In addition a number of further reduced rates were allowed in certain countries owing to historical ‘standstill derogations' agreed when the specific countries joined the EU. This has, over time, resulted in a patchwork of rates that vary from one country to the next, which also created inequalities within the EU. Some Member States enjoy derogations while others are not allowed to apply a reduced rate or zero rate for the same products or services.
Member States have also come under increasing pressure to favor certain sectors when it comes to VAT rates but they can't easily do so. They can't change their VAT policy for products and sectors that are not cited on the list for which reduced rates can apply.
The current rules have also not kept up with developments and digital products. Updates are difficult because decisions must be taken unanimously. That is why in its 2016 VAT Action Plan, the Commission set out plans to modernize the rules, removing outdated legal restrictions, while avoiding potential risks like the erosion of VAT revenues, distortion of competition and a shrinking of the tax base.
The European Commission now proposes (proposal was released on the 18th of January) to continue the minimum standard rate of 15% and provide harmonized and less restrictive rules that will enable all Member States to apply a range of rates to products;
- Two separate reduced rates of between 5% and the standard rate can be chosen by the Member State;
- One exemption from VAT (or 'zero rate');
- One reduced rate set between 0% and the reduced rates.
At the same time the Commission proposes to abolish the list of goods and services to which reduced rates can currently be applied. Instead, there will be a list of products to which reduced rates cannot be applied, ensuring that products such as alcohol, weapons, tobacco and gambling will always be taxed at the standard rate or above. This will give Member States more freedom in setting VAT rates, as per their request.
Safeguards will have to be introduced in order to avoid potential risks like revenue erosion, distortion of competition, unnecessary complexity and legal uncertainty. Member States will be required to ensure that reduced rates benefit the final consumer and, in order to protect revenues, that the average VAT rate applied to those transactions for which VAT cannot be deducted always exceeds 12%.
The Commission will submit the proposal to the Council, the European Parliament and the Economic and Social Committee. The proposal will require unanimous agreement from the Member States and is linked to the introduction of the new VAT regime.
Source: European Commission