Market leading insight for tax experts
View online issue

EC takes ‘a fresh look’ at reduced rates of VAT

printer Mail

The European Commission is consulting on a review of reduced rates of VAT. EU member states agreed many years ago which goods and services could benefit from a reduced rate, but EU policy ‘has developed and evolved since then’, the EC said. ‘Stakeholders’ are invited to consider whether reduced rates are now distorting competition.

‘It is high time that we take a fresh look at reduced VAT rates. Member states need new revenue sources, while businesses need simpler tax systems with fewer compliance costs,’ EC tax commissioner Algirdas Šemeta said.

‘Today we are asking whether certain reduced VAT rates are delivering what they seem to promise, or whether they pose more problems than they are worth.’

Abolition of reduced rates would not automatically trigger an increase in the overall VAT burden or jeopardise policy goals underlying the present structure, according to the consultation document. ‘Indeed, additional revenues from abolishing reduced rates could be used for both providing more targeted financial support for pursuing these policy goals and for reducing the standard VAT rate accordingly,’ it said.

Last December the EC adopted Communication on the future of VAT, setting out ‘the fundamental characteristics that must underlie the new VAT regime, and priority actions needed to create a simpler, more efficient and more robust VAT system in the EU’.

A review of the current VAT rates structure was identified as a ‘priority action’. The review is based on three guiding principles, the EC said:

‘1. Abolition of those reduced rates which constitute an obstacle to the proper functioning of the internal market. Reduced rates justified in the past can have distorting effects today because the economic, business and legal environments have changed in the meantime;

‘2. Abolition of reduced rates on goods and services whose consumption is discouraged by other EU policies. This could notably be the case for goods and services harmful to the environment, health and welfare;

‘3. Similar goods and services should be subject to the same VAT rate and progress in technology should be taken into account in this respect, so that the challenge of convergence between the on-line and the physical environment is addressed.’

Comments on Review of existing legislation on VAT reduced rates are invited by 3 January 2013. A series of questions and answers is available.

Cross-border investment

An EC consultation on direct tax problems linked to cross-border venture capital investment closes on 5 November.