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
Date: 2018-01-18
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: EU Member State, VAT rate, goods and services, provision of services, tax collection, tax harmonisation, tax relief

EN 

  EN 

   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 ......................................................................... 6 

1.1. 

Introduction ....................................................................................................... 6 

1.2.  Rules on VAT rates ........................................................................................... 7 

1.3.  Legal framework for these rules ........................................................................ 7 

1.4.  Utilisation of reduced rates ................................................................................ 9 

1.5.  The initial choice of an origin-based VAT system and its consequences 

for the rules on VAT rates ............................................................................... 10 

1.6.  Recent legislative proposals aimed at implementing a destination-based 

system .............................................................................................................. 12 

1.7.  Proposal for a  definitive VAT system based on taxation at destination 

and the reform envisaged of the rules on VAT rates ....................................... 13 

2.  PROBLEM DEFINITION ........................................................................................ 13 

2.1.  Problem 1:  The  current  rules  set  excessive  constraints  to  Member 

States’ tax policies ........................................................................................... 14 

2.2.  Problem 2:  Expiry  of  derogations  will  restrict  further  Member  States’ 

room for manoeuvre on rates ........................................................................... 21 

3.  EU RIGHT TO ACT ................................................................................................. 26 

3.1.  Analysis of subsidiarity ................................................................................... 26 

3.2.  Analysis of proportionality and EU value-added ............................................ 26 

4.  OBJECTIVES ........................................................................................................... 27 

4.1.  General policy objectives ................................................................................ 27 

4.2.  Specific policy objectives ................................................................................ 27 

4.3.  Consistency of objectives with other EU policies ........................................... 28 

5.  POLICY OPTIONS ................................................................................................... 28 

5.1.  Two options outlined in the VAT Action Plan ................................................ 28 

5.2.  Discarded options ............................................................................................ 30 

5.2.1.  Could  derogations  be  maintained  in  a  definitive  system 

without granting them to all Member States? .................................... 30 

5.2.2. 

Is  letting  derogations  (partly  or  entirely)  expire  a  policy 
option? ............................................................................................... 30 

5.3.  Baseline scenario (no EU action) .................................................................... 31 

5.4.  Option 1 ........................................................................................................... 31 

5.5.  Option 2 ........................................................................................................... 33 

5.6.  Sub-options of option 2 ................................................................................... 39 

5.6.1.  Sub-option 2a ..................................................................................... 39 

1 

 
5.6.2.  Sub-option 2b .................................................................................... 39 

5.6.3.  Sub-option 2c ..................................................................................... 39 

6.  ASSESSMENT OF IMPACTS ................................................................................. 40 

6.1.  Short-run impacts ............................................................................................ 40 

6.2.  Longer-run effects ........................................................................................... 42 

7.  COMPARISON OF THE OPTIONS ........................................................................ 44 

7.1.  Effectiveness in achieving the objectives ........................................................ 44 

7.1.1.  Provide  Member  States  with  sufficient  leeway  in  determining 

the scope and level of reduced VAT rates ......................................... 44 

7.1.2.  Treat Member States equally ............................................................. 44 

7.1.3.  Limit tax distortions of competition .................................................. 44 

7.1.4.  Minimise complexity and business costs .......................................... 46 

7.1.5.  Prevent litigation ............................................................................... 48 

7.1.6.  Prevent revenue erosion .................................................................... 49 

7.2.  Efficiency ........................................................................................................ 54 

7.3.  Coherence ........................................................................................................ 54 

7.4.  Conclusions ..................................................................................................... 55 

7.5.  Preferred option ............................................................................................... 56 

8.  MONITORING ......................................................................................................... 56 

9.  ANNEXES ................................................................................................................ 57 

9.1.  Procedural information .................................................................................... 57 

9.1.1.  Agenda planning and Work Programme References ........................ 57 

9.1.2. 

Inter-Service Steering Group ............................................................. 57 

9.1.3.  Consultation of the Regulatory Scrutiny Board ................................ 58 

9.2.  Stakeholder consultation ................................................................................. 62 

9.2.1.  Open Public Consultation .................................................................. 62 

9.2.2.  Consultation of the Group on the Future of VAT (GFV) .................. 66 

9.2.3.  Consultation  of  Member  States  concerning  the  existence  of 

distortions stemming from VAT rate differences .............................. 71 

9.2.4.  Consultation by means of the Eurobarometer ................................... 73 

9.3.  Who is affected by the initiative and how? ..................................................... 74 

9.4.  Evaluation and studies supporting this impact assessment ............................. 75 

9.4.1.  Sequence and scope of relevant studies ............................................. 75 

9.4.2.  Summary of central aspects of the underlying studies ...................... 76 
9.5.  VAT rates applied in the Member States at 1st January 2017 ......................... 80 

2 

 
9.6.  Technical document presented to the GFV by the Commission ................... 102 

9.7.  Economic impact of VAT infringements ...................................................... 110 

9.8.  Overview of risks .......................................................................................... 112 

10.  GLOSSARY ............................................................................................................ 115 

3 

 
 
 
 
List of tables 

Table 1:  Utilisation of reduced rates, % of potential tax base (‘rate gap’) ..................... 9 

Table 2:  Categories eligible for reduced rates under Annex III ................................... 10 

Table 3:  Evidence  and  potential  scale  of  impact  from  rates  differences,  selected 

goods and services .......................................................................................... 16 

Table 4:  Requests for modifications in the VAT Directive to allow for lower rates, 

2015-2017 ....................................................................................................... 17 

Table 5: 

Infringement procedures on violations of VAT Directive rules on rates ....... 19 

Table 6: 

Intervention logic and policy objectives ......................................................... 28 

Table 7:  Comparison of options ................................................................................... 55 

Table 8: 

Summary of replies from tax administrations on the impact of VAT rate 
differences ...................................................................................................... 71 

List of boxes 

Box 1: 

Outline of the history of VAT rates rules ......................................................... 8 

Box 2: 

Domains where the origin principle continues to apply ................................. 12 

Box 3: 

Box 4: 

Risk  of  distortion  to  the  Single  Market  from  the  operation  of  different 
VAT rates ....................................................................................................... 15 

Recent  examples  of  Member  States’  requests  for  changes  to  the 
applicable rate regime ..................................................................................... 17 

Box 5: 

The principle of fiscal neutrality and its application in the VAT system ....... 20 

Box 6: 

Derogations from the general rules on VAT rates in the VAT Directive....... 21 

Box 7: 

Impact of the expiry of derogations ................................................................ 25 

Box 8:  Weighted average VAT rate (implicit VAT rate) ........................................... 37 

Box 9: 

Fiscal distortion .............................................................................................. 43 

Box 10:  Quantifying the potential for revenue erosion under option 1 ........................ 52 

4 

 
 
 
 
 
 
 
List of figures 

Figure 1: 

Problem Tree ...................................................................................... 14 

Figure 2: 

Shares of tax base by rate, 2000 ......................................................... 23 

5 

 
 
 
 
 
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 revenues1. One of the EU’s 
own resources is also based on VAT (12.4% of the EU budget in 2015)2. 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 EU3. It is governed by the VAT Directive4 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 VAT5 (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  Eurostat, Tax revenue statistics, Eurostat (gov_10a_taxag)   

http://ec.europa.eu/eurostat/statistics-explained/index.php/Tax_revenue_statistics 

2  European Commission, EU Budget 2015, Financial Report  

http://ec.europa.eu/budget/financialreport/2015/lib/financial_report_2015_en.pdf 

3   Common rules were first adopted in 1967. 
4   Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax  – as 

amended (OJ L 347, 11.12.2006, p. 1) 

5   See  Communication  from  the  Commission  to  the  European  Parliament,  the  Council  and  the  European 
Economic and Social Committee on an action plan on VAT – Towards a single EU VAT area – Time to 
decide (COM(2016) 148 final) 

6 

 
 
                                                 
 
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 to6: 

  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 19917. 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 system8 and that for most derogations the scope could not 
be extended.9  

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)10. 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.  

6  See Box 6 for additional details. 
7   Article 110 of the VAT Directive: ‘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.’ 
8   With regard to the standard rate, Germany, Spain and Luxembourg agreed to increase their standard rate 
to  15%,  certain  Member  States  accepted  to  abolish  what  was  a  second  higher  standard  rate  (so-called 
luxury rate). 

9   This leads to a situation where one Member State can apply a zero rate to wax candles and night-lights, 
but only if they are white and cylindrical and if they are not decorated, spiralled, tapered or perfumed. 

10  Available at: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:12012E/TXT  

7 

 
                                                 
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 

1977 

Directive 
77/388/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. 

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 

1995 

COM(95) 731 

With the internal market, common rules on VAT rates are for the first time put in 
place. 

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 

The Council decides to continue with a standard rate of minimum 15%. 

Directive 96/95/EC 

COM(96) 328 

1999 

COM(99) 62 

Directive 
1999/85/EC 

2000 

COM(2000) 348 

2002 

COM(2002) 525 

Directive 
2002/93/EC 

Decision 
2002/954/EC 

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. 

The  Commission  proposes,  by  way  of  experiment,  to  allow  temporary  use  of 
reduced rates for labour-intensive services. 

The  Council  agrees  on  such  an  experiment  but  for  specific  labour-intensive 
services only. 

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. 

The  Commission  proposes  to  prolong  the  experiment  for  labour-intensive 
services. 

The  Council  agrees  on  the  prolongation  of  the  experiment  for  labour-intensive 
services. 

2003 

Following  a  review,  the  Commission  proposes  to  rationalise  Annex  III  and 

8 

 
 
COM(2003) 397 

2006 

Directive 
2006/18/EC 

2011 

COM(2011) 851 

2012 

Conclusions from the 
3167th  meeting  on 
15.5.2012 

2015 

Directive 2008/8/EC 

2016 

COM(2016) 148 

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. 

The  Council  cannot  agree  to  rationalise  Annex  III  or  to  rein  in  derogations  but 
decides to prolong the experiment for labour-intensive services. 

The Commission, in its communication on the future of VAT, suggests to adopt the 
principle of taxation at destination. 

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. 

Destination principle implemented for B2C services 

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 
objectives11. 

Table 1:  Utilisation of reduced rates, % of potential tax base (‘rate gap’) 

Member 
State 

Rate gap  

Member 
State 

AT 

BE 

BG 

CZ 

DE 

10.4 

12.4  2.8 

5.8 

7.2 

DK 

0.9 

EE 

ES 

FI 

FR 

GR 

HR 

HU 

IE 

2.5 

14.5  9.1 

10.0 

13.9 

4.1 

3.3  17.1 

IT 

LT 

LU 

LV  MT 

NL 

PL 

PT 

RO 

SE 

SI 

SK 

UK 

EU27 

15.6 
Rate gap  
Source: 2016 VAT gap report, p. 53 

14.6 

4.0 

3.2 

12.7 

12.2 

15.9 

11.1  2.9 

8.3 

11.3 

1.7 

3.3  5.3 

11  This  is  because,  although  reduced  VAT  taxation  can  help  poorer  households  and  can  change 
consumption behaviour  in  ways  perceived to  be desirable,  from  a  budgetary  viewpoint  it  is usually  an 
expensive means of doing so, mainly owing to the fact that reduced rates cannot be targeted to specific 
groups of consumers. For an extensive discussion of this point, see Institute of Fiscal Studies  et al., A 
retrospective evaluation of elements of the VAT system, London 2011. 

9 

 
 
                                                 
Table 2:  Categories eligible for reduced rates under Annex III 

Category  Coverage 

1 

2 

3 

4 

5 

6 

7 

8 

9 

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; 

Supply of water;  

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; 

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; 

Transport of passengers and their accompanying luggage;  

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; 

Admission to shows, theatres, circuses, fairs, amusement parks, concerts, museums, zoos, 
cinemas, exhibitions and similar cultural events and facilities;  

Reception of radio and television broadcasting services; 

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 

12 

Supply of goods and services of a kind normally intended for use in agricultural production 
but excluding capital goods such as machinery or buildings; 

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 

14 

15 

16 

17 

18 

19 

20 

21 

Admission to sporting events;  

Use of sporting facilities; 

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; 

Supply of services by undertakers and cremation services, and the supply of goods related 
thereto; 

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); 

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; 

Minor repairing of bicycles, shoes and leather goods, clothing and household linen (including 
mending and alteration); 

Domestic care services such as home help and care of young, elderly, sick or disabled;  

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. 

10 

 
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 businesses12.  

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 
jurisdictions13.  Differences  in  the  levels  of  VAT  rates  were  stark  already  in  1993;  the 
standard rate, for example, ranged from 15% to 25%14. 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 system15.  

As  noted  in  the  VAT  Action  Plan16,  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 

12  This  followed  a  policy  orientation  established  already  in  1967.  See  Communication  from  the 
Commission to the European Parliament, the Council and the European Economic and Social Committee 
on the future of VAT, "Towards a simpler, more robust and efficient VAT system tailored to the single 
market" (COM(2011) 851 final), p. 5.  

13  This  is  because  in  an  origin  system,  suppliers  apply  to  intra-EU  sales  the  VAT  rate  applicable  in  the 
country where they are located. This implies an immediate and significant tax advantage for all sales to 
entities located in a higher-rate jurisdiction which are not entitled to a refund of their VAT. As a result, 
any  significant  rate  differences  would  fatally  undermine  the  orderly  functioning  of  the  Single  Market, 
which relies on the elimination of tax subsidies having a direct impact on cross-border sales.  

14  In Luxembourg and Denmark respectively. See Table VIII, VAT rates applicable in the Member States of 

the European Union, available at  
http://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/taxation/vat/how_vat_wor
ks/rates/vat_rates_en.pdf 

15  See  Communication  from  the  Commission  to  the  European  Parliament,  the  Council  and  the  European 
Economic And Social Committee on the future of VAT: Towards a simpler, more robust and efficient 
VAT  system  tailored  to  the  single  market  (COM(2011)  851  final),  section 4.1.  The  Communication's 
conclusions on the destination system were endorsed by the Council conclusions of 15 May 2012.  

16  Communication  from  the  Commission  to  the  European  Parliament,  the  Council  and  the  European 
Economic And Social  Committee on the future of VAT: Towards a simpler, more robust and efficient 
VAT system tailored to the single market (COM(2016) 148 final). See also:   
http://ec.europa.eu/taxation_customs/taxation/vat/action_plan/index_en.htm 

11 

 
                                                 
 
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 rates17.  

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 
the 
last  milestone  of 
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.  

implementation  was 

the 

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 sales18.  

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 

17  Council Directive 2008/8/EC of 12 February 2008 amending Directive 2006/112/EC as regards the place 

of supply of services (OJ L 44, 20.2.2008, p. 11). 

18   See 

http://ec.europa.eu/taxation_customs/business/vat/digital-single-market-modernising-vat-cross-

border-ecommerce_en  

12 

 
                                                 
In December 2016, with the e-Commerce initiative19, 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 regime20 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.  

19  Proposal  for  a  Council  Directive  amending  Directive  2006/112/EC  and  Directive  2009/132/EC  as 
regards  certain  value  added  tax  obligations  for  supplies  of  services  and  distance  sales  of  goods 
(COM(2016) 757 final). 

20   Proposal  for  a  Council  Directive  amending  Directive  2006/112/EC  as  regards  harmonising  and 
simplifying  certain  rules  in  the  value  added  tax  system  and  introducing  the  definitive  system  for  the 
taxation of trade between Member States (COM(2017) 569 final). 

13 

 
                                                 
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  jurisdictions21.  The  destination  principle  is  already 

21  See  for  example  OECD,  Committee  on  Fiscal  Affairs,  Working  Party 9  on  Consumption  Taxes 

International Vat/Gst Guidelines: Guidelines On Neutrality, Paris 2011: 
http://www.oecd.org/tax/international-vat-gst-guidelines-9789264271401-en.htm. 

14 

Current rules on VAT rates consistent with an origin, not a destination systemProblemCurrent rules set excessive constraintsFurther restriction of Member StatesDriversExpiry of derogationConsequencesContinuous requests for changes in the VAT DirectiveRecurrent violations of the VAT DirectiveRisk of inability to introduce definitive regimeIntroduction of definitive VAT regime based on destination principle 
 
                                                 
 
currently applied to the overwhelming majority of cross-border transactions22 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 implemented23. 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 rates24 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  market25.  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 

22  The remaining exceptions are marginal: B2C sales of goods by firms operating below the threshold for 
distance  sales  (EUR 35 000  or  EUR 100 000),  cross-border  shopping  by  consumers  and  a  few  special 
schemes. These exceptions are discussed in the 2017 VAT rates study (PwC et al. , 2017). Intra-EU B2B 
transactions  are  unaffected  by  VAT  rate  differences  owing  to  the  reverse-charging  of  VAT  and,  more 
generally, the deductibility of input VAT.  

23    See  Institute  for  Fiscal  Studies  (lead),  A  retrospective  evaluation  of  elements  of  the  EU  VAT  system, 

London, 2011, p. 52. 

24  PwC PricewaterhouseCoopers LLP (Project Leader), Reform of rules on EU VAT rates, 2017.  
25   EC TAX REVIEW 2017–2 "Towards an [Unlawful] Modernized EU VAT Rate Policy, Rita de la Feria 

& Max Schofield (www.kluwerlawonline.com/ECTA2017010) 

15 

 
                                                 
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 States26. 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 88). 

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 

Category 

Good/Service 

Level of evidence 

Scale of impact 

Foodstuffs 

Basket of fast-moving 
consumer goods 

Vehicle fuel 

1 litre diesel 

Medical equipment 

Powered wheelchair 

Jewellery 

Luxury wristwatch 

Some 

Some 

Limited 

Limited 

Consumer electronics 

Notebook computer 

Some 

Medical/dental 
services 

Hairdressing 

Porcelain crown fitting 

Some 

Women’s haircut 
(medium-length hair) 

Limited 

Distance sales 

Academic textbooks 

Some 

Tourism 

Beach/winter sport 
holidays 

Flat-rate scheme for 
farmers 

Agricultural inputs 
(pesticides, seeds, etc.) 

Second-hand scheme 

Works of art 
Used cars 

Source: 2017 VAT rates study 

Limited 

Limited 

Some 

Limited 

Some 

None 

None 

Limited 

Some 

Limited 

Some 

Some/ 
Substantial 

Limited 

Some/ 
Substantial 

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 

26  https://ec.europa.eu/taxation_customs/business/vat/digital-single-market-modernising-vat-cross-border-

ecommerce_en  

16 

 
                                                 
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 

Type of supply  

Member States requesting/supporting 

Electronic publications 

DE, FR, IT, PL, BE 

Women’s sanitary products 

Internet services 

Source:  Commission services 

UK 

HU 

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 

17 

 
 
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 rates27, 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 hairdressing28. The measure was finally made permanent 
in 200929. 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  

27   Council Directive 92/77/EEC of 19 October 1992 supplementing the common system of value added tax 

and amending Directive 77/388/EEC (approximation of VAT rates) (OJ L 316, 31.10.1992) 

28   Council  Directive  1999/85/EC  of  22 October  1999  amending  Directive  77/388/EEC  as  regards  the 
possibility of  applying  on  an  experiment  basis  a  reduced  VAT  rate on  labour-intensive  services  (OJ  L 
277, 28.10.1999) 

29   Council Directive 2009/47/EC of 5 May 2009 amending Directive 2006/112/EC as regards reduced rates 

of value added tax (OJ L 116, 9.5.2009) 

18 

 
 
 
                                                 
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  

19 

 
 
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  

20 

 
 
Table 5,  the  majority  of  these  infringements  relate  to  specific  sectoral  transactions  of  a 
limited scope30 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. 

30   Section 9.7 includes estimates of the scope of the distortions for instances where quantification has been 

possible. The values found are typically of an order of magnitude of 0.1% of VAT revenues. 

21 

 
 
 
                                                 
Table 5:  Infringement procedures on violations of VAT Directive rules on rates 

Member 
State 

Reason for infringement procedure 

BE 

CZ 

CZ 

CZ 

DE 

DE 

DE 

EE 

IE 

EL 

ES 

FR 

FR 

FR 

FR 

FR 

FR 

Reduced rate on buildings 

Reduced rate for diapers 

Reduced rates on horses 

Reduced rate on medical equipment 

Reduced rate for artists – judgment of 23.10.2003 (C-109/02) 

Reduced rate on horses - judgment of 12.05.2011 (C-453/09) 

Reduced rate for works of art 

Reduced rate on diapers 

Reduced rate on horses – judgment of 14.03.2013 (C-108/11) 

Reduced rate on bowling 

Reduced rate on medical equipment – judgment of 17.01.2013 (C-360/11) 

Reduced rate for duty of attorneys – judgment of 17.06.2010 (C-492/08) 

Reduced rate on funeral expenses – judgment of 06.05.2010 (C-94/09) 

Reduced rate for the 140 first representations – judgment of 28.02.2012 (C-119/11) 

Reduced rate on horses – judgment of  08.03.2012 (C-596/10) 

Reduced rate on composite supply 

Reduced rate on domestic care services 

FR  

Reduced rates on supply of gas and electricity – judgment of 08.05.2003 (C-384/01) 

FR 

FR 

FR 

FR 

IT 

CY 

LV 

LU 

LU 

HU 

MT 

NL 

NL 

AT 

AT 

PL 

PL 

PL 

PL 

PT 

SE 

UK 

Reduced rates on medicinal products – judgment of 03.05.2001 (C-481/98) 

Reduced rate agricultural products 

Reduced rate on e-books – judgment of 05.03.2015 (C-479/13) 

Reduced rate for digital press 

Reduced rate on horses 

Reduced rate on medical equipment 

Reduced rate on medical equipment 

Reduced rate on e-books – judgment of 05.03.2015 (C-479/13) 

Reduced rate on horses 

Reduced rate on diapers 

Reduced rate for works of art 

Reduced rate for sports activity 

Reduced rate on horses – judgment of 03.03.2011 (C-41/09) 

Reduced rate on waste treatment 

Reduced rate on horses – judgment of 12.05.2011 (C-441/09) 

Reduced rate on shoes and children’s clothing – judgment of 28.10.2010 (C-49/09) 

Reduced rate for folk art 

Reduced rate on medical equipment – judgment of 04.06.2015 (C-678/13) 

Reduced rate on fire-fighting products – judgment of 18.12.2014 (C-639/13) 

Reduced rate for attorneys-at-law 

Reduced rate on CD books 

Reduced rate on environmentally friendly materials – judgment of 04.06.2015 (C-161/14) 

Source: Commission services 

22 

 
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 VAT31.  

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.  

31  For further details on this topic reference can, for example, be made to the discussion contained in the 

Opinion of Advocate General Mengozzi in case C-219/13 K Oy delivered on 14 May 2014. 

23 

 
                                                 
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 
compromise32 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. 

32   Council Directive 92/77/EEC of 19 October 1992 supplementing the common system of value added tax 

and amending Directive 77/388/EEC (approximation of VAT rates) (OJ L 316, 31.10.1992, p. 1) 

24 

 
 
                                                 
• 

• 

• 

• 

• 

• 

• 

• 

• 

• 

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)33 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. 

33  A Mathis, VAT Indicators, European Commission Taxation Papers No 2, Brussels 2004: 

https://ec.europa.eu/taxation_customs/sites/taxation/files/vat_indicators.pdf  

25 

 
                                                 
 
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 quo34.  

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%.  

34   This consequence is qualitatively similar to the impact of Problem 1, and indeed it could be argued that, 
logically,  Problem 2  should  be  seen  as  a  subset  of  Problem 1.  However,  Problem 1  would,  in  theory, 
need  to be  addressed  irrespective  of  the  introduction of  the  definitive  system,  whereas Problem 2  only 
emerges in conjunction with the changeover to such a system. Furthermore, each problem can be solved 
independently  of  the  other.  Thus,  for  presentational  reasons,  we  opt  for  a  separate  analysis  of  the  two 
problems.  

26 

 
 
 
                                                 
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. 

27 

 
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)35. 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 year36. 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%37,  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 

35   A study for 2011 found out that the household sector accounts for an average of 60% of all VAT liability 
in  the  EU-27  countries.  Irrecoverable  VAT  liabilities  from  intermediate  inputs  purchased  by  sectors 
producing exempt supplies account for 19%, and the remaining 21% accrue to the Government, NPISHs 
and  irrecoverable  VAT  on  GFCF  expenditures  of  exempt  sectors.  There  is  considerable  dispersion  in 
these  ratios  across  the  EU,  with  the  share  of  household  consumption  on  total  VAT  liabilities  ranging 
from a low of 35% in Luxembourg, to a high of 74% in Lithuania. This range reflects both the existence 
of multiple rates and of exemptions (for instance, the low value for Luxembourg is due to the importance 
of  financial  services  in  the  economy  and  the  super-reduced  rate  of  3%  applicable  to  a  large  part  of 
Annex III from which mainly final consumers benefit). 

36  This calculation underestimates the impact by neglecting the fact that parts of the zero-rated items, e.g. 
children's clothing and footwear, would need to be taxed at the standard rate instead of a reduced rate. 
37  See  http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/margin.html  for  data  on  profit 

margins by industry in the US.  

28 

 
                                                 
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 States38.  

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. 

38  See 

for 

example 

http://www.change.org/p/george-osborne-stop-taxing-periods-period. 

Similar 

campaigns were also started in other countries.  

29 

 
                                                 
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 
Council39 (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.  

39   Council conclusions on the VAT Action Plan adopted on 25 May 2016: 

‘The  Council  […]  WELCOMES  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,  INVITES  the  Commission  to  include  an  impact  assessment,  and  STRESSES  that  a 
sufficient level of harmonisation in the EU remains required and the adopted solution has to be carefully 
balanced to avoid distortion of competition, rise in business costs and negative impact on the functioning 
of the single market.’ 

30 

 
                                                 
 
Table 6:  Intervention logic and policy objectives 

Problems 
/consequen
ces 

General objectives 

Specific objectives  

affect 

Current 
origin-based 
rules 
subsidiarity 
by 
excessive 
constraints  to 
rates policy 

setting 

while 

Provide  Member  States  with 
sufficient leeway on reduced 
rates, 
avoiding 
distortion  of  competition,  a 
rise  in  business  costs  and  a 
negative 
the 
functioning  of  the  Single 
Market.  

impact  on 

with 

Provide 
Member 
States 
sufficient 
leeway 
setting 
reduced  VAT 
rates 

in 

Limit tax distortions  Prevent 

litigation 

on VAT rates 

Prepare  the  ground  for  the 
introduction  of  the  definitive 
system  by  providing  an 
the 
accepted  solution 
derogations issue 

to 

Treat  Member 
States equally 

Minimise 
complexity 
business costs 

and 

Protect 
revenue 
erosion 

VAT 
from 

of 

for 

Expiry 
derogations 
creates 
stumbling 
block 
introduction 
of 
system 

definitive 

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 subsidies40. 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 141 proposes to keep Annex III 
and  the  minimum  of  15%  for  the  standard  rate  and  option 242  consists  of  replacing 
Annex III and the minimum of 15% for the standard rate by safeguards.  

40  This  issue  is  discussed  at  length  in  chapter 10  of  Institute  of  Fiscal  Studies  (project  leader),  A 

retrospective evaluations of elements of the VAT system, London 2011, available at 
http://ec.europa.eu/taxation_customs/sites/taxation/files/docs/body/report_evaluation_vat.pdf  

41   “The minimum standard VAT rate of 15% would be maintained. The list of goods and services that can 
benefit from the application of a reduced rate would be reviewed in the context of the transition to the 
definitive system and then at regular intervals, in particular taking account of political priorities. Member 
States would be able to submit to the Commission their views on the needs for adjustment.  
The  Commission,  with  the  support  of  the  Member  States,  would  analyse  whether  such  changes  would 
pose any risk to the functioning of the single market or distort competition, and would report its findings 
before any change. 

31 

 
 
 
                                                 
 
 
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 Council43, 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 Council44 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 

Under this option all currently existing reduced rates, including derogations, legally applied in Member 
States  would  be  maintained  and  could  be  included  in  the  list  of  optional  reduced  rates  available  to  all 
Member States, ensuring equal treatment.” 

42   “The most ambitious approach in terms of granting Member States greater rate-setting power would be 

to abolish the list and allow them greater freedom on the number of reduced rates and their level. 
This option would require safeguards to be put in place to avoid unfair tax competition within the single 
market, while also guaranteeing legal certainty and reducing compliance costs. 
Also  under  this  option  all  currently  existing  reduced  rates,  including  derogations,  legally  applied  in 
Member  States  would  be  maintained,  the  possibility  to  apply  them  could  be  made  available  to  all 
Member States. The minimum standard VAT rate would be removed.” 

43   The  conclusions  adopted  by  the  Council  at  its  3468th meeting  held  on  25 May  2016  welcome  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. 

44   The  conclusions  as  adopted  by  the  Council  welcome  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. The adopted solution has to be carefully balanced to avoid distortion of competition, rise 
in business costs and negative impact on the functioning of the single market. 

32 

 
                                                                                                                                                   
Member  States  would  be  to  abolish  the  minimum  of  5%  to  the  entire  Annex III45. 
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  regime46.  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 

45   Two Member States are currently allowed to apply rates lower than 5% to the entire Annex III. 
46   Experience  from  the  past  relates  to  temporary  derogations  for  Member  States  joining  the  EU  in  2004. 
These derogations had to initially expiry in 2007, but were prolonged at the request of Member States. 
Eventually, all these derogations expired in 2010 in the absence of any proposal by the Commission.   

33 

 
                                                 
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 

34 

 
Committee47, 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 III48. 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. 

47   See information about the role and functioning of GFV and this Committee in the Glossary.  
48   The scope of the new Annex would be large and e.g. include insemination services for all animals and 

also the supply of livestock semen and horse semen. 

35 

 
                                                 
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 

36 

 
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 setting49. 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.  

49   It would be equivalent to reducing the scope of Annex III, which has never happened.  

37 

 
                                                 
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 include50: 

  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 
support51.  

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 

50   Latest available data by Eurostat on household final consumption expenditure by COICOP categories for 

the year 2014 for EU-28. 

51  This  theme  is  discussed  in  detail  in  the  study  ‘A  retrospective  evaluation  of  elements  of  the  EU  VAT 

system’, Final report, London 2011.  

