EU VAT rate rules to be relaxed, modernized under Council agreement

By Doug Connolly, MNE Tax

The European Council on December 7 reached an agreement on a proposed directive to update the EU’s rules on value-added tax (VAT) rates. Under the new rules, EU member states will have more options to apply reduced and zero VAT rates on certain goods and services in line with current EU priorities.

“Member States will have more flexibility to make their VAT systems reflect national policy choices,” EU Commissioner for Economy Paolo Gentiloni said, “while ensuring coherence with common European priorities: the green and digital transitions and of course the protection of public health.”

Changes directed at environmental priorities both add new categories of goods and services for preferential rates and phase out old ones. Reduced rates and exemptions for fossil fuels and other greenhouse-gas emitting goods will be phased out by 2030, and chemical fertilizers and pesticides phased out by 2032. At the same time, new preferential rates will be available for environmentally friendly goods like solar panels, electric bicycles, and recycling services.

In addition to green changes, reduced VAT rates will also be available for goods and services related to public health (e.g., personal protective equipment, certain medical equipment) and digital transitions (e.g., internet access, live streaming). Member states will also be able to exempt certain goods and services related to basic needs.

To ensure all states are treated equally, the changes will also make available to all member states certain preferential rates for products historically allowed to only some member states – except for any such preferential rates that are being phased out.

Although the changes will update and modernize the list of goods and services eligible for reduced VAT rates, it retains some limits. Beyond the standard VAT rate (above 15%), member states will be able to apply two reduced rates as low as 5% for categories of goods and services in the updated eligibility list. Additional reduced rates and exemptions (i.e., a 0% rate) will be available with respect to the approved “basic needs” categories.

The changes aim to modernize the existing EU VAT rules, which have been in place for 30 years. The agreement on planned changes comes three years after the European Commission proposed updating the rules in 2018.

The European Parliament must now issue its opinion on the proposal, expected by March 2022, before the Council can formally adopt the directive. The legislation will come into force 20 days after formally adopted. Once in force, EU member states can begin applying the new system.