It is common knowledge (or maybe only to the ever-multiplying hordes of beer enthusiasts) that the Czech Republic makes some of the finest beer in the world. Perhaps less obvious is the fact that the average-sized central European country also ranks at the top of world in beer consumption per capita.
Consequently, one would naturally believe that such a statistic aided the January 30, 2016 announcement of Czech Minister of Finance Andrej Babiš to reduce the value added tax on draft beer sold in restaurants. In reality, the decision is an inter-governmental olive branch of sorts and more generally, it speaks to the growing calls in Central Europe to reduce the VAT on basic necessities like food and increasingly, libations.
The Dry European Union
Article 98 of the European VAT Directive allows for member states to apply up to two reduced VAT rates in their respective countries but only for specific supplies of goods or services enumerated within the Directive. Noticeably absent from these specific supplies are alcoholic beverages.
Some countries, namely Portugal, Italy, Greece, Austria, and Sweden, have certain carve outs for low-alcohol drinks, culturally significant beverages, and domestic supplies of wine, but no country has a blanket reduced rate on alcohol. The basic principle behind this prohibition is health-related. Most foodstuffs subject to reduced rates in EU countries are what many would consider wholesome necessities such as milk, bread, and meat.
Likewise, many member states choose to subject some prepared foods and other beverages, like soft drinks, to the national standard rate. And with standard rates reaching as high as 25% in some countries, a couple of pints of larger will put you back some coin.
The Not-So-Hidden Loophole
In 2009, the EU Council amended the VAT Directive to allow for locally supplied restaurant services to be subject to reduced rates. The Council also allowed for the Member states to exclude alcoholic beverages from this reduced rate, which is exactly what the majority of states did. Some states, however, saw the language of the Directive as an opportunity to reduce the VAT on beer and wine sales while simultaneously achieving public policy objectives.
In July, Romania reduced draught beer tax from 24% to 9%, in an effort to bolster the tourism industry in the summer months. In the Czech Republic, politicians are hoping that more pilsner sales will result in more than just happier moods among its residents. The true aim of the Minister of Finance is a three-fold plan.
First, the reduced VAT will help national brewers sell more of their product domestically. Second, the hospitality industry, which will be the first industry implementing the Czech mandated electronic record of sales system, will be compensated for the inconvenience with more business. Lastly, a reduction in VAT for draught beer sales will lead the way for a single reduced rate of 10% for the majority of foodstuffs.
As this measure is implemented in the Czech Republic, it will be interesting to see the European Union’s response. Will they allow other countries to use wine and beer for national policy objectives? Here at Sovos, we continuously monitor these VAT developments to make sure your business stays compliant. Cheers!