EUROPEAN COMMISSION Brussels, 18.1.2018 SWD(2018) 7 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT

Accompanying the document Proposal for a Council Directive amending Directive 2006/112/EC as regards rates of value added tax {COM(2018) 20 final}

{SWD(2018) 8 final}



Contents 1.Introduction and context 1.1.Introduction 1.2.Rules on VAT rates 1.3.Legal framework for these rules 1.4.Utilisation of reduced rates 1.5.The initial choice of an origin-based VAT system and its consequences for the rules on VAT rates 1.6.Recent legislative proposals aimed at implementing a destination-based system 1.7.Proposal for a definitive VAT system based on taxation at destination and the reform envisaged of the rules on VAT rates 2.Problem definition 2.1.Problem 1: The current rules set excessive constraints to Member States’ tax policies 2.2.Problem 2: Expiry of derogations will restrict further Member States’ room for manoeuvre on rates 3.EU right to act 3.1.Analysis of subsidiarity 3.2.Analysis of proportionality and EU value-added 4.Objectives 4.1.General policy objectives 4.2.Specific policy objectives 4.3.Consistency of objectives with other EU policies

5.Policy options 5.1.Two options outlined in the VAT Action Plan 5.2.Discarded options 5.2.1.Could derogations be maintained in a definitive system without granting them to all Member States? 5.2.2.Is letting derogations (partly or entirely) expire a policy option? 5.3.Baseline scenario (no EU action) 5.4.Option 1 5.5.Option 2 5.6.Sub-options of option 2 5.6.1.Sub-option 2a 5.6.2.Sub-option 2b 5.6.3.Sub-option 2c 6.Assessment of impacts 6.1.Short-run impacts 6.2.Longer-run effects 7.Comparison of the options 7.1.Effectiveness in achieving the objectives 7.1.1.Provide Member States with sufficient leeway in determining the scope and level of reduced VAT rates 7.1.2.Treat Member States equally 7.1.3.Limit tax distortions of competition

7.1.4.Minimise complexity and business costs 7.1.5.Prevent litigation 7.1.6.Prevent revenue erosion 7.2.Efficiency 7.3.Coherence 7.4.Conclusions 7.5.Preferred option 8.Monitoring 9.Annexes 9.1.Procedural information 9.1.1.Agenda planning and Work Programme References 9.1.2.Inter-Service Steering Group 9.1.3.Consultation of the Regulatory Scrutiny Board 9.2.Stakeholder consultation 9.2.1.Open Public Consultation 9.2.2.Consultation of the Group on the Future of VAT (GFV) 9.2.3.Consultation of Member States concerning the existence of distortions stemming from VAT rate differences 9.2.4.Consultation by means of the Eurobarometer 9.3.Who is affected by the initiative and how? 9.4.Evaluation and studies supporting this impact assessment

9.4.1.Sequence and scope of relevant studies 9.4.2.Summary of central aspects of the underlying studies 9.5.VAT rates applied in the Member States at 1st January 2017 9.6.Technical document presented to the GFV by the Commission 9.7.Economic impact of VAT infringements 9.8.Overview of risks 10.Glossary

List of tables Table 1:Utilisation of reduced rates, % of potential tax base (‘rate gap’) Table 2:Categories eligible for reduced rates under Annex III Table 3:Evidence and potential scale of impact from rates differences, selected goods and services Table 4:Requests for modifications in the VAT Directive to allow for lower rates, 2015-2017 Table 5:Infringement procedures on violations of VAT Directive rules on rates Table 6:Intervention logic and policy objectives Table 7:Comparison of options Table 8:Summary of replies from tax administrations on the impact of VAT rate differences

List of boxes Box 1:Outline of the history of VAT rates rules Box 2:Domains where the origin principle continues to apply Box 3:Risk of distortion to the Single Market from the operation of different VAT rates Box 4:Recent examples of Member States’ requests for changes to the applicable rate regime Box 5:The principle of fiscal neutrality and its application in the VAT system Box 6:Derogations from the general rules on VAT rates in the VAT Directive Box 7:Impact of the expiry of derogations Box 8:Weighted average VAT rate (implicit VAT rate) Box 9:Fiscal distortion Box 10:Quantifying the potential for revenue erosion under option 1



List of figures Figure 1:Problem Tree Figure 2:Shares of tax base by rate, 2000





1.Introduction and context 1.1.Introduction VAT is a general tax on consumption applied to supplies of goods and services along the whole production and distribution process. It is a major and growing source of tax revenue in the European Union (EU). VAT raised slightly more than EUR 1 trillion in 2015, which corresponds to 7% of EU GDP or 17.6% of total national tax revenues . One of the EU’s own resources is also based on VAT (12.4% of the EU budget in 2015) . As a broad-based consumption tax, it is considered to be one of the most growth-friendly forms of taxation. One of the key strengths of VAT is that, by allowing taxpayers to exactly offset the tax incurred in previous stages of the production chain, it is much better suited than other types of indirect taxes to operate an internal market free of tax distortions. This was the main reason for its early adoption by the EU . It is governed by the VAT Directive which aims at ensuring that the principles underlying the functioning of this tax apply consistently in all Member States. In recent years, however, the VAT system has been unable to keep pace with the challenges of the global economy and the opportunities offered by new technologies. Therefore, the Commission adopted on 7 April 2016 an Action Plan on VAT (hereinafter ‘VAT Action Plan’) setting out ways to modernise the VAT system so as to make it simpler, more fraud-proof and business-friendly. In this context, the Commission announced its intention to adopt in 2017 four VAT-related proposals: 1)a definitive VAT system for intra-EU cross-border trade based on the principle of taxation in the Member State of destination in order to create a robust single European VAT area (first step); 2)a modernised VAT rates policy so as to allow Member States greater autonomy on setting the VAT rates; 3)a comprehensive simplification VAT package for SMEs; 4)a proposal to enhance VAT administrative cooperation and EUROFISC . This impact assessment relates to the second proposal, on rates policy. It is linked with the first legislative proposal aiming to put in place a definitive VAT system as part of the Regulatory Fitness and Performance Programme (REFIT), permanently based on the principle of taxation in the country of destination. 1.2.Rules on VAT rates The VAT Directive sets out a number of rules which constrain Member States’ autonomy in fixing the level of their VAT rates. These rules were formulated ahead of the abolition of internal customs checks along with fiscal frontiers in 1993. They include: Articles 96 and 97: Member States must apply a standard rate, which may not be lower than 15% until 31 December 2017. Articles 98 and 99: Member States have the option (but not the obligation) of applying a maximum of two reduced rates, not lower than 5%, to supplies of goods and services, listed in Annex III of the VAT Directive (see Table 2). This Annex contains 24 categories of goods and services; importantly, Member States can also apply a reduced rate to only part of a category. It allows Member States to tax at a reduced rate or exempt around 65% of household consumption expenditure (see section 1.3). Member States could not agree to specify any maximum for rates. Moreover, in contradiction to the general rules set out above, Member States in 1993 put in place more than 200 derogations (i.e. exceptions to the general rules) that allow certain Member States to: ·apply rates lower than 5% to products that are listed in Annex III; ·apply a reduced rate (including zero rates) to products that are not listed in Annex III.

