At the ECOFIN meeting forum “Economy and Finance” on 7 December 2021, the finance ministers of the EU member states represented in the forum agreed on an update of the current VAT regulations. The core subject was the increased application of reduced VAT rates.
These new regulations give governments more flexibility in the application of VAT rates. In total, this concerns 24 revised product categories, primarily from the fields of environment, digitalisation and health. In particular, the list has been updated to include:
- digital services that previously did not qualify for reduced rates such as internet access and livestreaming of cultural and sports events;
- goods which protect public health and that have shown to be crucial tools in the fight against COVID-19 and that could prove useful in future crises, such as personal protective equipment, masks and certain medical equipment; as well as more items considered as essential aids for the disabled;
- certain items such as bicycles, green heating systems and solar panels installed in private homes and public buildings, which can have a positive impact on the EU’s climate change priorities;
- diverse products and services deemed appropriate and useful by Member States, which are driven by the general interest of public policy objectives.
These updated rules give EU Member States the freedom to apply a reduced tax rate of up to 5% to the 24 product categories. A rate below 5% may be applied to only seven of these 24. The aim is to allow Member States to better recover from the economic burden of the coronavirus pandemic and to invest more in the green and digital transformation.
In addition to updating the categories, it was decided to abolish by 2030 the possibility for Member States to apply reduced rates and exemptions to goods and services that are considered harmful to the environment and do not promote the EU’s climate change objectives. Furthermore, exemptions and derogations for certain goods and services, which currently apply for historical reasons in certain Member States, can be applied by all countries in the future to ensure equal treatment and avoid distortions of competition. By contrast, existing exemptions that are not justified by public interest objectives other than those supporting EU climate action must be abolished by 2032.
Full details and the listing of all categories (see Annex III) can be found in the official ECOFIN proposal.
This new kind of flexibility received high approval from the participants of the Forum. Thus, 21 of the 27 EU member states voted in favour.
„Today’s unanimous agreement to modernise the rules governing VAT rates is excellent news. The result of marathon negotiations, it shows that where there is a will, there is a way – a European way forward. Member States will have more flexibility to make their VAT systems reflect national policy choices, while ensuring coherence with common European priorities: the green and digital transitions and of course the protection of public health.“
The draft will now be submitted to the European Parliament with its final text by March 2022. Once formally adopted by the Member States, the legislation will enter into force 20 days after its publication in the Official Journal of the European Union, allowing Member States to apply the new system from that date.
Find the full press release here.