38 

 
                                                 
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 consumer52.  

It is important to note that this basic principle has already been interpreted by the CJEU53. 
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 
system54.  

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 

52   CJEU, judgment of 6 October 2005, Case C-291/03, My Travel. 
53   CJEU, judgment of 14 March 2013, Case C‑108/11, Commission v Ireland. 
54   Only  some  B2B  supplies  of  goods  and  services  could  be  taxed  at  the  reduced  rate  under  this  option, 
which  are  normally  consumed  by  final  consumers,  e.g.  foodstuff  and  passenger  transport  services.  In 
particular  for  goods  the  reduced  rate  treatment  would  in  such  cases  ensure  that  the  same  VAT  rate  is 
applied throughout the entire supply chain. 

39 

 
                                                 
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%)55.  

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 Regulation56 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 

55   The value of the weighted average is calculated for the purposes of the Own Resources Regulation. It is 
confidential and its precise value for the various Member States cannot be made public in this document.  
56   Council Regulation (EEC, Euratom) No 1553/89 of 29 May 1989 on the definitive uniform arrangements 

for the collection of own resources accruing from value added tax (OJ L 155, 7.6.1989, p. 9). 

40 

 
                                                 
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 
NACE  categories,  they  will  be  able  to  directly  retrieve  the  corresponding  VAT  rate  for 
their supplies in each Member State. 

Member  States  would  be  requested  to  provide  the  data  structured  by  the  CPA 
classification, but data provided could also be based on the Combined Nomenclature (CN) 
used for customs purposes, because there is a corresponding CPA category for each CN 
category57. This is in particular important for those Member States which already use CN 
codes in their national VAT law. Reference to a code used for customs purposes will also 
considerably  reduce  ambiguity  whenever  the  good  is  traded  and,  in  most  cases,  allow 
quick  and  easy  identification  of  the  applicable  rate,  with  considerable  gains  in  terms  of 
compliance costs for traders58. It de facto replaces, from a trader’s perspective, the current 
double classification of goods and services with a single classification.  

Amendments  to  EU  legislation  governing  administrative  cooperation59  will  make  it 
mandatory for Member States to provide information on VAT rates according to CPA or 
CN and oblige the Commission to publish these data. 

The costs related to restructuring the information included in the TEDB would be covered 
by  the  current  contract  with  the  contractor  under  the  FISCALIS  2020  budget60.  The 
restructuring would be foreseen for the annual update of 2019, which  will commence in 
October  2018.  Member  States  that  do  not  already  use  the  CN  or  CPA  would  have  to 

57   There are 29 CN categories not covered in the CPA. 28 out of these 29 relate to engines and vehicles  
that would not be eligible for a reduced rate. Only one category (used pianos) has to be regrouped to its  
corresponding category (new pianos).    

58  Owing to the demanding data requirements of compliance cost calculations it has not been possible to 
supply  a  numerical  estimate  for  the  compliance  cost  savings  obtainable  through  the  web  portal.  The 
compliance cost gains will probably differ very substantially from one trader to the next, as they depend 
heavily on the specific business model of each enterprise. Cost savings will be lowest for businesses with 
a mainly domestic activity and highest,  ceteris paribus, for SMEs selling a wide and variable range of 
products in many EU Member States. The share of the latter type of businesses seems likely to increase, 
in  the  medium  and  long  terms,  as  SMEs  seize  the  greater  opportunities  for  sales  over  the  internet  and 
profit from the simplifications introduced by the definitive regime.  

59   Council Regulation (EU) No 904/2010 of 7 October 2010 on administrative cooperation and combating 

fraud in the field of value added tax (OJ L 268, 12.10.2010, p. 1). 

60   The  FISCALIS  2020  will  be  replaced  by  another  FISCALIS  programme  under  the  new  multi-annual 

financial framework (MFF) and financing the TEDB database is considered a priority. 

41 

 
                                                 
determine the corresponding codes61. Problems of delimitation should not occur, but any 
discussion  about  what  is  the  correct  classification  would  take  place  in  the  VAT 
Committee.  

5.6. 

Sub-options of option 2 

All sub-options are similar to option 2, but aim at restricting Member States’ flexibility in 
specifc areas. 

5.6.1.  Sub-option 2a 

Under this sub-option Member States would only be granted one additional reduced rate 
compared  to  today,  instead  of  two  under  option 2.  One  additional  reduced  rate  would 
allow  all  23  Member  States  to  keep  all  VAT  rates  they  currently  apply.  However,  5 
Member States (ES, FR, IE, IT, LU) would need to abolish either the super-reduced rate 
or zero rate.   

5.6.2.  Sub-option 2b 

Under  this  sub-option  Member  States  would  need  to  respect  an  additional  weighted 
average  rate  of  5%  for  the  reduced  rates.  This  constraint  would  not  oblige  any  Member 
State  to  change  any  VAT  rates  with  the  entry  into  force  of  the  definitive  VAT  system. 
Nevertheless,  it  is  a  safeguard  to  prevent  Member  States  from  entirely  replacing  the 
existing reduced rates of at least 5% by a super-reduced or zero rate.  

5.6.3.  Sub-option 2c 

Under this sub-option the negative list would be extended by including certain additional 
goods for which, although the study could find no evidence for it, some risk of distortion 
could  be  feared,  in  a  fully  liberalised  rates  regime,  because  of  potential  cross-border 
shopping. These would include goods such as computers, electronic and optical products, 
watches, musical instruments, electrical equipment and furniture, which have a high unit 
value and can be transported at an affordable cost by cross-border shoppers. 

The negative list would then be extended to cover around 23% of household consumption 
expenditure,  instead  of  15%  under  option 2  and  35%  under  the  current  rules,  that  must 
always be taxed at the standard rate.  

The difference of close to 12% in household consumption that under this sub-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 include62: 

  Clothing and footwear (4.9%) 
  Actual rentals of housing (4.7%) 

61  Estimating  the  budgetary  cost  that  Member  States  would  have  to  face  to  communicate  the  scope  of 
reduced  rates  on  the  basis  of  the  CPA  classification  is  not  straightforward,  because  it  depends  on  the 
complexity of the national VAT rate structure. In a Member State with a rate structure such as Denmark, 
these  costs  would  be  zero,  whereas  in  other  cases  Member  States  would  have  to  rely  on  at  least  one 
classification expert. Labour costs would occur when the system is being set up and in case of changes to 
the VAT rates.  

62   Latest available data by Eurostat on household final consumption expenditure by COICOP categories for 

the year 2014 for EU-28. 

42 

 
                                                 
  Animals not intended for foods production like dogs, cats and race horses 
  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. 

Compared  to  sub-option 2a,  this  option  would  e.g.  not  allow  reduced  rates  for 
environmental  products  such  as  low-emission  light  bulbs  or  solar  panels,  which  have  in 
the past been considered by some Member States.  

6. 

ASSESSMENT OF IMPACTS 

6.1. 

Short-run impacts  

Given that the  policy options envisaged  do not force Member States to change anything 
but  merely  provide  room  for  manoeuvre  by  establishing  equal  treatment,  some 
assumptions are needed as regards the likely course of action of the Member States, when 
confronted with greater flexibility.  

None  of  the  options  has  immediate,  automatic  impacts63,  because  Member  States  would 
not  be  obliged  to  change  any  of  their  VAT  rates.  National  governments  would  only  be 
given increased flexibility in setting VAT rates.  

This  Impact  Assessment  assumes  that  Member  States  will,  in  the  short  run,  utilise  the 
newfound room for manoeuvre to make targeted adjustments but will be keen to preserve 
the main working characteristics of their VAT system, in terms of the revenue raised, the 
overall operation of the system and the structure of the rates applied. This assumption is 
founded on a series of considerations of an economic nature and on the lessons that can be 
drawn from previous experiences with the introduction of new reduced rate categories. To 
cite some of these considerations: 

  VAT  is  one  of  the  main  taxes  for Member  States,  accounting  for  18.0%  of  total 
taxation  revenues64;  Member  States  are  well  aware  that  any  substantial  changes 
would risk directly affecting budgetary stability.  

  In  line  with  the  previous  point,  the  requests  for  modification  of  Annex III,  as 

shown in Box 4, typically involve changes of a limited scope. 

  Already  under  current  rules,  reduced  rates  and  exemptions  with  deductibility  of 
the VAT paid at the preceding stage (zero rates) can be applied to up to 50% of 
the tax base (65% of the tax base of households), so the potential for extension of 
reduced rates is not very large.  

  As highlighted by the discussion on the rates reform in the GFV, Member States 
overwhelmingly envisage limited adjustments to the scope of reduced rates; with 

63   The  one  immediate  impact  would  be  on  litigation  between  the  EU  and  Member  States  in  regard  to 
violations of rate rules in the VAT Directive. Depending on the update of Annex III, some or many of 
the open infringement procedures would cease under both options.  
64   2014 data. Source: European Commission, Taxation Trends 2015.  

43 

 
                                                 
some  of  them  explicitly  rejecting  any  significant  broadening  of  their  application 
(see section 9.2.2).  

  The policy option with the greatest potential impact,  option 2, will provide for a 

significant increase in rate flexibility only from 2022. 

  Finally, past extensions of the scope of reduced rates, such as the 1999 extension 
to  labour-intensive  local  services,  did  not  give  rise,  EU-wide,  to  any  visible 
negative  impact  on  VAT  revenues.  VAT  revenue  indeed,  on  average,  increased 
markedly  in  the  years  after  199965.  Only  some  Member  States  chose  to  extend 
their use of reduced rates, and those that did had ways of compensating targeted 
revenue shortfalls, e.g. by increasing the level of rates.  

As  such,  this  impact  assessment  assumes  that  direct social  and  economic  impacts  of  the 
reform  options  on  the  economy  as  a  whole  are  negligible  in  the  short  run.  There  may 
however be sectoral impacts given that targeted changes to the VAT system may occur. In 
such  cases,  rate  cuts  on  specific  products  would  impact,  in  the  absence  of  significant 
changes in overall VAT revenue, solely the concerned sector(s).  

As it is unknown where (if at all) such targeted changes would take place, it is not possible 
to estimate what their impact would be. In general, the introduction of a sectoral rate cut 
could benefit producers in the sector concerned or final consumers demanding the product 
in  question,  or  the  benefits  could  be  shared  between  the  two  parties.  Economic  theory 
suggests that the characteristics of each sector, most particularly the supply and demand 
elasticity  and  the  competitiveness  of  the  industry,  determine  how  much  the  reduction  of 
VAT  increases  profits  (with  the  attendant  knock-on  effects  on  sectoral  salaries  and 
employment)  and  how  much  is  passed  on  to  final  consumers  in  the  form  of  price  cuts. 
Higher competition and higher demand elasticities would, in general, lead to higher pass-
on and lower prices66.  

In  theory,  under  a  strict  formulation  of  the  assumption  of  constant  VAT  revenue,  any 
revenue shortfall due to a sectoral rate cut would have to be absorbed by increases in the 
standard VAT rate or in other rates. However, looking at the revenue impact witnessed in 
past infringement cases, typically amounting to significantly less than 1% of VAT revenue 
(for more on the Economic impact of VAT infringements, see section 9.7) and to the clear 
policy orientation of Member States to introduce only very limited budgetary adjustments 
(for more on the Stakeholder consultation, see section 9.2), this effect can be considered 
negligible  in  the  short  run.  Similarly,  the  social,  distributional  and  employment  effects 
would be negligible outside the concerned sector(s). 

The  environmental  impacts  would  be  even  more  specific  and  would  depend  strictly  on 
Member  States’  choices.  Whereas  under  option 1  they  would  be  restricted  by  the  new 
Annex III, option 2 would allow for the possibility to use VAT subsidies, instead of direct 
subsidies,  to  promote  e.g.  energy  efficient  products.  However,  at  the  same  time  – 

65   The arithmetic average of VAT revenues in Member States, at 7.0% of GDP in 1999, increased steadily 
in  the  following  years  peaking  at  7.9%  in  2006.  See  European  Commission,  Taxation  Trends  in  the 
European Union, 2012 edition, p. 186. 

66   Supply  elasticity  has  the  opposite  effect,  with  a  low  elasticity  resulting  in  higher  price  cuts.  For 
completeness one should also distinguish between short- and long-term elasticity, the second of which is 
notably linked to the barriers to entry in the sector. 

44 

 
                                                 
depending on the decisions made by Member States – environmentally harmful products 
could also end up benefiting from reduced VAT rates. 

6.2.  Longer-run effects 

For the longer term, it would be incorrect to assume a near constancy of revenue or of the 
other  major  characteristics  of  the  VAT  system,  as  social,  economic  and  political  forces 
may come into play and influence policy choices, so that over time the cumulative effect 
of  changes  might  become  perceptible.  In  the  absence  of  any  certainty  on  the  long-term 
direction  of  policy,  this  Impact  Assessment  concentrates  on  the  potential  risks  of  each 
option  in  order  to  illustrate  their  possible  long-term  impacts  and  compare  them  to  the 
baseline scenario. 

The  longer-term  risks  stemming  from  a  greater  degree  of  tax  rate  flexibility  have  been 
identified by the 2017 VAT rates study as follows: 

1.  the risk of introducing fiscal distortions67 in the Internal Market; 

2.  the  risk  of  generating  excessive  complexity  and  costs  for  operators  and  tax 
administrations, discouraging intra-EU trade and thus undermining the functioning 
of the Internal Market; 

3.  the  risk  of  creating  legal  uncertainty  and  fostering  litigation  between  the 
Commission  as  the  Guardian  of  the  Treaties  and  Member  States  and  at  Member 
State level, thus endangering business investment and generating costs; 

4.  the risk of eroding VAT revenues. 

As  the  objectives  of  the  initiative  explicitly  include  limiting  these  risks,  they  are 
discussed,  for  each  option,  in  the  section  dealing  with  the  effectiveness  of  the  various 
policy  options.  As  a  terminological  point,  it  should  be  noted  that  part  of  what  could  be 
understood as fiscal distortion is covered under the litigation risk (see Box 9).  

67   For  the  purposes  of  this  Impact  Assessment  “economic  distortion”  is  defined  as  the  relocation  of 
economic activity between jurisdictions, motivated purely by differences in VAT rate levels, as opposed 
to other factors, such as lower costs or higher demand. This definition therefore includes responses to tax 
regimes by both consumers and businesses, and a wide range of possible activities such as cross-border 
shopping, distance sales, and tourism. 

45 

 
 
 
                                                 
Box 9: 

Fiscal distortion 

The concept of fiscal distortion is a complex one, as it involves, first, an assessment of whether a difference 
in  taxation  is  sufficiently  large  to  have  an  impact  on  the  market,  and  secondly,  whether  the  difference  in 
taxation  is  justified  –  e.g.  on  grounds  of  tax  sovereignty  or  subsidiarity  –  or  whether  it  conflicts  with  the 
operation of the Single Market and creates room for manipulation. Given that neither of these assessments 
is always clear-cut, the EU legislator has made a number of pragmatic choices, which, in simplified terms, 
could  be  said  to  centre  on  the  distinction  between  taxes  which  directly  affect  the  sale  price  of  a  good  or 
service,  where  harmonisation  measures  are  sometimes  necessary,  and  taxes  which  do  not  directly  affect 
the sale price, where rules prohibiting discrimination on the basis of nationality apply but no harmonisation 
is  required.  The  former  have  been  identified  essentially  as  indirect  taxes  (notably  turnover  taxes  such  as 
VAT and excise duties), whereas the second group includes direct taxes.  

It should be noted that while this approach is broadly supported by economic theory, in view of the tighter 
link of indirect taxes with the market price, indirect impacts of direct taxation on the market price certainly 
exist,  and  indirect  taxes  are  not  always  fully  translated  into  the  sales  price.  As  such,  complete  tax 
neutrality is not achievable, but the EU rules are generally effective in largely shielding the Single Market 
from  distortions  caused  by  indirect  taxes.  In  particular,  VAT  has  very  attractive  properties  in  this  regard, 
because  the  zero-rating  of  exports  coupled  with  the  application  of  the  destination  principle  ensure  an 
almost  complete  tax  equivalence  between  domestic  products  and  equivalent  imported  products;  no 
imported  product  can  be  disadvantaged  or  advantaged  because  of  different  VAT  rates  in  the  country  of 
origin or destination, because both the imported and the domestic product pay in the end exactly the same 
VAT.  

The deviations from tax equivalence which are minor relate to the following cases:  

a) 

b) 

Products for which the destination principle does not apply. These were examined by the 2017 VAT 
rates study and for these, the impact from tax differences is direct and first-order. 

Products deriving some inputs from exempt sectors. This is because, technically, the VAT embedded 
in  inputs  from  exempt  sectors  cannot  be  deducted  and  thus  intervenes  in  price  formation.  As  a 
result,  a  sector  with  a  high  share  of  inputs  from,  e.g.,  the  financial  sector,  can  be  slightly 
disadvantaged  in  international  trade,  if  the  domestic  VAT  rate  is  high.  This  is,  however,  a  second 
order effect68.  

c) 

Other second-order competitiveness effects from the operation of other taxes.  

The 2017 VAT rates study focussed on a), as the cases covered there were first-order effects. The results 
of the study are listed in Error! Reference source not found.. Second-order effects under b) and c) are 
small and can be neglected.  

The  explanations  above  relate  to  tax  distortions  in  the  same  market,  e.g.  related  to  the  same  good  or 
service. Somewhat different considerations apply to tax distortions between merely similar products. Here, 
a distortion can occur if a sector is unduly penalised – or advantaged – from a different VAT rate applying 
on its product vs the products of competitors, in the absence of an economic justification for this. This type 
of distortion is prohibited, in the EU system, by a general provision, Article 110 TFEU.  

In the VAT domain, infringements of Article 110 TFEU have not occurred, partly because the rate applicable 
to each supply is set by the more specific VAT Directive. In a situation, however, whereby rate rules would 
be  extensively  liberalised,  a  risk  might  occur  of  VAT  rates  being  set  on  very  narrow  bases,  which  would 
multiply the risk of unfair competition – e.g. wine being taxed differently than other similar alcoholic drinks, 
or cars being taxed depending on their characteristics and so on. While an  à la carte differentiation in the 
rates  applied  on  similar  products  would  clearly  work  against  fair  competition,  it  should  be  stressed  that 
existing rules do not necessarily prevent the problem, having regard to the very narrow nature of certain 
derogations  and  to  Member  States’  freedom  to  restrict  the  application  of  reduced  rates  to  subsets  of  the 
categories  listed  in  Annex III.  Thus,  from  the  viewpoint  of  legal  principles  the  situation  does  not  change 
with  the  liberalisation  of  rate  rules,  as  Article 110 TFEU  continues  to  apply.  Nevertheless,  the  risk  that 
infringements  to  the  tax  neutrality  principle  would  increase  in  a  liberalised  regime  is  discussed  under  the 
the objective to ‘prevent litigation’.  

Finally,  another  form  of  tax  distortion  could  occur  in  the  event  that  the  compliance  costs  for  economic 
operators to conduct intra-EU or import transactions increase so much compared to domestic transactions, 
to create a trade barrier. This type of risk is covered under the objective ‘minimise complexity and business 
costs’.  

68  For a well-known explanation of this effect, see P. Krugman, M. Feldstein, International Trade Effects of 
Indirect Taxation, NBER Working Paper No. 3163, November 1989. Note that the authors use the term 
'VAT rebated on exports', which is equivalent, in the EU context, to the destination system. VAT is not 
rebated on exports in an origin system.  

46 

 
 
                                                 
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 

The  baseline  (status  quo)  substantially  fails  to  achieve  this  objective,  as  explained  in 
section 2.1.  Both  main  reform  options,  in  contrast,  provide  Member  States  with  greater 
leeway, but to a different extent.  

Under  option 2  Member  States  enjoy  an  extensive  leeway  in  introducing  new  reduced 
rates, being limited in this choice essentially only by the negative list, which is aimed to 
forestall  the  risk  of  distortion  of  competition.  Indeed,  under  option 2  the  principle  is 
introduced,  that  reduced  rates  are  allowed  unless  specifically  excluded.  The  two  sub-
options also substantially widen Member States’ leeway over reduced rates, although to a 
slightly  lesser  extent  owing  to  the  introduction  of  some  limitations  to  Member  States’ 
discretion;  under  sub-option 2a,  five  Member  States  would  have  to  reduce  the  total 
number  of  rates  compared  to  currently,  and  under  sub-option 2b,  reduced  rates  overall 
would have to exceed a certain minimum threshold, irrespective of overall VAT revenue. 
Under  sub-option 2c  flexibility  would  not  be  granted  with  regard  to  goods  that  have 
always been subject to the standard rate in all Member States.   

Under option 1 the leeway is clearly smaller than under option 2, as Member States will 
still  be  bound  to  a  predefined  (updated)  Annex III,  but  would  enjoy  a  significant 
expansion  of  their  ability  to  introduce  reduced  rates,  in  the  order  of  10%  of  household 
consumption.  Sub-option 2c  aims  to  reduced  or  even  eliminate  the  difference  between 
option 2 and option 1 by extending the negative list. The main limitation here comes from 
the fact that particular provisions stemming from legacy national rules may eventually be 
impossible to integrate in a reformed Annex III, potentially leading to some elimination of 
existing reduced rates. Given the fact that it is politically and economically more sensitive 
to abolish an existing reduced rate than to introduce a new one with a narrower scope, this 
could potentially turn out to be a stronger downside than currently anticipated. This could 
warrant a less favourable assessment of this option.    

7.1.2.  Treat Member States equally  

In  the  status  quo,  as  explained  in  section 2,  this  objective  is  not  achieved  as  Member 
States are treated substantially differently with regard to  derogations. Both main options 
provide a solution to this problem. However, under option 1 some derogations would be 
difficult to grant to all Member States and would therefore have to disappear, leading to a 
slightly  lower  effectiveness  of  option 1  in  solving  this  problem.  Under  option 2  and  its 
sub-options,  in  contrast,  certain  derogations  could  be  challenged  on  the  basis  of  the 
general  principle  (benefit  of  the  final  consumer)  and  Article 107 TFEU  (State  aid);  this 
would however lead to benefits in terms of achieving other objectives.  

7.1.3.  Limit tax distortions of competition 

Under a destination-based system, the scope for distortion of competition and harmful tax 
competition under the status quo is limited. The 2017 VAT rates study suggests that VAT-
motivated  cross-border  shopping  is  unlikely  unless  VAT  differentials  create  price 
differences equivalent to the more extreme price differences for excisable goods currently 
prevailing between some Member States; such large VAT differentials are unlikely under 

47 

 
the  existing  VAT  system  and  also  under  any  of  the  options.  This  is  the  basis  for  our 
assessment  that  this  objective  is  substantially  achieved  under  all  options.  The  main 
potential for distortion lies with the special schemes for travel agents and taxable dealers 
(also works of art) operating under the origin principle, but these have a narrow scope.  

Under neither of the main reform options potential incidences of distortion of competition 
increase  during  the  first  step  compared  to  the  baseline  scenario.  Based  on  the 
recommendations  by  the  VAT  Committee,  the  Commission  would  only  propose  an 
extension  of  Annex III  where  any  potential  distortion  of  competition  could  be  excluded. 
Such  modifications  to  the  Annex  (similar  to  the  one  proposed  for  e-publications)  could 
rather reduce distortion of competition by enabling tangible and digital products that are 
similar to be taxed equally. 

Under  option 1,  much  like  in  the  status  quo,  the  risk  of  economic  distortions  driven  by 
VAT  rate  differentials  is  limited.  The  extension  of  existing  derogations  to  all  Member 
States  appears  unlikely  to  generate  differences  in  VAT  treatment  between  countries 
sufficient  to  create  economic  distortions  and  motivate  harmful  tax  competition,  because 
such  differences  already  exist  and  no  distortion  of  competition  could  be  observed  apart 
from border regions. The economic impact will be limited to narrow border regions, given 
the  size  of  transactions  necessary  to  make  cross-border  shopping  economically  rational. 
One might however expect limited sectoral impacts for the tourism sector69.  

Under  option 2 and  its  sub-options the negative list to  which the standard  rate has to be 
applied would include all supplies, where the place of taxation could still lead to economic 
distortions. These are supplies under certain special schemes, vehicles and high value and 
easy-transportable  goods.  As  an  additional  safeguard  the  general  principle  that  reduced 
VAT rates may not create distortion of competition would be explicitly mentioned in EU 
VAT law instead of only being derived from Article 113 TFEU.  

The  2017  VAT  rates  study  indicates  that  greater  rate  differentials  could  by  definition 
always  result  in  more  tax  competition,  and  more  relocation  of  economic  activity  across 
borders for tax reasons in the case of cross-border shopping or tourism. Nevertheless, case 
studies, literature review and additional analyses suggest that this effect would still be of 
limited  magnitude,  as  VAT  differentials  would  need  to  approximate  some  of  the  larger 
excise  differentials  observable  between  Member  States  in  order  to  have  a  substantial 
impact. Therefore, under this option a small number of high-risk items would be included 
in  the  negative  list.  Nevertheless,  to  take  into  account  the  wider  potential  scope  of  the 
reduced rates and the transitory impacts of litigation (see also section 7.1.5), option 2 and 
sub-options 2a and 2b are prudentially assessed slightly lower than option 1 and than the 
baseline in terms of this objective. 

69  The  VAT  rates  study  (PwC  et  al.,  2017)  suggests  that  a  minimum  floor  with  regard  to  VAT  rates  on 
goods  and  services  provided  to  tourists  might  be  considered  to  prevent  ‘a  race  to  the  bottom'  in  VAT 
rates  for  tourism.  However,  any  such  minimum  rate  level  should  be  consistent  with  maintaining  the 
competitiveness  of  the  European  Union  as  a  whole,  relative  to  other  international  destinations. 
Furthermore,  under  the  current  rules  VAT  rates  applied  to  tourism  services  are  already  the  lowest 
amongst all sectors (25  Member States apply a reduced rate to accommodation and 18 Member States 
apply  a  reduced  rate  to  restaurant  services).  One  Member  State  applies  a  super-reduced  rate  to 
accommodation and restaurant services and under this option all other Member States would be allowed 
to do so. Still, it seems that this option would create only limited additional room for Member States to 
further  decrease  VAT  rates  on  tourism  services.  However,  in  recent  years  in  many  Member  States 
specific tourist taxes on accommodation were introduced in order to compensate for the low VAT rates 
in the sector.   

48 

 
                                                 
7.1.4.  Minimise complexity and business costs 

The current system allows for great variation of VAT rate structures in the Member States. 
This results in substantial costs for businesses. Traders need to know whether a reduced 
rate is applied in a particular case and if so at which level, particularly upon changeover to 
the  definitive  system  where  businesses  will  have  to  apply  the  VAT  rate  of  the  Member 
State of destination. This can be cumbersome, especially when VAT is due in a Member 
State  where  the  business  is  not  established,  and  when  any  of  the  over  200  derogations 
applies.  As  a  result,  under  the  status  quo  the  objective  of  minimising  complexity  and 
business costs cannot be said to be attained. 

To  assess  how  compliance  costs  for  businesses  would  evolve  under  the  various  policy 
options,  we  note  that  such  costs  are  positively  correlated  with  the  diversity  of  VAT 
regimes: the more different rules are applied within the EU, the more businesses have to 
spend  to  comply  with  the  rules  in  the  various  Member  States.  Any  increase  in  system 
complexity thus would tend to increase costs for businesses and, incidentally, also for the 
tax administrations. 

In  the  first  stage  of  both  of  the  main  reform  options,  changes  to  Annex III  would  be 
limited and not give rise to any additional complexity.  

In  the  second  stage  of  option 1  complexity  increases  relative  to  the  status  quo,  because 
Member States would be enabled to introduce one or two additional VAT rates, a super-
reduced and a zero rate for certain products as a result of opening up  derogations to all 
Member States.   

The literature review and additional analysis from the 2017 VAT rates study indicate that 
business costs derived from complexity are significant, providing compelling reasons for 
Member States to limit the number of rate bands in their VAT system. A Swedish survey 
carried  out  by  the  Swedish  Tax  Board  on  compliance  costs  of  VAT  in  Sweden70  also 
shows  that  there  is  a  clear  correlation  between  the  costs  of  handling  VAT  in  businesses 
and the number of rates of VAT to be handled71. 

The  maximum  possible  impact  on  complexity  is  large;  if  all  Member  States  took 
advantage  of  all  derogations  permitted,  this  would  lead  them  to  operate  a  standard  rate, 
three  reduced  and  super-reduced  rates,  and  an  additional  zero  rate.  The  introduction  of 
new VAT rates poses challenges for businesses not just in terms of invoicing, but also in 
terms of accounting, record-keeping, tracking legislative changes, and so forth. However, 
the introduction of many new rates seems highly unlikely, and complexity is rather likely 
to  grow  in  a  gradual,  accretive  fashion.  Taking  this  into  account,  we  assess  option 1  as 
scoring somewhat less well than the baseline on minimising business costs.  

Under  option 2,  in  the  second  stage  businesses  trading  across  borders  will  be  able  to 
access information on rates, and in particular on which goods and services are eligible for 
reduced VAT rates and (thanks to the CPA) how these are classified in each jurisdiction. 
The web portal structured by the CPA will act as the key tool to limit complexity. Member 
States will be obliged to upload on the webportal data according to CN or CPA and the 

70  Compliance costs of value-added tax in Sweden, report 2006:3B, Skatteverket:  

http://skatteverket.se/omskatteverket/rapporter.4.584dfe11039cdb626980000.html  

71  The study indicates that a uniform rate of VAT in Sweden would entail a reduction of compliance costs 

by approximately SEK 500 million (or approximately EUR 54 million). 

49 

 
                                                 
 
Commission  will  publish  this  information.  Businesses  will  thus  be  able  to  cut  their 
compliance costs by using the web portal72. This is important in particular for businesses 
in  the  e-Commerce  sector  that  in  future  will  be  able  to  use  the  extended  one  stop  shop. 
The cost reduction will be strongest, proportionally, for SMEs.  