These derogations agreed in Council negotiations aimed at allowing all Member States to keep all reduced and zero rates they applied before 1991. The only concession made by Member States was to accept that the derogations would be temporary and expire at the latest with the definitive VAT system and that for most derogations the scope could not be extended. A full overview of non-harmonised VAT rates is presented in section 9.5. 1.3.Legal framework for these rules The legal basis for adopting any rules on VAT is Article 113 of the Treaty on the Functioning of the European Union (TFEU). This article, to which the provisions of the VAT Directive must conform, subjects VAT legislation to an important constraint: any harmonisation of turnover taxes (such as VAT) is allowed only on the condition that such harmonisation is necessary to ensure the establishment and the functioning of the internal market and to avoid distortion of competition. This has consequences for the rules on rates, and an important part of the analysis developed in this Impact Assessment, specifically in the Problem Definition, is to review whether the existing rules respect fully this condition. Rules on rates, first adopted with an origin-based system in mind, have evolved over the years (see Box 1). In view of the abolition of fiscal frontiers, efforts were made to harmonise VAT rates. This still leaves much to the discretion of Member States some of which continue to rely on derogations granted. Box 1:Outline of the history of VAT rates rules 1967 Directive 67/228/EEC Other than a standard rate, Member States can apply reduced or increased rates. No rules are set on the level of those rates or the goods or services to which reduced or increased rates may be applied. 1977 Directive 77/388/EEC Member States are allowed, by way of derogation, to maintain existing reduced rates and exemptions with deductibility of the VAT paid at the preceding stage which satisfy certain specified conditions. 1987 and 1992 COM(87) 321 and COM(92) 5 To pave the way for the internal market, the Commission proposes to harmonise rates, with a standard rate of minimum 14% and maximum 20% and a reduced rate of minimum 4% and maximum 9% applied to a short list of goods and services (foodstuffs, excluding alcoholic beverages; energy products for heating and lighting; water supplies; pharmaceutical products; books, newspapers and periodicals; passenger transport). It also proposes to abolish all existing derogations. 1992 Directive 92/77/EEC The Council decides on a standard rate of minimum 15%, accompanied by a sunset clause, and two optional reduced rates of minimum 5% which may be applied to a longer list of goods and services (now Annex III). It also decides to maintain all existing derogations and link their expiry to the entry into force of the definitive VAT system. 1993 With the internal market, common rules on VAT rates are for the first time put in place. 1995 COM(95) 731 In view of transition to a definitive system based on taxation at origin, the Commission proposes a band for the standard rate (between 15% and 25%). 1996 Directive 96/95/EC The Council decides to continue with a standard rate of minimum 15%. COM(96) 328 In its programme for the single market, the Commission announces further initiatives to approximate (late 1997) and harmonise (mid-1999) rates. These initiatives are later abandoned. 1999 COM(99) 62 The Commission proposes, by way of experiment, to allow temporary use of reduced rates for labour-intensive services. Directive 1999/85/EC The Council agrees on such an experiment but for specific labour-intensive services only. 2000 COM(2000) 348 The Commission, as part of its strategy to improve the operation of the VAT system within the context of the internal market, announces a medium term review and rationalisation of VAT reduced rates and derogations. 2002 COM(2002) 525 The Commission proposes to prolong the experiment for labour-intensive services. Directive 2002/93/EC Decision 2002/954/EC The Council agrees on the prolongation of the experiment for labour-intensive services. 2003 COM(2003) 397 Following a review, the Commission proposes to rationalise Annex III and include categories of goods and services covered by derogations applied by a certain number of Member States where this has been found not to hamper the proper functioning of the internal market. It proposes to abolish parking rates and to limit the scope of other derogations so that zero rates and super reduced rates can only be applied to what is included in Annex III. 2006 Directive 2006/18/EC The Council cannot agree to rationalise Annex III or to rein in derogations but decides to prolong the experiment for labour-intensive services. 2011 COM(2011) 851 The Commission, in its communication on the future of VAT, suggests to adopt the principle of taxation at destination. 2012 Conclusions from the 3167th meeting on 15.5.2012 The Council concurs that taxation in the Member State of origin of the goods or services is not politically achievable and invites the Commission to examine ways to implement the destination principle. 2015 Directive 2008/8/EC Destination principle implemented for B2C services 2016 COM(2016) 148 The Commission outlines options for modernising the rules for VAT rules in its VAT Action Plan. Conclusions from the 3468th meeting on 25.5.2016 The Council welcomes the Commission's intention to propose increased flexibility on VAT rates, whilst noting the need for the VAT system to maintain a sufficient level of harmonisation. Source: Commission services 1.4.Utilisation of reduced rates In practice, the use of reduced rates varies very widely between Member States, reflecting national policy priorities, but only a few Member States make significant use of the flexibility granted to them by the VAT Directive. The differences in the degree of utilisation of reduced rates may be gleaned from the ‘rate gap’ measure shown in Table 1. This indicator shows what percentage of the theoretical VAT revenue is foregone owing to the recourse made to reduced rates. This is found to be less than 3% in countries such as Denmark, Slovakia, Estonia, Bulgaria and Romania, while at the other extreme it approaches or exceeds 15% in Ireland, Poland, Italy, Luxembourg and Spain. The difference in the degree to which reduced rates are used is consistent with widely different national political preferences on using indirect taxation to pursue social policy objectives . Table 1:Utilisation of reduced rates, % of potential tax base (‘rate gap’) Member State AT BE BG CZ DE DK EE ES FI FR GR HR HU IE Rate gap 10.4 12.4 2.8 5.8 7.2 0.9 2.5 14.5 9.1 10.0 13.9 4.1 3.3 17.1 Member State IT LT LU LV MT NL PL PT RO SE SI SK UK EU27 Rate gap 15.6 4.0 14.6 3.2 12.7 12.2 15.9 11.1 2.9 8.3 11.3 1.7 3.3 5.3 Source: 2016 VAT gap report, p. 53 Table 2:Categories eligible for reduced rates under Annex III Category Coverage 1 Foodstuffs (including beverages but excluding alcoholic beverages) for human and animal consumption; live animals, seeds, plants and ingredients normally intended for use in the preparation of foodstuffs; products normally used to supplement foodstuffs or as a substitute for foodstuffs; 2 Supply of water; 3 Pharmaceutical products of a kind normally used for health care, prevention of illnesses and as treatment for medical and veterinary purposes, including products used for contraception and sanitary protection; 4 Medical equipment, aids and other appliances normally intended to alleviate or treat disability, for the exclusive personal use of the disabled, including the repair of such goods, and supply of children’s car seats; 5 Transport of passengers and their accompanying luggage; 6 Supply, including on loan by libraries, of books on all physical means of support (including brochures, leaflets and similar printed matter, children’s picture, drawing or colouring books, music printed or in manuscript form, maps and hydrographic or similar charts), newspapers and periodicals, other than material wholly or predominantly devoted to advertising; 7 Admission to shows, theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas, exhibitions and similar cultural events and facilities; 8 Reception of radio and television broadcasting services; 9 Supply of services by writers, composers and performing artists, or of the royalties due to them; 10 Provision, construction, renovation and alteration of housing, as part of a social policy; 10a Renovation and repairing of private dwellings, excluding materials which account for a significant part of the value of the service supplied; 10b Window-cleaning and cleaning in private households; 11 Supply of goods and services of a kind normally intended for use in agricultural production but excluding capital goods such as machinery or buildings; 12 Accommodation provided in hotels and similar establishments, including the provision of holiday accommodation and the letting of places on camping or caravan sites; 12a Restaurant and catering services, it being possible to exclude the supply of (alcoholic and/or non-alcoholic) beverages; 13 Admission to sporting events; 14 Use of sporting facilities; 15 Supply of goods and services by organisations recognised as being devoted to social wellbeing by Member States and engaged in welfare or social security work, in so far as those transactions are not exempt pursuant to Articles 132, 135 and 136; 16 Supply of services by undertakers and cremation services, and the supply of goods related thereto; 17 Provision of medical and dental care and thermal treatment in so far as those services are not exempt pursuant to points (b) to (e) of Article 132(1); 18 Supply of services provided in connection with street cleaning, refuse collection and waste treatment, other than the supply of such services by bodies referred to in Article 13; 19 Minor repairing of bicycles, shoes and leather goods, clothing and household linen (including mending and alteration); 20 Domestic care services such as home help and care of young, elderly, sick or disabled; 21 Hairdressing. Source: VAT Directive 1.5.The initial choice of an origin-based VAT system and its consequences for the rules on VAT rates

Until 1993, the customs checks at the internal borders constituted an essential element of the VAT system as they allowed checking the dispatch of goods to another jurisdiction needed to operate the export exemption which ensures the neutrality of the system. However, the abolition of internal fiscal frontiers in that year obliged the EU to choose between two different solutions as concerns intra-EU transactions: taxation of the goods at origin or at destination. While both systems have advantages and disadvantages, the solution pursued was the origin principle, under which the VAT rules applicable to a transaction (including the tax rate to be applied) is determined by the Member State where the seller is located. This choice was made largely on account of the fact that it is the simplest and therefore the least costly for businesses. The implementation of the origin system, however, quickly hit a roadblock: such a system requires a very high degree of rate alignment among Member States to prevent tax distortions, because it provides a tax advantage to suppliers located in lower-rate jurisdictions. Differences in the levels of VAT rates were stark already in 1993; the standard rate, for example, ranged from 15% to 25%. Also in the following years, rates were not aligned and currently the difference between the highest and the lowest standard rate is still 10 percentage points (see section 9.5). Recognising that quick alignment of rates was unrealistic, a temporary solution was adopted: a transitory system for VAT, based on the destination system for most intra-EU transactions, which would apply temporarily until the adoption of a definitive regime; ahead of the switchover, rate convergence amongst Member States would be encouraged by setting minimum levels for VAT rates and limiting the application of reduced rates. It was hoped that over a period of a few years, Member States would be able to achieve the convergence in rate levels needed to allow the introduction of the planned origin-based definitive system. In 2012, however, given the lack of meaningful progress on rate convergence, the Commission, with the agreement of the Council and the European Parliament, decided to abandon the objective of a definitive VAT system based on the origin principle in favour of one based on the destination system. As noted in the VAT Action Plan , the choice of a destination-based system for the definitive system raises the question of whether, and to what extent, the existing legal limits on rates are still necessary, opening up the possibility of making them less constraining for Member States. This Impact Assessment assesses the merits of relaxing such limits and evaluates policy options for doing so. 1.6.Recent legislative proposals aimed at implementing a destination-based system In the last years, several measures were taken to underpin the move towards implementing a system based on the destination principle. An important decision was taken in 2008, when the Council adopted legislation aiming at changing the rules on VAT so as to ensure that VAT on services accrues to the country where consumption occurs, and to prevent distortions of competition between Member States operating different VAT rates. The result of this is that already now the taxation of the vast majority of supplies of services is based on the destination principle, a change which has been implemented progressively since 2010. The last milestone of the implementation was the implementation of destination-based taxation for electronic services in 2015. Since then, all B2C (business-to-consumer) supplies of telecommunications, broadcasting and electronic services (hereinafter ‘electronic services’) are taxable at the place where the customer resides and no longer where the supplier is located. Also the vast majority of supplies of goods are taxed where the customer is located or resides, because the place of supply is, as a rule, the place where the goods are located at the time when the supply takes place. The exceptions to taxation at the place of the customer are minor, e.g. cross-border shopping by non-residents and low-volume distance sales, where VAT is charged according to the origin principle (see Error! Reference source not found. 2 for details). Box 2:Domains where the origin principle continues to apply In the case of cross-border shopping where tourists (non-resident final consumers) can shop in any EU country paying the local VAT – this is obviously a simplifying provision to avoid having to declare VAT when they re-enter their country. Distance sales are sales in which goods are transported by or on behalf of a supplier in one EU Member State, to a person in another Member State who is not registered for VAT (final consumer). They typically include B2C mail order sales, phone or tele-sales or physical goods ordered over the internet (except sales of new means of transport, which are excluded from distance selling). If sales do not exceed the annual distance selling threshold, the seller may apply local VAT (origin principle) instead of registering for VAT in the destination country, facilitating compliance. However, once the threshold is surpassed, the destination principle applies, and the supplier becomes liable to VAT in the country of destination. The threshold is set by each Member State; it amounts to EUR 35 000 annually for most Member States but a few Member States apply a threshold of EUR 100 000. However, the Commission’s e-Commerce proposal, once adopted, will have the effect of removing this threshold from 2021 and replace it with a global EU threshold of EUR 10 000 for all intra-EU sales. The flat-rate scheme for farmers and the special schemes for travel agents and taxable dealers are small sectoral schemes that mainly aim at simplification in the concerned sectors. Source: Commission services In December 2016, with the e-Commerce initiative, the Commission proposed new rules allowing companies that sell goods online to take care of all their VAT obligations in the EU through a digital online portal (‘One Stop Shop’), hosted by their own tax administration and in their own language. Such rules already exist for online sellers of electronic services. In this context, the Commission proposed the introduction of a new yearly VAT threshold for all cross-border sales, replacing the current VAT distance sales system as from 2021. Finally, it should be noted that in December 2016 the Commission also adopted a specific proposal on rates for e-publications – following a particularly urgent demand to establish equal treatment of electronically supplied publications and publciations supplied on any means of physical support. 1.7.Proposal for a definitive VAT system based on taxation at destination and the reform envisaged of the rules on VAT rates Rules on VAT rates are directly linked to the switchover to the definitive VAT regime, because once the new regime is put in place, existing derogations to the general rules on VAT rates will expiry (see problem 2, section 2.2). The first proposal on the definitive VAT regime outlines general principles of the definitive VAT regime and a second proposal with detailed arrangements will follow. Before the entry into force of a definitive VAT system, the derogations problem (problem 2, section 2.2) must be discussed and settled because, as detailed later, this is a political precondition to approval. On the other hand, the adoption of the proposal on VAT rates (including a solution for the derogations problem) would not be conditional upon the adoption of the definitive VAT system, because already now the destination principle has been implemented for the vast majority of supplies of goods and services. Nevertheless, the entry into force of any major change to the VAT rules should be the same as for the entry into force of the definitive VAT system, because the rules are directly linked (expiry of derogations at the time the definitive regime enters into force). 2.Problem definition

