European Council Introduces a Proposal on Updated VAT Rates for EU Members

On December 7, the European Council agreed the proposal to update EU rules on rates of value added tax (VAT). The new rules reflect Member States’ current needs and the EU’s present policy objectives. The updates give taxation equal footing and more possibilities to apply reduced and zero VAT rates to Member States. One of the most significant features of the initiative is the step-by-step phasing out of preferential treatments for environmentally harmful goods.

It is stipulated Directive 2006/112/EC of 28 November 2006 on the Common System of Value Added Tax, which is effective now, should be amended accordingly.

Goods and Services Proposed for Reduced VAT Rates

The Council updated the list of goods and services for which reduced VAT rates are allowed, taking into account the digital transformation of the economy.

The rates for following goods and services are planned to be updated:

? Pharmaceutical products used for medical and veterinary purposes;
? Medical equipment, appliances, devices, items, aids and protective gear, including health protection masks, normally intended for use in health care or for the use of the disabled;
? Transport of passengers and their property, such as luggage, bicycles, including electric bicycles, motor or other vehicles;
? Books, newspapers and periodicals supplied either on physical means or electronically or both, other than publications wholly or predominantly devoted to advertising and other than publications wholly or predominantly consisting of video content or audible music;
? Admission to shows, theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas, exhibitions and similar cultural events and facilities or access to the live streaming of these events;
? Reception of radio and television broadcasting services and webcasting of the same programmes provided by a media service provider; internet access services provided as part of digitalisation policy;
? Construction, renovation and alteration of housing, including demolition and reconstruction, and repairing of housing and private dwellings;
? Construction and renovation of public and other buildings used for activities in the public interest;
? Goods and services usually intended for agricultural production, with the exception of machinery or buildings; until 1 January 2032, supply of chemical pesticides and chemical fertilisers;
? Admission to sporting events or access to the live-streaming of these events or both; use of sporting facilities;
? Goods and services used by organisations engaged in welfare or social security work;
? Services of sewage, street cleaning, refuse collection and waste treatment or waste recycling;
? Repairing services of household appliances, shoes and leather goods, clothing and household linen.
New items on the list include:
? Supply and installation of solar panels on and adjacent to private dwellings, buildings used in the public interest;
? Supply of services related to live equines;
? Electricity, district heating and district cooling; supply and installation of highly efficient low emissions heating systems; and, until 1 January 2030, natural gas and wood used as firewood;
? Live plants and other floricultural products;
? Children’s clothing and footwear; supply of children’s car seats;
? Bicycles, including electric bicycles; rental and repairing services of such bicycles;
? Works of art, collectors’ items and antiques;
? Legal services supplied to employed and unemployed people in labour court proceedings, and legal services supplied under the legal aid scheme;
? Tools and other equipment normally intended for use in rescue or first aid services when supplied to public bodies or non-profit-making organisations operating in civil or community protection;
? Services in connection with the operation of lightships, lighthouses or other navigational aids and life-saving services.

General Recommendations of the New Draft Directive

? The goods and services eligible for reduced rates should aim at the benefit of the final consumer and pursue objectives of general interest. Once goods and services are selected accordingly, reduced rates would normally be applicable along the entire commercial chain.

? In order to enable Member States to apply reduced rates in the strengthening of the resilience of their health systems, it is appropriate to extend the scope of goods and services considered to be essential to support the provision of health care and treatment of disabled.

? Member States should be given the possibility to contribute to a climate-neutral and green economy by means of applying reduced rates on environmentally friendly supplies and work towards elimination of environmentally harmful products.

? All Member States are to be treated equally and must obtain the same possibilities to apply reduced rates, which should however remain an exception to the standard rate. As such, a maximum of two reduced rates of a minimum of 5% is offered, along with a reduced rate less than 5% and an exemption with the right to deduct input VAT.

? Member States should be able to apply reduced rates and exemptions with the right to deduct VAT on the supplies of goods and services on which other Member States apply such rates and exemptions. Accordingly, Member States should present to the Council a report with a comprehensive list of the goods and services to which they apply reduced rates and exemptions.

? All services that can be supplied to a customer by electronic means shall be taxable at the place where the customer is established, has his permanent address or usually resides. Therefore, it is necessary to modify the rules governing the place of supply of services relating to such activities.

? A new provision in the VAT directive considers possible future crises and a possibility for Member States to respond swiftly to exceptional circumstances: pandemics, humanitarian crises or natural disasters. Members should have the possibility to apply an exemption with deductibility of VAT paid in respect of the intra-EU and domestic supplies of goods and services provided to emergency victims.

The following step in the adoption the Directive will be its consideration by the European Parliament, which is expected to provide its opinion by March 2022.

VAT Rates in the EU as of 2021

EU leaders of standard VAT rates are Hungary (27 percent), Croatia, Denmark, and Sweden (all at 25 percent). Luxembourg has the lowest standard VAT rate at 17 percent, together with Malta (18 percent), Cyprus, Germany, and Romania (all at 19 percent). The EU’s average standard VAT rate is 21 percent, six percentage-points higher than the minimum standard VAT rate required by the EU regulation (Article 19 of the VAT Directive establishes the standard rate must be no less than 15%, though there is no maximum).

COVID-19 stipulated implementation of specific VAT rates in several EU states; this especially concerns the hospitality industry. For instance, Germany temporarily reduced its standard VAT rate from 19 percent to 16 percent and its reduced VAT rate from 7 percent to 5 percent from July 1 to December 31, 2020. Ireland reduced its standard VAT rate from 23 percent to 21 percent from September 1, 2020 to February 28, 2021. However, now these indicators are back to their original values.

Main motifs for introducing lower VAT rates are typically promotion of equity (to create more comfortable conditions for low-income households) and development of local services (such as tourism, public transport and utilities).

Sources:

Communication of the EU Council

Draft Amending Directive 2006/112/EC

Current Directive 2006/112/EC

Explanation of VAT Rules by the European Commission

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