New rules on VAT rates for EU Member States

An agreement has been reached between EU finance ministers on new rules updating the list of goods and services for which reduced VAT rates are allowed. The Council also decided to limit the number of items to which reduced rates may be applied to prevent the undesirable spread of reduced rates.

According to the current rules, one standard rate of at least 15 % and a reduced rate of 5 % are allowed. Under new rules, EU Member States could have two separate reduced rates of between 5 % and standard rates, one reduced rate between 0 % and 5 % and one exemption, i.e., the so-called zero rate.

Also, the new rules would update the list of goods and services to which reduced VAT rates can be applied. New products and services to be added to the list include those that protect public health, are environmentally friendly, and support the digital transition. Following the entry into force of the rules, Member States could, for the first time, be exempt from VAT certain goods and services (listed) which are considered to cover basic needs.

Therefore, Member States should thus be given more flexibility in designing the VAT system in a way that reflects national policy decisions and is in line with European priorities, green and digital transition, and the protection of public health, according to a statement from the commissioner of the economic commission.

The plan is also to abolish by 2030 the possibility for Member States to apply reduced exemption rates to those goods and services that are considered harmful to the environment and the EU’s climate change objectives.

Certain derogations and exemptions for goods and services (currently in force in certain Member States for historical reasons) will be made available to all countries to ensure equal treatment and thus avoid distortions of competition. This does not apply to existing derogations that are not justified by public policy objectives, other than those that support EU climate policy. These deviations will have to be abolished by 2032.

The agreement of the finance ministers will enter into force after the European Parliament has issued its opinion. Thus, the updated rules will be sent to the European Parliament for consultation on the final decision by March 2022. Once the Member States have taken a formal decision, the legislation enters into force 20 days after its publication in the Official Journal of the European Union. This will allow the Member States to apply the new system from that date.

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