The causes and consequences of the problems in the current rates regime to be tackled by the upcoming Commission proposal are summarised in the Problem Tree (see Error! Reference source not found. ). It should be stressed that this initiative aims at dealing with one particular aspect of the VAT system only, namely the rules on setting VAT rates. Nevertheless, as highlighted in section 1, the proposal is linked to a much more wide-ranging proposal, the introduction of the definitive system, in ways that will be described later. Before entering into the specifics of the VAT rate regime, it is important to note that all EU legislation in the tax domain is subject to the unanimity principle. This factor should be taken into account (particularly when considering the abolition of derogations benefiting individual Member States), and more generally shapes the direction of policy outlined in the VAT Action Plan, which is to extend, rather than restrict, the room of manoeuvre for Member States, so long as this is not in conflict with the functioning of the Single Market. Figure 1:Problem Tree Source: Commission services 2.1.Problem 1: The current rules set excessive constraints to Member States’ tax policies As already mentioned, the legal framework restricting Member States’ autonomy in setting VAT rates was consistent with the objective of achieving a VAT system based on the origin principle, which is no longer current. The design of the rates regime needs to take this change into account, particularly as the unanimity requirement in the tax domain makes it difficult for Member States to extend reduced VAT rates to new areas. It is widely accepted in the economic literature that a system based on the destination principle is neutral as regards cross-border trade, because all goods and services sold in each market are taxed at the same level, preventing any tax advantage from accruing to producers located in lower-rate jurisdictions. The destination principle is already currently applied to the overwhelming majority of cross-border transactions and this will not change with the adoption of the definitive VAT system. The evaluation of the VAT system carried out in 2011 found that the application of the destination principle to the tax regime for business-to-business (B2B) trade in goods – and since 1 January 2010 for most services – achieved neutrality towards production decisions, and identified some (limited) potential distortions in the areas where the destination principle is not implemented . The few domains where the destination principle does not apply and where instead the origin principle, for reasons of convenience, continues (and will continue) to apply are: cross-border shopping, distance sales (below a certain threshold), and the special schemes for farmers, travel agents and taxable dealers (see Error! Reference source not found. 2). In line with this premise, the economic study on the reform of VAT rates commissioned in the context of this initiative (henceforth ‘2017 VAT rates study’), concentrated on areas where the destination principle was not implemented. It too did not find evidence of any meaningful risk for distortions to the Single Market related to the operation of different levels of VAT rates; even in those higher-risk instances such as areas where the origin principle continues to be applied, the impacts are rather limited (see Error! Reference source not found. ). As a conclusion, the constraints to Member States’ flexibility in setting VAT rates are no longer consistent with Article 113 TFEU on which the VAT Directive is based and which states that the ‘Council shall […] adopt provisions for the harmonisation of legislation concerning turnover taxes […] to the extent that such harmonisation is necessary to ensure the establishment and the functioning of the internal market and to avoid distortion of competition’. Respecting Article 113 TFEU requires that flexibility has to be balanced against the need to ensure the continued proper functioning of the internal market . Therefore, the progressively implemented taxation at destination since 2010 requires flexibility being allowed for Member States, which could not be granted while pursuing taxation at origin. Moreover, the current VAT Directive treats Member States significantly differently and these differences can no longer be justified in a destination-based VAT system (see problem 2). Box 3:Risk of distortion to the Single Market from the operation of different VAT rates The 2017 VAT rates study, in line with previous literature and the 2011 evaluation of the VAT system, found that, despite the existence of a large variety of rates, ‘under a destination-based VAT system, the scope for economic distortions and harmful tax competition is extremely limited’. This is because in a full destination system, goods supplied from other Member States or imported from third countries are always taxed exactly at the same rate as domestically produced products of the same category. This conclusion is in line with the answers provided by 17 Member States’ tax administrations to a survey asking whether they were aware of any distortions created by rate differences, notably as regards four VAT domains where the operation of the origin principle heightens distortion risks (cross-border shopping, distance sales, special schemes for farmers and second-hand scheme). Table 3 below illustrates the responses received, none of which highlight significant known effects from VAT rates. Most Member States did not identify any particular impact. The main problems highlighted relate mostly to the lack of respect of the distance sales threshold (where traders sometimes disregard it). However, under the Commission’s e-Commerce proposal, starting from 2021 that threshold will be replaced by a global threshold of EUR 10 000 for all intra-EU sales, while compliance will be facilitated by the introduction of a Mini One Stop Shop to allow traders to easily declare VAT due in other Member States. Both changes go in the direction of limiting the impact of the distortion. A full overview of the replies of the Member States is provided in section 9.2 (see Table 8 8). The 2017 VAT rates study went beyond the responses of Member States, which focus on the status quo, by assessing the distortion potential in a number of case studies specifically selected on the basis of economic and behavioural criteria, to show a high susceptibility to distortion (see part 1 of the study). The impact found for the goods and services selected for the case studies should, by design, be significantly greater than for most goods. Even so, the study found that the scale of the impact from rate differences was not substantial in any instances, except for tourism and the second-hand scheme (see Error! Reference source not found. ). Table 3:Evidence and potential scale of impact from rates differences, selected goods and services Source: 2017 VAT rates study In quantitative terms, it is also worth highlighting that the amounts potentially at risk of distortion represent only a tiny fraction of VAT revenue. VAT levied on cross-border shopping by EU residents can be estimated at less than EUR 7 billion in total; this is only about 0.6% of total VAT revenue in the EU. Furthermore, only a small fraction of that amount could realistically be seen as having been relocated owing to VAT competition, as cross-border shopping typically takes place on holidays in which most spending is driven by experiential considerations. The amounts at play in relation to the special systems are an even tinier fraction. As for distance selling, the elimination of the thresholds in favour of a global EU threshold planned for 2021 and the expected increase in compliance should reduce the scope of the problems. Another avenue for fiscal distortion could arise from a Member State applying a reduced rate on a good specified in such a way as to favour domestically-produced goods over others. This problem is prevented not only by the way the VAT system is structured, but also by the application of the tax neutrality principle (see Box 5 for details). Finally, one should address a methodological issue. In theory, one could argue that although little evidence of distortion has been found under current rules, this might be because these same rules, by prescribing common minima, limit the maximum potential rate difference to a few percentage points; the same result might therefore not hold under a scenario in which such minima were abolished. However, according to the 2017 VAT rates study, the impacts on cross-border shopping only become noticeable on certain categories of goods and services where price savings of 20% or above are achievable, and then essentially in border regions. This result does not change even in the case of high value items, for which the absolute savings can be significant. The finding considerably limits the scope of possible distortions even in a wholly liberalised rate regime. Consequences of problem 1 While it is not possible to quantify the extent of problem 1, given that the degree of policy restriction is not a measurable parameter, one can nevertheless gauge its seriousness from two consequences flowing from it, namely: the number of requests for changes to the VAT Directive received by the Commission and the number of violations of VAT provisions already in place. a) Continuous requests for changes in the VAT Directive Although the existing rules on VAT rates do leave Member States with a wide room for manoeuvre, they nevertheless set significant constraints to their action. This is demonstrated by the high frequency of requests for changes to rate rules; just in the last two years such requests were made by seven Member States in three different domains (see Box 4). That there is an ongoing need for adaptations to the VAT Directive was confirmed by views expressed in the Group on the Future of VAT (GFV), a group composed of Member State representatives and of the Commission which was tasked with providing a technical assessment of VAT reform options. In particular, in its meeting of 28 April 2017 on the rates system, only a small minority of Member State representatives defended the status quo, with a clear majority requesting changes to the scope of application of reduced rates. Similar views were also expressed by stakeholders in the open public consultation (see section 9.2 for details). Box 4:Recent examples of Member States’ requests for changes to the applicable rate regime

