Business 07/12/2021

EU opens the way for reduced VAT on more products

Reform will allow lower tax on environmentally beneficial products and extending the scope of super-reduced VAT across the EU

2 min
A supermarket in an image by axiu

BrusselsEuropean Union finance ministers today agreed on a reform of value-added tax (VAT) rules that will give governments more flexibility to apply reduced tax, exclude environmentally harmful products and allow other products considered essential to be added. The reform has needed three years of "marathon" negotiations, in EU Commissioner for the Economy Paolo Gentiloni's words, who recalled that proposal was initially made in 2018 and negotiations have dragged on until today.

As the European Commission recalls, current VAT rules are almost 30 years old and require "urgent modernisation". Tuesday's agreement involves updating the list of goods and services to which European partners can apply a reduced VAT rate. The new products are mainly related to public health, are environmentally friendly or support the digital transition in some way. On the other hand, each government will also have carte blanche to apply this VAT rate to products it considers essential. In Spain, for example, reduced VAT is 10%, and is currently applied to food, agricultural goods, water, sanitary towels, tampons and condoms, for example, as well as transport of passengers.

In addition, historical exemptions that apply to certain member states will be extended to the whole union. For example, Spain applies a super-reduced VAT of 4% on products such as bread, milk or eggs; books and magazines; vehicles for people with reduced mobility or social housing. In all these cases, if environmental principles are met, the EU will allow other European partners to apply the same criteria. The EU's reduced VAT rate is not allowed to go under 5%, but with this regulation other European governments will also be allowed to apply a "small number of products and goods" to a super-reduced VAT rate below this threshold, as Spain does.

If this reform has taken so many years, it is because the EU requires unanimity for any change to taxes. Now that all 27 governments have agreed, all that remains is for the European Parliament to give its final approval to the new European legislation – probably in March 2022 – and for it to come into force

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