Another important safeguard to avoid complexity under option 2 is the introduction of the 
general principle that reduced VAT rates must be for the benefit of the final consumer. In 
conjunction with the negative list, this principle excludes that products typically supplied 
between  businesses  only  could  benefit  from  a  reduced  VAT  rate.  Applying  the  standard 
rate in those cases helps to preserve simplicity for typical B2B supplies, which represent 
the bulk of international trade73, with no financial impact on businesses, because they can 
generally deduct input VAT. 

Assessing the impact of option 2 on business costs requires comparing the positive impact 
of  the  web  portal/CPA  with  the  negative  impact  that  can  derive  from  greater  system 
complexity.  Under  option 2,  Member  States  would  face  fewer  restrictions  to  introduce 
new reduced rates, or to extend them to new areas, which could well lead to an increase in 
system  complexity.  However,  it  seems  highly  unlikely  that  Member  States  would 
introduce large changes in the VAT rate structure very quickly, on account of the technical 
complexity  of  doing  so  and  the  potential  repercussions  on  revenue.  Any  trend  towards 
greater  system  complexity  is  thus  likely  to  be  gradual  and  a  result  of  cumulative,  rather 
than  revolutionary,  changes.  In  contrast,  the  introduction  of  the  web  portal/CPA  should 
take place by the time of the introduction of the definitive regime.  

Taking into account that the benefits of the web portal will accrue at introduction across 
the  whole  spectrum  of  goods  and  services,  while  the  costs  from  greater  complexity  will 
manifest themselves gradually; as well as of the fact that the possibility to recover from 
the  web  the  applicable  VAT  rate  for  a  given  good  or  service  constitutes  a  significant 
simplification  for  traders,  it  can  be  argued  that  the  cumulative  impact  of  option 2  on 
business costs will be a cost reduction.  

Nevertheless,  it  has  to  be  recognised  that  there  are  a  certain  number  of  risks  to  this 
conclusion. First, while a basis for the CPA already exists for goods in the form of the CN 
nomenclature, it will have to be reviewed, and the classification system for services needs 
to  be  set  up.  Second,  experience  with  web  tools  shows  that  there  could  be  risks  to  the 
successful  implementation  of  an  easy-to-use  portal  for  businesses,  particularly  in  the 
initial phases. As such, we prudentially allow, in the comparison of options table, also for 
a worse outcome of this option on business costs, particularly in the short run.  

72   This  decrease  in  compliance  costs  cannot  be  quantified  at  present.  This  is  due  to  several  reasons,  in 
particular  that  the  Standard  Cost  Model  (SCM)  for  the  quantification  of  compliance  costs  is  highly 
dependent  on  the  specific  procedure  adopted.  The  detailed  arrangements  of  the  future  definitive  VAT 
system are still to be agreed upon and will not enter into force before 2022. Anyhow, the details of those 
arrangements, e.g. the concept of a certified taxable person would not impact on the scope of Annex III 
or the level of VAT rates, but should generally decrease compliance costs for large businesses and some 
SMEs.  Obviously,  the  lack  of  a  fully  specified  procedural  baseline  prevents  the  formulation  of  SCM-
based  quantitative  estimates  also  for  the  present  Impact  Assessment  on  rates;  nevertheless,  all  these 
impacts  are  taken  into  account on  a  qualitative  basis  in  the  remainder of  the  analysis and  in particular 
when assessing the impact of the various policy options as outlined below. 

73  Intermediate  goods  trade  represented  about  USD 7 trillion  in  2013,  compared  to  USD 4 trillion  for 
primary goods, almost USD 4 trillion for consumer goods and around USD 3 trillion for capital goods. It 
can  be  assumed  that  the  vast  majority  of  intermediate  goods  and  most  capital  goods  would  involve 
products not used for household consumption. See UNCTAD, Key statistics and trends in international 
trade 2014, United Nations, Geneva, 2015.  

50 

 
                                                 
As for sub-option 2a, the fact that it implies a reduction in the total number of rates speaks 
for a more favourable impact on business costs than in the case of option 2. This is not the 
case for sub-options 2b and 2c, which have a similar impact on business costs as option 2.  

7.1.5.  Prevent litigation 

Baseline 

The  status  quo  solution  fails  to  achieve  this  objective  as  shown  by  the  large  number  of 
ongoing infringement procedures on VAT rates issues (see section 2.1).  

Harmonised  EU-level  rules  regarding  which  goods  and  services  are  eligible  for  which 
kinds  of  VAT  rates  have  historically  led  to  litigation  between  the  Commission  and 
Member States, arising from attempts  made to apply VAT rates not deemed permissible 
under the VAT Directive. While many issues are now part of settled EU case-law, the risk 
of  litigation  persists  and  may  increase  in  light  of  a  less  consensual  EU  political 
environment  and  of  greater  favour  for  national  solutions.  On  the  basis  of  the  arguments 
developed  in  the  problem  definition,  we  assume  a  continuation  of  the  current  trend 
whereby  Member  States  regularly  introduce  reduced  rates  in  violation  of  the  VAT 
Directive.  

It is even possible that current political dynamics seeing stronger calls for sovereignty in 
many  Member  States,  result  in  more  frequent  ‘go  it  alone’  solutions,  increasing  the 
number  of  violations  and  infringement  cases.  Thus  infringements  are  likely  to  continue 
generating litigation between the Commission and Member States at the same or a higher 
rate.  The  litigation  risk  could  further  increase  in  a  definitive  VAT  regime,  because 
Member  States  would  have  to  increase  VAT  rates  significantly  for  the  supplies  that  are 
currently covered by derogations.  

In addition, in the absence of updates to Annex III, the obsolescence of certain provisions, 
like  in  the  case  for  e-publications,  would  gradually  become  more  marked  and  thus 
conflicts with the principle of fiscal neutrality. 

Option 1 

The assessment of litigation risks in this scenario is complex because several effects will 
come  into  play  and  some  of  them  will  partially  offset  each  other.  On  the  one  hand,  the 
complexity  of  the  legal-technical  work  required  and  the  addition  of  new  categories  for 
which  case  law  is  either  lacking  or  limited  could  increase  the  scope  for  ambiguity,  and 
thus for subsequent litigation.  

On the other hand, regular updating of the list of goods and services eligible for reduced 
rates should minimise the scope for conflict between the policies that Member States want 
to  pursue  and  what  is  allowed  under  the  VAT  Directive.  This  would  reduce  litigation 
between  the  Commission  and  Member  States  on  rates  driven  by  the  wish  of  individual 
Member States to apply a reduced rate to areas where the VAT Directive currently does 
not  allow  this.  Since  this  option  would  markedly  widen  the  admissible  scope  for  the 
application  of  a  more  favourable  treatment,  the  scope  for  conflict  should  naturally 
diminish and would probably involve disputes primarily linked to boundary issues.  

These two effects run in opposite directions; the net impact will thus depend on which of 
the two turns out to be the stronger. Overall, it seems likely that the second effect would 
dominate and there would be a decline in Commission-Member State lawsuits.  

51 

 
However, a different type of litigation could arise from the narrow scope of some of the 
existing  super-reduced and  zero  rates  once  they are  extended  to  all  Member  States.  It  is 
conceivable  that  in  some  instances  economic  operators  might  attempt  to  challenge  the 
limited  scope  of  these  provisions,  once  introduced  not  as  exceptions  as  is  currently  the 
case, but rather as general provisions of the VAT Directive, on grounds of breach of the 
fiscal  neutrality  principle.  There  might  be  financial  interest  in  challenging  national  rate 
legislation if, for example, businesses operating in a closely related market are excluded 
from  the  reduced  rate,  based  on  equal  treatment  grounds.  To  overcome  this  risk,  each 
national  provision  will  have  to  be  reviewed  independently  before  granting  it  to  all 
Member  States,  but  the  process  will  be  complex,  particularly  if  Member  States  cannot 
agree to extend the scope of narrow derogations or do away with them.  

It should be noted that total social costs of litigation (i.e. the sum of private and public and 
public  direct  and  indirect  costs)  might  increase  if  the  nature  of  disputes  were  to  involve 
private  entities  more  frequently  than  at  present.  Currently,  litigation  mostly  involves  the 
Commission  and  Member  States,  as  the  Commission  attacks  rate  provisions  that  do  not 
conform  to  the  VAT  Directive;  participation  of  private  entities  is  relatively  rare,  on 
account  of  the  fact  that  economic  operators  rarely  have  an  interest  in  challenging  a 
Member  State  law  granting  a  reduced  rate.  It  is  however  impossible  to  predict  how 
frequently this second type of litigation would occur (if at all), with much depending on 
the outcome of the first judgements of this type.  

It  is  difficult  to  estimate  which,  if  any,  of  these  opposing  effects  will  prevail;  as  such, 
option 1 is assessed to be roughly equivalent to the status quo in terms of litigation risk.  

Option 2 

Also  under  option 2  opposing  effects  come  into  play.  First,  the  new  rules  will  render 
obsolete litigation under the current framework with regard to the correct interpretation of 
Annex III  and  the  legal  provisions  by  which  derogations  are  granted.  Although  some 
scope  for  conflict  between  what  individual  Member  States  do  and  the  VAT  Directive 
remains,  linked  e.g.  to  the  new  safeguards  introduced  by  option 2  the  fact  that  option 2 
liberalises extensively rate-setting in itself reduces the scope for litigation.  

On  the  other  hand,  that  impact  must  be  weighed  up  against  the  risk  of  Member  States 
accidentally  or  deliberately  contravening  TFEU  provisions  prohibiting  State  aid  and 
protectionist taxation, as well as the principle of fiscal neutrality as it has been established 
in case-law on VAT. It is impossible to predict to what extent, if any, Member States will 
adopt  VAT  rate  policies  leading  to  infringements  of  State  aid  rules  (Article 107 TFEU), 
prohibition  of  protectionist  taxation  (Article 110 TFEU)  or  violation  of  fiscal  neutrality, 
compared  to  the  baseline  scenario  and  option 1.  As  such,  it  cannot  be  excluded  that 
litigation risk increases under this option, noting also that the rules in the VAT Directive 
are relatively clearly defined in comparison to the higher-level principles articulated in the 
TFEU.  For  this  reason,  option 2  is  assessed  as  less  effective  than  the  baseline  on  this 
objective. A similar picture applies to sub-options 2a, 2b and 2c. 

7.1.6.  Prevent revenue erosion 

Nature of the problem 

The  potential  for  revenue  decrease  –  defined  as  the  maximum  possible  drop  in  revenue 
allowed by VAT rules – is actually quite high under the current rules, owing to the large 
hiatus between actual rates and the minima set by the VAT Directive. By way of example, 

52 

 
if  a  Member  State  decided  to  apply  the  minimum  standard  rate  of  15%  and  a  single 
reduced rate of 5%, which the Member State could apply to 50% of all supplies for which 
VAT  cannot  be  deducted,  this  would  result  in  a  weighted  average  VAT  rate  of  10%. 
Compared to the EU-28 mean of 18% (the mean is 19% for those Member States which 
cannot  apply  super-reduced  or  zero  rates),  the  potential  risk  of  revenue  erosion  can  be 
estimated at nearly 50%. This potential risk increases further after the expiry of the 15% 
minimum for the standard rate; however, this is a purely theoretical risk; the central role of 
VAT  as  a  revenue  raiser  makes  rash  across-the-board  cuts in  rates  unrealistic.  Rate  cuts 
would also normally be reversible. 

The real risk for VAT revenue is not that of a sudden revenue shortfall due to extensive 
rate  cuts,  but  that  of  erosion,  i.e.  that  successive  extensions  of  reduced  rates  to  new 
categories end up compromising permanently its revenue raising capacity. As experience 
shows,  the  decision  to  grant  a  reduced  rate  is  very  rarely  reversed.  Nevertheless, 
governments remain free  to  increase the level of any reduced  rate, if its budgetary costs 
become excessive; this can offset the revenue impact of the extension of the reduced rate 
to new areas.  

Baseline scenario 

Under the baseline scenario, revenue erosion is prevented by the existence of Annex III, 
which offers governments an opportunity to resist pressure to extend reduced rates to new 
domains. Once a reduced rate is granted to a good or a service, limitations in the number 
of  rates  also  reduce  the  scope  for  lobbying,  as  reducing  further  the  rate  for  a  particular 
interest  group  will  generally  require  reducing  the  VAT  on  a  range  of  other  goods  and 
services in the same band. This amplifies the budgetary cost, making the request harder to 
grant. This is a general feature; the more extensive the category to which a rate cut could 
be extended, the less likely it is that the rate cut is granted.  

Overall,  it  can  be  assumed  that  in  the  baseline  scenario  VAT  revenue  would  remain 
unchanged at close to current levels, owing to ongoing budgetary needs and to the key role 
of VAT as a source of revenue74 in the short run. Also the expiry of the 15% minimum for 
the  standard  rate  would  not  have  any  immediate  impact  given  the  fact  that  all  Member 
States have standard rates well above that level.  

Option 1 

Option 1,  by  increasing  the  scope  of  goods  and  services  for  which  reduced  rates  are 
legally permitted, raises the possibility of increased domestic pressure for rate reductions 
on particular categories of goods and services. For this reason, it scores less well than the 
status quo on revenue erosion. However, it has to be recognised that, in previous instances 
where  reduced  rates  were  extended  to  selected  new  categories,  this  did  not  cause  a 
reduction  in  VAT  revenue,  which  has  on  the  contrary  shown  a  consistent  upward  trend. 
This  is  because  tax  authorities  have  resorted  to  increases  in  the  standard  rate  or  other 
revenue-raising measures to offset the impact of targeted changes.  

74   There  could  only  be  an  impact  of  the  status  quo,  if  the  Commission  decided  to  launch  infringement 
procedures in cases where Member States interpret widely the wording of Annex III and if subsequently 
Member States would amend their national VAT law voluntarily or subsequent to a ruling of the CJEU 
confirming  the  position  of  the  Commission.  Such  a  scenario  is  however  unlikely,  because  the 
Commission would only launch infringement procedures where Member States clearly infringe the VAT 
Directive or violate the principle of fiscal neutrality. 

53 

 
                                                 
Member  States  would  under  this  option  be  enabled  to  apply  VAT  rates  lower  than  5%, 
including zero rates, to products included in a significantly enlarged Annex III. Applying 
such super-reduced or zero rates could have a negative budgetary impact in the Member 
States, depending on the use they make of the flexibility offered.  

As is the case for the baseline scenario, the maximum potential risk for erosion is high. If 
Member States decided to apply 0% to the entire Annex III (at least 50% of all supplies 
for which VAT cannot be deducted) and a standard rate of 15%, the weighted average rate 
could decrease to 7.5%. Compared to the EU-28 mean of 18% (the mean is 19% for those 
Member  States  which  cannot  apply  super-reduced  or  zero  rates),  the  risk  of  revenue 
erosion  can  be  estimated  at  nearly  60%.  The  quantification  of  this  additional  risk  of 
revenue  erosion  compared  to  the  baseline  scenario  can  also  be  illustrated  by  a  more 
complex approach (see Box 10). 

Another way of illustrating the risk of additional risk of revenue erosion under this option 
and the difficulty to distinguish this risk from that already existing under the current rules 
is to look at the most widespread de facto zero rate, which relates to passenger transport 
services. The current rules already allow applying a reduced rate to all passenger transport 
services  whilst  a  zero  rate  can  be  applied  to  most  international  passenger  transport 
services.  

A  recent  study  on  the  current  VAT  rules  for  passenger  transport  (hereinafter  ‘passenger 
transport study’)75 estimated that VAT revenue from passenger transport services for EU-
27 in 2010 amounted to EUR 8.8 billion, which nearly entirely originated from domestic 
passenger transport services. According to the VAT gap study76, the total VAT revenue in 
EU-27  in  2010  (the  study  used  data  for  2010)  was  EUR 861 billion  of  which 
EUR 8.8 billion represent 1%. This is the maximum risk of revenue erosion, but already 
under the current rules Member States could apply a reduced rate to passenger transport 
services, so a large part of VAT revenues originates from applying the standard VAT rate. 
The additional risk of revenue erosion under this option should therefore relate to Member 
States applying a zero rate instead of a reduced rate, which would represent far less than 
half of the risk already present in the current system.  

The example of passenger transport illustrates just how difficult it is to assess the real risk 
from  granting  Member  States  more  flexibility,  when  they  are  not  using  most  of  the 
flexibility  already  available.  While  extending  a  zero  rate  may  pose  a  theoretical  risk  of 
revenue  erosion,  in  practice  this  risk  can  vary  considerably  as  a  function  of  sectoral 
specificity.  The  example  of  passenger  transport  offers  a  good  illustration  of  this  as, 
realistically, the risk of erosion appears quite different depending on the market segment.  

Zero  rating  all  domestic  passenger  transport  is  only  a  potential  risk,  because  Member 
States  currently  taxing  it  at  the  standard  are  well  aware  of  what  the  passenger  transport 
study  emphasises,  namely  the  enormous  potential  that  the  application  of  VAT  in  this 
sector  would  have  in  terms  of  generating  revenue  and  the  limited  impact  of  applying 
reduced or zero rates on the demand for such services (due to low elasticities of demand 
and pass-through rates that are very low, varying between 7% and 50%). Conversely, zero 
rating all international passenger transport is a much more likely risk, as already now only 
few Member States tax international road and rail transport. This difference between the 

75   http://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/common/publications/-

studies/report_passenger_transport.pdf   

76  https://ec.europa.eu/taxation_customs/sites/taxation/files/2016-09_vat-gap-report_final.pdf  

54 

 
                                                 
two segments can be explained by the action of economic factors similar to those at work 
in  the  tourism  industry.  However,  international  road  and  rail  passenger  transport  only 
generated  VAT  revenues  of  EUR 0.5 billion  in  EU-27  in  2010  (0.06%  of  VAT 
revenues)77. Nearly all VAT revenues stem from domestic passenger transport services.  

Box 10:  Quantifying the potential for revenue erosion under option 1 

For this calculation Member States that already apply super-reduced and zero rates to more than only few 
items have to be left out. A risk of revenue erosion exists also for these Member States, but for them it is 
significantly lower as compared to those Member States that could introduce super-reduced and zero rates 
and it also depends on how far they already use these rates. 

In regard to the 21 Member States currently not able to apply super-reduced or zero rates, the illustration 
takes into account the average standard VAT rate applied by them, which is 22%, the average reduced VAT 
rate applied by them, which is 9%, and the mean of the average weighted rate estimated for each of these 
Member  States,  which  is  19%.  This  information  allows  calculating  that  in  these  21  Member  States  on 
average 77% of the products supplied to final consumers and exempt sectors are taxed under the standard 
rate and 23% are taxed under reduced rates. Under this option these Member States would be allowed to 
apply a zero rate (instead of 9%) to around 70% of the supplies already under the reduced rate, i.e. they 
could apply a zero rate to 16% of all products supplied to final consumers and exempt sectors (23% * 0.7 
= 16%). If Member States used all their flexibility, the mean of the weighted average rate could decrease 
to 17.6%. Compared to 19%, this is a decrease of 8%. This decrease is equivalent to a decrease of 8% in 
VAT revenues. So as a maximum the additional possible impact on VAT revenues for the average of the 21 
Member States that do not have super-reduced and zero rates is 8% or EUR 64.6 billion.  

A small additional risk of revenue erosion also exists for Member States already applying such rates as they 
would  be  enabled  to  enlarge  the  scope  of  super-reduced  and  zero  rates  used,  something  which  is  not 
possible under the current rules. 

However,  even  if  the  additional  risk  of  revenue  erosion  is  small  under  this  option  and 
Member  States  confirmed  their  opposition  to  extending  the  use  of  such  rates  during  the 
consultation,  special  interest  pressure  would  increase  once  Member  States  had  more 
flexibility  to  lower  the  level  of  reduced  rates  e.g.  for  basic  items  like  foodstuff.  A 
replacement  of  reduced  rates  by  even  lower  rates  would  then  normally  have  to  be 
compensated  by  an  increase  in  the  standard  rate.  It  would  therefore  have  no  significant 
systemic effects, but could lead to higher rate divergence.  

Finally,  the  risk  of  revenue  erosion  is  higher  if  zero  rates  are  extended  than  if  reduced 
rates are, as the reduced rates may easily be increased once their budgetary cost becomes 
excessive, but this does not apply to zero rates; to reduce budgetary losses from zero rates, 
the only option is to transform  them into reduced rates, which is politically more difficult.  

Option 2 

Maximum potential reduction of revenue 

Under this option, a Member State could decide to apply a zero rate to 85% of all supplies 
to households, which represent on average 60% of all supplies for which VAT cannot be 
deducted. However, the general principle that reduced rates must be for the benefit of the 
final  consumer  would  significantly  contribute  to  prevent  exempt  businesses  and  public 
bodies  benefiting  from  such  zero  rates.  Zero  rates  could  e.g.  be  granted  for  the 
construction of new buildings for residential purposes and not to new buildings in general. 

77   Furthermore, albeit the possibility of a zero rate being applied, the shift in the place of taxation to the 
place of departure in a definitive VAT system for international passenger transport as currently foreseen 
under the VAT Directive could even lead to increased VAT revenue, because it would become easier for 
Member States to tax these supplies including air and maritime passenger transport, which is currently 
exempt in all 28 Member States. 

55 

 
 
                                                 
Thus, under this option a zero rate could be applied to 50% (85% * 60%) of all supplies 
for which VAT cannot be deducted.  

However,  the  revenue  safeguard  foreseen  under  this  option  will  prevent  revenues  from 
falling below the levels prevailing today in the most lightly taxing Member States of the 
EU. These Member States will have little room for extending the scope of reduced rates or 
lowering VAT rates under this option.  

Likely impact on revenues 

Obviously, the budgetary safeguard, like all safeguards in the field of indirect taxation, by 
prescribing a minimum level, cannot prevent Member States with currently high weighted 
average rates from significantly lowering their VAT rates; but this would be a tax policy 
decision that Member States should be free to take. However, it is unlikely that Member 
States that depend on VAT revenues and that have established high VAT rates despite the 
existing  possibility  to  lower  the  rates  under  the  current  rules,  will  do  so  under  revised 
rules.  

Nonetheless,  the  additional  flexibility  provided  by  this  option  would  render  Member 
States  more  susceptible  to  special  interest  pressure,  as  there  is  no  legal  obstacle  to 
reducing  any  particular  rate  band,  or  moving  any  particular  good  and  service  to  a  lower 
rate band. While the targeted restrictions on high-risk goods and services in the negative 
list  would  provide  some  legal  limits,  these  are  not  anticipated  to  apply  to  a  particularly 
wide  range  of  products.  The  vulnerability  to  domestic  pressures  would  be  more  acute 
where  there  are  no  limitations  on  the  number  of  rate  bands  a  country  could  implement: 
pressure groups could then propose a particular rate for a particular product, and political 
justifications for targeted sectoral benefits are usually easy to find.  

In the past, Member States have reacted differently to such pressure. Some have resisted 
entirely,  in  particular  Denmark  has  never  introduced  any  reduced  rates.  Looking  at  the 
percentage  of  household  final  consumption  expenditure  taxed  at  the  standard  rate,  there 
are  several  Member  States  where  the  percentage  amounts  to  nearly  90%  (no  impact  of 
special  interest  pressure)  and  at  the  other  end  there  is  one  Member  State  where  this 
percentage is only around 35%, but this percentage has not varied over the past decades. 
All other Member States lie within this range, mostly between 50% and 70%78.  

Experience  from  when  Annex III  was  extended  to  cover  labour-intensive  services  also 
shows that VAT revenues did not in actual fact decrease. This is because lowering VAT 
rates led to taxation of previously undeclared supplies (for instance in the HORECA and 
construction  sectors),  while  the  level  of  other  VAT  rates  were  increased.  Notably,  from 
2004 to 2014 VAT as percentage of GDP increased by 0.4 percentage points, from 6.6% 
to  7%,  in  the  EU-28  and  VAT  as  a  percentage  of  total  taxation  also  increased  by 
0.4 percentage points from 17.6% to 18%. 

Overall, however,  option 2 scores worse  than the  status  quo on the risk of VAT erosion 
because it facilitates the granting of reduced rates to specific new categories. For the same 
reason, it also scores lower than option 1.  

78  Detailed  data  is  provided  by  each  Member  State  to  the  Commission  to  calculate  the  VAT-based  own 
resources, but this data is not published and therefore only rough estimates could be used for this impact 
assessment. 

56 

 
                                                 
Sub-option 2a 

Sub-option 2a  makes  it  slightly  more  difficult  to  extend  a  reduced  rate  to  a  new  sector 
because  the  policymaker  has  fewer  rate  bands  at  its  disposal.  This  leads  to  a  greater 
clustering  effect,  which,  as  discussed  above,  discourages  rate  cuts.  This  effect  however 
does not seem strong enough to warrant a strong distinction between the risk of revenue 
erosion  under  option 2  and  sub-option 2a;  both  are  more  exposed  to  this  risk  than  the 
status quo and option 1.  

Sub-option 2b 

Sub-option 2b  contains  an  additional  budgetary  safeguard  preventing  the  weighted 
average  of  all  reduced  rates  to  fall  below  5%.  By  putting  an  additional  hurdle  to  rate 
cutting,  this  sub-option  scores  better  on  VAT  erosion,  although  its  revenue  impact 
appears, from preliminary calculations, not to be very significant.  

Sub-option 2c 

The extension of the negative list can be an effective tool in reducing the risk of revenue 
erosion,  depending  on  its  final  coverage.  With  a  significantly  extended  list,  in  terms  of 
revenue erosion sub-option 2c would score close to option 1.   

7.2.  Efficiency 

For a detailed overview of the main risks affecting the achievement of the various policy 
objectives,  please  see  section 9.8,  which  summarises  the  assessment  laid  down  in  the 
previous section.  

7.3.  Coherence 

Both options are coherent with the subsidiarity approach outlined in the VAT Action Plan, 
providing Member States with more flexibility in setting VAT rates in a destination-based 
VAT system. 

57 

 
 
 
Table 7:  Comparison of options 

Objective 

Baseline 

Option 1 

Option 2 

Sub- 
option 2a 
(with one 
less rate) 

-- 

+ 

+++ 

++ 

Sub- 
option 2b 
(5% mini-
mum avera-
ge rate) 
++ 

Sub- 
option 2b 
(extended 
negative list) 

++[+] 

Provide 
sufficient 
leeway in 
setting 
reduced 
rates 
Treat 
Member 
States 
equally 
Limit tax 
distortions 
Minimise 
complexity 
and 
business 
costs 
Prevent 
litigation 
Prevent 
revenue 
erosion 

-- 

++ 

+++ 

+++ 

+++ 

+++ 

++ 

- 

-- 

++ 

++ 

-- 

-- 

+ 

+/++ 

+/++ 

+/++ 

+/++ 

-/+[+] 

0/++ 

-/+[+] 

-/+[+] 

--/--- 

--/--- 

--/--- 

--/--- 

-/-- 

-/-- 

-/+ 

+ 

Key: symbols indicate the degree by which each option attains the relevant objective 

+++/--- objective fully achieved / not achieved 

++/--  

objective substantially achieved/not achieved  

+/-  

objective achieved/not achieved to a limited extent 

The symbol '/' indicates alternative outcomes, depending on circumstances 

7.4.  Conclusions 

With regard to the risks, it is important to recall that under the current rules and also with 
enhanced flexibility Member States will always retain full ability to safeguard revenue by 
not  lowering  the  VAT  rates,  and  thus  can  control  to  what  extent  the  budgetary  cost  is 
proportionate  to  the  objective  pursued.  Member  States  can  also  simplify  their  national 
VAT  rates  system,  but  they  would  not  be  obliged  to  do  so  by  EU  law.  Therefore,  both 
options respect the integrity of the VAT system. 

The risk of increased complexity under both options compared to the baseline scenario has 
to  be  weighted  up  against  the  additional  flexibility  that  Member  States  gain  under  each 
option and particularly the fact that the baseline scenario carries the risk that the definitive 
VAT system may not become reality, because Member States would not accept the expiry 
of derogations.   

If  the  options  are  compared,  option 2  is  the  preferred  option  from  a  technical  point  of 
view,  because  it  provides  for  general  rules  to  solve  the  derogations  problem  and 
contributes  to  harmonisation  by  introducing  the  CPA  classification  for  the  negative  list 
and by setting as a general principle that reduced rates must be for the benefit of the final 
consumer. The problem of option 1 lies in the fact that it aims at extending significantly 
an  already  excessive  and  unstructured  list  of  goods  and  services  to  which  reduced  VAT 
rates  can  be  applied.  Thus,  conflicts  with  the  principle  of  fiscal  neutrality  are  likely  to 
increase. 

58 

 
No  solution  is  optimal.  As  there  is  little  or  no  harmonisation  of  VAT  rates  under  the 
current rules, finding a common denominator for common restrictions on Member States’ 
freedom  in  setting  VAT  rates  can  only  be  achieved  by  Member  States  in  Council  after 
consulting the European Parliament and the Economic and Social Committee.  

Both options render transparent the size of the derogations problem and the fact that the 
current  flexibility  is  still  not  enough  to  cater  for  all  demands  by  Member  States  for 
reduced rates. As a matter of fact, under both options Member States could no longer use 
the  argument  of  equal  treatment  in  order  to  obtain  a  specific  rate  (e.g.  zero  rates  for 
tampons or children’s clothing) without naming the consequences. 

7.5. 

Preferred option 

The  most  effective  option  in  achieving  all  objectives  seems  to  be  sub-option 2c,  which 
extends  the  negative  list  and  restricts  Member  States  in  applying  reduced  rates  to  most 
goods  for  final  consumption.  However,  given  the  unanimity  requirement  in  the  area  of 
taxation it will eventually be for the Council, after consulting the European Parliament and 
the  Economic  and  Social  Committee,  to  define  the  items  to  be  included  in  the  negative 
list. Proposing a limited  or  an extended negative  list  will not  preclude any outcome that 
the Council envisages.  

Proposing  a  negative  list  instead  of  the  current  Annex  III  requires  that  stakeholders  are 
informed  about  the  magnitude  of  the  derogations  problem  and  the  complexity  of  the 
current  system  in  order  to  justify  the  reason  behind  the  change  of  paradigm.  The 
intransparent  rules  on  VAT  rates  have  allowed  Member  States  to  benefit  from 
disharmonised rules at EU level, while the general rules always suggested harmonisation. 
Already  the  short  negative  list  under  option  2  would  oblige  certain  Member  States  to 
abolish reduced VAT rates for heating oil, short-term hire of means of transport and the 
extended  negative  list  under  sub-option  2c  would  not  allow  Member  States  to  introduce 
reduced rates for energy-efficient or energy-saving goods.   

