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Member States discuss VAT rates proposal

June 18th, 2021

On 18 June, the Economic and Financial Affairs Council held a political debate on the European Commission’s proposal on the revision of VAT rates.

During the past months, national delegations have been discussing the European Commission 2018 proposal aimed at granting Member States more flexibility in the application of reduced and zero-rates. In light of these discussions, the Presidency of the Council (held by Portugal) has worked on a compromise proposal and circulated a note to all the delegations to further progress discussions on the following points:

Establishing a sunset clause to categories included in Annex III of the VAT Directive closely related with the EU Green Deal objectives (natural gas and firewood; chemical pesticides and chemical fertilisers) – The presidency proposes to phase out the possibility to apply reduced rates to these categories by 1 January 2035.

Including in the VAT Directive a standstill clause (Article 105a) for derogations which Member States currently apply regarding the application of reduced, parking, zero or super reduced rates and exemptions with or without deductibility of the tax – The presidency proposes that Member States can continue to apply their derogations, except existing derogations on fossil fuels, chemical pesticides and chemical fertilisers, which, to be consistent with the objectives of the Green Deal, should be subject to the same sunset clause that is proposed to related categories of Annex III, having to be phased out by 1 January 2035. Furthermore, in order to ensure equal treatment, and to comply with Article 27 of TFUE, derogations under the standstill clause would become available to all Member States, provided that interested Member States notify the VAT Committee.

Ensuring a level playing field in the VAT Directive by allowing all Member States the right to apply a zero-rate or a super reduced rate to a limited set of supplies of goods and services – The presidency proposes to allow the application of these rates exclusively to certain supplies of goods and services that address basic needs and clear public policies (covering the categories related to food and water, medicines and health products, transport of persons, some cultural items and solar panels).

During the debate, Member States provided political guidance on the work of the Council’s presidency. It is clear that further work is needed at the technical level (in the working group) for an agreement to be reached.