EU indirect tax reform update

For indirect taxation, the report highlights both momentum and continued political friction across energy, excise, VAT and customs-linked reforms.

VAT and e-commerce: structural reform constrained by risk and readiness

VAT reform linked to e-commerce and customs modernisation remains one of the most strategically important—but operationally sensitive—areas of EU indirect tax policy. While 2025 delivered tangible legislative outcomes, the Council report makes clear that deeper structural change is still constrained by concerns over fraud, system scalability and alignment with parallel customs reforms.

Incentivisation of the IOSS: a pragmatic incentivisation instead of mandate

Following the failure to secure unanimity for a mandatory Import One Stop Shop (IOSS) under the VAT in the Digital Age (ViDA) package, the Commission pivoted toward a more pragmatic approach. Targeted IOSS incentives for July 2028 designed to encourage voluntary uptake of the IOSS were separated from the wider customs reform package and progressed independently.

These measures—agreed under the Polish Presidency and formally adopted in July 2025—aim to strengthen VAT collection on low-value imports by steering platforms and intermediaries toward pre-payment of VAT at the point of sale. While the approach stops short of compulsion, it reflects political reality: Member States broadly accept the IOSS as the least disruptive compliance model for cross-border e-commerce, but remain wary of mandating it without stronger assurances on enforcement and data integrity.

Abolition of the €150 Threshold: Alignment Delayed

The more controversial reform—the abolition of the €150 threshold for both customs duty exemption and VAT IOSS eligibility—remains unresolved. From a policy perspective, removing the threshold is intended to eliminate distortions, reduce undervaluation, and align VAT and customs treatment of imported goods. In practice, however, Member States expressed concern that extending the IOSS to higher-value consignments could materially increase fraud exposure and overwhelm existing control frameworks.

Debate under the Belgian, Hungarian and Danish Presidencies also exposed unresolved tensions between VAT rules and proposed changes to the Union Customs Code, particularly around the treatment of goods held in customs warehouses and the expansion of the “distance sales” definition. Several delegations questioned whether VAT reforms could safely proceed before the final shape of the UCC reform is known.

A Waiting Game with Strategic Consequences

As a result, the Council has effectively paused further progress on this strand of VAT reform, opting to await the outcome of trilogue negotiations on the customs package. While procedurally logical, the delay reinforces uncertainty for marketplaces, logistics providers and tax technology platforms preparing for a post-threshold e-commerce environment.

The broader direction is nevertheless clear: the EU is moving steadily toward a model of VAT collection at source for cross-border e-commerce, tighter platform liability, and deeper integration between VAT and customs data. The remaining question is not if these changes will land, but when the political and technical conditions will finally align to allow them to do so at scale.

Energy Taxation Directive (ETD): Ambition Meets Political Reality

The revision of the Energy Taxation Directive, a core pillar of the EU’s “Fit for 55” package, remains unresolved. The proposal aims to realign energy taxation with climate objectives by shifting from volume-based to energy-content-based taxation, ranking rates by environmental performance, and reducing fossil fuel incentives—while safeguarding Member State revenues.

Despite intensive technical and political discussions throughout 2025, culminating in a policy debate at ECOFIN in November, Member State positions remain divergent. While the Danish Presidency made significant efforts to broker compromise, consensus has yet to emerge.

Tobacco Taxation Directive: Broad Support, Key Concerns

The Commission’s July 2025 proposal to modernise tobacco excise rules was broadly welcomed by Ministers, particularly its extension to novel tobacco and nicotine products and its alignment with public health objectives.

However, negotiations have exposed sensitivities around the scale of minimum excise increases, transitional periods, and automatic indexation mechanisms linked to inflation and purchasing power. Technical discussions are progressing, with a first compromise text now on the table.

EU’s indirect tax outlook

The ECOFIN report underscores a familiar pattern: strong policy direction at EU level, but complex political trade-offs in delivery. For businesses, the message is clear—structural change is coming, but timelines and final designs remain fluid, particularly where VAT, customs and excise intersect.