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EU Finance Ministers Agree Landmark VAT Rate Rule Changes

Wednesday, January 5, 2022

EU finance ministers have agreed an update to the rules governing value-added tax rates for goods and services.

The 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 digitalization and protecting public health.

The European Parliament will now be asked to endorse a final text of the agreement 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.

Paolo Gentiloni, Commissioner for Economy, said: "Today's unanimous agreement to modernize 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."

Under the agreement, sealed on December 7, ministers have agreed an update to 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.

Member states have agreed to broaden Annex III to the following good and services:

  • digital services that previously did not qualify for reduced rates such as internet access and livestreaming of cultural and sports events;
  • goods which protect public health and that have shown to be crucial tools in the fight against COVID-19 and that could prove useful in future crises, such as personal protective equipment, masks and certain medical equipment, as well as more items considered as essential aids for the disabled;
  • certain items such as bicycles, green heating systems, and solar panels installed in private homes and public buildings, which can have a positive impact on the EU's climate change priorities;
  • diverse products and services deemed appropriate and useful by member states, which are driven by the general interest of public policy objectives.

Ministers also agreed on the following amendments:

  • Barring reduced rates and exemptions for goods and services deemed detrimental to the environment and to the EU's climate change objectives by 2030;
  • 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 to 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.

Member states will continue to apply a standard rate of VAT above 15 percent. However, they will now also have the possibility to apply two reduced rates as low as five percent to goods and services in up to 24 categories in Annex III of the VAT Directive. They may also now apply one reduced rate lower than five percent and one exemption (zero rate) to a maximum of seven categories on the list considered to cover basic needs e.g. foodstuffs, medicines, pharmaceutical products.

The implementation of the new VAT rate freedoms are linked to the adoption of a wider EU value-added tax law reform project for a "definitive VAT regime", which will provide for the imposition of value-added tax based on the location of the consumer, rather than that of the supplier. This will remove the potential for competition on VAT rates between member states, eliminating the potential for suppliers to locate themselves in territories that offer the lowest VAT rates.