8. 

MONITORING 

The preferred option would generally not oblige Member States to change the VAT rates 
they  currently  apply  with  the  exception  of  rates  that  could  contradict  Articles 107  and 
110 TFEU.  Monitoring  is  required with  regard to  the  changes  in  the  national  VAT  laws 
concerning these exceptions. 

Monitoring  is  also  required  with  regard  to  the  correct  application  of  the  rules  on  VAT 
rates included in the VAT Directive. Until the entry into force of a definitive VAT system 
the  Commission  will  continue  to  monitor  that  Member  States,  when  applying  reduced 
rates, respect minimum rates, the scope of Annex III and its limitations and the scope of 
derogations granted to them. Compliance of Member States with the rules will continue to 
be enforced and could always lead to infringement procedures. 

Beyond that, the monitoring at EU level takes place in a continuous review of the scope of 
the  reduced  rates  applied  in  line  with  Article 100  of  the  VAT  Directive.  To  this  extent, 
there is also a continuous collection of information about the VAT rates in place in each 
Member  State.  Such  information  is  currently  published  by  the  Commission  in  the 
document  ‘VAT  rates  applied  in  the  Member  States  of  the  European  Union’,  which 
primarily serves as an information tool for researchers, businesses and final consumers.  

59 

 
With the implementation of a definitive VAT system, such information would be collected 
on a mandatory and standardised basis. A web portal would provide accurate and timely 
information on the reduced VAT rates in place in each Member State. A list of products 
according to CPA that are not covered by the standard rate in each Member State would 
be included in the web portal and regularly updated by the Member States. 

Monitoring would focus on the correct application by Member States of the negative list, 
the general principles and the principle of fiscal neutrality.  

Monitoring  of  the  quantitative  safeguard,  the  weighted  average  rate,  would  also  be 
required.  Data  on  the  weighted  average  rate  is  already  available  and  submitted  by  all 
Member States to the Commission for calculating the VAT own resources. 

An evaluation report reviewing the negative list, the general principles and the safeguards 
would  be  prepared  by  the  Commission  five  years  after  the  entry  into  force  of  the  new 
rules. The evaluation should assess in how far the safeguards are effective and efficient in 
mitigating  the  risks  assessed  in  this  impact  assessment  (litigations  and  revenue  erosion)  
and to what extent the risks analysed in this impact assessment might have materialised. 
The  evaluation  results  would  be  communicated  to  the  Council  in  the  form  of  a  report, 
which  would  conclude  on  a  potential  need  for  reviewing  the  negative  list,  the  general 
principles or safeguards and hence the need for a legislative initiative.  

It would also be required to repeat the evaluation every five years, in particular because 
the negative list would require a constant review.  

9. 

ANNEXES 

9.1. 

Procedural information 

9.1.1.  Agenda planning and Work Programme References 

This initiative is part of the Commission Work Programme 2017 and REFIT.  

The  Agenda  Planning  Reference  is  2017/TAXUD/007.  The  Inception  Impact  Assessment 
was published on 22 December 201679. 

9.1.2.  Inter-Service Steering Group 

An  Inter-Service  Steering  Group  was  set  up  for  the  follow-up  of  the  VAT  Action  Plan. 
The  Steering  Group  met  on  five  occasions,  on  5 December  2016,  6 April  2017,  14 June 
2017, 26 September 2017 and 26 October 2017 to discuss a general reform on VAT rates. 
The  following  Directorates-General  (DG)  and  services  were  consulted:  DG  Agriculture 
and  Rural  Development,  DG  Budget,  DG  Communications  Networks,  Content  and 
Technology,  DG  Competition,  DG  Economic  and  Financial  Affairs,  DG  Education  and 
Culture, DG Environment, DG Eurostat, DG Internal Market, Industry, Entrepreneurship 
and SMEs, DG Justice and Consumers, the Secretariat-General and the Legal Service. The 
feedback received from these directorates and services was taken into account in the report 
and the draft by DG TAXUD was amended during the process.  

79   http://ec.europa.eu/smart-regulation/roadmaps/docs/2017_taxud_007_vat_rates_en.pdf  

60 

 
                                                 
9.1.3.  Consultation of the Regulatory Scrutiny Board 

The Impact Assessment Report was submitted to the Regulatory Scrutiny Board for a first 
time on 30 June 2017 and a second time on 5 October 2017.  

On  24 October  2017,  the  Regulatory  Scrutiny  Board  gave  a  positive  opinion  with 
reservations.  The  report  was  further  adjusted  in  order  to  integrate  the  Board’s 
recommendations.  The  recommendations  by  the  Regulatory  Scrutiny  Board  have  been 
addressed as follows:  

Board recommendation 

What has been done? 

Where? 

1.  It  is  not  clear  on  what  grounds  the 
report  states  that  ‘the  Commission 
policy  course  is  now  firmly  oriented 
towards  the  pursuit  of  flexibility  in 
than 
rates, 
setting  VAT 
harmonisation’. 
seems 
inconsistent  with  the  views  of  most 
stakeholders  and  the  conclusions  of 
the ECOFIN Council. 

rather 

This 

The corresponding sentence under 
option 1 has been deleted. 

Section 5.4 

Section 4.1 

The  general  objective  has  been 
clarified.  

2. It is not clear why the only way  to 
treatment  of 
ensure  equality  of 
Member  States  is  by  extending  on  a 
permanent  basis  all  derogations.  It 
actually  prejudges 
the  preferred 
option. 

It is explained that equal treatment 
could  also  be  achieved  without 
extending  derogations 
all 
Member  States,  for  example  by 
letting  derogations  expire  or  by 
proposing  selective  abolition  of 
derogations.  

to 

Details  on  the  failure  of  past 
Commission  proposals  aiming  at 
abolition of derogations have been 
added.  

3.  The 
report  downplays  other 
important  specific  objectives,  such  as 
minimizing  complexity  and  costs  – 
notably for businesses as requested by 
the  Council  –  or  protecting  VAT 
revenues from erosion. 

Specific  objectives  have  been 
added  and  assessed  accordingly.  
Minimizing complexity and costs, 
which was initially covered by the 
specific 
of 
introducing  excessive  compliance 
costs 
tax 
for  operators  and 
administrations’,  has  become  a 
particular specific objective. 

objective 

‘risk 

Box 1 
section 2.2 

and 

Sections 4.1 
and 7 

4.  The  definition  of  the  baseline  has 
been  modified 
the  resubmitted 
in 
report and is now confusing. 

The  baseline  scenario  has  been 
amended  and  assessed  according 
to the RSB’s request. . 

Sections 5.3 
and 7 

5.  The  report  does  not  consider  sub-
options  within  the  two  polar  options 
of  extending  all  derogations  to  all 

Three  sub-options  for  option 2 
have  been  added  and  assessed 
accordingly.  

Sections 5.5 
and 7 

61 

 
versus introducing a minimal negative 
list to which the standard rate applies. 

Sub-options 
included as discarded options. 

for  option 1  are 

6. The comparison of the options does 
not  adequately  take  into  account  the 
risks  associated  to  complexity,  legal 
uncertainty  and  litigations,  business 
costs  and  tax  erosion.  It  does  not 
for  a 
provide  a  sufficient  basis 
preferred option. 

and 

modified 

The comparison of the options has 
all 
been 
objectives/risks  are  assessed  and 
compared  in  section 6.  Risks  are 
discussed  extensively  for  each 
option  and  for  the  baseline.  The 
final  conclusions  are  included  in 
section 7. 

Section 7 

Further 
adjustment requirements 

considerations 

and 

What has been done? 

Where? 

rates), 

towards 

(1) The report needs to clarify whether 
and on what grounds it can assert that 
‘the  Commission’s  policy  course  is 
now  firmly  oriented 
the 
pursuit  of  flexibility  in  setting  VAT 
rates  rather  than  harmonisation’.  It 
should  explain  how  this  is  consistent 
25/05/2016  ECOFIN 
the 
with 
conclusions 
increased 
(welcoming 
flexibility  only  on  existing  reduced 
the  09/11/2016 
and  zero 
(considering 
ECOFIN  conclusions 
that ‘further harmonisation in the area 
of  VAT 
to  cross-border 
transactions  is  needed  and  should  be 
continued  to  be  carried  out’),  the 
24/11/2016 
Resolution 
EP 
(considering that ‘a simple system for 
fewer 
VAT 
exemptions  is  necessary’)  and  the 
majority  view  of  all  stakeholders  (in 
favour  of  maintaining  the  simplicity 
of  the  VAT  system  and  limit  rate 
differences,  even  if  this  limits  the 
room  for  manoeuvre  of  Member 
States). 

demands 

relating 

which 

The  cited  sentence  has  been 
deleted and the general objectives 
have  been  amended  to  be  more 
nuanced. 

Section 5.4 

Section 4.1 

have 

2016 

The  ECOFIN  conclusions  of 
25 May 
been 
integrated,  wheras  the    ECOFIN 
conclusions  of  9 November  2016 
and the EP resolution could not be 
integrated  because  they  relate  to 
the  definitive  VAT  system  and 
VAT exemptions. 

set 

out 

Plan 

The  IA  clarifies  that  the  VAT 
the 
Action 
Commission  intention  of  granting 
more  flexibility  in  setting  VAT 
rates  to  Member  States  in  a  VAT 
taxation  at 
system  based  on 
destination  compared 
to  what 
would  have  been  required  in  a 
VAT  system  based  on  taxation  at 
origin. 

the 

introduction  of 

(2)  The  baseline  should  be  revised  to 
include 
the 
definitive  VAT  system,  based  on  the 
destination  principle.  It  cannot  be 
argued that the proposal on VAT rates 
is  not  conditional  upon  the  adoption 
on  the  definitive  VAT  system,  while 
justifying at the same time the case for 
the 
further 

flexibility 

rate 

by 

Section 5.3 

revised 

As  per  request,  the  baseline  has 
been 
the 
to 
introduction of the definitive VAT 
system. 

include 

The sentence that the proposal on 
VAT rates is not conditional upon 
the  adoption  on  the  definitive 
VAT system has been deleted. 

62 

 
of 
is 

all 
not 

The  IA  clarifies  that  a  temporary 
existing 
extension 
derogations 
deemed 
necessary  for  the  adoption  of  the 
proposal  on  the  definitive  VAT 
system,  because  the  entry  into 
force  of  new  rules  on  VAT  rates 
and  the  entry  into  force  of  the 
be 
definitive 
identical.  The  IA  also  clarifies 
that  a  temporary  extension  of  all 
existing 
the 
derogations 
absence  of  an  agreement  on  the 
VAT  rate  rules  for  a  definitive 
system,  would  de  facto  imply  the 
(unrealistic) expiry of derogations 
given  the  unanimity  requirement 
for adopting new rules. 

system  would 

in 

The specific objectives have been 
revised and assessed accordingly.  

Sections 4.1 
and 7 

establishment of the definitive regime 
based on the destination principle. As 
the 
a  ‘no-policy-change’  scenario, 
baseline  could  also 
the 
include 
continuation of the 15% minimum for 
the  standard  rate  and  the  temporary 
extension  of  all  existing  derogations 
(especially if this is deemed necessary 
for the adoption of the proposal on the 
definitive VAT system). 

the 

with 

across 

flexibility 

(3) The report has to align the specific 
objectives 
Council 
conclusions  and  make  them  more 
for 
balanced 
Member  States,  equal 
treatment, 
preservation  of  the  single  market, 
avoiding  distortions  to  competition, 
avoiding  rise  in  business  costs  and 
preserving  a  sufficient  degree  of 
harmonisation. Extending the effect of 
derogations  on  a  permanent  (rather 
than on a temporary) basis and for all 
(instead for only those Member States 
requesting  it)  has  to  be  properly 
motivated rather than considered as an 
objective in itself. 

(4) The report should better justify the 
use  of  Art 113 TFEU  as  a  legal  basis 
for  the  measures  envisaged  under  the 
proposed options. 

The explanation of the legal basis 
of  the  VAT  Directive,  which  is 
Article 113 TFEU, 
been 
amended.  

has 

Sections 1.6, 
3.1,  5.4  and 
5.5 

an 

(5) The envisaged options continue to 
be  based  on  a  ‘lowest  common 
denominator’  perspective,  with  no 
effort  to  design  other  sub-options. 
be 
Such 
approach 
reconsidered  especially 
the 
report  concludes  that  the  proposed 
options are not acceptable to Member 
States  anyway.  The 
report  must 
include  and  assess  more  (sub-options 

should 
since 

Three  sub-options  for  option 2 
have  been  added  and  assessed 
accordingly.  

Sections 5.5 
and 7 

63 

 
of 

regarding, for example, the number of 
reduced  rates  (for  instance,  limiting 
them  to  three,  as  envisaged  in  the 
VAT  rates  study)  and/or  the  type  of 
safeguards  (for  instance,  keeping  an 
average 5% minimum rate, envisaging 
different 
the 
formulations 
budgetary  safeguard  or  extending 
derogations  only  when  necessary  and 
on  a 
temporary  basis).  Option 2 
defines  the  negative  list  based  on  a 
minimalist  approach.  It  does  not 
consolidate  current  practice  like  for 
derogations  under  option 1.  Therefore 
the  report  has  to  consider  possible 
extensions of the negative list as sub-
options to option 2. 

revenues  depend  on 

(6) The report should elaborate on the 
risk  analysis.  Most  of  the  potential 
negative impacts on the single market 
(distortions  of  competition,  increased 
complexity  and  business  costs,  legal 
uncertainty  and  litigations),  or  on 
budget 
the 
potential  actions  Member  State  are 
likely  to  take  once  they  have  more 
freedom  to  set  VAT  rates.  The  report 
should  present  a  more  thorough  risk 
analysis,  assessing  in  a  systematic 
way  the  likelihood  of  the  identified 
risks and the proposed risk mitigating 
measures.  The  comparison  of 
the 
options  should  better  reflect  these 
dimensions.  The  report  should  be 
comprehensive  on  costs  and  refer  to 
the  administrative  costs  of  setting  up 
the 
the  web  portal 
implementation of options. 

support 

to 

In  order 

(7) 
facilitate  sound 
to 
decision-making by the political level, 
the  different  options  should  be  more 
rigorously  and  transparently  assessed. 
In  case  of  a  preferred  option,  the 
choice  should  also  clearly  distinguish 
and  weigh  out  aspects  related  to  its 
its  political 
technical  pertinence, 
the 
feasibility  and 
integrity of the VAT system. 

its  respect  of 

A risk  analysis has  been included 
for  all  options,  as  well  as  a 
detailed overview.  

Section 7 

Th comparison of the options and 
the  preferred 
the  analysis  of 
options 
revised 
been 
accordingly.  

have 

Sections 7.4, 
7.5 and 9.9 

64 

 
 
9.2. 

Stakeholder consultation 

Consultation strategy 

The  approach  taken  to  consult  stakeholders  about  this  initiative  centred  on  three 
initiatives: an open public consultation, a consultation of Member States in the Group on 
the  Future  of  VAT  (a  forum  where  Member  States’  administrations  provide  the 
Commission  with  technical  advice  on  legislative  initiatives  in  the  field  of  VAT)  and  a 
Eurobarometer survey.  

9.2.1.  Open Public Consultation 

A public consultation on the reform of VAT rates was carried out from 21 December 2016 
until 21 March 2017. The goal of the consultation was to gather the opinions of different 
groups of stakeholders regarding the reform envisaged by the Commission and the way it 
should be achieved. The choice of the open public consultation was driven by the fact that 
a  wide  variety  of  stakeholders  are  affected  by  this  tax,  namely  tax  administrations, 
businesses,  non-profit  organisations  and  citizens,  tax  practitioners,  associations,  etc.  The 
consultation also targeted academics and tax experts.  

A  questionnaire  was  made  available  to  stakeholders  on  the  EU  Survey  website  asking 
them their opinion on the current system as well as on the objectives, the priorities and the 
means the Commission should pursue in its proposal. 

The questionnaire was available in English, but respondents could attach detailed opinions 
in  their  national  language.  327  replies  were  received  and  60  position  papers  were 
submitted. The strongest share of replies (38%) represented sectoral associations, 26% of 
responses came from businesses, while less than 10% of the respondents (in total 28) were 
private persons. In terms of geographical coverage, 62% of the responses from businesses 
originated  from  Sweden  and  Bulgaria,  which  needs  to  be  taken  into  account  when 
interpreting the survey results for EU businesses. 

The  questionnaire  was  divided  in  three  separate  parts  to  target  the  different  groups  of 
respondents:  one  with  questions  for  businesses,  one  with  questions  for  tax  experts  and 
associations and finally one with questions to all stakeholders.  

Opinions  differed  as  to  the  priorities  for  reform:  52%  of  all  respondents  indicated 
simplicity of the VAT system, whereas 29% indicated flexibility for Member States. 19% 
of the respondents had no opinion.  

However,  only  14%  of  the  respondents  wanted  to  keep  the  current  system,  indicating  a 
need  for  reform.  With  regard  to  specific  reform  scenarios  46%  of  the  respondents 
preferred  option 1  and  22%  of  the  respondents  preferred  option 2,  while  17%  of  the 
respondents had no opinion. 

General remarks 

The  majority  of  questions  were  only  asked  to  specific  groups  of  respondents;  only 
4 questions  were  asked  to  all  participants.  For  example,  businesses  were  mainly  asked 
about their practical experience with the VAT system. Being the collector and main target 
of the VAT rules, the questions focused on their experiences, the problems they encounter 
in their daily activities, the constraints the VAT system puts on them, its flaws and what 
could  be  improved  or  changed  to  make  the  system  more  business-friendly.  Tax 

65 

 
administrations  from  two  Member  States  replied  using  the  EU  Survey  tool  and  one  by 
email. 

Part 1: Questions asked to all stakeholders  

When asked about the priorities of a reform, 52% of the respondents indicated simplicity 
of the VAT system, 29% indicated flexibility for Member States and 19% had no opinion.  

These answers should be analysed according to the different groups of respondents. Too 
few private citizens participated to analyse them as a separate group; thus, only businesses 
and associations can be analysed separately. Similarly to the results of all respondents, the 
majority of businesses opted for simplicity, whereas 34% thought that more flexibility for 
Member States should be a priority. Associations replied similarly to businesses.  

Of  particular  interest  is  the  submission  of  a  stakeholder  that  referred  to  the  2011  Green 
Paper (COM(2011) 851 final), which called for a VAT system characterised, inter alia, by 
user-friendliness  i.e.  a  single  set  of  clear  and  simple  VAT  rules.  The  stakeholder  in 
question suggested that, for general consumption goods and services, the rules should be 
the same for all Member States. Leeway could be granted to Member States ‘but only in 
specific sectors, which regard solely the internal market (the so-called ‘short leash’)’. 

With  regard  to  a  specific  element  of  flexibility  for  Member  States,  the  number  of  rates, 
52% of all participants did not want to give more flexibility to Member States, whilst 26% 
would  allow  Member  States  an  unlimited  number  of  rates  and  23%  had  no  opinion. 
Businesses and associations answered similarly. 

With  regard  to  the  minimum  of  15%  for  the  standard  VAT  rate,  again  52%  of  the 
respondents suggested to keep this minimum. 32% had no opinion and 16% were against 
keeping a minimum. Only very few associations want to abolish the minimum.  

A stakeholder  considers that an option for a higher VAT rate should be included. In his 
view, this would: 

–  create the opportunity to overcome (at least partly) the often criticized regressive effect 

of VAT; 

–  create  more  flexibility  to  impose  a  higher  VAT  rate  to  demeritorious  goods,  such  as 

goods which may harm health or the environment; and 

–  allow compensating for fiscal losses generated by the application of reduced rates. 

With  regard  to  specific  reform  scenarios,  14%  wanted  to  keep  the  current  system.  46% 
preferred  option 1  and  22%  preferred  option 2.  17%  of  the  respondents  had  no  opinion. 
Businesses’  support  for  option 2  was  stronger  compared  to  other  stakeholders  whereas 
associations demonstrated preference for option 1.  

It was suggested that the Commission check: 

- as regards the goods and services already subject to a reduced rate, whether economic, 
social  or  technical  reasons  which  justified  its  application  are  still  valid  and  whether  the 
related implementation ways can be improved. In particular, ‘reduced rates justified in the 

66 

 
 
past  can  have  distorting  effects  as,  meanwhile,  the  economic,  commercial  and  legal 
context has changed’; 

- as regards the items for which the application of a reduced VAT rate will be requested, 
whether  there  are  economic,  social  or  technical  reasons  justifying  their  inclusion  among 
the items subject to a reduced rate.  

22%  of  all  respondents  that  suggested  abolishing  the  list  of  products  subject  to  reduced 
rates  were  asked  about  general  safeguards  to  avoid  tax  competition  between  Member 
States. 

Multiple answers were possible, but no clear direction with regard to safeguards could be 
obtained  from  the  answers.  15%  said  that  no  safeguards  are  necessary  and  the  preferred 
safeguards were ‘basic rules not further specified’ (45% of the respondents) and ‘Member 
States informing the Commission about their plans’ (41% of the respondents). 

Only  7  out  of  the  73  respondents  specified  their  answer,  but  only  two  tried  to  specify 
safeguards.  These  two  respondents  provided  the  same  answer  ‘services  benefiting  from 
reduced rates must: (1) be labour-intensive; (2) largely be provided directly or indirectly to 
final  consumers;  (3)  be  mainly  local  and  not  likely  to  cause  distortion  of  competition’. 
These  principles  were  in  fact  the  principle  on  which  an  extension  of  Annex III  with 
labour-intensive services in 2009 was agreed and no safeguards with regard to goods were 
mentioned by these two respondents.  

All respondents were asked how information on VAT rates should be provided. Multiple 
answers were possible. It is noteworthy that most respondents did not provide an answer. 
15% mentioned a European database accessible to everyone. It was further suggested that 
the publication of VAT rates in force be managed at EU level and not at national level.  

Part 2: General analysis 

The stakeholder  categories targeted were  as  follows:  business; tax expert, tax advisor  or 
tax  practitioner;  trade/business/professional  association;  academic  institution,  think-tank; 
non-governmental  organisation,  consumer  association;  national  tax  administration;  other 
public  authority,  public  institution,  including  national  or  regional  parliaments;  private 
citizen; other.  

Less than 10% of the respondents (in total 28) were private persons and nearly 40% were 
associations. Nearly 20% of the respondents are based in Belgium. This reflects the large 
share  of  associations  participating  in  the  consultation.  There  was  a  surprisingly  high 
number  from  Bulgaria  and  Sweden;  businesses  from  the  two  countries  are  even  more 
overrepresented.  

Part 3: Analysis for businesses only  

62% of the answers come from Sweden and Bulgaria, so for this entire section the answer 
cannot be generalised. They could only reflect the situation in these Member States.  

42% of the respondent businesses were small businesses with 1-9 employees, while 35% 
were  medium-sized  businesses,  namely  businesses  with  10-249  employees.  Of  big 
businesses (with 250 or more employees), only 22% responded. Out of the businesses that 
responded, 47% sell their goods only domestically while 31% engage in cross-border sales 

67 

 
to  5  or  more  Member  States;  17.5%  are  involved  in  cross-border  transactions  to  2-4 
Member States. 

19% of business with cross-border activities consider that rates have a major influence on 
the purchasing behaviour of their cross-border customers, whereas 12% consider that they 
are only a marginal factor and 12% that they are not important. Surprisingly, half of the 
businesses  did  not  answer  this  question.  When  asked  about  the  impact  of  complexity  of 
VAT rates on cross-border sales, 48% of businesses indicated that they never considered 
potential  difficulties  with  VAT  rates  to  be  important.  A  rather  high  percentage  (almost 
30%) did not express an opinion, while only 16.5% feared difficulties due to VAT rates - 
but this did not prevent them from pursuing sales opportuinities in other Member States. 

Part 4: Mixed groups 

49%  of  stakeholder experts  in  VAT,  associations  and  citizens  consider  that  the  range  of 
goods and services listed in Annex III of the VAT Directive is not adequate. Examples of 
the  goods/services  that  these  stakeholders  suggested  to  include  in  Annex III  include  e-
publications, basic energy provisions, eye care, horses, children footwear/clothes/nappies, 
driving  licences,  digital  media,  housing,  landscape  services,  renovation  services,  female 
hygiene  products,  beach 
travel  agency  services,  ecolabel  products, 
accommodation rents, floricultural products, cultural goods and services. 

facilities, 

As  to  the  question  on  whether  granting  additional  flexibility  to  Member  States  would 
create  new  distortions  of  competition,  the  views  are  divided  with  almost  identical 
percentages. Hence we cannot draw a clear conclusion on this matter. 

Businesses, tax experts and associations have signalled a number of cases of distortions of 
competition.  In  several  cases,  however,  such  distortions  are  not  substantiated.  The 
stakeholders often consider that any price difference between similar products/services is 
equal  to  a  distortion  of  competition  (e.g.  where  repair  and  maintenance  work  to  private 
dwellings  is  subject  to  a  standard  rate  whereas  construction  work  for  new  buildings  is 
zero-rated). This is not always the case.  

The issue of public bodies was among the distortions signalled. It was pointed out that the 
current  VAT  system  allows  for  an  artificial  distinction  between  public  and  private 
providers of waste services, which leads to a distorted playing field at the expense of EU 
consumers. It was maintained, in particular, that Article 13 of the VAT Directive is being 
interpreted  in  different  ways  by  Member  States,  which  as  a  consequence  treat  certain 
taxable services as non-taxable, even in markets that are open to competition.  

The stakeholder that raised the issue suggests that waste management be included in the 
list of taxable activities (Annex I of the VAT Directive), which was created explicitly with 
the  goal  to  avoid  distortions  of  competition  between  public  and  private  bodies.  In  his 
view,  the  fact  that  waste  management  is  not  included  in  the  list  is  all  the  more 
problematic,  given  that  waste  management  is  an  activity  in  which  the  private  sector  is 
actively  involved  and  which  is  capital  (requires  huge  investments)  and  labour-intensive, 
thus rendering the sector very sensitive to VAT.  

The stakeholder at issue maintains that on the basis of the current wording of Article 13, 
‘it could be argued that, if waste management is organised as a public service task that 
public bodies have to perform under public law (i.e. waste management is an activity ‘in 
which  they  engage  as  public  authorities’),  there  is  no  market  since  private  service 
providers  do  not  perform  the  same  activity  as  they  are  not  obliged  to  perform  waste 

68 

 
management  services  (i.e.  the  public  service  obligation  is  part  of  the  activity  ‘waste 
management’  so  that  private  service  providers  cannot  perform  the  same  activity)  and 
therefore there is no competition which could be distorted either’. It is argued that such a 
narrow interpretation of Article 13 neglects the fact that public bodies could  – and, with 
regard  to  the  positive  effect  on  the  efficiency  of  public  services,  should  –  outsource 
services  to  private  service  providers.  It  also  allows  Member  States  to  exclude  certain 
activities / services from competition and the relevant EU law simply by classifying them 
as  ‘public  service  tasks’/responsibilities  of  public  administration.  According  to  the 
stakeholder at issue, it should be made clear that Article 13 also covers the competition for 
the market and not only the competition in the market.  

Another  distortion  signalled  by  a  few  stakeholders  concerns  passenger  transport.  It  was 
maintained  that  the  current  VAT  system,  through  voluntary  derogations,  distorts 
competition within the transport sector. More specifically, it was mentioned that while in 
many cases bus and rail are subject to VAT, aviation and maritime transport are not. In the 
stakeholders’ view, ‘this means that the most carbon intensive mode, aviation has prices 
which  are  artificially  lower,  creating  distortions  between  rail/bus  and  aviation/ferry’. 
Depending on the interests of their sector, stakeholders suggest either to implement VAT 
on all forms of passenger transport or to exempt all cross-border passenger transport. 

Further  distortions  were  signalled  in  the  fields  of  construction,  visual  health  services, 
smoking  cessation  products,  renewable  equipment  for  the  direct  production  of  energy, 
medical spa treatment, etc.  

As to the number of VAT rates, 52% of the respondents consider that there is no need for 
more rates, while 26% would like to allow Member States an unlimited number of rates. 
Half of the respondents suggest to maintain the current minimum standard rate of 15% and 
the minimum reduced rate of 5%. 

In  terms  of  the  position  papers  submitted,  the  vast  majority  advocate  the  application  of 
reduced/zero  rates  to  the  products/services  of  direct  interest  to  the  respondent  or  the 
application of a standard rate to their competitors.  

Conclusion 

The opinions of the respondents vary widely; hence there is no clear consensus on any of 
the issues. Given that the responses are sometimes contradictory, it may be assumed that a 
number of respondents lack knowledge of the VAT system or certain aspects thereof.  

What  can  be  noted,  however,  is  that  the  respondents  are  in  principle  satisfied  with  the 
current number of VAT rates as well as with the current minimum standard and reduced 
rate. In contrast, only 14% of the respondents want to keep the current VAT rates system, 
indicating a need for reform. Respondents consider that the scope of the list of goods and 
services  eligible  for  reduced  rates  should  be  extended  to  include  more  products  and 
services. As to the reform options, the respondents indicated a preference for simplicity of 
the VAT system and a slight preference for option 1. 

9.2.2.  Consultation of the Group on the Future of VAT (GFV) 

The 18th GFV meeting, which took place on 28 April 2017, served as a consultation with 
Member States on the initiative at issue. The Member State delegates were asked to take a 
position  on  the  technical  paper  No 057  Technical  options  for  the  2017  Commission 

69 

 
proposal  on  ‘Reform  of  rules  on  VAT  rates’  (section 9.6)  prepared  by  the  Commission 
services.  

The Commission services stressed that the purpose of the working document is to consult 
Member  States’  tax  administrations  on  a  number  of  technical  elements  related  to  the 
proposal.  It  was  explained  that,  in  accordance  with  the  Commission’s  Action  Plan  on 
VAT of 7 April 2016, two reform options are put forward. They aim to modernise rules on 
VAT rates to bring them fully in line with a destination-based VAT system and to allow 
Member  States  more  flexibility  in  setting  VAT  rates.  The  first  option  would  result  in  a 
proposal to extend and regularly review Annex III to the VAT Directive (the list of goods 
and  services  eligible  for  reduced  rates),  whereas  the  second  option  would  result  in  an 
outright abolition of Annex III. 