Despite the not insignificant latitude enjoyed by Member States in rate-setting, requests for changes to the applicable rate regime, more than two decades after the rules on reduced rates were first established, continue to be frequent (see Error! Reference source not found. ). These requests are usually linked to the fact that goods or services to which a Member State would like to apply a reduced rate are not listed amongst those eligible under Annex III and therefore must be taxed at the standard rate. Table 4:Requests for modifications in the VAT Directive to allow for lower rates, 2015-2017 Source: Commission services Experience suggests that requests for allowing lower rates to specific products will continue to be made in the future. This conclusion is supported by the fact that even though Annex III has already been modified several times in the past, such requests continue to be presented quite frequently. For example, already in 1999, just seven years after rules limiting the discretion of all Member States to set VAT rates, Annex III was modified to allow – although on a temporary basis – reduced rates on a range of labour-intensive services, such as small repair services; the renovation of private dwellings; window cleaning and private household cleaning; domestic care services; and hairdressing. The measure was finally made permanent in 2009. Other recurrent requests involve for instance appliances with low energy consumption. b) Recurrent violations of the VAT Directive by Member States Until now, 40 infringement procedures on rates involving 20 different Member States have been initiated (see

Table 5 ). The Commission, in its role as Guardian of the Treaties, has to act upon such infringements and initiate proceedings against the Member States concerned. In addition, since 2008 the Commission also initiated 25 EU pilot procedures related to rates, with the aim of addressing the problem before the start of a formal infringement procedure. However, as can be seen from

Table 5 , in a large portion of cases the issue cannot be resolved and the procedure continues until the final judgment phase. At present, violations of provisions on rates represent about 7% of all open infringement cases initiated by the Commission in the tax domain. Procedural requirements also generate litigation at Member State level, as national courts must decide whether to refer to the Court of Justice of the European Union (hereinafter ‘CJEU’) for a preliminary ruling. As is apparent already from a quick glance at

Table 5 , the majority of these infringements relate to specific sectoral transactions of a limited scope and without systemic importance, and as such do not meaningfully distort intra-EU or domestic competition. Nevertheless, these are cases which are often highly sensitive in view of the goods or services concerned (as they may affect primary needs, social or cultural objectives) and of the direct impact that reverting to the standard rate may have on the final consumer. As a result, infringements with minor and local economic consequences have often in the past given rise to heated controversy, typically when an unlawfully broad application of reduced rates was challenged by the Commission. Particularly, when there is no market distortion it is difficult to justify to the public why Member States should be so constrained in their tax sovereignty as to be prevented from taking decisions on VAT where this has a purely local impact. So, above and beyond the direct economic costs of litigation on the parties, and the impact of legal uncertainty on businesses in the affected sectors, there are also long-term, impossible to quantify negative consequences in terms of the perceived legitimacy of the EU rules in place.

Table 5:Infringement procedures on violations of VAT Directive rules on rates Member State Reason for infringement procedure BE Reduced rate on buildings CZ Reduced rate for diapers CZ Reduced rates on horses CZ Reduced rate on medical equipment DE Reduced rate for artists – judgment of 23.10.2003 (C-109/02) DE Reduced rate on horses - judgment of 12.05.2011 (C-453/09) DE Reduced rate for works of art EE Reduced rate on diapers IE Reduced rate on horses – judgment of 14.03.2013 (C-108/11) EL Reduced rate on bowling ES Reduced rate on medical equipment – judgment of 17.01.2013 (C-360/11) FR Reduced rate for duty of attorneys – judgment of 17.06.2010 (C-492/08) FR Reduced rate on funeral expenses – judgment of 06.05.2010 (C-94/09) FR Reduced rate for the 140 first representations – judgment of 28.02.2012 (C-119/11) FR Reduced rate on horses – judgment of 08.03.2012 (C-596/10) FR Reduced rate on composite supply FR Reduced rate on domestic care services FR Reduced rates on supply of gas and electricity – judgment of 08.05.2003 (C-384/01) FR Reduced rates on medicinal products – judgment of 03.05.2001 (C-481/98) FR Reduced rate agricultural products FR Reduced rate on e-books – judgment of 05.03.2015 (C-479/13) FR Reduced rate for digital press IT Reduced rate on horses CY Reduced rate on medical equipment LV Reduced rate on medical equipment LU Reduced rate on e-books – judgment of 05.03.2015 (C-479/13) LU Reduced rate on horses HU Reduced rate on diapers MT Reduced rate for works of art NL Reduced rate for sports activity NL Reduced rate on horses – judgment of 03.03.2011 (C-41/09) AT Reduced rate on waste treatment AT Reduced rate on horses – judgment of 12.05.2011 (C-441/09) PL Reduced rate on shoes and children’s clothing – judgment of 28.10.2010 (C-49/09) PL Reduced rate for folk art PL Reduced rate on medical equipment – judgment of 04.06.2015 (C-678/13) PL Reduced rate on fire-fighting products – judgment of 18.12.2014 (C-639/13) PT Reduced rate for attorneys-at-law SE Reduced rate on CD books UK Reduced rate on environmentally friendly materials – judgment of 04.06.2015 (C-161/14) Source: Commission services The high number of infringement procedures in this field raises the question why the rules are violated so frequently and by so many Member States. One answer is certainly that extending reduced VAT rates to new areas is a very long process given the unanimity requirement in the tax domain. By way of example, the final adoption of rules allowing for the permanent application of reduced rates to locally supplied labour-intensive services took several steps, including a three-year experimental period which was extended several times, lasting overall more than ten years, from the late 1990s until the introduction of those permanent rules on 1 January 2010. Such long time frames can occasionally even result in the rules for VAT rates, for example as regards products subject to technological progress, becoming obsolete; this was notably the case for digital publications (see Box 5). Box 5:The principle of fiscal neutrality and its application in the VAT system According to EU case law the principle of fiscal neutrality or VAT neutrality is inherent in the common system of VAT and precludes treating similar goods or services, which are in actual or potential competition with each other, differently for VAT purposes. This is an expression of the general principle of equal treatment in matters relating to VAT. It states that if goods or services are similar, they must be subject to the same rate of VAT. In order to determine whether the goods or services in question are similar in nature, account must primarily be taken of the point of view of a typical consumer, so as to establish whether those goods or services meet the same needs of that consumer, while avoiding artificial distinctions based on insignificant differences. The CJEU has held that two supplies of services are similar where they have similar characteristics and meet the same needs from the point of view of consumers, the test being whether their use is comparable, and where the differences between them do not have a significant influence on the decision of the average consumer to use one such service or the other. The principle of fiscal neutrality remains unaffected by any reform proposal, including those assessed in this impact assessment. It will always bind Member States’ tax policy decisions. Problems of respecting the principle of fiscal neutrality can only appear when specific provisions of the VAT Directive prevent Member States from applying the principle. Today, this is particularly the existence of Annex III and derogations, often very narrowly formulated, that gives rise to this kind of conflict, as the boundary set according to the rate rules may not coincide well with the criterion based on product similarity. The instances where Annex III or one of the derogations contradict the principle of fiscal neutrality often lead to litigation. For example, the CJEU recently ruled that Annex III prohibits taxing at a reduced rate an e-book for download, while the same e-book supplied on any means of physical support can benefit from such a reduced rate, although the products were considered as similar by the CJEU. As a result, Member States in adhering to the principle of fiscal neutrality could end up infringing the VAT Directive. The latest example concerns a case where the Dutch Supreme Court (Hoge Raad) on 11 November 2016 held that sunscreen with UVA and UVB filters and toothpaste containing fluoride are pharmaceuticals according to the Dutch Health law and have to be treated similar to other pharmaceuticals that are taxed at the reduced rate in the Netherlands. However, Annex III does not allow granting a reduced rate to sunscreen and toothpaste. It only allows reduced rates for pharmaceutical products of a kind normally used for health care, prevention of illnesses and as treatment for medical purposes. Stakeholders affected by Problem 1 Problem 1 affects directly Member States, by preventing them from introducing tax policy changes, and the Commission by forcing it to intervene continuously in defence of the application of provisions devoid of EU-level importance. It also affects businesses, insofar as the introduction of reduced rates in violation of the VAT Directive and the subsequent abolition of the said reduced rates create instability in the business environment. The worsening in the tax treatment following reinstatement of the higher rate may make investments made in the meantime, and potentially entire business lines, unprofitable in the sectors affected. Such costs however cannot be quantified. The direct impact on consumers is more limited because rate changes will affect only a small share of their expenditure and the overall level of VAT revenues – as opposed to the portion raised on each good or service – is dictated by budgetary concerns. 2.2.Problem 2: Expiry of derogations will restrict further Member States’ room for manoeuvre on rates

