Brussels, 5 July 2007
VAT reduced rates: Commission launches a
political debate on how to simplify current EU legislation
The European Commission, in its Communication
adopted today, considers that there is a real need for a simplification and
rationalisation of the current VAT rates structure, in particular the reduced
VAT rates. It believes that there is a place for more flexibility which would
allow Member States to apply VAT reduced rates to local supplies. However, this
flexibility needs to be balanced to ensure the proper functioning of the
Internal Market and to avoid disproportionate compliance costs for business. To
this extent, possible ways are put forward but no concrete proposal is made for
new categories of products or services, given the need for prior political
consideration by Member States. At the same time, the Commission proposes to
extend, until the end 2010, most of the derogations coming to an end
"The application of VAT reduced rates is a very sensitive issue in an area
where the unanimity principle forces all stakeholders to be inclined to
compromise. Today I am very happy to launch a broad political debate between
Member States; we need their views before defining a coherent and achievable
long term policy.", said László Kovács, the Commissioner for
Taxation and Customs Union. "We consider that a new framework for reduced rates
is needed, more rational, more transparent and more flexible for the Member
The Communication is based on, and presents the results of, an economic study
conducted by an independent think-tank, as well as on other reflections on the
possible way forward in the field of reduced rates.
The main conclusion of this study is that from an economic perspective a
single uniform VAT rate (per Member State) is the best policy choice. It would
slightly improve consumer welfare in comparison with the current situation,
reduce distortions in the functioning of the Internal Market, simplify the rules
and thus reduce compliance costs for business.
However, there may be specific economic benefits from operating a reduced
rate in carefully targeted sectors. According to the study, lower VAT rates
could contribute to economic growth if they can induce consumers to spend more
on bought–in goods and services. Such a change in consumption habits often
also allows more time to be spent on leisure activities with an associated
increase in expenditure. For (certain) locally supplied services – notably
those usually referred to as "do-it-yourself" - such a shift could take place.
There are also arguments for introducing VAT reduced rates in sectors employing
many low skilled workers in order to permanently create new jobs. However,
overall net gains seem to be minor.
The study also stresses that other economic instruments (such as subsidies)
might often be more efficient than reduced VAT rates to achieve environmental,
social, cultural and economical policies.
Flexibility balanced with some imperatives
The Commission considers there is a place for more flexibility to be given to
Member States to apply VAT reduced rates. However, the room for manoeuvre is
narrow. Indeed, the Internal Market requires that goods and services can be
traded within the EU without giving rise to unacceptable distortions of
competition for companies or for Member States. These distortions could arise
when consumers buy in other Member States in order to benefit from reduced
prices. Locally supplied services (which cannot be delivered from a remote
location) could be a candidate for reduced rates, as they do not pose any major
risk to the internal market. However, political input is required here to
determine what distortions can be deemed to be acceptable.
Moreover, there is a danger that introducing additional reduced VAT rates may
lead to increased costs, making single market access more difficult for traders.
Having to deal with different VAT rates in different Member States clearly
creates a cost; which becomes particularly burdensome where the variation of
rates concerns not just a few goods or services but hundreds, with different
definitions for the scope of each reduced rate. Here again, political input is
needed to find the appropriate balance between flexibility and the risk of
increasing compliance costs.
Other criteria need to be taken into consideration, such as policy coherence
(does it make sense to allow for a reduced rate on gas or electricity if we
assume that this would generate more energy consumption?) and sustainability and
legal certainty for stakeholders (use of reduced rates for the promotion of
certain goods depends largely on political priorities that can evolve over
Equal treatment and measured debate
Derogations for reduced rates granted to Member States which joined the EU
before 1 January 1995 are valid until the adoption of the definitive VAT system.
However, many reduced rate derogations granted to the other Member States expire
at the end of 2007 or in 2008. This difference in treatment creates inequality
between Member States without any substantial justification. This could prejudge
the outcome of the future discussions on the use of reduced rates.
Therefore, the Commission proposes to extend till the end of 2010 these last
mentioned derogations providing they do not conflict with a smooth functioning
of the Internal Market, with another Community policies or became obsolete. This
planned prolongation aims at allowing an in-depth debate, without undue time
pressure, in order to design new common rules to apply after 2010.
The current situation as regards VAT rates remains highly disparate and very
complex. Yet the basic rules are simple: supplies of goods and services subject
to VAT are normally subject to a rate of at least 15%, but the Member States may
apply reduced rates of not less than 5% to goods and services set out in a
restricted list. However, these simple rules are complicated by a multitude of
derogations granted to certain Member States – and not to others –
during the negotiations preceding the introduction of the VAT rates Directive
(1992) or in Acts of Accession.
Given that this situation is not satisfactory, the European Council requested
in February 2006 the Commission to present an overall assessment report on the
impact of VAT reduced rates in terms of job creation, economic growth and the
proper functioning of the internal market, on the basis of a study carried out
by an independent economic think-tank.
Further information is available on the following website:
The study made by an independent think-tank is available at this following