Latest spikes in global fuel prices leads to second extension of reduced VAT rate
Spain has again extended to 30 June 2022 its temporary reduction in VAT on domestic electricity from 21% to 10%. The measure was first introduced in June until 31 December 2021. It was then first extended to April 2022.
Other European electricity VAT cuts have now been widely copied.
The rate reduction will apply to:
- Consumers on low-incomes and welfare support
- Supplies to households and small businesses based on a price ceiling of €45 per MWh in the marketplace.
The reduction will cost the government €560 million euros in lost revenue in 2021 and will save households around €857 million euros. The government has also suspended the electricity industry 7% tax, IVPEE, levied on producers for July, August and September. IVPEE tends to be passed on directly to the end consumers
Spanish electricity prices have been rising rapidly in the past few months. The rise in electricity prices has coincided with a new formula for calculating household consumption, which has upset many Spaniards who believe it is pushing up rates.
European Commission derogation from reduced VAT rate rules granted
In setting the 10% rate, Spain is varying from the rules on reduced VAT rates contained within the EU VAT Directive. It sought initial permission for the second half of 2021. It has now applied for permission to extend the measure for the first four months of 2022.
Article 98 of the VAT Directive establishes that Member States may apply either one or two reduced rates. Reduced rates can only be applicable to the supply of goods and services in the categories described in the Annex III of the Directive. Nevertheless, Article 102 of the VAT Directive establishes that, after consultation of the VAT Committee, each Member State may apply a reduced rate to the supply of natural gas, electricity, or district heating.
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