Introduction of definitive system triggering the expiry of special provisions (derogations) which currently allow Member States to maintain more favourable tax rates in specific domains As explained, rules on VAT rates did not really exist before 1993, but the entry into force of the Single Market obliged Member States to agree such rules. After long negotiations a compromise was found in Council at the last minute. The trick was to agree on common rules for the future (minimum of 5% for the reduced rates and a list of goods and services to which such reduced rates could be applied), but not to oblige the then nine Member States to abolish any reduced VAT rates in force at that time. This was achieved by granting derogations and by agreeing that these derogations should expire only once the definitive VAT system enters into force. However, Member States still use these derogations today, 25 years later, and only very few rates covered by the derogations have disappeared since 1993. Until 2004 as part of their Accession Treaty new Member States could also negotiate derogations that would only be abolished with the definitive VAT system. That covered another 3 Member States. Because the Commission had learnt from the past that Member States did not show any interest in voluntarily renouncing on VAT rates covered by derogations, as of 2004 most of the derogations granted to the newest Member States included a predefined expiry date of 2007 (they eventually expired in 2010 after having been prolonged once). The last attempt made by the Commission in 2003 to partly abolish some ‘old’ derogations was blocked by Member States in Council. As a result, there is a very large disparity in the derogations remaining, with ‘old’ Member States benefiting from, in some cases, very wide derogations, in contrast with extremely limited deviations from the general rules in the newer Member States. Box 6:Derogations from the general rules on VAT rates in the VAT Directive • Article 110: Member States which, at 1 January 1991, were granting exemptions with deductibility of the VAT paid at the preceding stage or applying reduced rates lower than the minimum laid down in Article 99 may continue to grant those exemptions or apply those reduced rates. The exemptions and reduced rates referred to in the first paragraph must be in accordance with Community law and must have been adopted for clearly defined social reasons and for the benefit of the final consumer. • Article 111: Subject to the conditions laid down in the second paragraph of Article 110, exemptions with deductibility of the VAT paid at the preceding stage may continue to be granted in the following cases:

(a) by Finland in respect of the supply of newspapers and periodicals sold by subscription and the printing of publications distributed to the members of corporations for the public good;

(b) by Sweden in respect of the supply of newspapers, including radio and cassette newspapers for the visually impaired, pharmaceutical products supplied to hospitals or on prescription, and the production of, or other related services concerning, periodicals of non-profit-making organisations;

(c) by Malta in respect of foodstuffs for human consumption and pharmaceuticals. • Article 112: If the provisions of Article 110 cause for Ireland distortion of competition in the supply of energy products for heating and lighting, Ireland may, on specific request, be authorised by the Commission to apply a reduced rate to such supplies, in accordance with Articles 98 and 99. • Article 113: Member States which, at 1 January 1991, in accordance with Community law, were granting exemptions with deductibility of the VAT paid at the preceding stage or applying reduced rates lower than the minimum laid down in Article 99, in respect of goods and services other than those specified in Annex III, may apply the reduced rate, or one of the two reduced rates, provided for in Article 98 to the supply of such goods or services. • Article 114: Member States which, on 1 January 1993, were obliged to increase their standard rate in force at 1 January 1991 by more than 2% may apply a reduced rate lower than the minimum laid down in Article 99 to the supply of goods and services in the categories set out in Annex III. The Member States referred to in the first subparagraph may also apply such a rate to restaurant services, children's clothing, children's footwear and housing. • Article 115: Member States which, at 1 January 1991, were applying a reduced rate to restaurant services, children's clothing, children's footwear or housing may continue to apply such a rate to the supply of those goods or services. • Article 117: Austria may apply one of the two reduced rates provided for in Article 98 to the letting of immovable property for residential use, provided that the rate is not lower than 10%. • Article 118 (parking rates): Member States which, at 1 January 1991, were applying a reduced rate to the supply of goods or services other than those specified in Annex III may apply the reduced rate, or one of the two reduced rates, provided for in Article 98 to the supply of those goods or services, provided that the rate is not lower than 12%. • Article 119 (parking rates): For the purposes of applying Article 118, Austria may apply a reduced rate to wines produced on an agricultural holding by the producer-farmer, provided that the rate is not lower than 12%. • Article 120: Greece may apply rates up to 30% lower than the corresponding rates applied in mainland Greece in the departments of Lesbos, Chios, Samos, the Dodecanese and the Cyclades, and on the islands of Thassos, the Northern Sporades, Samothrace and Skiros. • Article 121: Member States which, at 1 January 1993, regarded work under contract as the supply of goods may apply to the delivery of work under contract the rate applicable to the goods obtained after execution of the work under contract. • Article 122: Member States may apply a reduced rate to the supply of live plants and other floricultural products, including bulbs, roots and the like, cut flowers and ornamental foliage, and of wood for use as firewood. For more information on the specific VAT rates based on Articles 110 to 122, see section 9.5. Derogations are also included in Articles 371 to 390c in combination with Annex X. These ‘stand-still’ derogations allow Member States to continue to exempt until the adoption of definitive arrangements certain supplies under the conditions as applied on 1 January 1978. Some of these exemptions are accompanied by a right of deduction in which case they compare to zero rates. That is for example the case with internal air and sea passenger transport services where an exemption with right of deduction is applied by all Member States.

In budgetary terms, the most substantial derogations are the zero rates (under Articles 110 and 111), both because of the greater rate of tax subsidisation and because some zero rates are applied to rather broad categories (e.g. food). Mathis (2004) found that in 2000, the highest share of zero rates was in the UK, accounting for about 20% of the tax base, followed by Ireland at slightly over 10%. The presence of super-reduced and parking rates was significant in Luxembourg; together covering roughly half of the tax base (see Figure 2). Data by Mathis (2004) is the latest and only data available. While the share of the zero rate in the UK and Ireland should have remained roughly constant, possibly with some erosion due to the lower elasticity to income of many of the goods covered by such rate, Luxembourg has abolished most of the parking rates since then and increased the share of the super-reduced rate. Figure 2:Shares of tax base by rate, 2000 Source: Mathis (2004) All these derogations will expire, given the provisions in the VAT Directive, when the definitive system is implemented. This would then result in Member States losing the ability to legally maintain reduced rates in several domains, further restricting their room for manoeuvre in VAT rates policy compared to the status quo. Generally speaking, the expiry of a temporary derogation is not necessarily a problem per se, as the default solution of reverting to the general rules could be an acceptable or even a better solution. However, Member States are strongly opposed to any further restriction in their ability to set rates. Consultation with Member States in the GFV has confirmed that as experienced since the 1990s phasing out an already granted VAT reduced rate is extremely difficult from a political viewpoint, owing to the fact that economic operators have founded their business models on the existing rate system and repealing such a rate would be highly disruptive. Several Member States made it clear when the GFV met on 28 April 2017 that to consider phasing out the existing derogations which allow super-reduced and zero rates was unacceptable. Even a number of the Member States not themselves benefiting from such derogations indicated that phasing them out was not a workable solution (see section 9.2 for details). This is perhaps also linked to the fact that, as showed by the results of the 2017 VAT rates study, the expiry of such derogations would not address any specific problem for the Member States not directly affected. Speaking of the expiry of the derogations, it should also be mentioned that as at 31 December 2017 the obligation for Member States to set the standard rate at a minimum level of 15% will expire. The expiry of this obligation, unlike what happens for the derogations, does not trigger any immediate consequence given that all Member States levy standard rates that are well above the 15% threshold, and it seems highly unlikely that in the foreseeable future any Member State would wish to cut the standard rate below 15%. Breach of the equal treatment principle It should be noted that the derogations in their current form contradict the principle of equal treatment. This is because, as explained in Box 6 above, many of these provisions are grandfathering clauses allowing exceptions based on the situation at some past date or to individual Member States (for example, the Article 110 derogation allows the continuation of zero rates in jurisdictions where and as they were in place at the date of 1 January 1991, and the Article 114 derogation allows Luxembourg and Spain to apply a super-reduced rate to the entire Annex III). As mentioned above, the disparity in the application of derogations is very large, creating a divide between pre-1992 Member States and the others. There is no compelling reason why the same rights in terms of rates should not be extended to the other Member States, given that the rationale for limiting this possibility to some Member States was linked with the now defunct objective of adopting an origin system. Several Member States have pointed out in the GFV that the reform of the rates system must address this breach to the equal treatment principle. Consequences of the problem As confirmed by Member States during the GFV consultation, the expiry of these derogations is not an acceptable outcome for many of them. Thus, the lack of a clear and agreed solution extending the effect of the derogations is likely to prevent the introduction of the definitive system in itself. Stakeholders affected Member States All Member States can apply rates lower than 5% (‘super-reduced’ rates) to at least one category of Annex III and two Member States (Spain and Luxembourg) even to the entire Annex III. Nine Member States (Austria, Belgium, France, Ireland, Italy, Luxembourg, Portugal, Spain and the UK) can apply reduced rates to numerous supplies that are not included in Annex III. Zero rates (technically, exemptions with a right of deduction) are applied to specific goods in Belgium, Denmark, Ireland, Malta, Finland, Sweden and the United Kingdom; additional zero rates exist in the area of international passenger transport in all Member States. Box 7:Impact of the expiry of derogations The biggest impact from the expiry of derogations would be felt by the UK and Ireland, owing to extensive zero rating in these Member States. The UK applies a zero rate to approximately 20% of all supplies for which VAT cannot be deducted (equivalent to 35% of supplies to final consumers who consume 60% of all the supplies for which VAT cannot be deducted). If instead of the zero rate a reduced rate of 10% were applied to these supplies, the weighted average rate should increase from approximately 15% to approximately 17%. VAT revenue would increase by around 14%, equivalent to approximately GBP 18 billion per year. The situation in Ireland is similar.