The  floor  was  subsequently  opened  for  the  delegates  to  state  their  position  on  the 
questions  posed  in  the working  document. Certain  delegations requested to  be given the 
possibility  to  submit  their  position  in  written  form  at  a  later  date.  The  Commission 
accepted  the  request  and  set  a  deadline  within  which  written  comments  should  be 
submitted.  Three  Member  States  submitted  written  comments.  The  questions  and  the 
views expressed by the delegates, during the discussion and in writing, were as follows: 

1. What categories of Annex III require adaptation, in the view of Member States? What 
criteria should be used to identify priorities? 

The  majority  of  Member  States  expressed  preference  for  option 1  and  agreed  with  a 
regular  update  of  Annex III.  Examples  of  Annex III  categories  which  Member  States 
would  like  to  see  updated  or  clarified  include  categories 1,  4,  7,  8,  9,  10,  11  and  13. 
Member States suggested a number of goods/services to be included in Annex III, notably 
international transport by train and boat, telephony services, laptops, motorcycle helmets, 
horses,  children’s  goods  such  as  clothes,  footwear,  etc.,  Internet  access  services,  and 
sanitary protection products.  

Option 2 was discarded by most delegations. Member States consider that full flexibility 
in  the  determination  of  VAT  rates  may  result  in  many  risks,  the  major  ones  being  a 
significant  complication  in  the  implementation  and  monitoring  of  reduced  rates  by 
business  and  tax  administrations,  a  significant  increase  in  the  political  pressure  to 
introduce  new  reduced  rates,  the  unequal  treatment  of  similar  supplies  of  goods  and 
services  in  the  single  market,  and  the  reduction  of  the  Member  States’  budget  revenues 
from VAT. Moreover, it was sustained that from a technical and political point of view, it 
would be very difficult to negotiate a negative list of supplies that would not to be taxed at 
a reduced rate.  

Almost one third of the Member States were satisfied with the status quo. If required, they 
would be willing to accept option 1 but are against full subsidiarity and thus wish to retain 
a certain degree of harmonisation.  

A minority of Member States expressed opposition to any adaptation of Annex III on the 
basis that this would (a) be inconsistent with the objective of harmonisation, (b) render the 
VAT rates system more complex both for administrations and businesses, and (c) make it 
politically  difficult  for  Member  States  to  take  goods/services  out  of  the  extension in  the 
future,  by  subjecting  them  to  the  standard  rate.  It  was  argued  that,  according  to  studies, 
reduced  rates  are  ineffective  as  a  tool  to  lighten  consumers'  tax  burden.  The  Member 
States in question expressed worries that the initiative may be detrimental to cross-border 

70 

 
trade  and  ultimately  the  internal  market.  Equally  important  for  them  seems  to  be  the 
question  of budget.  One delegation took  the view that  the tax base  should  be broadened 
instead. 

A couple of Member States expressed preference for greater flexibility – but not in cases 
of  distortion  of  competition.  They  would  not  like  to  see  more  restrictions  imposed  on 
Member States.  

A few Member States sustained that the issue is political and thus it is premature to hold a 
discussion at this point; decisions should be taken at Council level. Six delegations did not 
articulate an opinion but stated that they would submit their position in writing. 

As  regards  the  criteria  to  be  used  for  the  extension  of  the  list,  most  Member  States 
consider  that  technological,  economic  and  social  developments  are  essential,  whereas 
environmental and health factors were also mentioned. One delegation maintains that no 
specific criteria should be used when identifying priorities; Annex III should be adjusted 
when needed, for instance when problems with delimitation occur. 

There is broad agreement that clarification of the scope of the categories in Annex III is 
necessary  to  address  ambiguous  terminology,  with  a  thin  minority  of  delegations 
considering that only clarification is needed, not extension.  

2.  Which  arrangements  would  the  Member  States  favour  for  the  updating  of  Annex III? 
How  should  the  process  be  defined?  At  what  intervals  should  the  regular  review  of 
Annex III take place? 

Less than half of the delegations responded to the question. Most of those considered that 
the update of Annex III should be conducted through the standard procedure, which is in 
the Council, upon consultation with the GFV. Some, however, believed that it may not be 
worth involving the GFV, while others thought that the current Council procedure is too 
complex  and  time-consuming  and  should  be  simplified.  Other  suggestions  included  the 
Working  Party  on  tax  questions,  an  additional  Working  Group  to  be  created  and  a 
comitology procedure. 

As  to  the  frequency  of  the  regular  review  of  Annex III,  only  one  suggestion  was  put 
forward, according to which the review of Annex III should take place at regular intervals 
of  3-5 years.  A  further  suggestion  put  forward  in  a  written  contribution,  which  was 
received by the Commission services at a later stage, agreed with a 5-year regular interval. 
The  update  could  take  place  by  means  of  either  a  Directive  or  an  Implementing 
Regulation. 

3.  Do  the  Member  States  desire  more  flexibility  concerning  the  number  of  VAT  rates? 
What should be the maximum number of VAT rates allowed? 

Delegations seemed to be divided on this issue. 

Half  of  them  opted  for  maintaining  the  status  quo,  which  is  a  maximum  of  5 rates,  and 
suggested that each Member State keep their current rate structure. A delegation pointed 
out  that  the  number  of  categories  to  which  the  reduced  rates  may  apply  is  equally 
important.  

The  other  half  expressed  a  preference  for  fewer  rates,  reaching  a  broad  consensus  for  a 
maximum  of  3 rates,  which  would  render  the  VAT  system  simpler.  A  few  delegations 

71 

 
proposed to abolish zero rates, while another pointed out that zero rates do not constitute 
rates from a legal point of view and thus should not be considered as such. 

One delegation submitted two specific scenarios regarding the number and level of rates. 
These are as follows: 

(1)  Maintaining the existing derogations for exemption with a right of deduction at the 
preceding stage outside Annex III, taking into account that the reduced rate cannot 
be  0%,  and  review  Annex III  in  relation  to  which  Member  States  will  have  the 
right to apply a standard VAT rate combined with two reduced rates of at least 5% 

or 

(2) 

Application of the standard rate combined with two reduced rates (of at least 5% 
but no more than the permitted minimum rate of the standard rate) for the supplies 
of  goods  and  services  listed  in  Annex III  of  the  VAT  Directive  and  an  explicit 
right of application of one derogation per Member State which may be in the form 
of an exemption with a right of deduction at the preceding stage. 

The same delegation suggested to insert an explicit provision in the VAT Directive which 
would  allow  for  an  exemption  with  a  right  of  deduction  at  the  preceding  stage  of  the 
supply  of  international  passenger  transport,  as  such  exemption  is  currently  applied  by  a 
large number of Member States (thirteen). 

4. What are Member States’ views on the need for a minimum rate level, and what should 
this level be? 

Most  delegations  favoured  retaining  minimum  rate  levels,  arguing  that  their  potential 
abolishment would result in less harmonisation and increased complexity for businesses. 
The majority of delegations considered the current thresholds of 15% for the standard rate 
and 5% for the reduced rate to be satisfactory.  

Amongst the Member States which considered that the 15% threshold for the standard rate 
is  adequate,  some  would  not  mind  revising  it  –  on  condition  that  it  be  kept  to  a  similar 
level –, whereas others did not agree with a possible increase.  

Only  one  delegation  suggested  to  increase  the  standard  VAT  rate  to  around  17%-18%, 
while another took the view that the standard rate should be at least twice as high as the 
reduced rate.  

As to the minimum threshold for the reduced rate, one delegation was in favour of it being 
slightly  reduced.  Another  delegation  considered  that  the  threshold  would  depend  on 
whether the existing derogations remain or are phased out. A third one argued that, if it is 
decided to limit the number of rates, no restrictions should be imposed as to the rate level.  

In  terms  of  super-reduced  and  zero  rates,  the  discussion  was  inconclusive.  Certain 
Member  States  supported  zero  and  super-reduced  rates,  while  others  were  against 
reducing rates to 0% in order to limit the risk of revenue erosion. 

A delegation pointed out that, even under the current system, there is no equality amongst 
Member States; to illustrate this view, it provided the hypothetical example of a Member 
State  with  30%  standard  rate  and  20%  reduced  rate  in  comparison  to  another  with  20% 
standard rate and 10% reduced rate. 

72 

 
5. Do Member States favour extending derogations to all Member States or phasing them out? 
Should  the  derogations  be  introduced  in  a  new  Annex III,  which  would  include  zero  and 
super-reduced rates? 

A clear majority of the delegations which expressed a position were in favour of extending 
derogations to all Member States. As to the way this should be done, some were flexible, 
some suggested to include the derogations in a special Annex III, some proposed a review 
of Annex X with a view of moving certain items contained therein to Annex III, but most 
did not provide comments.  

A  minority  opposed  the  extension  of  derogations  to  all  Member  States,  considering  that 
such  a  move  would  jeopardise  the  existing  harmonisation  level  and  would  create 
significant  political  pressure  for  Member  States’  governments.  It  is  the  same  Member 
States which maintained reservations about the use of zero rates and super-reduced rates. 
Two delegations suggested phasing out derogations. 

Member  States  underlined  that  the  issue  of  derogations  requires  profound  consideration 
before any change. 

6. Do Member States favour implementation on the same date of all changes to rate rules, 
including derogations, or should there be different times for entry into force? If so, what 
elements should enter into force later? 

Roughly one third of the Member States considered that the implementation of changes to 
VAT rate rules should be connected with the definitive system (although one delegation 
pointed  out  that  reference  should  be  made  not  to  the  definitive  system  but  to  the 
destination  principle).  In  contrast,  a  few  Member  States  considered  that  such  changes 
should  be  implemented  as  soon  as  possible  and  in  any  case  not  at  the  same  time  as  the 
entry into force of the definitive system. 

With  regard  to  the  timing  of  the  implementation,  the  delegations  were  divided.  Some 
thought that the changes should take place at the same time, whereas some would like to 
see them taking place gradually. The latter thought that modification of Annex III may be 
possible  rapidly  as  regards  goods/services  to  which  the  destination  principle  already 
applies  and  in  any  case  before  the  definitive  system  is  put  in  place.  A  few  delegations 
considered  that  the  timing  will  depend  on  the  option  chosen  as  well  as  on  the  decision 
concerning derogations; they maintained that it is not appropriate to set any timeframe at 
this point. In a written submission sent to the Commission services following the meeting, 
a Member State suggested that the application of the minimum standard rate be extended 
after 1 January 2018, so as not to allow a period during which there is no requirement for 
a minimum standard rate. 

7. Would Member States favour the use of the Combined Nomenclature to define Annex III 
categories? 

While Member States broadly agreed that the use of the CN could mitigate the complexity 
of the VAT rates system, experience at national level has demonstrated that this may entail 
a  number  of  problems.  It  was  stressed  that,  being  a  customs  instrument,  the  CN  has  a 
different aim from than that of a VAT instrument. It covers only goods whereas Annex III 
contains not only goods but also services. Moreover, there are nuances in relation to some 
Annex III  items  e.g.  pharmaceutical  products  ‘of  a  kind  normally  used  for  health  care’, 
which cannot be covered by the CN. Furthermore, the CN contains categories for ‘other’ 
goods. It is unclear what such categories cover. Lastly, given that the CN changes and is 

73 

 
restructured frequently, uncertainty may arise as to the rates of new products added to the 
CN. In sum, the use of the CN may not be as straightforward as it seems.  

The  Commission  services  concluded  that  while  no  consensus  was  reached  on  several 
important  questions,  the  discussion  provided  useful  insights,  including  the  openness 
expressed by some Member States on exploring whether solutions can be found to make 
better use of the possibility to link Annex III to the Combined Nomenclature.  

9.2.3.  Consultation  of  Member  States  concerning  the  existence  of  distortions  stemming 

from VAT rate differences  

Member  States’  tax  administrations  were  consulted  during  the  preparation  of  the  2017 
VAT rates study with regard to the existence of impacts or distortions on their domestic 
market  stemming  from  VAT  rate  differences  with  other  Member  States.  The  following 
table gives an overview of their replies.  

Table 8:  Summary  of  replies  from  tax  administrations  on  the  impact  of  VAT  rate 

differences 

Country 

Cross-border 
shopping 

Belgium 

No data 

Distance sales 

Farmers 

Auction 

No significant impact 
noted 

No data 

No data 

Croatia 

No data 

No data 

Not applicable 

No data 

Cyprus 

Not aware of VAT effect. 
Prohibitive cost to 
access local market. 

Limited impact. Any 
effect likely not to be 
driven by VAT rates. 

No data. Impact 
likely to be 
limited in any 
case. 

Auction industry 
negligible. 
Second-hand car 
market 
significant, but 
cross-border 
impacts are 
limited. 

Czech 
Republic 

No indication of VAT 
effect 

No indication of VAT 
effect 

Not applicable 

No data 

Estonia 

Finland 

Significant level of 
cross-border shopping 
between Finland and 
Estonia as well as 
between Estonia and 
Latvia - but mostly 
related to excise goods. 

No indication of 
significant level of 
distance selling to 
Estonia below the 
threshold, though risk 
analysis focused on 
larger vendors. 

Not aware of VAT effect 
at present. Some cross-
border shopping 
between Finland and 
Sweden or Estonia. 
Potential for growth in 
cross-border shopping in 
case of more 
differentiated VAT rates.  

Hungary 

No relevant data. VAT 
one element of price; 
currency effects more 
significant. Significant 
number of high-value 
cars noted in Hungary 
with non-Hungarian 
number plates. 

Significant levels of 
distance sales into 
Finland involving 
suppliers in other 
Member States. Approx. 
25-30% of distance 
sellers to Finland are not 
registered for VAT even 
if the threshold for VAT 
registration exceeded. 
This could be motivated 
by differences in rates. 

Significant issues with 
non-compliance noted, 
and studies conducted. 
VAT differences are a 
major factor in price. 
Goods involved include 
pet food, electronic 
devices, TV-s, laptops, 
games, toys, sporting 

74 

Not applicable 

Auction industry 
negligible 

No indication of 
issue 

No indication of 
issue 

No data 

Issues with 
inappropriate use 
of second-hand 
scheme for cars, 
clothes, etc. 

 
Country 

Cross-border 
shopping 

Distance sales 

Farmers 

Auction 

Ireland 

Perception of VAT 
differences between 
UK/Ireland has led to 
cross-border shopping, 
(mainly groceries, 
alcohol, clothing and 
durables) though price 
mark-ups and exchange 
differences play a more 
significant role. 

Italy 

Aware of some cross-
border shopping but 
reliable data are lacking. 

Latvia 

Not aware of any issue. 

Lithuania 

Luxem-
bourg 

No data. Anecdotal 
evidence of Lithuanians 
travelling to Poland to 
shop. 

Indirect tax authorities 
cannot distinguish 
between supplies made 
to residents and non-
residents. Lower VAT 
rates generally offset by 
higher costs related to 
e.g. real estate and 
personnel costs. 

Malta 

No issues due to 
location. 

Nether-
lands 

Some cross-border 
shopping noted, with 
products including 
coffee, tobacco, alcohol, 
diesel and LPG. Not 
aware of significant VAT-
related effect. 

equipment, sporting 
clothes, perfumes, etc. 

Significant level of 
purchases into Ireland 
from UK. Wide range of 
measures used to 
monitor internet retail 
activity directed at 
customers in Ireland. 
Focus on prohibited 
goods, high value 
imports, and high duty 
goods such as tobacco 
and alcohol. 

No data currently, but 
investigating ways of 
improving monitoring in 
future. 

Aware of significant 
amount of distance 
sales, but detailed data 
lacking. VAT not 
considered a significant 
factor. 

Not aware of any issue. 

Issues noted 
with farming 
inputs that are 
zero rated in the 
UK for VAT 
purposes, such 
as live animals. 
No systematic 
data compiled. 

Significant issues 
noted with 
second-hand 
vehicle imports, 
(fraudulent or 
incorrect VAT 
documentation, 
resulting in VAT 
qualifying 
imports being 
treated as 
margin vehicles); 
missing trader 
fraud. 

No data 

No data 

Not aware of any 
issue. 

Not aware of any 
issue. 

Not aware of any 
issue. 

Not aware of any 
issue. 

No data 

Not aware of any 
issue. 

Not aware of any 
issue. 

No data. However, 
aware of increased 
levels of ecommerce. 
Overseas vendors likely 
due to market 
competition and 
availability of product, 
as well as convenience. 

Lack of data, but known 
issues particularly where 
some products available 
at reduced rates 
elsewhere (e.g. pet 
food). 

Not applicable. 

Auction industry 
negligible. 

Not aware of any 
issue. 

Not aware of any 
current issue. 
Problems noted 
between 2011 
and 2012 due to 
relatively high 
rate of VAT on 
import of 
artworks into 
Netherlands. 

Poland 

No data 

No data 

No data 

No data 

Slovenia 

Significant level of 
inbound cross-border 
shopping, due to lower 
prices (particularly for 
services). 

No significant impact 
noted 

Not aware of any 
issue. 

Not aware of any 
issue. 

UK 

No data; impact 
believed to be low due 

No systematic data. 
Anecdotally there are 

Not aware of any 
issue. 

Not aware of any 
issue. 

75 

 
Country 

Cross-border 
shopping 

to limited land borders. 

Source: 2017 VAT rates study 

Distance sales 

Farmers 

Auction 

significant levels of 
distance sales into and 
out of the UK. 

9.2.4.  Consultation by means of the Eurobarometer  

A  Eurobarometer  survey80  was  commissioned  by  the  Commission  to  investigate  the 
knowledge  that  Europeans  have  of  VAT  levels  in  their  country  and  to  assess  the 
importance  citizens  attach  to  VAT  as  a  source  of  public  revenue.  It  explored  their 
awareness of reduced rates and perceptions of how these may impact the national public 
budget. It also looked at cross–border purchasing behaviour within the EU, with respect to 
both goods and services bought over the Internet and those purchased while visiting other 
EU  Member  States.  This  survey  was  carried  out  by  TNS  Opinion  &  Social  in  the 
28 Member  States  between  the 11 and 20 October 2014. Some  27 868 respondents from 
different social and demographic groups were interviewed face-to-face for its purposes.  

A summary of the results is provided below. 

Two-thirds (65%) of European citizens were able to correctly cite their national standard 
VAT  rate,  while  35%  either  gave  a  wrong  answer  or  were  unable  to  answer.  With  the 
exception of Finland (49%), the UK (47%), France (41%) and Ireland (31%), a majority of 
respondents  in  all  Member  States  were  able  to  correctly  state  the  standard  VAT  rate  in 
their country. 

More than eight in ten (84%) European citizens thought that VAT is an important revenue 
source in their country. This opinion was shared by at least 72% of respondents in every 
Member  State.  While  the  majority  thought  VAT  is  an  important  revenue  source,  nearly 
half of respondents (48%) also believed that they pay a higher rate than in other Member 
States, while 25% thought it is about the same and just 10% thought it is lower. 

Another  key  element  of  this  survey  was  to  measure  the  awareness  of  reduced  rates  and 
perceptions of how these may impact the national public budget. 

Once again, a majority of European citizens (61%) were aware that reduced rates of VAT 
are  applied  in  all  Member  States  including  in  their  country  to  a  number  of  goods  and 
services, while just over a third (36%) were unaware of these different VAT rates. When 
asked about the impact of reduced VAT rates on the national public budget, a majority of 
EU  citizens  (56%)  thought  that  the  application  of  reduced  VAT  rates  leads  to  a  ‘very 
important’ or ‘fairly important’ reduction in revenue. 

After being provided with a series of four statements relating to reduced VAT rates, this 
survey  found  that  more  than  four  in  ten  Europeans  (43%)  were  in  favour  of  abolishing 
reduced rates and replacing them with different alternatives, while slightly less than four 
in  ten  (39%)  thought  that  reduced  VAT  rates  should  continue  unchanged.  The  most 
chosen alternative was lowering the standard VAT rate on all goods and services (24%), 

80  http://ec.europa.eu/commfrontoffice/publicopinion/index.cfm/Survey/getSurveyDetail/yearFrom/ 

1974/yearTo/2015/surveyKy/2024 

76 

 
 
                                                 
which  was  followed  by  a  system  where  only  the  poorer  households  receive  an  annual 
fixed  cash  allowance  (10%)  and  finally  a  system  where  every  household  receives  an 
annual fixed cash allowance (9%). It is worth noting that just under a fifth of respondents 
(18%) did not know or understand enough to give their opinion about these alternatives to 
reduced VAT rates. 

The  survey  asked  respondents  about  their  cross-border  purchase  behaviour  for  private 
purposes,  both  via  the  Internet  (online  shopping)  and  on  trips  to  other  Member  States. 
Three  in  ten  of  respondents  (30%)  had  purchased  goods  or  services  in  another  EU 
Member  State  in  the  last  12 months,  close  to  the  29%  who  had  done  so  in  the  previous 
survey conducted in 2012. 

Over half of European citizens (56%) who use the Internet had made online purchases of 
goods  and  services  from  sellers  based  in  their  own  country  in  the  last  12 months,  an 
increase  of  eight  percentage  points  since  2012.  Under  a  fifth  or  respondents  (19%)  had 
made purchases from sellers based in another EU Member State (+4 pp from 2012). 

Around a fifth of European citizens (22%, -2 pp since 2012) had made purchases of goods 
and  services  for  private  purposes  when  visiting  other  countries,  either  during  a  business 
trip or holiday or when making a trip primarily to purchase goods or services. 

The reasons why European citizens had chosen to purchase goods or services from another 
country  were  also  explored.  The  most  frequently  mentioned  reason  was  the  lower  price 
(57%), followed by greater choice (30%) and better quality (18%).  

9.3.  Who is affected by the initiative and how?  

The Commission intends to grant flexibility to Member States by the legislative initiative. 
Thus, only Member States are directly affected by this initiative. It should also be noted 
that  the  policy  options  envisaged,  and  in  particular  the  preferred  policy  option,  do  not 
oblige Member States to modify any of the current VAT rates. If Member States do not 
avail  themselves  of  the  greater  leeway  in  fixing  VAT  rates  provided  by  this  initiative, 
there would be no actual impact of the initiative, except for the required adaptations in the 
EU and national legal system, to integrate the new legal arrangements.  

However, if any Member State does avail itself of the possibility to extend reduced, super-
reduced, or zero rates to new domains, the following stakeholders would be affected: 

a)  Member  State  treasuries  would  obviously  face  the  corresponding  revenue  losses, 
unless  the  extension  of  reduced  rates  was  offset  by  other  rate  increases  or  by  other 
compensating measures. There would be no impact in terms of the EU own resources. 

b) Taxable persons carrying out sales in the affected sectors would face some adaptation 
and learning costs related to the change in VAT rates, but would benefit from a reduced 
VAT liability. This would allow them to reduce the (VAT-included) final sales price. The 
economic  impact  of  the  rate  change  itself  would  depend  on  several  factors,  but  most 
importantly  on  which  proportion  of  sales  was  realised  to  other  VAT  taxable  persons 
(generally, businesses) or to non-taxable persons such as consumers or VAT-exempt legal 
persons.  In  the  first  case,  the  impact  is  negligible,  because  VAT  levied  on  purchases  of 
business inputs is refunded. In the second case, the lower VAT liability allows the seller to 
choose between reducing the final (VAT included) price by the same amount as the VAT 
cut, or to offset (in whole or in part) the VAT cut with an increase in the pre-tax price, and 
pocket a higher profit margin. Economic theory predicts that the choice between these two 

77 

 
extremes  will  ultimately  depend  on  the  short-  and  long-run  elasticity  of  supply  and 
demand in each sector. The adaptation and learning costs would be small from a one-off 
change, but would add up if the tax system as a whole becomes more complicated. This 
latter risk is discussed in the Impacts section, under ‘compliance costs’.  

Apart from the impact on prices, taxable persons may benefit from a positive or negative 
cash flow effect. This effect might be relatively sizeable for businesses in specific sectors, 
but would almost entirely cancel out at an aggregate level.  

c) If the VAT rate is cut and producers do not capture the entire cut in their profit margins, 
consumers  of  the  affected  goods  (including  VAT-exempt  legal  persons)  will  benefit 
from lower final prices. However, it is worth noting that often VAT cuts on specific goods 
are  financed  by  equivalent  increases  in  the  standard  VAT  rate,  so  that  at  an  aggregate 
level, the benefit for the average consumer is nil; only those that have an above-average 
consumption  of  the  affected  good  benefit,  while  those  that  do  not  consume  those  goods 
will lose out on average.  

9.4.  Evaluation and studies supporting this impact assessment 

9.4.1.  Sequence and scope of relevant studies 

The  rules  on  VAT  rates,  besides  being  an  important  research  area  in  the  economic 
literature,  were  also  subject  to  many  Commission-launched  reviews  and  studies  which 
constituted  an  important  knowledge  base  for  this  impact  assessment.  The  most  relevant 
recent studies and evaluations are listed in the following.  

In 2007 a ‘Study on reduced VAT applied to goods and services in the Member States of 
the  European  Union’  by  Copenhagen  Economics81  examined  the  theoretical  and 
empirical merits for reduced VAT rates.  

In 2011, DG TAXUD commissioned ‘A retrospective evaluation of elements of the EU 
VAT system’ carried out by the Institute for Fiscal Studies IFS et al.82. The findings of 
the study have been used as a starting point to the examination of the current VAT system. 
This comprehensive evaluation exercise covered all important aspects for the design of an 
improved VAT system. 

In  2013,  a  ‘study  on  the  economic  effects  of  the  current  VAT  rates  structure’  by  a 
consortium  led  by  the  Netherlands  Bureau  for  Economic  Policy  Analysis  CPB 
followed up on the main evaluation83. The focus of this study was on the economic effects 
that  would  follow  from  abolishing  zero  and  reduced  rates,  under  various  hypotheses, 
including the introduction of compensatory measures.  

A  specific,  additional  study  was  carried  out  for  this  Impact  Assessment  by  PwC 
PricewaterhouseCoopers  LLP  (Project  Leader)  on  the  ‘Reform  of  rules  on  EU  VAT 
rates’84.  This  study,  which  analysed  the  current  rules  for  VAT  rates  in  the  light  of  the 
destination principles, reviewed all instances where the origin principle still applies. The 
case studies included serve as an assessment of the current rules and in particular focus on 

81   The study by Copenhagen Economics is accessible for download here. 
82   The evaluation of the EU VAT system by IFS can be accessed here. 
83   For the study by CPB, follow this link. 
84   The final report has been submitted by the consortium in May 2017; publication is pending. 

78 

 
                                                 
the analysis of potential impacts of increased flexibility in setting VAT rates for Member 
States.  The  results  of  this  study  constitutes  the  basis  of  section 2  of  this  Impact 
Assessment (problem definitions) and also section 7 (comparison of options). 

9.4.2.  Summary of central aspects of the underlying studies 

The evaluation of elements of the VAT system in 2011 was carried out before the current 
Better  Regulation  Guidelines  had  been  established.  More  importantly,  at  that  point  in 
time, the VAT system was still set to lead to the origin system for VAT in the definitive 
regime.  For  the  evaluation,  this  implied  that  the  research  questions  in  particular  with 
respect  to  the  system  of  VAT  rates  and  the  possible  recommendations  of  the  evaluation 
were  focussing  on  the  extent  to  which  the  VAT  rates  structure  has  been  effective  to 
prepare for an origin based definitive regime.  

The decision later on for a destination based principle implies a fundamental change of the 
orientation of the VAT system. To the extent that reduced VAT rates and diversification 
had been analysed in the  evaluation of 2011, conclusions were  drawn in the light  of the 
destination  principle,  thus  limiting  the  direct  applicability  of  the  findings.  Nevertheless, 
the study retains its usefulness and constitutes one of the bases for this review.  

The subsequent studies in 2013 and 2017 were set up as specific external studies to collect 
information and external expert knowledge on specific economic effects of the VAT and 
on the assessment of possible design options for a reform of rules on EU VAT rates. This 
means  that  these  studies  were  not  set  up  as  retrospective  evaluations  following  the 
Commission standards for evaluations. 

In the following, findings from the evaluation of 2011 and from the specific studies have 
been re-organised to provide a summary assessment of information.  

Objectives of the current approach to setting of VAT rates 

The  rules  on  VAT  rates  were  originally  conceived  to  encourage  rate  convergence 
amongst  Member  States  by  setting  minimum  levels  for  VAT  rates  and  limiting  the 
application of reduced rates: Rate convergence was an economic requirement to allow 
the introduction of an origin-based definitive regime. 

In  an  origin-based  VAT  system,  Member  States  –  depending  on  their  particular 
circumstances – may have an incentive to lower VAT rates in order to encourage suppliers 
to  relocate  to  their  jurisdiction  in  order  to  increase  VAT  revenues.  Consequently,  the 
constraints  on  VAT  rates  currently  contained  in  the  VAT  Directive  were  intended  to 
forestall,  or  at  least  mitigate  any  risks  of  tax  competition  which  would  lead 
governments to reduce VAT rates to prevent erosion of the VAT base (the so-called ‘race 
to the bottom’). This risk only applies to origin-based VAT systems, as a fully destination-
based VAT system could not lead to distortion of competition. 

Effectiveness: To what extent have these objectives been achieved? 

The  rules  on  VAT  rate  setting  had  only  a  limited  impact  on  rate  convergence  and  on 
limiting the application of reduced rates. Contrary to the idea of minimum rates as setting 
a  factual  minimum  of  applied  VAT  rates,  furthermore  only  to  be  applied  to  an  agreed 
limited number of products, there exist some 200 derogations for rates lower than 5% for 
products  listed  in  Annex III  of  the  VAT  Directive  or  for  reduced  rates  for  products  not 
even included in that Annex III. Similarly, the rate gap varies considerably across Member 

79 

 
States. This indicator shows what percentage of the theoretical VAT revenue is foregone 
owing to the  recourse to reduced rates.  The difference in the  degree of the utilisation  of 
reduced  rates  is  consistent  with  widely  different  national  political  preferences  on  using 
indirect  taxation  to  pursue  social  policy  objectives  –  but  also  shows  that  there  was  a 
limited impact on the extent that  Member States could effectively be encouraged to rate 
convergence across Member States.  

