New European Union Reduced VAT Rates Approved

The EU Council approved a proposed directive to amend rules governing reduced VAT rates at the ECOFIN meeting held on 7 December 2021. The new rules grant EU Member States more options and flexibility in determining the reduced VAT rates to apply to certain goods and services through amendments to the EU VAT Directive.

New rules

Member States may apply a standard VAT rate above 15%. They can apply two reduced VAT rates as low as 5% for up to 24 items on an updated list of eligible goods and services and a lower rate for up to 7 items (once the directive becomes effective).

The new system will allow for a reduced rate, or exemption, on certain essential goods such as foodstuffs and medicines. The list of goods and services (Annex III of VAT Directive) to which all Member States can apply reduced VAT rates is updated and modernised. New products and services that aim to protect public health (e.g., personal protective equipment), are environmentally friendly (e.g., solar panels), and that support a modern digital transition will be eligible for a reduced rate (e.g., live streaming events).

The ability to apply reduced rates and exemptions has been removed for goods and services deemed detrimental to the environment and the EU’s climate change objectives. This includes phasing out reduced rates for fossil fuels and other greenhouse gas emitting goods by 2030 and chemical fertilisers and pesticides by 2032.

Making derogations and exemptions must end by 2032 for specific goods and services that are not justified by public policy objectives other than those supporting the EU’s climate action.

Timeline

The rules will be sent to the European Parliament for consultation by March 2022. Once formally adopted, the legislation is effective 20 days after its publication in the Official Journal of the EU.

Certain provisions of the new system will apply from 1 January 2025:

• Reduced rates and place of supply rules are available for admission or access to live streamed entertainment or sporting events and for the supply of works of art, collectors’ items and antiques listed in Annex IX.
• Optional margin scheme for art dealers, will reduce the risk of double taxation for sales of works of art by applying reduced rates of the countries of origin.

Potential impact

The new system is an effort to harmonise the vast application of reduced rates across the EU. While intent on equality, it could create immediate complications for Member States with more VAT rates to strategically select and implement while also increasing the scope of VAT budgeting. Additional rate categories will inevitably fuel VAT litigation for tax authorities and the CJEU, and place administrative burdens and costs on businesses.

Following the ECOFIN meeting, Cyprus announced its intention to adjust VAT rates – particularly for products and services related to public health and the green and digitalization transition. More Member States are expected to weigh in on these changes.

You can find additional information on the council directive here.

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