A significant impact can also be estimated for Luxembourg, which applies a super-reduced rate of 3% to the majority of the categories of Annex III. This amounts to around 25% of all taxable supplies. If a VAT rate of 5%, instead of 3%, had to be applied, the weighted average rate would increase from 13% to 13.5%. This increase of close to 4% is equivalent to an increase in VAT revenue of close to 4% or EUR 130 million. The budgetary impact is however small compared to the flexibility that is taken away from Luxembourg, because it is allowed to apply a super-reduced rate to the entire Annex III and has the right to introduce such rates at any time. The same is true for Spain. Apart from Luxembourg, also France, Italy and Spain would be obliged to abolish existing super-reduced rates. The impact is deemed to be limited in Italy and France, where the super-reduced rate is limited in application (less than 5% of supplies to final consumers). The same difficulty in approximately estimating the quantitative impact occurs when attempting to quantify the impact of abolishing parking rates, which are mostly targeted VAT subsidies and often concern B2B supplies, for which VAT would be deductible. Austria would be significantly impacted by having to abolish the reduced rate applied to the letting of immovable property for residential use, which constitutes an important subsidy for social housing. Austria would have to apply a rate of 20% instead of 10%, respectively 13% to the targeted sector, which creates around 15 000 dwellings each year. Finally, all Member States would be obliged to tax international air and maritime transport, including cruises. Abolishing these derogations cannot be quantified, because of the complicated place of taxation rules (VAT would not be applied to the ticket price, but to the distance on/over EU territory which is difficult to determine). The impact on businesses from the abolition of the rates would depend on the extent of the rate change. Given that profit margins in retail are thin, typically below 10% , there is no doubt that substantial changes in pricing would result. The knock-on effects of this would have a major impact on profitability in certain sectors. The impact on consumers would depend on whether governments would offset the rate increases with cuts in other VAT rates, e.g. in the standard rate. Assuming that offsetting cuts are introduced, the main impact would be a worsening in the distributionary impact of VAT, because lower-income households typically spend a higher proportion of their income on necessities, which make up the bulk of zero-rated and super-reduced supplies. Other stakeholders In a VAT system based on the destination principle, there is no direct distortionary impact from cross-border differences in rates. The more favourable tax treatment in certain Member States could give rise to second-order effects only if it resulted in a significantly larger sector and if economies of scale play an important role. While no such case has been identified in practice, as highlighted by the replies of the Member States to the consultation (see Error! Reference source not found. and section 9.2.3), the inequality of treatment is resented by stakeholders as a matter of principle. The theoretical impact of a difference in treatment would fall primarily on producers, as most consumers are not likely to spend a substantial share of their revenue on the affected good. Nevertheless, consumers in higher-tax Member States may sometimes feel unduly penalised by a VAT treatment that is less favourable than in other Member States. A good example is represented by the recent public opinion campaigns to extend zero-rate treatment on women’s sanitary products, currently allowed only in Ireland, to other Member States. 3.EU right to act 3.1.Analysis of subsidiarity The current limitations for Member States in setting VAT rates are laid down in the VAT Directive. An initiative to modernise the VAT rules for rates therefore requires a proposal by the Commission to amend that Directive. Thus, action at EU level is justified as it is the only way to solve the problems. The legal basis is Article 113 TFEU which states: ‘The Council shall, acting unanimously in accordance with a special legislative procedure and after consulting the European Parliament and the Economic and Social Committee, adopt provisions for the harmonisation of legislation concerning turnover taxes, excise duties and other forms of indirect taxation to the extent that such harmonisation is necessary to ensure the establishment and the functioning of the internal market and to avoid distortion of competition.’. It should be noted that Article 113 TFEU clearly states that provisions to create a harmonised EU framework for turnover taxes such as VAT are only admissible inasmuch as they are necessary to safeguard the functioning of the Single Market and avoid distortions. VAT rules on rates therefore must be established keeping the right balance between preventing situations where rate differences might be so large as to distort competition, and respecting Member States’ tax sovereignty in line with the subsidiarity principle. 3.2.Analysis of proportionality and EU value-added As highlighted by the numerous requests for amendment of the Directive and infringement cases involving rates, it is necessary to improve the current EU legislation, which is unduly constraining for Member States. This can only be done through amendments to the VAT Directive. This initiative aims at granting Member States more freedom to set VAT rates while maintaining certain safeguards for the Internal Market and national budgets, thereby providing EU added value compared to the current system. 4.Objectives 4.1.General policy objectives The main general objective is to balance the objective of the VAT Action Plan (to allow Member States to maintain all currently existing reduced rates legally applied by them and to increase Member States' leeway on reduced VAT rates) with the mandate of the Council (to avoid distortion of competition, rise in business costs and negative impact on the functioning of the single market). Another general objective is to prepare the ground for the introduction of the definitive system by providing an accepted solution to the derogations issue. The proposal on rates should smooth the way for the introduction of the definitive VAT system through a more consistent application of the principle of equality of treatment, as opposed to the current system where certain derogations to VAT rates apply only to certain Member States.

4.2.Specific policy objectives The specific objectives of this proposal are listed below. They spell out the general objectives and additionally take into consideration the need to provide a stable and efficient legal framework for rates and the key revenue-raising role of VAT. 1.Provide Member States with sufficient leeway in determining the scope and level of reduced VAT rates, 2.Treat Member States equally; 3.Limit tax distortions; 4.Minimise complexity and business costs; 5.Prevent litigation on VAT rates; 6.Protect VAT revenue from erosion. It should be recognised that, in many ways, these objectives involve some trade-off with each other. In particular, the more leeway is granted to Member States in setting rates (objective 1), the more difficult it becomes to avoid increases in business costs (objective 4), as Member States may introduce, in an uncoordinated fashion, individual rules that complicate the overall rates landscape and thus, the tax system. Similarly, achieving objective 2 in itself generates greater complication of the tax system and thus conflicts with objective 4. Under these circumstances, clearly the aim must be to find the right compromise between the conflicting policy objectives, as recognised by the Council conclusions that call for a ‘carefully balanced’ final solution. Thus, in the assessment of the policy options this analysis will analyse carefully the risks stemming from each solution, comparing them with the degree of achievement of each of the policy objectives. Table 6:Intervention logic and policy objectives Problems

/consequences General objectives Specific objectives Current origin-based rules affect subsidiarity by setting excessive constraints to rates policy Provide Member States with sufficient leeway on reduced rates, while avoiding distortion of competition, a rise in business costs and a negative impact on the functioning of the Single Market. Provide Member States with sufficient leeway in setting reduced VAT rates Limit tax distortions Prevent litigation on VAT rates Expiry of derogations creates stumbling block for introduction of definitive system Prepare the ground for the introduction of the definitive system by providing an accepted solution to the derogations issue Treat Member States equally Minimise complexity and business costs Protect VAT revenue from erosion Source: Commission services (2017) 4.3.Consistency of objectives with other EU policies As illustrated in other sections of this Impact Assessment, VAT rate differentiation may, in general, be utilised to help achieve social policy objectives other than revenue raising. In particular, it can be used for distributional purposes or to make more affordable the consumption of certain goods and services deemed to be worthy of social support. However, a substantial consensus among economists exists that VAT is, in general, not the best instrument in this regard owing to the fact that it is not targeted, resulting in higher budgetary outlays than direct subsidies. Hence, this impact assessment does not investigate the use of VAT to achieve policy objectives other than revenue raising; the policy options laid out herein are, however, assessed with regard to the specific objective of granting Member States more flexibility in setting VAT rates, which could facilitate pursuing social policy objectives according to Member States’ priorities. 5.Policy options 5.1.Two options outlined in the VAT Action Plan The VAT Action Plan outlined two broad options. Option 1 proposes to keep Annex III and the minimum of 15% for the standard rate and option 2 consists of replacing Annex III and the minimum of 15% for the standard rate by safeguards. While the description of the options in the VAT Action Plan is of general nature and leaves open the precise definition of the safeguards to be envisaged, both options have in common to maintain all currently existing reduced rates, including derogations, legally applied in Member States and to envisage to grant the derogations, currently only available to some Member States, to all Member States to ensure equal treatment between Member States. The mandate expressed in the Council conclusions on the part on VAT rates of the VAT Action Plan welcomed the intention of the Commission to present a proposal for increased flexibility for Member States, so that they could benefit from the existing reduced and zero rates in other Member States. The wide extent of the derogations enjoyed by some Member States implies that both options lead to a significant reduction in the constraints on rates set by the VAT Directive. Given that fundamental choice, the main difference between the options consists in the fact that option 1 maintains the current fundamental VAT principle whereby reduced rates are allowed only when specifically permitted, whereas under option 2 reduced rates are allowed unless specifically excluded. Views by stakeholders

