This feature highlights the European Commission’s ongoing attacks against the way European Union (EU) Member States are applying reduced rates of value-added tax (VAT) to certain goods and services as it battles to simplify the European VAT system.
Under the EU VAT Directive, member states must apply a standard VAT rate of at least 15%, but have the option of applying one or two reduced VAT rates, with a minimum of 5%, to goods and services included on a restrictive list annexed to the Directive. However, that simple structure is complicated by a multitude of derogations which are included in the Directive or were granted to certain member states, for example, in Acts of Accession.
As part of wider work being done to fundamentally reform the EU value-added tax landscape, the European Commission launched a public consultation in October 2012 to ascertain opinions on certain reduced tax rates, and what a change in European rules in that area might imply.
The consultation was a follow-up to the EU VAT Strategy setting out the priority actions needed to create, a simpler, more efficient and more robust VAT system in the EU, which the Commission presented in December 2011. A review of reduced VAT rates was then highlighted as a priority. The three principles which should guide this review were listed as the abolition of those reduced rates which constitute a distortion to competition, and an obstacle to the proper functioning of the internal market; the removal of reduced rates on goods and services, the consumption of which is discouraged by other EU policies; and the subjection of similar goods and services to the same VAT rate, with progress in technology being taken into account in that respect.
As the list of goods and services which can benefit from a reduced rate was agreed by member states many years ago, respondents to the consultation were asked whether certain reduced VAT rates now contradict EU policy objectives, with answers being concentrated on the reduced rates for water, energy, waste management and housing. The consultation was part of an assessment process, and the Commission stressed that is not proposing the abolition or introduction of any reduced VAT rate yet, and that the results of the public consultation, which ran until January 4, 2013, will feed into the preparation of new proposals on VAT rates, which the EC will present in 2013.
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