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Poland Urges EU To Quickly Pass VAT Rate Reforms

Thursday, August 8, 2019

Polish Finance Minister Marian Banas has urged the Finnish presidency of the European Union to press ahead with reform of EU VAT rate rules, to enable the country to reduce the rate of VAT on children's clothing and footwear.

According to a ministry statement issued on August 2, 2019, Banas has "repeated his request to intensify legislative work on the European Commission's proposal regarding the reform of VAT rates," after having raised the matter in a speech at the Economic and Financial Affairs Council meeting on July 9, 2019, which dealt with the Finnish presidency's priorities.

Under the EU VAT Directive, member states may apply up to two reduced rates as low as five percent to a limited number of supplies listed in Annex III of the Directive, although a number of member states also exercise specific derogations granted to them to more broadly levy these reduced rates.

As children's clothing is not currently among the supplies listed in Annex III, and Poland has not been granted the right to derogate from the VAT Directive on this matter, these supplies must be taxed at the standard rate, which in Poland is 23 percent.

The EU is proposing to significantly relax the rules that dictate which goods and services can be subject to reduced rates, as part of larger plans to overhaul EU VAT rules.

The European Commission says that its plans for a "definitive EU VAT regime" would eliminate the potential for distortions in competition between states, as the state whose VAT rules and rates would apply to a supply would be based on where a supply is consumed, rather than those of the country in which the supplier is based.

Centering tax rules based on the location of the supplier has encouraged suppliers to establish themselves in states with low VAT rates, creating distortions to competition in the EU Single Market. The EU hopes that by shifting tax rules to a "destination-based" system, centered on where the consumer is, these distortions will be removed, and states will be allowed more freedom to choose which goods and services should be subject to lower rates of VAT when supplied to their citizens.

Under a proposal announced by the Commission on January 18, 2019, a new harmonized and flexible system of reduced rates would apply in the EU, allowing member states to apply a third reduced rate of between zero and five percent. In addition, the current list of goods and services to which reduced rates can be applied will be abolished and replaced by a new list of products to which the standard rate – of at least 15 percent – must always be applied. This list will include products such as weapons, alcoholic beverages, gambling, and tobacco.

These proposals were approved by the European Parliament on October 3, 2018, and have been passed on to the European Council.