary for the functioning of the internal market; greater flexibility for governments to reflect their policy preferences through their VAT rates’.

That being said, the European Commission is proposing a standard VAT rate of minimum 15% across the bloc and, at the same time, is giving the Member States the flexibility to put in place:

  • two separate reduced rates of between 5% and the standard rate chosen by the Member State;
  • one exemption from VAT (also known as the 'zero rate');
  • one reduced rate set at between 0% and the reduced rates.
In addition, the current list of goods and services to which reduced rates can be applied will be abolished. Instead, there will be put in place a so-called negative list of products on which the reduced rate or zero rate cannot be applied by Member States, which includes:
  • Services subject to the tour operator margin scheme (TOMS);
  • Goods subject to VAT under the margin scheme for second-hand goods;
  • Goods subject to VAT in accordance with the special arrangements for sales by public auctions;
  • Precious metals, jewelry and bijouterie;
  • Alcoholic beverages;
  • Tobacco products;
  • Supply, hire, maintenance and repair of means of transport;
  • Fuel oil, gas and lubricating oils;
  • Weapons and ammunition;
  • Computer, electronic and optical products and watches;
  • Electrical equipment;
  • Furniture;
  • Musical instruments;
  • Works of art;
  • Financial and insurance services;
  • Gambling and betting services.
The European Commission said that Member States will also have to ensure that the weighted average VAT rate is at least 12%. Another key point of the proposal is the fact that all goods currently enjoying rates different from the standard rate can continue to do so.

Benefits

These new rules are very important for businesses which are selling products and services in more than one country, because they face 11% higher compliance costs compared to those trading only domestically.

Also, the proposed measures are expected to reduce cross-border VAT fraud by around 80% and the overall VAT compliance costs by up to 18% per year.

What's Next

The proposal will be handed to the European Parliament and the European Economic and Social Committee for consultation, and to the European Council for their agreement. It will require unanimous agreement from all Member States in the Council before the proposal can enter into force.

If all goes well, these rules will be applied starting with 2022.

Sources and Further Reading

European Commission
European Commission
Lexology
Gauci-Maistre Xynou
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