The  current  rules  were  also  not  effective  in  preparing  the  ground  for  an  origin-based 
definitive  regime.  In  fact,  the  destination  principle  is  applied  to  the  overwhelming 
majority of cross-border transactions. Finally, the limited effectiveness of the VAT rates 
system can also be shown by the large number of 40 infringement procedures plus 25 pilot 
procedures only on reduced VAT rates. 

Efficiency: To what extent are costs proportionate to the intended benefits? 

The constraints to Member States for setting VAT rates represent a cost, in particular in 
case  of  infringement  procedures  of  non-existing  economic  relevance,  by  creating 
uncertainty  for  businesses.  The  only  benefit  for  Member  States  lies  in  the  fact  that  the 
restrictions by EU law reduce special interest pressure. 

The rules on VAT rate setting had been put in place with an origin-based VAT system in 
mind. As explained, rate convergence is a prerequisite for the successful introduction of an 
origin-based VAT system. The vision of introducing an origin-based VAT system in turn 
provided  for  valid  reasons  to  put  in  place  stringent  constraints,  limiting  Member  States' 
freedom to change the level of VAT rates. Given the decision to establish a destination-
based VAT system, these restrictions have no longer other benefits than a limited benefit 
with regard to revenue protection. However, even within the origin-based VAT system, it 
is questionable whether costs incurred could still be considered proportionate with respect 
to the intended benefits. The Commission is required to follow up any infringement of the 
VAT  rates  system  with  the  respective  infringement  procedure,  and  this  in  principle 
independent  of  the  often  limited  economic  relevance  of  the  infringement.  Such 
infringement  procedures  tie  resources  both  at  Member  State  level  as  well  as  at  the 
European Commission, while achieving little benefits in terms of limiting the risk of tax 
competition, given the limited relevance of most infringements. 

The  constraints  to  Member  States  to  change  VAT  rates  or  decide  freely  on  the  level  of 
VAT rates could similarly be considered as a type of implicit costs. Within the context of 
an  origin-based  system,  these  restrictions  can  be  considered  proportionate,  given  the 
intention to encourage rate convergence. However, in view of the decision to now switch 
instead  to  a  destination-based  VAT  system,  the  constraints  to  Member  States  are  not 
justified anymore but considered as unnecessary or excessive.  

Relevance: How well do the original objectives still correspond to the current needs? 

The  change  from  the  envisaged  origin-based  VAT  system  towards  a  destination-based 
VAT  system  implies  a  complete  U-turn  of  the  underlying  principles.  Given  that  the 
destination-based VAT system does not pose a risk of market distortion, this reduces the 
relevance of the original objective to encourage rate convergence to limit tax competition. 
A  revision  of  the  VAT  rate  system  therefore  requires  also  a  reconsideration  of  the 
objectives, adjusted to the newly introduced principle of a destination-based VAT system. 

There is no longer a correspondence, because the original objective has been changed. The 
restrictions were only linked to preparing the ground for the origin-based system. As this 

80 

 
is  not  given  anymore  and  studies  show  that  there is  no  market  distortion  to  be  expected 
from  differences  in  VAT  rates  in  a  destination  based  system,  the  restrictions  are  not 
relevant anymore. 

Coherence: To what extent does the intervention remain internally coherent? 

The current system of VAT rate setting was coherent with an origin-based VAT system, 
but is no longer coherent within a destination-based VAT system. To this extent, the rules 
on VAT rates are no longer coherent with the subsidiarity principle. 

EU Added Value: To what extent does action continue to be required at EU level? 

While  preparing  for  an  origin-based  VAT  system,  convergence  of  VAT  rates  was  an 
economic  requirement.  Such  a  convergence  of  VAT  rates  across  Member  States  could 
only  be  envisaged  by  action  at  the  EU  level  and  accompanying  measures  like  setting 
minimum levels for VAT rates and limiting the application of reduced rates.  

The  change  to  a  destination-based  VAT  system  logically  has  consequences  on  the 
consideration whether actions continue to be required at EU level, or whether subsidiarity 
analysis would not rather indicate that Member States are better placed to decide on the 
setting  of  individual  VAT  rates.  Given  that  the  switch  to  the  destination  principle 
neutralizes the risk of market distortion, this should be reflected in an adapted approach to 
VAT  rate  setting  and  limit  the  restrictions  to  Member  States.  After  all,  the  observed 
difference  in  the  degree  of  the  utilisation  of  reduced  rates  is  consistent  with  widely 
different  national  political  preferences  on  using  indirect  taxation  to  pursue  social  policy 
objectives.  As  these  differences  in  VAT  rates  do  not  cause  market  distortions,  Member 
States  should  be  free  to  follow  their  individual  national  preferences.  The  continued 
requests  for  modifications  of  the  VAT  Directive  to  allow  for  lower  rates  are  a  clear 
indication that Member States are interested to adapt VAT rates to national preferences. 

There  is  no  requirement  for  restricting  Member  States  in  setting  VAT  rates.  The  only 
requirement at EU level is to limit complexity of the VAT system in order to ensure the 
functioning of the internal market.  

The  continued  requests  for  modifications  of  the  VAT  Directive  to  allow  for  lower  rates 
and the difference in the degree of the utilisation of reduced rates is consistent with widely 
different  national  political  preferences  on  using  indirect  taxation  to  pursue  social  policy 
objectives. 

Position of the Commission towards studies and findings: 

On the reliability of results and triangulation of findings: The analysis of the VAT system 
carried out in the studies is solid and in line with the scientific consensus. Literature has 
consistently pointed to the lack of efficiency of the VAT system, so that  the findings of 
the  studies  are  non-controversial  and  have  been  indirectly  confirmed  by  many  other 
researchers.  

On compliance costs: The regulatory costs of the existing system with regard to rates have 
mostly been investigated from the perspective of the costs for businesses to comply with 
VAT rates, with fewer results available as regards the costs for the public administration. 
Chapter 4 of the retrospective evaluation of the VAT system expounds on the results from 
this  strand  of  research.  While  the  details  differ,  most  studies  concur  on  the  ‘three  main 

81 

 
lessons’  identified  by  Prof.  Evans  in  2008,  namely  that  compliance  costs  are  high  and 
significant; they are regressive; and they are not falling over time.  

On  the  need  to  act  now:  In  the  Action  Plan  on  VAT  the  Commission  announced  a 
proposal  for  a  definitive  VAT  regime  based  on  taxation  in  the  Member  States  of 
destination,  which  requires  accompanying  measures  and  amendments  of  the  VAT 
Directive with regard to the rules on VAT rates.  

82 

 
 
9.5.  VAT rates applied in the Member States at 1st January 2017 

83 

 
 
  
 
CONTENTS 

I.  LIST OF VAT RATES APPLIED IN THE MEMBER STATES 
II.  APPLICATION OF REDUCED VAT RATES BY THE MEMBER STATES TO THE CATEGORIES OF GOODS AND SERVICES CONTAINED IN ANNEX III OF VAT 

DIRECTIVE  2006/112/EC 

III.  APPLICATION OF THE PARKING RATE IN CERTAIN MEMBER STATES 
IV.  LIST OF SUPER-REDUCED RATES (LESS THAN 5%) APPLIED IN THE MEMBER STATES 
V.  CASES WHERE THE ZERO RATE IS APPLIED TO CONSUMPTION IN THE LEGISLATION OF THE MEMBER STATES (TITLE VIII, CHAPTER 4 OF THE 

VAT DIRECTIVE 2006/112/EC) 

VI.  VAT RATES GENERALLY APPLIED IN THE MEMBER STATES TO CERTAIN PRODUCTS OR SERVICES 
VII.  GEOGRAPHICAL FEATURES OF THE APPLICATION OF THE VAT IN THE EUROPEAN UNION 
VIII.  THE EVOLUTION OF THE VAT RATES APPLICABLE IN THE MEMBER STATES 

N.B.:    The  purpose  of  this  document  is  to  disseminate  information  about  the  VAT  rates  in  force  in  the  Member  States  of  the 
European Union. 

The  information  has  been  supplied  by  the  respective  Member  States  and  complemented  by  the 
Commissions services but part of the additions has not been verified yet by some Member States. 

The Commission cannot be held responsible for its accuracy or completeness, neither does its publication imply 
any endorsement by the Commission of the Member States’ legal provisions. 

84 

 
 
 
 
I. 

List of VAT rates applied in the Member States (in %) 

Member States 

Belgium 

Bulgaria 

Czech Republic 

Denmark 

Germany 

Estonia 

Ireland 

Greece 

Spain 

France 

Croatia 

Italy 

Cyprus 

Latvia 

Lithuania 

Luxembourg 

Hungary 

Malta 

Netherlands 

Austria 

Poland 

Portugal 

Romania 

Slovenia 

Slovakia 

Finland 

Sweden 

United Kingdom 

Code 
BE 

BG 

CZ 

DK 

DE 

EE 

IE 

EL 

ES 

FR 

HR 

IT 

CY 

LV 

LT 

LU 

HU 

MT 

NL 

AT 

PL 

PT 

RO 

SI 

SK 

FI 

SE 

UK 

Super-reduced Rate  Reduced Rate 

Standard Rate  Parking Rate 

- 

- 

- 

- 

- 

- 

4.8 

- 

4 

2.1 

- 

4 

- 

- 

- 

3 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

6 / 12 

9 

10 / 15 

- 

7 

9 

9 / 13,5 

6 / 13 

10 

5,5 / 10 

5 / 13 

5 / 10 

5 / 9 

12 

5 / 9 

8 

5 / 18 

5 / 7 

6 

10 / 13 

5 / 8 

6 / 13 

5 / 9 

9.5 

10 

10 /14 

6 / 12 

5 

21 

20 

21 

25 

19 

20 

23 

24 

21 

20 

25 

22 

19 

21 

21 

17 

27 

18 

21 

20 

23 

23 

19 

22 

20 

24 

25 

20 

12 

- 

- 

- 

- 

- 

13.5 

- 

- 

- 

- 

- 

- 

- 

- 

14 

- 

- 

- 

13 

- 

13 

- 

- 

- 

- 

- 

- 

N.B.: Exemptions with a refund of tax paid at preceding stages (zero rates) are not included above (see section V) 

85 

 
II. 

Application of reduced VAT rates by the member states to the categories of goods and services contained in Annex III of VAT Directive 2006/112/EC 0 = zero rate 

(exemption with refund of tax paid at preceding stage); [ex] = exemption; N/A = not applicable 

Category 

BE 

BG 

LT 

LU 

HU 

MT 

NL 

AT 

PL 

PT 

RO 

SI 

1 

Foodstuffs 

2 

Water supplies 

3 

Pharmaceutical products 

Medical equipment for disabled 
persons 

4 

Children’s car seats 

5 

Transport of passengers 

Books 

6 

12 

21 

6 

6 

21 

6 

21 

21 

6 

0 

6 

21 

Newspapers 

Periodicals 

0 

6 

21 

0 

6 

21 

[ex] 

6 

7 

8 

Books on other physical means 
of support 

21 

20 

21 

25 

21 

3 

0 

6 

10 

9 

9.5 

CZ 

10 

15 

DK 

DE 

EE 

25 

7 

19 

20 

20 

EL 

13 

ES 

4 

24 

10 

CY 

5 

LV 

21 

19 

12 

IE 
0 
4.8 
9 
13.5 
23 
[ex] 

23 

0 

23 

0 

23 

[ex] 

13 

6 
13 

24 

13 

24 

10 

4 
10 

21 

4 

10 

21 

FR 
2.1 
5.5 

10 

20 

5.5 

2.1 
5.5 
10 
20 

5.5 

20 

HR 

5 

13 

25 
13 

25 

5 

25 

5 

25 

25 

13.5 

24 

20 

20 

0 

[ex] 

24 

10 

10 

25 

9 

0 

6 

24 

20 

23 

24 

6 

4 

21 

4 

4 

5.5 

20 

5.5 

20 

2.1 

20 

15 

25 

7 

20 

20 

10 

15 

25 

19 

9 

20 

15 

25 

7 

9 

19 

7 

19 

7 

7 

19 

20 

20 

20 

15 

15 

0 

10 

15 

25 

[ex] 

25 

25 

20 

10 

0 

25 

5 

18 

27 

27 

5 

5 

5 

5 

5 

5 
9 

21 

21 

5 

12 

3 

3 

21 

17 

27 

12 

5 

21 

12 

[ex] 

21 

9 

21 

5 

12 

9 

19 

21 

21 

3 

17 

17 

[ex] 

3 

3 

3 

5 

27 

27 

27 

5 

5 

[ex] 

0 

5 

18 

0 

5 

5 

6 

6 

21 

6 

21 

21 

[ex] 
6 

21 

6 

6 

5 

8 

23 

8 

10 

10 

8 

20 

20 

10 

13 

10 

20 

8 

8 

8 

5 

23 

5 

23 

8 

6 

13 

23 

6 

6 

23 

6 

6 

6 

6 

23 

6 

23 

6 

SK 

20 

10 

FI 

14 

SE 

12 

UK 

0 

25 

20 

9 

9 

9.5 

20 

24 

25 

9.5 

10 

10 

25 

0 

0 

0 

20 

9 

9.5 

10 

19 

22 

19 

9.5 

20 

0 

20 

9.5 

10 

10 

5 

5 

9.5 

10 

24 

25 

20 

7 

9 

9 

24 

21 

20 

5 

12 

9 

3 

5 

5 

6 

10 

23 

23 

5 

9.5 

20 

20 

10 

25 

7 

9 

9 

[ex] 

25 

[ex] 

[ex] 

6 

24 

24 

4 

2.1 

21 

20 

[ex] 

5 

12 

9 

3 

5 

[ex] 

[ex] 

[ex] 

18 

IT 

4 

5 

10 

10 

10 

22 

4 

22 

22 

10 

[ex] 

4 

22 

4 

22 

4 

4 

22 

10 

5 

5 

5 

13 

25 

5 

13 

25 

5 

2.1 

5.5 

10 

20 

10 
20 

10 

20 

25 

[ex] 

20 

[ex] 

[-] 

21 

2.1 

N/A 

4 

N/A 

[-] 

21 

N/A 

[ex] 

[ex] 

27 

18 

6 

13 

23 

19 

9.5 

20 

10 

25 

20 

18 

21 

10 

24 

25 

20 

6 

23 

[ex] 

13 

23 

5 

9.5 

20 

9.5 

20 

5 

13 

19 

23 

19 

22 

6 

19 

23 

[ex] 

[ex] 
6 

19 

5 

6 

[ex] 
22 

9.5 

9.5 

[ex] 

20 

[ex] 
20 

20 

20 

5 

5 

6 

6 

10 

[ex] 

27 

18 

10 

20 

13 

20 

20 

20 

10 

13 

13 

6 

[ex] 

21 

21 

6 
21 

6 

6 

6 

5 

23 

8 

8 

13 

8 

8 

23 

23 

8 

[ex] 

8 

8 

23 

23 

5 

8 
23 
8 

25 

25 

5 

5 

21 

25 

22 

5 

21 

21 

[ex] 

25 

22 

19 

21 

21 

3 

3 

3 

17 

[ex] 

21 

21 

21 

3 

17 

N/A 

[ex] 

25 

25 

[ex] 

22 

4 

25 

10 

5 

5 

5 

[ex] 

27 

[ex] 
27 

27 

27 

18 

[ex] 

5 

25 

22 

19 

21 

21 

25 

13 

4 

10 
22 
10 

5 

19 

9 

21 

21 

12 

9 

8 

3 

17 

3 

27 

18 

27 

18 

18 

7 

86 

21 

21 

N/A 

27 

18 

6 

19 

9.5 

20 

24 

25 

23 

19 

9.5 

20 

24 

25 

20 

6 

13 
23 
6 

9 

19 

9 

9.5 

20 

9.5 

20 

24 

14 

10 

25 

20 

12 

20 

Admission to cultural services 
(shows, cinema, theatre) 

6 

20 

15 

[ex] 

7 

20 

9 

6 

21 

Admission to amusement parks 

6 

20 

15 

25 

19 

20 

9 

24 

21 

Pay TV/ cable TV 

21 

20 

25 

19 

20 

23 

[ex] 

24 

21 

[ex] 

21 

[ex] 
21 

TV licence 

9 

Writers, composers etc. 

10 

Social housing 

10a 

Renovation and repairing of 
private dwellings (*) 

10b 

Window cleaning and cleaning in 
private  households 

11 

Agricultural inputs 

12 

Hotel accommodation 

[-] 

6 
21 
[ex] 
12 

6 

21 

6 

21 

6 

12 
21 
6 

20 

15 

[ex] 

7 

20 

23 

20 

15 

25 

19 

20 

13.5 

24 

24 

[ex] 

21 

4 

10 

20 

15 

25 

19 

20 

13.5 

24 

10 

20 

15 

25 

19 

20 

13.5 

24 

21 

20 

9 

15 

21 

15 

25 

25 

7 

7 

20 

9 

0 
4.8 
13.5 
23 
9 

13 

24 

13 

10 

10 

10 

5.5 
10 
20 
5,5 
10 
20 
10 

20 

10 

20 

10 

24 

25 

[ex] 

[ex] 

24 

25 

10 

6 

0 

6 

6 

0 

5 

5 

0 

0 

0 

6 

0 

[ex]   

6 

6 

0 

20 

10 

24 

10 

24 

10 

[ex] 

[ex] 

[ex] 

10 

[ex] 

10 

24 

6 

25 
[ex] 

20 

20 
5 
0 

5 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
12a 

Restaurant and catering 
services 

12 

20 

15 

21 

25 

19 

20 

9 

[ex] 

24 

10 

5.5 

10 

25 

10 

20 

15 

20 

15 

20 

[ex] 

15 

[ex] 

25 

7 

19 

[ex] 

[ex] 

25 

19 

20 

[ex] 

24 

20 

9 

24 

10 

21 

[ex] 

21 

5.5 

25 

20 

[ex] 

25 

25 

7 

[ex] 

[ex] 

20 

25 

24 

4 

[ex] 

10 

10 

22 

22 

[ex] 

5 

22 

9 

5 

5 

21 

21 

21 

21 

21 

21 

[ex] 

3 

17 

3 

[ex] 

18 

27 

18 

27 

18 

3 

27 

7 

6 

6 

6 

[ex] 

10 

13 

[ex] 

8 

8 

8 

[ex] 

[ex] 

[ex] 

[ex] 

[ex] 

17 

[ex] 

[ex] 

23 

21 

10 

13 

23 

23 

[ex] 

6 

23 

9 

5 

22 

9.5 

20 

14 

12 

20 

9.5 

20 

10 

[ex] 

19 

9.5 

20 

[ex] 

19 

22 

20 

[ex] 

[ex] 

[ex] 

10 

[ex] 

6 

6 

[ex] 

[ex] 

25 

20 

20 

[ex] 

20 

15 

[ex] 

19 

20 

[ex] 

24 

21 

20 

25 

[ex] 

19 

5 

21 

21 

3 

27 

18 

[ex] 

20 

8 

[ex] 

19 

9.5 

20 

[ex] 

[ex] 

[ex] 

20 

[ex] 

[ex] 

[ex] 

15 

[ex] 

21 

20 

6 

6 

6 

21 

21 

20 

20 

20 

20 

20 

21 

15 

21 

21 

21 

15 

21 

25 

25 

25 

25 

25 

25 

7 

[ex] 

[-] 

19 

19 

19 

19 

[ex] 

19 

19 

[ex] 

24 

21 

[ex] 

13.5 

[ex] 

[ex] 

[ex] 

25 

[ex] 

5 

[ex] 

21 

[ex] 

17 

[ex] 

[ex] 

[ex] 

21 

20 

23 

[ex] 

6 

19 

[ex] 

[ex] 

[ex] 

[ex] 

[ex] 

20 

13.5 

20 

20 

20 

20 

20 

13.5 

13.5 

13.5 

[ex] 

9 

24 

[-] 

24 

24 

24 

13 

24 

20 

10 

20 

20 

20 

5.5 

10 

20 

10 

21 

21 

21 

21 

21 

25 

10 

5 

21 

21 

3 

27 

18 

21 

10 

8 

6 

19 

9.5 

20 

24 

25 

25 

25 

25 

25 

25 

22 

22 

22 

19 

19 

19 

[ex] 

19 

22 

5 

21 

21 

21 

21 

21 

21 

21 

21 

21 

21 

8 

8 

8 

[ex] 

17 

8 

27 

27 

27 

27 

[ex] 

27 

5 

5 

5 

5 

6 

6 

6 

[ex] 

18 

6 

20 

20 

20 

20 

20 

8 

8 

8 

[ex] 

23 

8 

6 

23 

23 

6 

23 

19 

19 

19 

19 

19 

9.5 

9.5 

9.5 

9.5 

9.5 

20 

20 

20 

20 

20 

24 

24 

24 

24 

24 

25 

25 

25 

25 

25 

0 

20 

20 

20 

20 

20 

20 

6 

[ex] 

6 

[ex] 

6 

21 

6 

21 

21 

13 

Admission to sporting events 

14 

Use of sporting facilities 

15 

Social services in so far as 
those transactions are not 
exempt pursuant to Articles 132, 
135 and 136 of the Directive 
2006/112/EC 

16 

Supplies by undertakers and 
cremation services 

17 

18 

Medical and dental care in so far 
as those services are not 
exempt pursuant to points (b) to 
(e) of Article 132(1) of the 
Directive 2006/112/EC 

Collection of domestic waste and 
street cleaning, other than the 
supply of such services by 
bodies referred to in Article 13 of 
the Directive  2006/112/EC 

19 

Minor repairing (including 
mending and alteration) of: 

Bicycles 

Shoes and leather goods 

Clothing and household linen 

20 

Domestic care services (**) 

21  Hairdressing 

(*) excluding materials which form a significant part of the value of the supply 
(**) e.g. home help and care of the young, elderly, sick or disabled 

87 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
III Application of the parking rate in certain Member States 

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 to the supply of those 
goods or services, provided that the rate is not lower than 12 %. 

BELGIUM 
Parking rate of 12% applicable to: 
1.  Certain energy products such as: 
- coal and solid fuel obtained from coal 
- lignite and agglomerated lignite (except for jet) 
- coke and semi‑coke from coal, lignite and peat 
- uncharred petroleum coke used as fuel. 
2.  Certain tyres and inner tubes for agricultural tractors and machinery, excluding 
tyres and inner tubes for forestry tractors and cultivators. 

Services relating to the care of the human body 

Supply of immoveable property 
Services consisting of the routine cleaning of immoveable property 

IRELAND 
Parking rate of 13.5% applicable to: 
1.  Energy for heating and light 
2.  Movable property used in the construction and maintenance of immovable 
property 
3. 
4. 
5.  Repair and maintenance of movable property 
6. 
7.  Certain specific tourist services 
8. 
Services relating to photography 
9. 
Services supplied by jockeys 
10.  Works of art and antiques 
11.  Short-term hire (less than 5 weeks) of: 
- motor vehicles designed for the conveyance of persons by road 
- ships, boats and other vessels not exceeding 15 tonnes gross designed 
for the conveyance of passengers 
- sports and pleasure craft, including yachts, cabin cruisers, dinghies, canoes, skiffs 
and racing boats 
- caravans, mobile homes, tents and trailer tents. 
12.  Driving schools 
13.  Professional services supplied by veterinary surgeons 

Solid mineral fuels, mineral oils and wood intended for use as fuel, with the 

LUXEMBOURG 
The parking rate of 14% applies to: 
1.  Wines with an ABV of 13% or less, with the exception of sparkling wines, liqueur 
wines and fortified wines 
2. 
exception of wood for heating 
3.  Washing and cleaning products 
4. 
5.  Heat, cooling and steam, with the exception of heat provided by heating networks 
6. 
7.  Administration of credit and credit guarantees by a person or organisation other 
than that granting the credit 

Printed advertising matter, commercial and similar catalogues; tourism publications 

Safe custody and administration of securities 

AUSTRIA 
The parking rate of 13% applies to: 
1. Wine from farm production carried out by the producing farmer 

PORTUGAL 
The parking rate of 13% applies to: 
1.  Wine 

88 

 
 
 
 
 
2.  Agricultural tools and utensils, mobile silos, tractors, pumps and other machinery 
designed  exclusively  or  mainly  for  the  purpose  of  agriculture,  cattle  breeding  or 
forestry. 
3.  Diesel for the agriculture 

89 

 
CY 

LV 

LT 

LU 

HU 

MT 

NL 

AT 

PL 

PT 

RO 

SI 

SK 

FI 

SE 

UK 

III. 

List of super-reduced rates (less than 5%) applied in the Member States (N.B.: The 
list is not exhaustive) 

BE 

BG 

CZ 

DK 

DE 

EE 

IE 

4.8 

EL 

ES 

4 

4 

4 

4 

4 

4 

4 

4 

HR 

FR 

2.1 

IT 

4 

2.1 

2.1 

2.1 

2.1 

2.1 

4 

4 

4 

4 

4 

4 

4 

4 

4 

GOODS and 
SERVICES 

Food products 

Beverages: Mineral 
water/lemonade 

Clothing   and 
footwear for children 

Pharmaceuticals 

- Books 

-  Books on other 
physical means of 
support 
- Newspapers 

- Periodicals 

Television licence 
fees 

Reception of radio 
and TV 

- Hotels 

- Restaurants 
Admission to 
cultural services, 
shows (cinema, 
theatre, sports) 

Use of sports 
installations 

- Treatment of 
waste and waste 
water 

- Collection of 
household waste 

Passenger transport   

Property sector: 

- Supply of new 
buildings 

- Renovation and 
repairs 

- Construction work 
on new buildings 

Royalties 

Medical equipment 
for disabled persons 

Water distribution 

Social services 

Supplies by 
undertakers and 
cremation services 

- Cut flowers and 
plants 

-  Pesticides, natural 
and   artificial 
fertilizers 

Raw wool 

Agricultural inputs 

4.8 

90 

3 

3 

3 

3 

3 

3 

3 

3 

3 

3 

3 

3 

3 

3 

3 

3 

3 

3 

3 

3 

3 

3 

3 

3 

3 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
IV.  Cases where the zero rate is applied to consumption in the legislation of the 
Member States (article Title VIII, Chapter 4 of the VAT directive 2006/112/EC) 

BELGIUM 

- Supplies of daily and weekly newspapers and periodicals of general information 
- Supplies of certain recovered materials and by-products 

DENMARK 

- Sales of newspapers normally published at a rate of more than one issue per month 
-  

IRELAND 

- Supplies of printed books and booklets, including atlases, but excluding: 
- newspapers, periodicals, brochures, catalogues, directories and programmes, 
- books of stationery, cheque books and similar products, 
- diaries, organisers, yearbooks, planners and similar products the total area of whose 
pages consist of 25 per cent or more of blank spaces for the recording of information, 
- albums and similar products, and 
- books of stamps, tickets or coupons. 
- Supplies of some food and drink intended for human consumption 
- (excluding certain products such as alcoholic beverages, manufactured beverages, 
ice-cream, confectionery, biscuits, pastries and savoury products such as crackers, 
crisps, popcorn and roasted nuts) 
- Supplies of seeds, plants, trees, etc. used for food production 
- Supplies of certain fertilisers in units of not less than 10 kg 
- Supplies of animal feeding stuffs excluding medicine which is packaged, sold or 
otherwise designated for the use of dogs, cats, cage birds or domestic pets. 
- Supplies of orally administered medicines for human consumption 
- Supplies of orally administered medicines for animal consumption excluding 
medicine which is packaged, sold or otherwise designated for the use of dogs, cats, 
cage birds or domestic pets. 
- Supplies of certain articles of feminine hygiene 
- Supplies of medical equipment such as wheelchairs, walking frames and crutches, 
orthopaedic appliances and other artificial parts of the body (excluding false teeth, 
corrective spectacles and contact lenses) 
- Supplies of articles of clothing and footwear for children of average size under the 
age of ten  
- (excluding clothes made of fur or skin and articles of clothing and footwear not 
marked with the size or age) 
- Supplies of wax candles and night-lights that are white and cylindrical, excluding 
candles and night-lights that are decorated, spiralled, tapered or perfumed. 
- Services provided by the Commissioners of Irish Lights in connection with the 
operation of lightships, lighthouses or other navigational aids. 
- Life saving services provided by the Royal National Lifeboat Institution including 
the organisation and maintenance of the lifeboat service. 

MALTA 

- Supplies of food products for human 
consumption, except for supplies of pre-cooked 
dishes and certain highly processed products, such 
as ice-cream, chocolates, manufactured beverages 
or beverages subject to excise duty, and pet foods 
- Supplies of seeds or other means of propagation of plants classified under the above paragraph 
- Supplies of live animals of a type generally used as, or yielding or producing, food for human 

consumption 

- Supplies of pharmaceuticals, medicines only where prescribed 

FINLAND 

- Printing services for membership publications of non-profit making organisations 

SWEDEN 

- Services with regard to production (basically printing services) of membership periodicals, staff 
periodicals and periodicals issued by non-profit organisations, including services related to such 

91 

 
 
 
 
 
 
production, such as distribution services 

- Medicine supplied on prescription or sold to hospitals or imported into the country to be supplied 

on prescription or sold to hospitals 

UNITED KINGDOM 

- Supplies  of  food  and  drink  for  human  consumption  (excluding  alcoholic  drinks,  confectionery, 
crisps  and  savoury  snacks,  hot  food,  sports  drinks,  hot  takeaways,  ice  cream,  soft  drinks  and 
mineral water) 

- Supplies of animals and animal feeds, and plants and seeds  - if the animal or plant produces food 

that is normally used for human consumption. 

