EU finance ministers reached agreement on 7 December to update the current rules governing value-added tax (VAT) rates for goods and services.
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Why did the rules governing VAT rates need to be updated?
Current EU rules on VAT rates are almost thirty years old and were in urgent need of modernisation given the evolution of the overall VAT rules over the years. That is why the Commission proposed in 2018 to reform VAT rates.
That proposal aimed to fully align VAT rules with the EU’s priorities, because in some cases they could even have an adverse effect on progress in these areas. For example, some reduced rates currently allowed under the VAT Directive can have a potentially detrimental effect on the environment.
It also aimed to ensure that EU rules encompass certain goods and services linked to technological developments and current public health priorities, to maximise their potential to support positive changes in our society.
Today’s new rules are supported by a previous agreement to move the EU’s VAT system to one where VAT is paid in the Member State of the consumer rather than the Member State of the supplier. This ensures that a greater diversity in rates (as agreed today) would be less likely to disrupt the functioning of the Single Market or to create distortions of competition. At the same time, it also avoids proliferation of reduced rates which would endanger Member States’ capacity to collect revenues in the post-COVID-19 era.
What rates will Member States be able to apply to goods on the updated list?
Member States will continue to apply a standard rate of VAT above 15%.
However, they will now also have the possibility to apply two reduced rates as low as 5% to goods and services in up to 24 categories included in an updated and modernised Annex III of the VAT Directive.
They may also now apply one reduced rate lower than 5% and one exemption (‘zero rate’) to a maximum of seven categories on the list considered to cover basic needs e.g. foodstuffs, medicines, pharmaceutical products.
Member States have unanimously agreed on this reform. It will ensure a maximum of flexibility while also avoiding the erosion of public revenue: a particularly important safeguard given the huge efforts being undertaken towards a sustainable economic recovery in the aftermath of the COVID-19 pandemic and the massive investment needs we face in the coming years in view of the green and digital transitions.
What has been agreed on the list of goods and services that can benefit from reduced rates?
Today’s agreement follows intense and diligent consultations between Member States to bring the EU’s VAT rates regime into the modern world and align it with EU priorities such as the green and digital transitions, and the protection of public health.
As part of this, Member States have agreed to widen the current list of goods and services (Annex III of the VAT Directive) that can benefit from reduced VAT rates. In particular, the list has been updated to include:
- digital services that previously did not qualify for reduced rates such as internet access and livestreaming of cultural and sports events;
- goods which protect public health and that have shown to be crucial tools in the fight against COVID-19 and that could prove useful in future crises, such as personal protective equipment, masks and certain medical equipment; as well as more items considered as essential aids for the disabled;
- certain items such as bicycles, green heating systems and solar panels installed in private homes and public buildings, which can have a positive impact on the EU’s climate change priorities;
- diverse products and services deemed appropriate and useful by Member States, which are driven by the general interest of public policy objectives.
The updated list has been compiled according to a number of general principles, to which Member States will need to adhere going forward. These include: equal treatment between Member States, alignment of the list with EU priorities in support of the green and digital transitions, and public health protection, and the exclusion of certain goods and services for which reduced rates are not considered appropriate.
Reduced rates for goods and services that were permissible under the previous system but are deemed out of step with the European Green Deal will have to be ended in those Member States that apply them by 2030 at the latest.
What has been decided for derogations and exemptions currently available to individual Member States?
Under the current system, some Member States had been given authorisation upon their accession to the EU to apply derogations such as exemptions and reduced rates to specific items for which such treatment is not normally allowed under Annex III of the VAT Directive. These derogations and exemptions have led to a patchwork of rates across the EU, unequal treatment between Member States able to apply such special measures and those that are not, and represent a possible distortion of competition.
As part of today’s agreement, existing derogations for Member States that are aligned with the general principles on VAT rates can be kept provided they are in line with the EU Green Deal and pursue public policy objectives, but an ‘equal treatment’ clause makes them available for other Member States who wish to use them. So-called ‘super-reduced rates’ which allow stand-alone reduced rates below 5% in some Member States as well as ‘parking rates’ which allow reduced rates no more than 3 percentage points lower than the standard rate for certain specific products may also be kept under the same conditions.
Member States will need to end any derogations that are not in line with the EU’s Green Deal by 2030. A number of items that can have a detrimental effect on the environment and, as a consequence, on climate change mitigation action, have been explicitly excluded from Annex III. Member States will have until 2030 to end any favoured treatment for such products. Other existing derogations that are not justified by public policy objectives will need to be ended by 2032.
