The European Commission proposes more freedom on VAT rates

The European Commission intends to reduce the debates over value added tax rates by giving Member States more powers to set their own charges on most products. The Commission has proposed new rules by providing to the Member States more flexibility to set VAT and to create a better tax environment to help SMEs, especially companies trading cross-border and to reduce the lost arising from VAT fraud.

According to the existing VAT rules, the Member State a can apply reduced VAT rates only for a couple of sectors and products, while the minimum VAT rate (15%) is applicable for all of the other products. The current, complex list of goods and services to which reduced rates can be applied would be abolished and contrary to the existing rules, the new proposal determines a new list of products (such as weapons, alcoholic beverages, gambling and tobacco) to which the standard rate of 15% or above would always be applied. In addition to a standard VAT rate of minimum 15%, Member States would now be able to put in place (a) two separate reduced rates of between 5% and the standard rate chosen by the Member State; (b) one exemption from VAT (or ‘zero rate’); and (c) one reduced rate set between 0% and the reduced rates.

In respect of the SMEs, under the current rules, Member States can exempt sales of small companies from VAT provided that they do not exceed a given annual turnover, which varies from one country to the other. Growing SMEs lose their access to simplification measures once the exemption threshold has been exceeded. Also, these exemptions are available only to domestic payers. These rules would be changed and extended for companies with higher revenue and not only for the domestic entities.

This new change is one of the final steps of creating a single VAT area for Europe with simple rules. The common VAT system plays an important role in Europe’s Single Market. VAT is a major and growing source of revenue in the EU, raising over €1 trillion in 2015, which corresponds to 7% of the EU GDP.




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