Are New VAT Rate Freedoms Coming for EU Member States in 2022?

Sam Wichman
February 17, 2021

The EU is re-considering plans to give its Member States more freedom to determine which goods and services should be subject to reduced rates in their territory. The proposed changes would also allow Member States the opportunity to apply a third reduced rate.

Current VAT rate system

Currently, the EU VAT Directive gives national governments some freedom to set the number and level of rates they choose. Each Member State must have a standard rate for all goods and services, which applies to all non-exempt goods and services, and must be no less than 15%.

In addition to the standard rate, a Member State can choose to apply one or two reduced rates but may only do so to goods or services specifically listed in the EU VAT Directive. The reduced rates must not be less than 5%, outside of some special VAT rates that allow limited exceptions for EU countries to depart from the basic rules and apply reduced rates below 5% or zero-rate goods and services other than those listed in the EU VAT Directive.

Potential changes

Over three years ago, the European Commission proposed to grant more flexibility for Member States to change the VAT rates they apply to certain products and services. These proposals include enabling Member States to apply a third reduced rate between 0% and 5% in addition to the existing one or two reduced rates.

The proposal provides for abolishing the current list of goods and services, Annex III of the EU VAT Directive, to which the reduced rates may be applied. Instead, there will be a new list, likely another Annex, of goods and services to which the standard rate must always be applied.

This new ‘negative’ list would include products such as tobacco, gambling, weapons, and alcoholic beverages. Currently, when Member States face domestic pressure from their citizens to apply a reduced rate to certain products or services, the Member States can point to Annex III of the EU VAT Directive for why they cannot approve such a reduction.

However, if the negative list is approved it will limit the ability of domestic governments to resist tax reductions by blaming the EU VAT Directive, thus making VAT rate decisions more political. Finally, to protect public revenues, there is a proposal that would require Member States to ensure the weighted average of all VAT rates applied is at least 12%.

Uncertainty ahead

It is unclear exactly when we can expect these changes to occur. While there is widespread support for the EU’s plans on VAT rates, there is some sentiment that this flexibility could lead to growing use of reduced rates and a more complex system EU-wide.

This concern has resulted in one main area of conflict: whether to use a negative list (which goods or services must be subject to the standard rate) or increase the current positive list (which goods or services may be subject to a reduced rate). There had been political agreement for implementation of these changes in 2022, but that timeline was unofficial and now seems less than certain. The Council of the EU is currently aiming to have a final agreement on an implementation date in place by June 2021.

We’ll provide more updates regarding the new VAT rate freedoms coming to the EU and the timeline for implementation when appropriate.

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Sam Wichman

Sam Wichman is a Junior Regulatory Counsel at Sovos. Within Sovos’ Regulatory Analysis function, Sam focuses on international VAT, global sales tax, and domestic sales tax issues. Sam received his B.A. in Political Science and Economics from the University of Wisconsin-Madison and his J.D. from Boston College Law School. Sam is pending admission to the Massachusetts Bar.
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