European Finance Minister meeting at ECOFIN on 18th June failed to agree on a compromise to enable more reduced rate setting freedoms for member states. Countries such as Germany, France and Sweden were not in agreement around environmental protections rules being proposed by the Portuguese Presidency. In particular, what they see as overly slow plans to withdraw reduced rates on fossil fuels, pesticides, and fertilizers.
An August 2021 study by the European Parliament highlighted how increased reduced VAT rates raises compliance costs of businesses. Follow all the European Union’s completed and planned reforms via VAT Calc’s EU VAT reform tracker.
The discussions were centred around various proposals to update the EU VAT Directive on what taxable supplies members states my give tax benefits to via categorising them below their main standard VAT rate. Broadly, the Directive only allows two reduced VAT rates (must be above 5%) on a limited ranges of goods and services as defined in Annex II of the VAT Directive.
Breakthrough on positive list of supplies for reduced VAT rates?
The newest proposal is for a ‘whitelist’ of goods and services which could enjoy reduced rate rankings, while phasing out VAT reductions for environmentally harmful items.
The matter will now be picked up in the next rotating presidency of the Council of the EU, which will be held by Slovenia. The negotiations are currently progressing well and, although they are now focussed on a positive list of supplies to which the reduced rates may apply rather than on a negative list as in the original proposal2, these negotiations are still driven by the idea that the application of reduced or zero VAT rates should, alongside other criteria, take into account social policy aspects.