In the Council, Member States supported extending existing derogations to all Member States as a solution to the problem of the expiry of derogations. As for the choice between the two options, Member States first in the Council did not express a clear preference, but then in the GFV preferred the more conservative option 1. As for the open public consultation, a plurality (42%) of respondents supported granting derogations to all Member States, whereas 25% favoured abolishing them. Only 8% of respondents said that the derogations should not be extended to all Member States but be made permanent for those Member States that currently benefit from them. However, one quarter of respondents had no opinion on the matter. Also the results from the open public consultation show greater support for option 1; 60% of the respondents preferred to keep Annex III, whereas 22% supported its abolition. The other 18% of respondents had no opinion. However, contradictions in the opinions expressed by Member States and stakeholders appear, when taking into account that the requirement for granting all derogations to all Member States would be to abolish the minimum of 5% to the entire Annex III. Nevertheless the majority of Member States in the GFV and also 50% of the respondents to the open public consultation suggested to keep the minimum rate, 30% had no opinion and only 20% were against keeping a minimum rate. 5.2.Discarded options 5.2.1.Could derogations be maintained in a definitive system without granting them to all Member States? The definitive system requires for the rules on VAT rates to treat Member States equally. Therefore, derogations cannot be granted on a permanent basis in a definitive VAT system and could only be introduced as a temporary measure. As reference could no longer be made to a definitive system, it would be necessary to determine a final date for the expiry of the derogations that is reasonable, e.g. five years. With the prospect of such a date set, Member States however know that the derogations would in fact expire unless a common agreement could be reached to avoid this and unless the Commission would present any proposal, whereas under the current rules each Member State can always delay the expiry of derogations by blocking the entry into force of the definitive regime. As explained in section 5.1 when consulted, Member States could not agree on any proposal that would de facto lead to the expiry of derogations. Thus, any option that proposes to prolong derogations in a definitive regime for a limited period of time would require finding a long-term solution for the derogations along the line of what is included in the options analysed in this Impact Assessment. 5.2.2.Is letting derogations (partly or entirely) expire a policy option? Letting derogations expire partly or even entirely would have been a valid policy option. However, given the implementation of the destination principle and with the proposal for a definitive VAT system based on destination-based taxation, the VAT Action Plan clearly states that Member States should be allowed to keep the VAT rates based on derogations. This is in line with the mandate from the Council and the subsidiarity requirements of Article 113 TFEU outlined in the VAT Action Plan. Any option that would propose to abolish certain derogations would go against the VAT Action Plan, Article 113 TFEU and the Council mandate. The force of Member States’ commitment to an expansive use of derogations is also confirmed by the fact that several attempts by the Commission to abolish certain derogations failed in the past (see Box 1). Only extensions to Annex III were ever adopted by the Council. From a purely technical viewpoint the expiry of derogations is attractive because of the simplicity of such a solution. It is also consistent with views held by tax economists who question the economic efficiency of reduced rates and overwhelmingly favour a VAT system with a broad base and as little use as possible of reduced rates. However, the VAT Directive now and in future does not prevent Member States from simplifying their national rules on VAT rates. Many Member States, in particular Denmark, have opted for simple rules, whereas others make intensive use of VAT subsidies. The latter is consistent with the view of most citizens who support differential taxation and the idea that meritorious or necessary goods deserve a more favourable tax regime. The wide use of reduced, super-reduced and zero rates in some Member States, despite their technical weaknesses, indeed testifies to the substantial political support for using reduced rates as an important tool of social policy. Not surprisingly then Member State representatives in the GFV made it clear that a reform proposal obliging Member States to give up existing reduced rates or longstanding derogations could not be accepted. 5.3.Baseline scenario (no EU action) The baseline scenario assumes that the scope of Annex III remains unchanged. It also takes into account that the minimum of 15% for the standard rate will expire at the end of 2017 in the absence of any initiative. Finally, for the purposes of the baseline scenario it is assumed that other legislative proposals on VAT put forward by the Commission are approved and implemented. These are: ·The definitive arrangements for cross-border business-to-business (B2B) trade in goods between Member States (definitive VAT system). ·The implementation of the extension of the One Stop Shop (OSS) in 2021 simplifying e-Commerce which is expected to decrease compliance costs with regard to registering and declaring VAT, but will not directly impact on compliance costs related with the multiplicity of VAT rates. ·The SME VAT Package which would have positive impacts on administration and compliance costs, but would have no direct link to VAT rates and their levels. 5.4.Option 1 While it is easy to agree on equal treatment of Member States and to ask for existing derogations to be granted to all Member States, the size of the derogations problem and the complexity of the legal provisions render it difficult in practice to do so. A solution for the expiry of the derogations is in any event only required once the definitive VAT regime enters into force, which is planned for 2022.

Consequently, a staged approach is necessary taking into account that Member States need a quick solution allowing to deal with their demands to extend or review the scope of Annex III. Furthermore, a quick solution is needed for the minimum of 15% for the standard VAT rate. The minimum exists since 1993, when the rules on VAT rates first entered into force and was prolonged five times since then. The last prolongation was adopted in 2015 and lasts until the end of 2017. By 2018 the minimum requirement will expire. In a first and immediate step the option would therefore consist of prolonging the minimum standard rate and providing for a regular review of Annex III to make sure its wording is clear and not obsolete, and its contents are in line with technological developments and social and political needs. The review would take place in the VAT Committee, would be based on suggestions from Member States and would be followed by a legislative proposal by the Commission to adapt Annex III as and when needed. While such a commitment is perhaps more of political significance than legal consequence, it does affect the status quo by providing a reassurance to Member States. A three-year interval has been selected taking into account the preferences of Member States as expressed in the GFV that sufficient time for technical discussion is given in order to allow for technically solid solutions which can be agreed on. This leaves the time needed for discussions to take place in the VAT Committee. The review will prepare and facilitate negotiations in Council, which have consistently proven difficult, time-consuming, and often get bogged down on technical details. In a second step, on 1 July 2022 with the entry into force of a destination-based definitive VAT system, a solution for the derogations problem would be envisaged in order to allow all Member States to benefit permanently from the derogations currently granted to some of them only. The approach under this option is to grant existing derogations to all Member States without granting flexibility of setting VAT rates that goes beyond what is already applied under the current rules now by at least one Member State. This would be done by extending further (by products such as children’s clothing and footwear) the revised Annex III and abolishing the 5% minimum for it. In addition a new Annex would have to be created to cover all other items (mainly those falling under parking rates) that are not covered by Annex III. Parts of the new Annex would have to be taxed at the minimum of 5% and parts at a minimum of 12% to accommodate for parking rates. Member States would be allowed to apply a maximum of four reduced rates in order to allow all of them, including Ireland, to continue to apply the same (number of) VAT rates as at present. A possible sub-option would be to only grant Member States three redued VAT rates and to oblige Ireland to either abolish its super reduced rate of 4.8% or its zero rate. This option will allow granting a substantial part of existing derogations to all Member States but not all. This is because in cases where the conditions for the application of parking or zero rates refer to national provisions outside the VAT system or even specific national institutions, it will not be possible to include such conditions in EU VAT law as part of the general provisions. Nonetheless, parts of these derogations could be granted to all Member States, if the underlying supplies were identified and if agreement on the scope of each provision could be reached, so that potential conflicts with the fiscal neutrality principle could be excluded. The option is in line with the provisions of Article 113 TFEU, because the additional flexibility granted under this option is already being applied by certain Member States and no problems for the functioning of the internal market and/or distortion of competition could be observed. The incorporation of divergent national provisions in the enlarged Annex III and a new Annex would require highly complex technical-legislative work and a specific study before any new Annex could be proposed. Instead of the 35% of household consumption expenditure that must always be taxed at the standard rate under the baseline scenario, it can be assumed that the percentage would decrease under this option to around 25%, as Member States would be allowed to apply a reduced rate (or sometimes even a zero rate) to e.g. children’s clothing and footwear, actual rent of housing, wine, short-term hire of vehicles, driving schools and about another 100 items of minor quantitative importance. Any possible sub-option whereby only some of the derogations, whether fully or partially, are granted has to be discarded, because any such scenario would require an arbitrary choice by the Commission between derogations that should be granted to all Member States and derogations that should be left to expire. The arbitrary choice can be illustrated by a theoretical scenario that would grant all Member States only those super-reduced and zero rates that relate to Annex III. While it appears a valid option, this scenario reflects the perception that Annex III includes merit products, whereas products excluded from Annex III were excluded for good reasons. This is however not true, because the scope of Annex III is largely a result of negotiations in Council and the application of reduced rates simply reflects political choices made at a certain point in time. Under such a scenario Member States could in fact not apply a zero rate for children’s clothing and footwear, just to give an example, although this was explicitly requested by Member States during discussions in the GFV. This option will leave it to the Council, subject to consultation of the European Parliament, to make a choice of the derogations that should be granted to all Member States and those derogations that should expire. 5.5.Option 2 The first step of this option is identical to option 1, but as a second step this option envisages a different solution for the derogations problem and the rules on VAT rates in a definitive VAT system. This option would imply replacing the current Annex III with a negative list to which the standard rate of a minimum of 15% has to be applied. This solution substitutes the current principle, whereby reduced rates can be introduced only if specifically allowed, with the principle that reduced rates are allowed on any supply unless this is specifically excluded. Replacing Annex III with a negative list aims at a clear and simple solution for the derogations problem and makes the rules on VAT rates more transparent. This principle also corresponds better to the finding that under a full destination principle, it is hard to find evidence of distortion from VAT rates; it is therefore more proportionate to set limits only where these are necessary. Characteristics and functioning of the new ‘negative list’ The negative list would constitute the main safeguard against rate-driven distortions. It addresses the findings of the 2017 VAT rates study which highlighted that, while in the vast majority of cases risks of distortion from cross-border shopping are limited, in specific cases some impact cannot be excluded. Thus, in line with the results of the study, the negative list would comprise goods subject to excise duties (alcohol, tobacco and car fuel), products subject to particular place-of-supply rules (supply and hire of vehicles), items subject to the special origin-based schemes (flat-rate farmers, travel agents and taxable dealers), high value items that are easily transportable (jewellery, weapons and ammunition, telecommunication equipment, works of art), and exempted services for which Member States have an option to tax (financial services, gambling and betting services).

