Chapter News

New rules on VAT rates offer Member States more flexibility while supporting the EU’s green, digital and public health priorities

The Commission welcomes the agreement reached by EU finance ministers today to update the current rules governing value-added tax (VAT) rates for goods and services. These new rules will provide governments with more flexibility in the rates they can apply and ensure equal treatment between EU Member States. At the same time, the updated legislation will bring VAT rules into line with common EU priorities such as fighting climate change, supporting digitalisation and protecting public health. The European Parliament must now be consulted on this final text.

Paolo Gentiloni, Commissioner for Economy, said: “Today’s unanimous agreement to modernise the rules governing VAT rates is excellent news. The result of marathon negotiations, it shows that where there is a will, there is a way – a European way forward. Member States will have more flexibility to make their VAT systems reflect national policy choices, while ensuring coherence with common European priorities: the green and digital transitions and of course the protection of public health.”

In detail

Current EU rules on VAT rates are almost thirty years old and were in urgent need of modernisation given the evolution of the overall VAT rules over the years. That is why the Commission proposed in 2018 to reform VAT rates.

Today’s agreement will ensure that EU VAT rules are fully aligned with the EU’s common policy priorities. Today’s announcement will address these issues by:

  • Updating the list of goods and services (Annex III to the VAT Directive) to which all Member States can apply reduced VAT rates. New products and services added to the list include those that protect public health, are good for the environment and support the digital transition. Once the rules come into force, Member States will for the first time also be able to exempt from VAT certain listed goods and services considered to cover basic needs.
  • Removing the possibility by 2030 for Member States to apply reduced rates and exemptions to goods and services deemed detrimental to the environment and to the EU’s climate change objectives.
  • Making derogations and exemptions for specific goods and services, currently in place for historical reasons in certain Member States available to all countries to ensure equal treatment and avoid distortions of competition. However, existing derogations that are not justified by public policy objectives other than those in support of EU’s climate action will need to end by 2032.

Today’s new rules are supported by a previous agreement to move the EU’s VAT system to one where VAT is paid in the Member State of the consumer rather than the Member State of the supplier. This ensures that a greater diversity in rates (as agreed today) would be less likely to disrupt the functioning of the Single Market or to create distortions of competition. At the same time, it also avoids proliferation of reduced rates which would endanger Member States’ capacity to collect revenues in the post-COVID-19 era.

In the coming years, Member States will need to pursue efforts to ensure a sustainable recovery from the COVID-19 pandemic and invest heavily for the green and digital transitions. Protecting public revenues is particularly important in this context. This is why the updated legislation also specifies the minimum level of reduced rates, as well as the maximum number of goods and services in Annex III to which Member States may apply those rates (see Q&A for full details). For the first time, however, Member States will also be able to apply one reduced rate lower than 5% or exempt a small number of items on the list from VAT.

Next steps

The updated rules will now be sent to the European Parliament for its consultation on the final text by March 2022. Once formally adopted by Member States, the legislation will come into force 20 days after its publication in the Official Journal of the European Union, allowing Member States to apply the new system as of that date.

Compliments of the European Commission.