EC to Radically Change the VAT Directive

Allowing member states to introduce their own reduced rates of VAT is currently being considered by the European Commission (EC) in a radical change to the VAT Directive. No official announcement has been made.

With the commission already agreeing to remove the 15% minimum standard VAT rate, starting from 2016, they are now reflecting on how they can give more flexibility. Donato Raponi, Head of the EU VAT unit said: "We are reflecting now if we are to fix limits, yes or no."

It was an idea originally put forward by the President and Raponi believes “they (EC) welcome this idea just to give more flexibility to the member states in fixing the VAT rates." Raponi also confirmed that from 2016 the minimum VAT standard rate of 15% will no longer be mandatory.

"The first step that we took now because you know the standard rate and the minimum standard rate is valid until the end of this year (2015)" he said. "We have to make a proposal [if we want] to prolong this minimum standard rate [and] we will not do it. We are not prolonging this minimum standard rate. So, this is the first step we took and it has been decided by the Commission.”

Raponi, however, stressed that the plans are in their very early stages, despite positive noises coming from the European Commission. The EU VAT is now waiting for a formal agreement, with the likelihood that they will need to prepare an impact assessment.

"We didn’t get any formal agreement [yet]," Raponi added. "I had a meeting with the Cabinet President, and they said they were very interested because it would solve a lot of problems with the member states. It’s a reason why they were very happy with this idea."

The changes to the 2015 VAT place are possibly due to the place of supply changes to e-services, telecommunications and broadcasting. This has resulted in domestic changes to rates in these sectors and will only affect the tax take or member state which enacts them, preventing a 'race to the bottom’ where states could set low or zero rates to attract businesses.

There is a likelihood that these changes are set to be broadened and rolled out to include some goods from 2016. As a result, more flexibility is possible, without fostering too much harmful tax competition. However, if the changes are not implemented carefully, it is possible that extensive reduced or zero rates could be used by low-tax jurisdictions such as Luxembourg.

Lee Squires of Hogan Lovells said that we "Already have a system where the main rate varies quite considerably between member states. If people can start applying different zero rates and reduced rates then I guess you’ve got more room for distortion of competition, which was eliminated in relation to electronic services by the changes to the place of supply rules.”

"But I suppose you could have other similar things where there was a sort of mismatch of treatments between member states."

Zero rates is a prospect that appeals to businesses and consumers. The current VAT Directive does not allow zero rates. However, some member states such as the UK have zero rates due to a 'standstill provision’. This allows them to retain zero rates that applied at the time entered the EU (or European Economic Community, as it was known until 1993).

Raponi said that, in his personal view, zero rates should be allowed, but "at this stage, this issue hasn't been discussed".

Changes to the VAT Directive usually take a long time to be implemented, but Raponi is confident, that the changes could be agreed on relatively swiftly, because the changes would be giving member states more sovereignty, rather than restricting it.

"You want more flexibility, you want to have less Europe," he said. "From our point of view it [total control over VAT rates] is not really necessary for the functioning of the internal market, so why not give this flexibility."

"The Commission is currently examining options for a reform of the VAT rates regime but it is too early to speculate on consequences for individual goods or services," said Vanessa Mock, EC spokesperson for taxation and customs.

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