The negative list would also include the supply of computer, electronic and optical products (CPA codes 26.3 and 47.00.32), electrical equipment (CPA codes 27 and 47.00.54), machinery and equipment not normally seen as a B2C supply (CPA codes 28 and 47.00.88) and furniture (CPA codes 31 and 47.00.55). This would see the inclusion of all goods for final consumption that could be of a significant value on the assumption that Member States do not want increased flexibility in setting VAT rates with regard to these supplies. This would however limit Member States that envisage in the future to offer a reduced VAT rate for energy saving electrical equipment, including household appliances. The contents of that negative list would be subject to regular review in order to address any emerging needs. Under the negative list as currently envisaged, three Member States would be obliged to abolish a reduced rate for wine and one Member State to abolish a reduced rate for short-term hire of means of transport. The negative list as envisaged is supposed to serve as a basis for discussion in Council, assisted by the European Parliament. Given that Member States have expressed in the past interest for rate cuts on environmental products such as electric cars, low-emission light bulbs or solar panels, Council could always decide to shorten the negative list. Although the unanimity principle makes any agreement in taxation complicated, updating the negative list should be less challenging than updating Annex III. This is because of the different incentives at play. Currently, the main obstacle to agreement in updating Annex III is the fear that any reduction in its scope is bound to generate pressure at national level to cut the rate, once a Member State is free to do so. In contrast, an update of the negative list would go in the opposite direction, guaranteeing Member States from special interest pressure. Of course, it would remain very difficult to include in the negative list items currently at reduced rate in some Member States, but this is not realistic even in the current setting. In addition, the scope of the negative list would be smaller and there would be clearer criteria for adding items to the negative list, as this would normally be linked to a risk of distortion. Another advantage of a negative list compared to Annex III is that it can be structured according to the common classification of products by activity, abbreviated as CPA in order to provide for a better link to the restructured enhanced web portal that would also be established under this option. Furthermore, the structure of the negative list linked to the CPA would avoid to the maximum extent possible a potential conflict between respecting the list and at the same time adhering to the principle of fiscal neutrality (see Box 5). The negative list would cover slightly more than 15% of household consumption expenditure, whereas under the current rules 35% percent of household consumption expenditure must always be taxed at the standard rate. Excluded would also be all supplies that do not relate to final consumption and which can therefore only be B2B supplies. The difference of 20% in the household consumption that under this option could be taxed at the reduced rate (if the negative list, following negotiations in Council, remains as above) compared to what is possible under the current rules would include: ·Furnishings, household equipment and routine maintenance (5.4%), in particular energy-saving equipment ·Clothing and footwear (4.9%) ·Actual rentals of housing (4.7%) ·Consumer electronics (1.3%) and electric appliances for personal care ·Animals not intended for foods production like dogs, cats and race horses ·Musical instruments ·Services not covered under the current Annex III (gardening, personal care, all repair services of movable tangible goods, services supplied by small animal practitioners) ·Electronic services other than e-publications. Member States could under this option decide to grant specific VAT subsidies to support the above mentioned sectors that under the current rules may only benefit from direct subsidies. Compared to direct subsidies, VAT subsidies tend to be more permanent and they cannot be limited to certain groups of final consumers, e.g. low income households, so they are generally considered not to be the most efficient support tool in terms of costs. On the other hand, they are easier to administer for beneficiaries and have a higher take-up rate, an argument used in their favour by proponents of environmentally efficient household appliances. The interplay between a possibly higher take-up rate and more limited possibility for targeting such rates provides for a mixed picture in terms of the potential ecological impact of this option. Similar considerations apply to the potential greater use of reduced rates to support goods or services deemed worthy of social support. A VAT subsidy for a specific product has an impact on the concerned sector. As discussed in section 6.1, the impact of a tax cut on profits (with possible impacts on salaries and employment) and prices depends essentially on the degree of competition in the sector concerned and the elasticity of demand. Higher competition and higher elasticity will lead to higher pass on and thus to lower prices. Limitation of the number and level of reduced VAT rates permitted Currently Member States can apply two reduced rates of a minimum of 5% and all Member States apply in addition a zero rate for international passenger transport services. Furthermore, 5 Member States apply a super-reduced rate. In order to abstain from restricting Member States’ freedom in setting VAT rates, Member States need to be allowed to apply the two reduced rates of a minimum of 5% and two additional reduced rates for which the limit of 5% does not apply. This solution will grant Member States the same rights under the general rules in a definitive VAT system compared to today. As no Member State has expressed any interest in applying additional VAT rates compared to today (see section 9.2 on stakeholder consultation) and because the 2017 VAT rates study concluded that a significant increase in the number of VAT rates permitted would entail risks for the Single Market as a result of a large potential increase in the complexity of the system, Member States should not be allowed to apply more than four reduced rates under this option in order to respect the objective of simplicity.

The general principle that reduced rates must not distort competition The explicit introduction of the general principle in the VAT Directive that reduced rates must neither lead to distortions of competition nor hamper the functioning of the internal market would enforce the conditions laid down in Article 113 TFEU. It should also be noted that even in the absence of a positive list (Annex III), reduced rates will continue to be the exception to the standard rate which remains the default solution. As under option 1 Member States will continue to be able to restrict as much as they want the scope of reduced VAT rates and could even abolish them entirely. The requirement for reduced rates to benefit only the final consumer: formulation and significance In order to delimit the scope of the application of reduced rates under this option, the VAT Directive will stipulate that reduced rates can only be applied if they are ‘for the benefit of the final consumer’. Such a provision exists already now, but only applies to a part of the derogations. It reflects the basic principle of VAT, namely that VAT is a consumption tax designed to be borne only by the final consumer. It is important to note that this basic principle has already been interpreted by the CJEU. According to established case-law, the final consumer is the person who acquires goods or services for personal use, as opposed to an economic activity, and thus bears the tax. It follows that reduced VAT rates under this option could not be applied to goods and services that can be used only for intermediate consumption. That does not exclude the use of reduced rates where the goods or services supplied are typically sold to final consumers. Nonetheless, as a basic principle this will in particular prevent Member States from introducing reduced rates that are for the benefit of exempt businesses (e.g. financial institutions) or for the benefit of public bodies that are able to supply services free of VAT to final consumers. Most importantly, it will prevent Member States from applying reduced rates to goods and services that can only be supplied B2B and for which VAT can be deducted. To this extent, the principle will contribute to simplicity of the VAT system. Budgetary safeguard Finally, this option would include a budgetary safeguard in order to protect Member States from any potential long-term risk (see section 6) of revenue erosion resulting from progressive extension of reduced rates caused by special interest pressure. In particular, individual Member States would not, as a rule, be allowed to extend the scope of reduced rates if the weighted average VAT rate falls below the level of 12%. This weighted average rate is already calculated by each Member State in order to determine the VAT own resources of the Union. The 12% benchmark has been set based on the fact that in recent years, the lowest (weighted) average VAT rates applied can be found in Luxembourg, Malta, Cyprus, France and Spain ranging between 12% and 15%. All other Member States apply an average VAT rate of above 15% (on an average 19%). It must be noted that Article 113 TFEU does not allow for the introduction of a pure budgetary safeguard that fixes revenue at a certain percentage, e.g. the gross domestic product (GDP). However, whereas the weighted average VAT rate is technically a revenue safeguard, it refers de facto to the average VAT rates applied and can be interpreted as replacing the requirement of a minimum of 5% for the two additional reduced rates. Box 8:Weighted average VAT rate (implicit VAT rate) To measure the level of the VAT revenues, focusing on statutory VAT rates is unsatisfactory as, owing to differences in consumption patterns, the average effective tax rate differs in each Member State. The weighted average VAT rate in a Member State takes into account all VAT rates in force and each VAT rate is weighted with the share of the value of the transactions to which that rate applies as a percentage of the total of taxable transactions. To link this indicator to VAT revenues, only those transactions are taken into account for which VAT cannot be deducted. This includes mainly supplies to final consumers, but also those made to exempt sectors of the economy, including public bodies. This weighted average VAT rate does not only give an indication of the VAT burden, but also of the tax differentials induced by reduced VAT rates. The closer the standard rate and the weighted average VAT rate are, the smaller the impact of reduced rates. In the extreme case of Denmark, where there is only the standard rate and some exemptions that would count as a zero rate, the standard and the weighted rate are nearly identical. To illustrate this weighted average VAT rate in another way, it is the VAT rate, which if applied to all goods and services subject to VAT, would raise the same VAT revenues as the current array of rates. Under the Own Resources Regulation Member States are required to calculate a weighted average of VAT, if more than one VAT rate is applied. In order to calculate the weighting of the various rates the Member State shall break down, by VAT rate applied, all transactions which are taxable under its national legislation and which do not entitle the customer to deduction of VAT. Transactions which are subject to exemption with refund of the tax paid at the preceding stage are regarded as taxable transactions subject to a zero rate. Web portal to include information on VAT rates structured by CPA The web portal, called ‘Taxes in Europe’ database (TEDB), financed by the Fiscalis 2020 programme, is the Commission’s on-line information tool covering the main taxes in force in the Member States and in particular VAT. The system contains information on around 650 taxes, as provided to the Commission by the Ministries of Finance of the Member States, but it does not cover information on customs duties and tariffs, which can instead be found in the customs tariff database (TARIC). Access to the TEDB is free for all users and the information can be found quickly and easily using the search tool. For the moment information on reduced VAT rates included in the TEDB is structured according to the categories of Annex III and the various other provisions in the VAT Directive allowing for reduced rates. The current structure therefore limits the existing web portal to an information tool for stakeholders other than businesses. In future this information should be published according to a common statistical classification. This will mean that for the purpose of the web portal the information on rates will no longer be grouped according to the provisions of the VAT Directive, but by product category based on the common classification of products by activity, abbreviated as CPA. The advantage for businesses is substantial, because CPA product categories are related to activities as defined by the statistical classification of economic activities in the European Community (NACE). Each CPA product is assigned to one single NACE activity. This linkage to NACE activities gives the CPA a structure parallel to that of NACE at all levels. As all businesses have to register their business activity according to N