Tax Advice

EU enshrines sustainability in VAT law

On 05.04.2022, the Coun­cil of the EU is­sued a di­rec­tive to mo­der­nize EU VAT ra­tes. The new re­gu­la­ti­ons are in­ten­ded to give go­vern­ments more fle­xi­bi­lity with re­gard to the ap­plica­ble tax ra­tes. In ad­di­tion, the con­cept of sus­tai­na­bi­lity will be en­shri­ned in Eu­ro­pean VAT law for the first time. The new Ger­man go­vern­ment will have new lee­way that must be used.

The pre­vious pro­vi­si­ons on EU VAT ra­tes were al­most 30 years old. It had been clear for a long time that they were in need of mo­der­niza­tion. In par­ti­cu­lar, the is­sues of the di­gi­tal eco­nomy and cli­mate change have hardly been ta­ken into ac­count to date. The lack of fle­xi­bi­lity in the re­gu­la­ti­ons was also cri­ti­ci­zed. In many ca­ses, the agree­ment of all mem­ber sta­tes was re­qui­red if in­di­vi­dual mem­ber sta­tes con­side­red it ne­cessary to pro­mote cer­tain sec­tors of the eco­nomy in their coun­try and wan­ted to grant a re­du­ced tax rate for ser­vices. His­to­ri­cal de­ro­ga­ti­ons for cer­tain Mem­ber Sta­tes also led to unequal tre­at­ment: While some Mem­ber Sta­tes were al­lo­wed to ap­ply re­du­ced or zero ra­tes to cer­tain supplies, others were ex­clu­ded from doing so for the same type of supply.

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Pre­viously, a stan­dard VAT rate of at least 15% ap­plied to all goods and ser­vices wi­thin the EU. Mem­ber sta­tes were also able to ap­ply one or two re­du­ced ra­tes of at least 5% to cle­arly de­fi­ned goods and ser­vices.

Reform considerations of the EU Commission

Up­dating the re­gu­la­ti­ons in the VAT ac­tion plan an­noun­ced in 2016 was on the EU Com­mis­sion's agenda for the first time. A pro­po­sal pre­sen­ted at the be­gin­ning of 2018 then in­clu­ded the ab­oli­tion of the list of re­du­ced ra­tes and the in­tro­duc­tion of a ne­ga­tive list of goods to which no re­du­ced ra­tes may be ap­plied (e.g. al­co­hol, to­bacco, wea­pons). This would have gi­ven the mem­ber sta­tes grea­ter lee­way in set­ting VAT ra­tes. The idea of sus­tai­na­bi­lity was not a prio­rity at the time.

Directive takes sustainability into account

The di­rec­tive that has now been is­sued is ba­sed on a draft by the EU fi­nance mi­nis­ters in the Eco­no­mic and Fi­nan­cial Af­fairs Coun­cil (ECOFIN) on 7 De­cem­ber 2021, which de­via­ted from the Eu­ro­pean Com­mis­sion's pro­po­sal and in­tro­du­ced com­ple­tely new mo­ti­ves into Eu­ro­pean VAT law. The Coun­cil ex­pli­citly ju­sti­fied its draft di­rec­tive with the ob­jec­tives of cli­mate pro­tec­tion and pu­blic health pro­tec­tion. It plan­ned to spe­ci­fi­cally amend the list of goods and ser­vices to which re­du­ced ra­tes can be ap­plied (An­nex III of the VAT Di­rec­tive) in this re­gard.

In the draft di­rec­tive, the Coun­cil as­su­med that the le­gal frame­work for re­du­ced ra­tes must be co­he­rent with other EU mea­su­res and took up in­itia­ti­ves in the area of health pro­tec­tion and tack­ling cli­mate change. Here, the Coun­cil re­lied in par­ti­cu­lar on the "EU4Health pro­gram" (EU Re­gu­la­tion 2021/522) and the con­cept of a "Green Deal" pre­sen­ted by the EU Com­mis­sion on 11 De­cem­ber 2019.

The ECOFIN Coun­cil's con­side­ra­ti­ons have now been im­ple­men­ted in the Di­rec­tive amen­ding the EU VAT ra­tes of 5 April 2022. The pre­vious sys­tem of a stan­dard VAT rate of 15% and up to two re­du­ced VAT ra­tes of at least 5% has been re­tai­ned, alt­hough these may only be ap­plied to 24 of the 29 ser­vices lis­ted in An­nex III. The list of goods and ser­vices to which re­du­ced ra­tes can be ap­plied will be ad­ap­ted to the EU's cli­mate pro­tec­tion and pu­blic health ob­jec­tives.

From 2030 at the la­test, Mem­ber Sta­tes must levy the stan­dard rate of 15% on fos­sil fu­els, na­tu­ral gas, fire­wood, etc. Re­du­ced tax ra­tes on che­mi­cal pesti­ci­des and fer­ti­li­zers are also to be ab­olis­hed from 2032 at the la­test. In­stead, tax rate re­duc­tions and/or ex­emp­ti­ons will be made pos­si­ble for the fol­lo­wing ser­vices:

  • Me­di­cal pro­tec­tive equip­ment,
  • re­spi­ratory masks,
  • ne­cessary aids for peo­ple with disa­bi­li­ties,
  • di­gi­tal ser­vices such as in­ter­net ac­cess and live strea­ming of cul­tu­ral or spor­ting events,
  • eco­lo­gi­cal hea­ting sys­tems and so­lar pa­nels that are in­stal­led in pri­vate hou­se­holds and pu­blic buil­dings and can have a po­si­tive im­pact on cli­mate pro­tec­tion.

In ad­di­tion, a pro­vi­sion is plan­ned that will al­low Mem­ber Sta­tes to quickly in­tro­duce tax ex­emp­ti­ons on be­ne­fits to di­sas­ter vic­tims in cri­sis si­tua­ti­ons (e.g. pan­de­mics and na­tu­ral di­sas­ters). In this way, the di­rec­tive not only enab­les mem­ber sta­tes to re­act fle­xi­bly to the chal­len­ges of cli­mate change, but also pro­vi­des them with op­por­tu­nities to pro­mote eco­lo­gi­cally sound be­ha­vior among EU ci­ti­zens.

Room for maneuver for the new federal government

The new di­rec­tive came into force on 6 April 2022. This crea­tes the ba­sis for im­ple­men­ta­tion in na­tio­nal VAT law. In view of the new fe­deral go­vern­ment's plans as set out in the co­ali­tion agree­ment, many of the plan­ned re­gu­la­ti­ons are also li­kely to be in­cor­po­ra­ted into Ger­man VAT law.



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