- Supplies of water other than water for enterprises, distilled or mineral water 
- Supplies of pharmaceuticals, medicines only where prescribed 
- Supplies of 
medical and 
surgical 
instruments, 
aids only to 
handicapped 
persons 
(excluding 
hearing aids, 
dental 
prostheses, 
spectacles, etc.) 
- Supplies of children’s clothing and footwear 
- Supplies  of  books,  children’s  painting  and  picture  books,  newspapers,  periodicals,  magazines, 
brochures, leaflets, pamphlets, sheet music, maps, publications (Some items are standard-rated such as 
exercise books, letterheads, posters) 
- Construction of buildings for residential purposes; approved alterations to listed buildings 
- Sale or long lease of a new dwelling with garage or parking space 
- Supplies of certain materials by a person supplying the above-mentioned services, excluding 

maintenance and repair work 

- Supplies for and by charity organisations of goods donated with a view to being sold 
- Supplies of magnetic tape, tape recorders, etc. to the Royal National Institute for the Blind 
- Supplies to a charity organisation of radio receivers for free loan to blind persons 
- Sewage services 
- The transport of passengers in any vehicle, vessel or aircraft with 
the capacity of carrying at least 10 passengers; or by the Post Office; 
or by any scheduled service 
- The transport of passengers or freight from or to a place outside the United Kingdom 
- Supplies of certain caravans and houseboats 
- Supplies of boots and helmets for industrial use 
- Supplies of motor-cycle and cycle helmets 
- The issuing of bank notes 

92 

 
 
IV. 

VAT rates generally applied in the Member States to certain products or   services 
0 = zero rate (exemption with refund of tax paid at preceding stage); [ex] = exemption; [m] = taxation on the margin; [-] =out of scope; N/A = not applicable 

GOODS and SERVICES 

BE 

BG 

CZ 

DK 

DE 

EE 

IE 

EL 

ES 

FR 

HR 

IT 

CY 

LV 

LT 

LU 

HU 

MT 

NL 

AT 

PL 

PT 

RO 

SI 

SK 

FI 

SE 

UK 

Alcoholic beverages 

Spirits 

Wine 

Beer 

Non-alcoholic beverages 

Mineral water 

Lemonade 

Fruit juices 

Clothing 

Adults 

Children 

Children nappies 

Footwear 

Adults 
Children 

Tobacco 

Hifi-Video 

Computer, smartphones 

E-books 

Household electrical 
appliances 

Furniture 

Furs 

Jewels 

21 

21 

21 

6 

6 

6 

21 

21 

21 

21 
21 

21 

21 

21 

21 

21 

21 

21 

21 

Telecommunication services 

Phone/ fax/ telex/etc. 

Pay TV/ cable TV 

TV licence 

Energy products 

21 

21 

[-] 

20 

20 

20 

21 

21 

21 

25 

25 

25 

19 

19 

19 

20 

20 

20 

23 

23 

23 

24 

24 

24 

21 

21 

21 

20 

15 

25 

19 

20 

23 

13 

10 

20 

15 

25 

19 

20 

23 

24 

10 

20 

15 

25 

19 

20 

23 

24 

10 

25 

25 

25 

25 
25 

25 

25 

25 

25 

25 

25 

25 

25 

25 

25 

19 

19 

19 

19 
19 

19 

19 

19 

19 

19 

19 

19 

19 

19 

19 

20 

20 

20 

20 
20 

20 

20 

20 

20 

20 

20 

20 

20 

20 

20 

23 

0 

0 

23 
0 

23 

23 

23 

23 

23 

23 

23 

23 

23 

23 

24 

24 

24 

24 
24 

23 

23 

23 

24 

23 

23 

23 

23 

24 
24 

[ex] 

21 

21 

21 

21 
21 

21 

21 

21 

21 

21 

21 

21 

21 

21 

21 

20 

20 

20 

20 
20 

20 

20 

20 

20 

20 

20 

20 

20 

20 

20 

20 

21 

21 

21 

21 
21 

21 

21 

21 

21 

21 

21 

21 

21 

21 

[ex] 

[ex] 

21 

20 

20 

20 

5.5 

10 

5.5 

10 

5.5 

10 

20 

20 

20 

20 
20 

20 

20 

20 

5.5 

20 

20 

20 

20 

20 

20 

10 

25 

25 

25 

22 

22 

22 

25 

22 

25 

22 

25 

22 

25 

25 

25 

25 
25 

25 

25 

25 

25 

25 

25 

25 

25 

25 
[ex] 

25 

22 

22 

22 

22 
22 

22 

22 

22 

4 

22 

22 

22 

22 

22 

22 

22 

19 

19 

19 

5 

5 

5 

19 

19 

19 

19 
19 

19 

19 

19 

19 

19 

19 

19 

19 

19 

19 

19 

21 

21 

21 

21 

21 

21 

21 

21 

21 

21 

21 

21 

21 

21 

21 

21 
21 

21 

21 

21 

21 

21 

21 

21 

21 

21 

21 

21 

21 

21 

21 
21 

21 

21 

21 

21 

21 

21 

21 

21 

21 

21 

17 
14 
17 

17 

3 

3 

3 

17 

3 

17 

17 
3 

17 

17 

17 

17 

17 

17 

17 

17 

17 
3 

17 

27 

27 

27 

18 

18 

18 

27 

18 

27 

18 

27 

18 

27 

27 

27 

27 
27 

27 

27 

27 

27 

27 

27 

27 

27 

27 

27 

18 

18 

18 

18 
18 

18 

18 

18 

18 

18 

18 

18 

18 

18 

18 

21 

21 

21 

6 

6 

6 

21 

21 

21 

21 
21 

21 

21 

21 

21 

21 

21 

21 

21 

21 

21 

20 
20 
13 

20 

23 

23 

23 

23 

13 

23 

20 

23 

13 

20 

23 

23 

20 

20 

20 

20 

20 
20 

20 

20 

20 

20 

20 

20 

20 

20 

20 

10 

5 

23 

23 

23 

8 

23 

23 
23 

23 

23 

23 

23 

23 

23 

23 

23 

23 
8 

23 

23 

6 

23 

23 

6 

23 
23 

23 

23 

23 

23 

23 

23 

23 

23 

23 

23 

6 

19 

19 

19 

9 

9 

9 

9 

19 

19 

19 

19 
19 

19 

19 

19 

19 

19 

19 

19 

19 

22 

22 

22 

20 

20 

20 

24 

24 

24 

25 

25 

25 

20 

20 

20 

9.5 

20 

14 

12 

20 

9.5 

20 

14 

12 

20 

9.5 

20 

14 

12 

20 

22 

22 

22 

22 
22 

22 

22 

22 

22 

22 

22 

22 

22 

20 

20 

20 

20 
20 

20 

20 

20 

20 

20 

20 

20 

20 

24 

24 

24 

24 
24 

24 

24 

24 

24 

24 

24 

24 

24 

24 

24 

25 

25 

25 

25 
25 

25 

25 

25 

25 

25 

25 

25 

25 

25 

25 

20 

0 

0 

20 
0 

20 

20 

20 

20 

20 

20 

20 

20 

20 

20 

10 

[ex] 

[ex] 

19 
19 

[ex] 

19 

22 

22 

[ex] 

20 
20 

[ex] 

20 

25 

[ex] 

20 

[ex] 

[-] 

21 

2.1 

N/A 

4 

[-] 

21 

N/A 

27 

[-] 

[ex] 

10 

Natural gas 

21 

20 

21 

25 

19 

20 

13.5 

13 

21 

20 

5.5 

25 

10 

19 

21 

21 

8 

27 

[-] 

18 

21 

20 

23 

23 

19 

22 

20 

24 

25 

5 

93 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Electricity 

District heating 

Firewood 

Timber for industrial use 

Petroleum products 

Petrol (unleaded) 

Diesel fuel 

LPG 

Heating oil 

Lubricants 

Motor vehicles 

21 

21 

6 

21 

21 

21 

21 

21 

21 

21 
6 

[m] 

Passenger transport (domestic) 

Air 

Sea 

Inland waterway 

Rail 

Road 

6 

6 

6 

6 

6 

Passenger transport (international) 

Air 

Sea 

Inland waterway 

Rail 

Road 

Travel agencies 

Hotels 

Take away 

Bars and cafés 

0 

0 

6 

6 

6 

21 

[m] 

6 

6 

20 

20 

20 

20 

20 

20 

20 

20 

20 

20 

20 

21 

21 

15 

21 

21 

21 

21 

21 

21 

21 

15 
21 

25 

25 

25 

25 

25 

25 

25 

25 

25 

25 

[ex] 

20 

N/A 

[ex] 

20 

20 

20 

0 

0 

0 

0 

0 

15 

21 

15 

21 
15 

21 

0 

0 

0 

0 

0 

[ex] 

[ex] 

[ex] 

25 

0 

0 

0 

0 

0 

20 

[m] 

21 

[m] 

25 

[m] 

9 

15 

25 

20 

15 

25 

19 

19 

7 

7 

19 

19 

19 

19 

19 

19 

19 

19 

19 
7 
[-] 

19 

7 

19 

7 
19 

7 

0 

0 
7 
0 

19 

7 
19 
7 

19 

[m] 

7 

7 

20 

13.5 

13 

20 

20 

20 

20 

20 

20 

20 

20 

20 

13.5 

13.5 

23 

23 

23 

23 

13.5 

23 

23 

13 

24 

24 

24 

24 

24 

24 

24 

24 

20 

[ex] 

24 

20 

[ex] 

24 

21 

21 

21 

21 

21 

21 

21 

21 

21 

21 

10 

10 

20 

5.5 

5.5 
20 

10 

20 

20 

20 

20 

20 

20 

20 

25 

25 

25 

25 

25 

25 

25 

25 

25 

25 

10 

22 

10 

22 

22 

22 

22 

22 

22 

22 
4 

[m] 

19 

19 

19 

19 

19 

19 

5 

19 

19 

19 

21 

12 

21 

21 

21 

21 

21 

21 

21 

21 

10 

25 

10 

N/A 

12 

10 

25 

10 

9 

12 

20 

[ex] 

24 

10 

10 

N/A 

10 

N/A 

12 

20 

[ex] 

24 

10 

10 

25 

N/A 

12 

20 

[ex] 

24 

10 

0 

0 

0 

0 

0 

20 

[m] 

9 

20 

0 

0 

24 

24 

24 

24 

[m] 

13 

13 
24 

0 

0 

0 

0 

0 

23 

[m] 

9 

9 

9 

23 

10 

[ex] 
10 

[ex] 

0 

0 

0 

0 

0 

22 

[m] 

10 
0 

0 

0 

25 

0 

0 

10 

N/A 

0 

25 

10 
[ex] 

20 

[m] 

25 

25 

[m] 

0 

0 

10 

10 

10 

21 

[m] 

12 

0 

0 

0 

0 

0 

21 

[m] 

21 

5 
9 

0 

0 

N/A 

N/A 

0 

19 

[m] 

9 

5 

9 

19 

10 

10 

13 

10 

10 

10 

25 

10 

21 

21 

24 

10 

10 

13 

25 

10 

94 

21 

9 

21 

21 

21 

21 

21 

21 

21 

21 

21 
9 
21 

9 

21 

9 

21 

9 
21 

9 

0 

0 

0 

0 

0 

21 

[m] 

9 

8 

8 

8 

17 

17 

17 

8 

14 

17 

17 

27 

5 

27 

27 

27 

27 

27 

27 

27 

27 

3 

27 

N/A 

N/A 

5 

18 

18 

18 

18 

18 

18 

18 

18 

18 

0 

0 

3 

3 

3 

27 

N/A 

27 

N/A 

27 

0 

18 

0 

0 

N/A 

N/A 

N/A 

18 

[m] 

7 

18 

0 

N/A 

0 

N/A 

0 

0 

0 

17 

[m] 

3 

3 

0 

0 

0 

27 

[m] 

18 

18 
27 

21 

21 

21 

21 

21 

21 

21 

21 

21 

21 

20 

20 

13 

20 

20 

20 

20 

20 

20 

20 

21 

13 

6 

6 

6 

6 

0 

0 

6 

6 

6 

21 

[m] 

6 

6 

N/A 

10 

10 

10 

0 

N/A 

0 

10 

10 

20 

[m] 

13 

10 

23 

23 

8 

23 

23 

23 

23 

23 

23 

23 

8 

8 

8 

8 

8 

0 

0 

8 

0 

8 

23 

[m] 

8 

8 
23 

8 

23 

23 

23 

6 

23 

23 

13 

23 

23 

23 

23 

23 

6 

6 

6 

6 

6 

0 

0 

0 

0 

0 

23 

[m] 

6 

13 

23 

13 

19 

19 

19 

19 

19 

19 

19 

19 

19 

19 

22 

22 

22 

22 

22 

22 

22 

22 

22 

22 

20 

20 

20 

20 

20 

20 

20 

20 

20 

20 

24 

24 

24 

24 

24 

24 

24 

24 

24 

24 

19 

9.5 

20 

10 

19 

9.5 

N/A 

10 

19 

9.5 

20 

10 

19 

9.5 

20 

10 

19 

9.5 

20 

10 

0 

0 

N/A 

0 

9.5 

22 

[m] 

9.5 

22 
9.5 

0 

N/A 

0 

0 

0 

0 

0 

0 

0 

0 

20 

[m] 

24 

[m] 

25 

[m] 

20 

10 

12 

20 

14 

12 

0 

0 

0 

0 

0 

19 

[m] 

9 

19 

9 
19 

9 

19 

25 

25 

25 

25 

25 

25 

25 

25 

25 

25 

6 

6 

6 

6 

6 

0 

0 

0 

0 

0 

5 

20 

20 

20 

20 

20 

20 

5 

5 

20 

20 

0 

0 

0 

0 

0 

0 

0 

0 

0 

0 

20 

[m] 

20 

0 
20 

Bars and cafés 

21 

20 

15 

21 

25 

19 

20 

21 

21 

3 

27 

18 

6 

20 

22 

20 

24 

25 

20 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Goods 

Services 

Cut flowers and plants 

Decorative use 

Food production 

Immovable property 

Social Housing (category 
10/ Annex III) 

Renovation and repairing 
(category 10a / Annex III) 

Building land 

6 

6 

6 

12 

6 

21 

[ex] 

Construction work on new 
buildings 

Agricultural Inputs 

Pesticides and plant 
protection materials 

Fertilisers 

6 

  12 

21 

12 

21 

6 

12 

21 

20 

Treatment of waste and 
waste water 

21 

20 

Collection of household 
waste, … 

21 

20 

Arrangements for the taxation of gold 

Ingots and bars 

[ex] 

21 

20 

Night clubs 

Alcoholic beverages 

21 

21 

20 

20 

21 

21 

25 

25 

19 

19 

20 

20 

23 

23 

Consumption on board ships, aircraft or  trains 

10 

10 

10 

20 

13 

25 
13 
25 

22 

10 

21 

21 

21 

21 

19 

19 

0 

9 
19 

21 

10 

25 

10 

19 

21 

21 

10 

5.5 

25 

10 

5 

21 

21 

3 

17 

3 

17 

3 
17 

8 

3 

24 

24 

13 

24 

24 

24 

13 

24 

27 

27 

18 

18 

6 

21 

20 

20 

27 

18 

6 

21 

13 

27 

0 

6 

10 

23 

23 

5 
8 
23 
0 
8 

8 

5 

8 

23 

9 

19 
9 
19 

9 

19 

9 
19 

19 

9 

19 

22 

22 

20 

20 

24 

24 

25 

25 

20 

20 

9.5 

20 

24 

25 

20 

9.5 

20 

14 

25 

0 

20 

15 

25 

20 

15 

25 

7 

7 

20 

13.5 

20 

0 

20 

21 

25 

[ex] 

20 

13.5 

24 

25 

Supplies of new buildings 

21 

20 

21 

25 

[ex] 

20 

13.5 

24 

20 

15 

25 

19 

20 

13.5 

24 

4 

10 

20 

15 

25 

19 

20 

13.5 

24 

10 

25 

4 

10 

5 

21 

21 

N/A 

27 

5 

[ex] 

21 

20 

8 

25 

10 

5 

21 

21 

N/A 

27 

18 

5.5 

10 

20 

5.5 

10 
20 

20 

20 

25 

20 

25 

21 

10 

21 

4 

10 

6 

21 

21 

[ex] 

[ex] 

21 

20 

[ex] 

[ex] 

20 

27 

27 

5 

8 

23 

23 

8 

23 

8 

5 

9.5 

20 

24 

25 

[ex] 

19 

9.5 

20 

24 

25 

19 

[ex] 

19 

6 

19 

[ex] 

[ex] 

[ex] 

20 

[ex] 

[ex] 

20 

24 

25 

22 

22 

9.5 

22 

9.5 

23 

23 

22 

4 

10 

22 

4 

10 

[ex] 

21 

21 

[ex] 

19 

21 

21 

19 

21 

21 

[ex] 

3 

3 

17 

20 

21 

25 

19 

20 

13.5 

24 

27 

18 

21 

20 

23 

23 

6 
13 
23 
13 
23 

6 

6 

[ex] 

6 

6 

23 

[ex] 

20 

21 

25 

19 

20 

23 

24 

10 

21 

15 

21 

15 

[ex] 

21 

25 

25 

25 

[ex] 

19 

7 

[-] 

19 

[-] 

19 

20 

20 

20 

0 

23 

[-] 

13.5 

[-] 

13.5 

24 

10 

24 

10 

24 

[-] 

10 

19 

20 

23 

[ex] 

0 

21 

10 

20 

10 

20 

10 

20 

10 

25 

22 

5 

21 

21 

17 

27 

18 

21 

20 

8 

6 

9 

9.5 

20 

24 

25 

20 

25 

4 

25 

25 

10 

22 

10 

5 

5 

5 

[-] 

21 

21 

21 

21 

22 

21 

3 

3 

3 

27 

18 

21 

13 

20 

27 

18 

21 

10 

27 

18 

[-] 

21 

10 

8 

8 

8 

6 

9 

9.5 

20 

24 

25 

23 

6 

[-] 

6 

19 

9.5 

20 

24 

25 

19 

9.5 

20 

24 

25 

20 

20 

0 

20 

[ex] 

[ex] 

[ex] 

[ex] 

[ex] 

[ex] 

[ex] 

[ex] 

[ex] 

[ex] 

[ex] 

[ex] 

24 

[ex] 

[ex] 

[ex] 

[ex] 

0 

21 

[ex] 

[ex] 

22 

[ex] 

20 

25 

22 

21 

21 

17 

27 

23 

23 

0 

25 

95 

20 

5 

0 

20 

5 

20 

0 

20 

20 

0 

20 

0 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Coins (currency) 

Jewellery, gold plate, 
medals, tools 

Services supplied by 
lawyers 

[ex] 

21 

21 

20 

20 

[ex] 

21 

21 

[ex] 

25 

21 

20 

21 

25 

Taxation of works of art, collector’s items and  antiques 

Works of art, collector’s 
items and antiques 

21 

[m] 

20 

21 

[m] 

25 

Rate on importation 
(Article 103 of the 
Directive 2006/112/EC) 

Supplies by creators and   

occasional sales 
(Article 103(2) of the 
Directive 2006/112/EC) 

6 

20 

15 

25 

6 

20 

21 

25 

19 

7 

[ex] 

19 

7 

19 

19 

[m] 

7 

19 

7 

19 

[ex] 

[ex] 

[ex] 

20 

23 

24 

[ex] 

0 

21 

21 

[ex] 

[ex] 

[ex] 

20 

20 

25 

25 

22 

22 

[ex] 

19 

[ex] 

[ex] 

[ex] 

[ex] 

[ex] 

0 

[ex] 

[ex] 

[ex] 

19 

[ex] 

[ex] 

21 

21 

21 

21 

17 

17 

27 

27 

18 

21 

20 

20 

23 

23 

19 

22 

20 

24 

[ex] 

0 

24 

25 

25 

[ex] 

20 

0 

20 

20 

23 

24 

21 

20 

25 

22 

19 

21 

21 

17 

27 

18 

21 

20 

23 

20 

13.5 

23 

[m] 

24 

[m] 

20 

25 

21 

22 

[m] 

[m] 

5 

[m] 

21 

21 

17 

27 

18 

21 

20 

23 

[m] 

[m] 

[m] 

[m] 

5 

6 

13 

8 

19 

22 

20 

24 

25 

20 

22 

20 

24 

19 

25 

20 

[m] 

[m] 

19 

9.5 

20 

[m] 

10 

24 

12 

5 

23 

23 

23 

6 

6 

23 

[m] 

6 

23 

18 

6 

13 

8 

6 

19 

9.5 

20 

10 

12 

20 

20 

13.5 

24 

10 

5.5 

25 

10 

5 

21 

21 

8 

20 

13.5 

24 

10 

5.5 

10 

N/A 

10 

N/A 

21 

21 

8 

27 

27 

[-] 

96 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
V. Geographical features of the application of VAT in the EU 

DENMARK 
The  Faeroe  Islands  and  Greenland  are  not  part  of  the  European  Union;  consequently,  VAT 
(according to the VAT Directive 2006/112/EC) is not applicable on these territories. 

GERMANY 
For VAT purposes, the country does not include the island of Heligoland or the territory of 
Büsingen. 

GREECE 
According to Article 120 of the VAT Directive, Greece may apply rates up to 30% lower than 
the  corresponding  rate  applied    in  the  mainland  to  the  following  islands:  Chios,  Cyclades, 
Dodecanese,  Lesbos,  Northern  Sporades,  Samos  and  Samothrace.  The  lower  rates  currently 
applied in the Greek Islands are 4%, 9% and 17%. The following islands are excluded from 
the application of these lower rates: Thira, Mykonos, Naxos, Paros, Rhodes, Skiathos (since 
01/10/2015);  Syros,  Andros,  Tinos,  Milos,  Kea,  Antiparos,  Sifnos,  Karpathos,  Alonissos, 
Thassos  and  Skiros  (since  01/06/2016);  Skopelos,  Amorgos,  Ios,  Kythnos,  Serifos,  Sikinos, 
Anafi, Kimolos, Folegandros, Irakleia, Donoussa, Thirasia, Schinoussa, Koufonisia, Dilos. 

SPAIN 
For VAT purposes, the country does not include the Canary Islands, Ceuta and Menilla. 

FRANCE 
Special rates apply in Corsica and the overseas departments (DOM): 
a)  Corsica 
0.90%: 

the first performances of some shows, sales of live meat and charcuterie 
animals to persons not liable to pay tax; 

2.10%: 

10%: 

some goods supplied in Corsica and some services to which the reduced rates 
are applicable in mainland France; 
certain work on immovable property, agricultural equipment, certain supplies of 
furnished lodging, and sales for consumption on the premises, sales of electricity 
supplied at low voltage; 
petroleum products; 

13%: 
The standard rate applicable in Corsica is the same as in the rest of 
the country: 20%. 

b)  DOM 
In the overseas departments, but not French Guiana and Mayotte, 

97 

 
 
 
 
 
 
 
a reduced rate of 2.10% and a standard rate of 8.5% are applicable and the rates of 1.05 % 
and  1.75  %,  respectively  (on  the  first  performances  of  certain  shows  and  certain  sales  of 
animals for slaughter and meat). 

c)  Monaco 
Goods  and  services  supplied  to  or  from  the  Principality  of  Monaco  are  regarded  as  having 
been supplied to or from France. 

ITALY 
The  following  territories  are  excluded  from  the  scope  of  VAT:  Livigno,  Campione  d’Italia 
and the territorial waters of Lake Lugano. 

CYPRUS 
Transactions  originating  in,  or  intended  for,  the  United  Kingdom  Sovereign  Base  Areas  of 
Akrotiri and Dhekelia are treated as transactions originating in, or intended for, the Republic 
of Cyprus. The application of the acquis is suspended in those areas of the Republic of Cyprus 
in which the government of the Republic of Cyprus does not exercise effective control. 

AUSTRIA 
A special rate of 19% applies in Jungholz and Mittelberg. 

In the Azores 

PORTUGAL 
Special rates apply in the Azores and Madeira: 
a) 
4%: 
9%: 

reduced rate; 
reduced rate / parking rate; 18%:
standard rate; 

In Madeira 

b) 
5%: 
12%: 

reduced rate; 
reduced rate / parking rate; 22%:
standard rate. 

FINLAND 
The Åland Islands are excluded from the scope of VAT. 

UNITED KINGDOM 
Goods and services supplied to or from the Isle of Man are regarded as having been supplied to or from the United Kingdom. 

98 

 
 
 
 
 
 
 
 
 
V. 

The evolution of VAT rates 
applicable in the Member States 

MEMBER STATES 
AND DATES 

REDUCED RATE 

STANDARD 
RATE 

INCREASED 
RATE 

PARKING 
RATE 

Belgium 
01/01/1971 
01/01/1978 
01/12/1980 
01/07/1981 
01/09/1981 
01/03/1982 
01/01/1983 
01/04/1992 
01/01/1994 
01/01/1996 
01/01/2000 

Bulgaria 

01/04/1994 
01/07/1996 
01/01/1999 
01/01/2007 
01/04/2011 

Czech Republic 
01/01/1993 
01/01/1995 
01/05/2004 
01/01/2008 
01/01/2010 
01/01/2012 
01/01/2013 
01/01/2015 

Denmark 
03/07/1967 
01/04/1968 
29/06/1970 
29/09/1975 
01/03/1976 
03/10/1977 
01/10/1978 
30/06/1980 
01/01/1992 

Germany 
01/01/1968 
01/07/1968 
01/01/1978 
01/07/1979 
01/07/1983 
01/01/1993 
01/04/1998 
01/01/2007 

Estonia 
1991 
1993- 

6 
6 
6 
6 
6 
1 | 6 
1 | 6 
1 | 6 | 12 
1 | 6 | 12 
1 | 6 | 12 
6 | 12 

- 
- 
- 
7 
9 

5 
5 
5 
9 
10 
14 
15 
10 | 15 

- 
- 
- 
9.25 
- 
- 
- 
- 
- 

5 
5,5 
6 
6.5 
7 
7 
7 
7 

- 
- 

18 
16 
16 
17 
17 
17 
19 
19.5 
20.5 
21 
21 

18 
22 
20 
20 
20 

23 
22 
19 
19 
20 
20 
21 
21 

10 
12.5 
15 
15 
15 
18 
20.25 
22 
25 

10 
11 
12 
13 
14 
15 
16 
19 

10 
18 

25 
25 
25 | 
25+5 
25 | 
25+5 
25 | 
25+8 
25 | 
25+8 
25 | 
25+8 
- 
- 
- 
- 

- 
- 
- 
- 
- 

- 
- 
- 
- 
- 
- 
- 
- 

- 
- 
- 
- 
- 
- 
- 
- 
- 

- 
- 
- 
- 
- 
- 
- 

- 
- 

14 
- 
- 
- 
- 
- 
17 
- 
12 
12 
12 

- 
- 
- 
- 
- 

- 
- 
- 
- 
- 
- 
- 
- 

- 
- 
- 
- 
- 
- 
- 
- 
- 

- 
- 
- 
- 
- 
- 
- 

- 
- 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2000-2008 
01/01/2009 
01/07/2009 

5 
9 
9 

18 
18 
20 

- 
- 
- 

- 
- 
- 

MEMBER STATES 
AND DATES 

REDUCED RATE 

STANDARD 
RATE 

INCREASED 
RATE 

PARKING 
RATE 

Ireland 
01/11/1972 
03/09/1973 
01/03/1976 
01/03/1979 
01/05/1980 
01/09/1981 
01/05/1982 
01/03/1983 
01/05/1983 
01/07/1983 
01/05/1984 
01/03/1985 
01/03/1986 
01/05/1987 
01/03/1988 
01/03/1989 
01/03/1990 
01/03/1991 
01/03/1992 
01/03/1993 
01/01/1996 
01/03/1997 
01/03/1998 
01/03/1999 
01/03/2000 
01/01/2001 
01/03/2002 
01/01/2003 
01/01/2004 
01/01/2005 
01/12/2008 
01/01/2010 
01/07/2011 
01/01/2012 

Greece 
01/01/1987 
01/01/1988 
28/04/1990 
08/08/1992 
01/04/2005 

15/03/2010 

01/07/2010 
01/01/2011 
20/07/2015 
01/06/2016 

Spain 
01/01/1986 
01/01/1992 
01/08/1992 
01/01/1993 

1 | 5,26 | 11.11 
1 | 6,75 | 11.11 
10 
1 | 10 
1 | 10 
1,5 | 15 
1,8 | 18 
2,3 | 23 
2,3 | 5 | 18 
2 | 5 | 18 
2 | 5 | 8 | 18 
2,2 | 10 
2,4 | 10 
1,7 | 10 
1,4 | 5 | 10 
2 | 5 | 10 
2,3 | 10 
2,3 | 10 | 12,5 
2,7 | 10 | 12,5 | 
16 
2,5 | 12,5 
2,8 | 12,5 
3,3 | 12,5 
3,6 | 12,5 
4 | 12,5 
4,2 | 12,5 
4,3 | 12,5 
4,3 | 12,5 
4,3 | 13,5 
4,4 | 13,5 
4.8 | 13.5 
4.8 | 13.5 
4.8 | 13.5 
4.8 | 9 | 13.5 
4.8 | 9 | 13.5 

3 | 6 
3 | 6 
4 | 8 
4 | 8 
4,5 | 9 

5 | 10 

5,5 | 11 
6,5 | 13 
6 | 13 
6 | 13 

6 
6 
6 
3 | 6 

100 

16.37 
19.5 
20 
20 
25 
25 
30 
35 
23 | 35 
23 | 35 
23 | 35 
23 
25 
25 
25 
25 
23 
21 
21 
21 
21 
21 
21 
21 
21 
20 
21 
21 
21 
21 
21.5 
21 
21 
23 

18 
16 
18 
18 
19 

21 

23 
23 
23 
24 

12 
13 
15 
15 

30.26 
36.75 
35 | 40 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 

36 
36 
36 
- 
- 

- 

- 
- 
- 
- 

33 
28 
28 
- 

- 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 
12.5 
16 
12.5 
12.5 
12.5 
12.5 
12.5 
12.5 
12.5 
12.5 
13.5 
13.5 
13.5 
13.5 
13.5 
13.5 
13.5 

- 
- 
- 
- 
- 

- 

- 
- 
- 
- 

- 
- 
- 
- 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
01/01/1995 
01/07/2010 
01/09/2012 

4 | 7 
4 | 8 
4 | 10 

16 
18 
21 

- 
- 
- 

- 
- 
- 

MEMBER STATES 
AND DATES 

REDUCED RATE 

STANDARD 
RATE 

INCREASED 
RATE 

PARKING 
RATE 

France 

1/01/1968 
1/12/1968 

(1) 
(1) 

01/01/1970 
01/01/1973 
01/01/1977 

1/07/1982 

(2) 

01/01/1986 
01/07/1986 
17/09/1987 
01/12/1988 
01/01/1989 
08/09/1989 
01/01/1990 
13/09/1990 
29/07/1991 
01/01/1993 
01/08/1995 
01/04/2000 
01/01/2012 
01/01/2014 

6 
7 
7.5 
7 
7 
4 | 5,5 | 7 
4 | 5,5 | 7 
2,1 | 4 | 5,5 | 7 | 
13 
2,1 | 4 | 5,5 | 7 | 
13 
2,1 | 4 | 5,5 | 7 | 
13 
2,1 | 5,5 | 13 
2,1 | 5,5 | 13 
2,1 | 5,5 | 13 
2,1 | 5,5 | 13 
2,1 | 5,5 
2,1 | 5,5 
2,1 | 5,5 
2,1 | 5,5 
2,1 | 5,5 | 7 
2,1 | 5,5 | 10 

16.66 
19 
23 
20 
17.6 
18.6 
18.6 
18.6 
18.6 
18.6 
18.6 
18.6 
18.6 
18.6 
18.6 
18.6 
20.6 
19.6 
19.6 
20 

20 
25 
33.33 
33.33 
33.33 
33.33 
33.33 
33.33 
33.33 
28 
28 
25 | 28 
25 
22 
22 
- 
- 
- 
- 
- 

13 
15 
17.6 
17.6 
- 
- 
- 
- 
28 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 

(1) Up to 1.1.1970, the VAT rates were applicable to a price inclusive of VAT itself. As from 1.1.1970, the 
(2) 4% rate 1.7.1982 to 1.1.1986 was provisional. 

