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Spain further electricity VAT rate cut to 5% as inflation hits 27-year high

Domestic electricity rate to be cut from 10% to 5% as inflation hits 8.7% in May

Prime Minister Pedro Sanchez announced in Parliament on 22 June a plan to half the VAT rate on domestic electricity to 5%. It was originally cut from the 21% standard rate to 10% in late 2021. This, along with other initiatives, are to be decided at a special cabinet meeting set for Saturday and could come into effect immediately.
Inflation in Spain reached 8.7% in May 2022, up from 8.1% in April. This is the highest rate since 1995.
The ruling PSOE party obtained the worst result in the party’s history in last Sunday’s Andalusia elections, dropping to 30 seats and losing all provinces, including Seville.

Cut follows December 2021 reduction from 21% to 10% on electricity

Spain had 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 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

European Commission derogation from reduced VAT rate rules granted

In setting the 10% rate, Spain was 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.

Check VAT Calc’s global VAT and GST rates via our global rate database.

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