Croatia 
01/08/1998 
01/11/1999 
01/01/2006 
01/08/2009 
01/03/2012 
01/01/2013 
01/01/2014 

Italy 
01/01/1973 
01/01/1975 
18/03/1976 
10/05/1976 
23/12/1976 
08/02/1977 
03/07/1980 
01/11/1980 
01/01/1981 
05/08/1982 
19/04/1984 
20/12/1984 
01/08/1988 
01/01/1989 
13/05/1991 
01/01/1993 
01/01/1994 
24/02/1995 
01/10/1997 

- 
0 
0  | 10 
0  | 10 
0  | 10 
5 | 10 
5 | 13 

6 
6 
6 
6 | 9 
1 | 3 | 6 | 9 
1 | 3 | 6 | 9 | 12 
2 | 8 
1 | 2 | 3 | 6 | 9 | 
12 
2 | 8 
2 | 8 | 10 | 15 
2 | 8 | 10 | 15 
2 | 9 
2 | 9 
4 | 9 
4 | 9 | 12 
4 | 9 
4 | 9 
4 | 10 
4 | 10 

101 

22 
22 
22 
23 
25 
25 
25 

12 
12 
12 
12 
12 
14 
15 
14 
15 
18 
18 
18 
19 
19 
19 
19 
19 
19 
20 

- 
- 
- 
- 
- 
- 
- 

18 
30 
30 
30 
30 
35 
35 
35 
35 
38 
30 | 38 
30 
38 
38 
38 
- 
- 
- 
- 

- 
- 
- 
- 
- 
- 
- 

- 
18 
18 
18 
18 
18 
18 
15 | 
18 
18 
20 
20 
- 
- 
- 
- 
12 
13 
16 
- 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
17/09/2011 
01/10/2013 
01/01/2016 

Cyprus 
01/07/1992 
01/10/1993 

4 | 10 
4 | 10 
4 | 5 | 10 

- 
- 

21 
22 
22 

5 
8 

- 
- 

- 
- 

- 
- 

- 
- 

MEMBER STATES 
AND DATES 

REDUCED RATE 

STANDARD 
RATE 

INCREASED 
RATE 

PARKING 
RATE 

01/07/2000 
01/07/2002 
01/01/2003 
01/08/2005 
01/03/2012 
14/01/2013 
13/01/2014 

Latvia 
01/05/1995 
01/01/2003 
01/05/2004 
01/01/2009 
01/01/2011 
01/07/2012 

Lithuania 
01/05/1994 
01/08/1994 
01/01/1997 
01/05/2000 
01/01/2001 
01/01/2009 
01/09/2009 

Luxembourg 
01/01/1970 
01/01/1971 
01/07/1983 
01/01/1992 
01/01/1993 
01/01/2015 

Hungary 
01/01/1988 
01/01/1993 
01/08/1993 
01/01/1995 
01/01/2004 
01/01/2006 
01/09/2006 
01/07/2009 
01/01/2012 

Malta 
01/01/1995 
01/01/1999 
01/01/2004 
01/01/2011 

Netherlands 
01/01/1969 

5 
5 
5 
5 | 8 
5 | 8 
5 | 8 
5 | 9 

- 
9 
5 
10 
12 
12 

- 
9 
- 
5 
5 | 9 
5 | 9 
5 | 9 

4 
2 | 5 
3 | 6 
3 | 6 
3 | 6 
3 | 8 

0 | 15 
0 | 6 
10 
0 | 12 
5 | 15 
5 | 15 
5 
5 | 18 
5 | 18 

5 
5 
5 
5 | 7 

4 

102 

10 
13 
15 
15 
17 
18 
19 

18 
18 
18 
21 
22 
21 

18 
18 
18 
18 
18 
19 
21 

8 
10 
12 
15 
15 
17 

25 
25 
25 
25 
25 
20 
20 
25 
27 

15 
15 
18 
18 

12 

- 
- 
- 
- 
- 
- 
- 

- 
- 
- 
- 
- 
- 

- 
- 
- 
- 
- 
- 
- 

- 
- 
- 
- 
- 
- 

- 
- 
- 
- 
- 
- 
- 
- 
- 

- 
- 
- 
- 

- 

- 
- 
- 
- 
- 
- 
- 

- 
- 
- 
- 
- 
- 

- 
- 
- 
- 
- 
- 
- 

- 
- 
- 
- 
12 
14 

- 
- 
- 
- 
- 
- 
- 
- 
- 

- 
- 
- 
- 

- 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
01/01/1971 
01/01/1973 
01/01/1976 
01/01/1984 
01/10/1986 
01/01/1989 
01/10/1992 
01/01/2001 
01/10/2012 

4 
4 
4 
5 
6 
6 
6 
6 
6 

14 
16 
18 
19 
20 
18.5 
17.5 
19 
21 

- 
- 
- 
- 
- 
- 
- 
- 
- 

- 
- 
- 
- 
- 
- 
- 
- 
- 

MEMBER STATES 
AND DATES 

REDUCED RATE 

STANDARD 
RATE 

INCREASED 
RATE 

PARKING 
RATE 

Austria 
01/01/1973 
01/01/1976 
01/01/1978 
01/01/1981 
01/01/1984 
01/01/1992 
01/01/1995 
01/01/2016 

Poland 
05/07/1993 
04/09/2000 
01/01/2011 

Portugal 
01/01/1986 
01/02/1988 
(1)

24/03/1992

01/01/1995 
01/07/1996 
05/06/2002 
01/07/2005 
01/07/2008 
01/07/2010 
01/01/2011 

8 
8 
8 
8 | 13 
10 
10 
10 
10 | 13 

7 
3 | 7 
5 | 8 

8 
8 

5 

5 
5 | 12 
5 | 12 
5 | 12 
5 | 12 
6 | 13 
6 | 13 

16 
18 
18 
18 
20 
20 
20 
20 

22 
22 
23 

16 
17 

16 

17 
17 
19 
21 
20 
21 
23 

- 
- 
30 
30 
32 
- 
- 
- 

- 
- 
- 

30 
30 

30 

- 
- 
- 
- 
- 
- 
- 

- 
- 
30 
30 
32 
- 
12 
13 

- 
- 
- 

- 
- 

- 

- 
- 
12 
12 
12 
13 
13 

(1) On 24 March 1992 Portugal abolished the zero rate. All goods and services previously zero-rated are 
now taxed at 6%. 

Romania 
01/07/1993 
01/01/1995 
01/02/1998 
01/01/2000 
01/01/2004 
01/12/2008 
01/07/2010 
01/01/2016 
01/01/2017 

Slovenia 
01/07/1999 
01/01/2002 
01/07/2013 

Slovak Republic 
01/01/1993 
01/08/1993 
01/01/1996 

18 
18 
22 
19 
19 
19 
24 
20 
19 

19 
20 
22 

23 
25 
23 

- 
9 
11 
- 
9 
5 | 9 
5 | 9 
5 | 9 
5 | 9 

8 
8.5 
9.5 

5 
6 
6 

103 

- 
- 
- 
- 
- 
- 
- 
- 
- 

- 
- 
- 

- 
- 
- 

- 
- 
- 
- 
- 
- 
- 
- 
- 

- 
- 
- 

- 
- 
- 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
01/07/1999 
01/01/2003 
01/01/2004 
01/01/2007 
01/05/2010 
01/01/2011 

Finland 
01/06/1994 
01/01/1995 

10 
14 
- 
10 
6 | 10 
10 

5 | 6 | 12 
6 | 12 | 17 

23 
20 
19 
19 
19 
20 

22 
22 

- 
- 
- 
- 
- 
- 

- 
- 

- 
- 
- 
- 
- 
- 

- 
- 

MEMBER STATES 
AND DATES 

REDUCED RATE 

STANDARD RATE 

INCREASED 
RATE 

PARKING 
RATE 

01/01/1998 
01/10/2009 
01/07/2010 
01/01/2013 

Sweden 
01/01/1969 
01/01/1971 
01/06/1977 
08/09/1980 
16/11/1981 
01/01/1983 
01/07/1990 
01/01/1992 
01/01/1993 
01/07/1993 
01/01/1996 

United Kingdom 
01/04/1973 
29/07/1974 
18/11/1974 
12/04/1976 
18/06/1979 
01/04/1991 
01/04/1994 
01/01/1995 
01/09/1997 
01/12/2008 
01/01/2010 
04/01/2011 

8 | 17 
8 | 12 
9 | 13 
10 | 14 

2,04 | 6,38 
3,09 | 9,89 
3,54 | 11,43 
3,95 | 12,87 
3,67 | 11,88 
3,95 | 12,87 
4,17 | 13,64 
18 
21 
12 | 21 
6 | 12 

- 
- 
- 
- 
- 
- 
- 
8 
5 
5 
5 
5 

Source: Commission website 

22 
22 
23 
24 

11.11 
17.65 
20.63 
23.46 
21.51 
23.46 
25 
25 
25 
25 
25 

10 
8 
8 
8 
15 
17.5 
17.5 
17.5 
17.5 
15 
17.5 
20 

- 
- 
- 
- 

- 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 

- 
- 
25 
12.5 
- 
- 
- 
- 
- 
- 
- 
- 

- 
- 
- 
- 

- 
- 
- 
- 
- 
- 
- 
- 
- 
- 
- 

- 
- 
- 
- 
- 
- 
8 
- 
- 
- 
- 
- 

104 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
9.6.  Technical document presented to the GFV by the Commission  

EUROPEAN COMMISSION 
DIRECTORATE-GENERAL 
TAXATION AND CUSTOMS UNION 
Indirect Taxation and Tax Administration 
Value Added Tax 

Group on the future of VAT 
18th meeting – 28 April 2017  

taxud.c.1(2017) – EN 

Brussels, 11 April 2017 

GROUP ON THE FUTURE OF VAT 

GFV NO 057 

Technical options for the 2017 Commission proposal on 
‘Reform of rules on VAT rates’ 

105 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Background 

The  rules  on  rates  set  by  the  VAT  Directive  were  agreed  in  1992  as  a  basis  for 
introducing an  origin-based  VAT  system.  Since 2012,  however,  the  EU  has  abandoned 
the  objective  of  an  origin-based  system  and  has  instead  been  working  on  introducing  a 
definitive VAT system based on the alternative destination system. Destination systems, 
by nature, require much less alignment in taxation levels and, consequently, less stringent 
rules  on  VAT  rates.  For  this  reason,  in  the  Action  Plan  on  VAT  of  7 April  2016,  the 
Commission outlined two options for modernising rules on VAT rates to bring them fully 
into  line  with  a  destination-based  VAT  system  and  to  allow  Member  States  more 
flexibility in setting VAT rates. The first option would result in a proposal to extend and 
regularly review Annex III of the VAT Directive (the list of goods and services eligible 
for  reduced  rates),  whereas  the  section  option  would  result  in  an  outright  abolition  of 
Annex III.  

On 25 May 2016, in the conclusions85 of the meeting on the Action Plan on VAT86, the 
Council took note of the direction of action proposed by the Commission with regard to 
VAT rates and of its intention to make a legislative proposal in 2017, proposing a reform 
to give more freedom to Member States in setting up rates and proposing two options. In 
addition, the Council 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, while warning that a sufficient level of 
harmonisation  in  the  EU  remains  required  and  the  adopted  solution  has  to  be  carefully 
balanced to avoid distortion of competition, a rise in business costs and a negative impact 
on the functioning of the single market.  

Purpose of the document 

The  Commission  plans  to  present  a  legislative  proposal  on  reforming  the  VAT  rates 
system  in  the  autumn  2017.  While  the  choice  of  a  rates  system  ultimately  depends  on 
political  preferences,  the  Commission  would  like  to  consult  Member  States’  tax 
administrations on a number of design elements which are more technical in nature. This 
technical  paper  aims  at  providing  a  basis  for  such  a  discussion  at  the  meeting  of  the 
Group on the Future of VAT.  

General direction of reform 

The legislative proposal should address two issues: 

1) What is the right level of restrictions, if any, to the Member States’ freedom in setting 
VAT rates?  

2) Which new rules should replace the derogations to the VAT rates that will expire upon 
the changeover to the definitive VAT system?   

85   See http://www.consilium.europa.eu/en/press/press-releases/2016/05/25-conclusions-vat-action-plan 
  The Council on the same date also approved the Commission's proposal for prolonging temporarily the 

duration of the obligation to respect a 15% minimum standard rate of VAT until the end of 2017.  

86   https://ec.europa.eu/taxation_customs/sites/taxation/files/com_2016_148_en.pdf 

106 

 
                                                 
Problem 1: Constraints set by the general rules 

The VAT Directive sets out general rules framing Member States’ freedom to set VAT 
rates. Currently, a ‘standard’ VAT rate of a minimum rate of 15% has to be applied to all 
taxable  supplies  of  goods  and  services.  However,  Member  States  can  choose  to  tax 
certain goods and services specifically listed in the Annex III of the VAT Directive using 
one or two different ‘reduced’ VAT rates, set at no less than 5%. Member States are not 
allowed  to  extend  the  scope  of  the  reduced  rates  to  goods  and  services  not  covered  by 
Annex III. 

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, and faces an already extensive  de facto 
adoption  of  the  destination  principle.  The  design  of  the  rates  system  needs  to  take  this 
change into account.  

The study on VAT rates, whose draft version has been distributed ahead of the meeting, 
has not found evidence of any meaningful risk for distortion to the Single Market from 
the operation of different levels of VAT rates. As such, the current constraints to Member 
States'  tax  policies  are  arguably  not  fully  justified  with  regard  to  the  subsidiarity 
requirement  set  by  Article 113 TFEU  (‘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’).  

Although  current  rules  on  VAT  rates  do  provide  Member  States  with  a  wide  room  for 
manoeuvre,  they  nevertheless  set  significant  constraints  to  their  action.  This  is 
demonstrated  by  two  phenomena:  first,  the  frequent  requests  for  changes  in  the  VAT 
Directive in the direction of extending the scope for reduced, super-reduced or zero rates 
(by  way  of  example,  just  in  the  last  two  years  such  requests  were  put  forward  in  three 
different domains) and second, the large number of infringements to the VAT directive in 
the domain of VAT rates. These derive from the fact that several Member States, owing 
to  the  time  required  to  obtain  changes  in  the  VAT  Directive  or  the  inability  of  the 
Council  to  agree  on  such  changes,  take  the  shortcut  of  directly  introducing  changes  in 
their national VAT legislation, introducing VAT rates that they know are contrary to EU 
law. 

Problem 2: Derogations from the general rules 

The  simple  general  rules  on  rates  were  considerably  complicated  by  the  granting  of  a 
multitude  of  derogations  upon  adoption  of  the  Directive  in  1992.  These  derogations 
allow specific Member States to apply reduced rates lower than 5% (super-reduced rates 
and  also  zero  rates)  or  to  apply  specific  reduced  rates  of  a  minimum  of  12%  (parking 
rates) to specific goods and services and most of them will expire with the adoption of a 
definitive VAT system.  

One  should  add  that,  apart  from  the  issue  of  their  expiry,  derogations  undermine  the 
simplicity  and  coherence  of  the  EU  VAT  system  and  contradict  the  principle  of  equal 
treatment.  There  has  also  been  pressure  from  some  Member  States  to  grant  further 
derogations from the system, as highlighted by the so-called ‘tampon tax’ controversy. 

107 

 
The  forthcoming  legislative  proposal  should  address  both  of  these  issues.  It  should  be 
noted however that no extension of rate flexibility is planned in the case of supplies that 
are still taxed under special schemes operating on the origin principle.  

Technical direction of reform 

The  Commission  identified  increased  flexibility  as  the  guiding  principle  to  address  the 
first problem (constraints) and equal treatment of Member States as the guiding principle 
for the second problem (derogations). 

Possible Dimensions of flexibility 

Flexibility dimension 1: Extension of Annex III 

While option 2 would abolish Annex III altogether, Option 1 is based on extending and 
regularly reviewing the supplies covered by Annex III. This raises the question of a) how 
to extend the Annex; and b), how to review it.  

a) How to extend annex III 

As indicated in the Action Plan on VAT, an extension of Annex III should at least take 
into account technological and economic developments. A first step in that direction was 
made  recently  with  the  Commission’s  proposal  to  enable  Member  States  to  apply  a 
reduced VAT rate to electronically supplied publications. 

The  identification  of  the  changes  to  be  made  to  Annex  III  should  take  into  account 
Member States’ suggestions and could be based on the two following criteria: 

a)  Changes to adapt the Annex to technological, economic or social developments;  

b)  Changes to address ambiguous terminology (e.g. ‘social housing’); 

Council recommendations call for adaptations to be carried out maintaining a sufficient 
level  of  harmonisation  and  preventing  unjustified  increases  in  compliance  costs  for 
businesses. Increases in compliance costs could be mitigated by the foreseen extension of 
the MOSS and by the introduction of a web portal providing accurate, timely and binding 
information  on  the  reduced  VAT  rates  in  place  in  each  Member  State.  Harmonisation 
could be introduced by defining goods that can benefit from a reduced VAT rate on the 
basis  of  the  Combined  Nomenclature;  this  would  also  decisively  cut  rate  identification 
costs for businesses. 

What  categories  of  Annex III  require  adaptation,  in  the  view  of  Member  States?  What 
criteria should be used to identify priorities? 

Process:  

The  Action  Plan  does  not  specify  which  process  to  follow  for  the  extension  and 
especially the successive regular review of the contents of Annex III. Experience shows 
that negotiations in the Council on the basis of a Commission proposal can be long and 
difficult and tie up the Council Working Party on Tax Questions on technical questions 
that might easier be addressed in the preparation of a proposal. It seems that the Group on 
the Future of VAT could be an appropriate forum to discuss and prepare regular updates 
of Annex III. 

108 

 
Which  arrangements  would  the  Member  States  favour  for  the  updating  of  Annex III? 
How  should  the  process  be  defined?  At  what  intervals  should  the  regular  review  of 
Annex III take place? 

Flexibility dimension 2: number of rates 

Currently  the  general  rules  provide  for  a  standard  rate  and  a  maximum  number  of  two 
reduced rates; de facto, however, derogations provide for some Member States to apply 
many more different rates (typically three-four, but five in the case of Ireland, counting 
zero rates).  

While a more VAT rates allow Member States more flexibility, the recent study by PWC 
has found that an increase in the number of VAT rates could lead to an exponential rise 
in  business  compliance  costs  and  to  a  similar  increase  in  the  cost  for  public 
administration. On the other hand, cutting the number of rates is politically sensitive. The 
maximum number of VAT rates applied in the EU is five, but 21 Member States apply 
three or less VAT rates87. 

Do  the  Member  States  desire  more  flexibility  concerning  the  number  VAT  rates?  What 
should be the maximum number of VAT rates allowed? 

Flexibility dimension 3: level of minimum rates 

The floor to rates fixed in the directive was directly linked to the avoidance of distortion 
in  an  origin  system  but  this  justification  falls  away,  in  most  cases,  in  a  destination 
system. An EU-level floor to rates may limit lobbying activities by sectors hoping to get 
more favourable treatment, but the absence of minimum rates in itself cannot generally 
lead to a rise in business costs or, except in special cases, to distortion of competition in a 
destination based VAT system.  

The justification for the current minimum of 15% for the standard VAT rate, which will 
expire by the end of 2017, appears particularly doubtful from an economic perspective. 
Apart  from  the  absence  of  any  distortion  risk,  lowering  the  standard  VAT  rate  below 
15% is from the current perspective an unrealistic scenario looking at the standard rates 
currently applied by Member States (17% to 27%) and their fiscal constraints. Given the 
expiration of this provision, as of 2018 Member States would only be restricted to apply 
a standard VAT that is higher than the reduced rates.  

In  contrast,  the  current  minimum  of  5%  for  reduced  rates  could  be  maintained  in  a 
definitive VAT system, but the fact that, thanks to derogations, rates lower than 5% have 
in  the  past  applied  to  all  categories88  of  Annex  III,  sheds  doubt  on  the  ‘potential 
distortion’ argument supporting this.  

87   The  latter  are  the  Member  States  that  do  not  apply  super-reduced  or  zero  rates.  It  seems  therefore 
appropriate to adjust the maximum number of VAT rates in case super-reduced and zero rates should be 
granted to all Member States. 

88   Except to the supplies that were added to Annex III in 2009. 

109 

 
                                                 
What are Member States’ views on the need for a minimum rate level, and what should 
this level be?  

Flexibility dimension 4: granting existing derogations to all Member States  

The  Council  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.    

By  definition,  granting  to  all  Member  States  what  is  already  applied  in  one  or  more 
Member States cannot harm the functioning of the internal market, if the internal market 
is functioning under the current arrangements. It would solve the problem that the current 
temporary  provisions  will  expire  with  the  entry  into  force  of  definitive  VAT 
arrangements.  The  alternative  solution,  phasing  derogations  out,  has  not  worked  in  the 
past  except  upon  accession.  This  pleads  in  favour  of  extension  of  derogations  to  all 
Member  States.  On  the  other  hand,  some  of  the  derogations  are  highly  particular 
provisions, and their inclusion in Annex III would be technically difficult.  

Do Member States favour extending derogations to all Member States or phasing them 
out? Should the derogations be introduced in a new Annex III, which would include zero 
and super-reduced rates? 

Timing of entry into force of the new rules 

The new rules on rates could enter into force on the same date as the definitive system, 
but this is not a necessity. For example, the changes in Annex III could enter into force 
earlier if there is an urgent need to address obsolete provisions, but a choice could also be 
made in favour of avoiding a too frequent disruption of the VAT system. Similarly, the 
new  rules  on  derogations  could  enter  into  force  at  a  different  time  from  the  new  rate 
rules,  e.g.  to  give  sufficient  adaptation  period  for  a  phase-out  or  extension,  or  to  avoid 
burdening operators with too many changes at the same time.  

Do Member States favour implementation on the same date for all changes to rate rules, 
including derogations, or should there be different times for entry into force? If so, what 
elements should enter into force later? 

Possible elements of the options 

A common feature of both options would be the restriction of the number of VAT rates 
and the difference between the two options would be the scope of Annex III. The level of 
rates to be fixed depends on the choice by Member States and is independent from the 
preferred option.   

Commission services’ views on possible elements of option 1 (extension of Annex III) 

Updating  Annex III  to  what  Member  States  apply  in  practice  would  require  a  broader 
definition of existing categories of Annex III, e.g. to allow a reduced rate for the letting 
of  medical equipment as  part  of category 4, for the construction  of buildings  as  part of 
categories 10  and  10a  and  for  minor  repairs  other  than  those  listed  in  category 19. 
Furthermore, new categories could be added to Annex III, e.g. internet access services. 

110 

 
Another area could concern reduced rates for electronically supplied services apart from 
e-publications,  which  have  an  analogue  counterpart  included  in  Annex III,  notably 
telecommunication and broadcasting services. 

On the other hand, there are also demands to allow for the applications of zero rates for 
products  that  are  already  included  in  Annex III,  e.g.  sanitary  protection  products  and 
demands to allow for zero rates for supplies that are not even included in Annex III, e.g. 
live-saving and rescue equipment, energy saving materials and tissues and cells. 

Therefore,  option 1  needs  to  follow  a  structured  approach.  First  the  scope  of  Annex III 
needs to be determined and in a second step minimum rates would need to be determined 
for each specific category of the extended Annex III. 

Granting existing derogations to all Member States  

Parking,  super-reduced  and  zero  rates  according  to  Title VIII,  Chapter 4  (temporary 
provisions) mostly relate to categories included in Annex III, but Annex III would have 
to be extended in order to grant all derogations of Chapter 4 to all Member States. 

An  extension  of  Annex III  (and  the  possibility  to  apply  rates  lower  than  5%)  would 
provide  Member  States  currently  applying  super-reduced  and  zero  rates  with  legal 
certainty, given that the CJEU in Case C-596/10 ruled that super-reduced rate cannot be 
applied to supplies that were not included in Annex III of the VAT Directive. 

On  the  other  hand,  an  extension  of  Annex III  is  technically  complex,  because  existing 
super-reduced  and  zero  rates  are  sometimes  limited  and  targeted  VAT  subsidies.  The 
narrow  scope  of  such  derogations  could  even  lead  to  disputes  with  regard  to  fiscal 
neutrality once they are added to Annex III. 

An additional problem arises in cases where the conditions for the applications of super-
reduced  and  zero  rates  refer  to  national  provisions  outside  the  VAT  system,  specific 
national institutions or regional rates. There is no possibility to include such conditions in 
EU VAT law as general provisions. They can only be granted on a permanent basis in a 
definitive VAT system or expire.   

Finally, when Member States agreed on the scope of Annex III in 1992, they could not 
agree  to  include  all  points  of  Annex X  also  in  Annex III  and  some  points  were  only 
partially  included  in  Annex III.  This  leads  to  a  situation  where  several  Member  States 
may be infringing the VAT Directive by applying a reduced rate to services included in 
Point 10 of Annex X (passenger transport), but which are not included in Annex III. 

In addition, Annex X in connection to Articles 371 to 390c will expire upon the adoption 
of  the  definitive  VAT  system.  It  allows  Member  States  to  continue  to  exempt  certain 
supplies under the conditions applied on 1 January 1978 and some of these exemptions 
are de facto zero rates. The Commission could propose to enlarge the scope of Annex III, 
if categories of Annex X are only partially included in Annex III and to add to Annex III 
the points of Annex X, where the exemptions are still applied and de facto constitute zero 
rates.  This  could  also  include  a  change  of  the  place  of  supply  rules  for  passenger 
transport services in-line with a Commission proposal from 1993 and Article 393 of the 
VAT Directive.  

111 

 
Commission services’ views on possible elements of option 2 (abolishing Annex III) 

Under option 2 Annex III would be abolished. The minimum of 15% for the standard rate 
would expire and also the minimum of 5% for reduced rates could be abolished with the 
aim  of  granting  existing  derogations  to  all  Member  States  and  provide  Member  States 
will full flexibility in setting VAT rates.  

However, also  under option 2 the number of reduced  rates would need  to  be limited in 
order  to  reduce  the  risk  of  frequent  changes  in  the  level  of  rates  and  limit  the  rise  in 
compliance costs. 

As mentioned before, a potential increase in business costs could be also mitigated by the 
foreseen extension of the MOSS, by a web portal providing accurate, timely and binding 
information  on  the  reduced  VAT  rates  in  place  in  each  Member  State,  and  by  an 
obligation to define goods that can benefit from a reduced VAT rate on the basis of the 
Combined  Nomenclature89.  A  link  in  the  national  VAT  law  to  the  Combined 
Nomenclature  already  exists  in  several  Member  States  and  these  Member  States  are 
invited to elaborate on their experience.   

In  addition,  a  list  of  products  that  cannot  be  subject  to  reduced  VAT  rates  could  be 
established as a safeguard. This list would at least include services that are taxed at the 
place  of  establishment  of  the  supplier  and  supplies  under  a  special  VAT  scheme  and 
possibly  other  supplies  which  may  be  at  greater  risk  for  distortions  in  light  of  their 
characteristics.  

To  conclude,  one  key  advantage  of  option 2  is  that  the  issue  of  derogations  would  be 
easily  solved  by  abolishing  Annex III  and  minimum  rates.  Under  option 1  equal 
treatment  of  Member  States  would  be  difficult  to  achieve,  because  existing  parking, 
super-reduced and zero rates are sometimes targeted VAT subsidies with a narrow scope. 

Questions to the delegates 

The delegates are invited to comment on: 

1)  Extensions of Annex III 

2)  Extending the number of rates 

3)  Duration and level of minimum rates  

4)  Granting derogations to all Member States 

5)  Timing of entry into force of the new rules 

6)  Elements of option 1 

7)  Under option 1, how to extend and to regularly review Annex III 

8)  Elements of option 2 

9)  Under option 2, measures to mitigate compliance costs. 

89   When declared to customs in the Union, goods must generally be classified according to the Combined 

nomenclature. 

112 

 
 
 
                                                 
9.7.  Economic impact of VAT infringements  

No estimates of the economic impact of Member States infringing the VAT Directive are 
conducted  prior  to  starting  an  infringement  procedure,  as  unlawful  provisions  must  be 
challenged irrespective of their size; as such, it is not possible to provide estimates for all 
infringement  cases.  Therefore,  only  rough  estimates  of  the  turnover  involved  can  be 
formulated, for the cases where it was possible to identify sectoral turnover in statistics.  

It  must  be  stressed  that  the  impact  on  turnover  determined  below  is  likely  to  be  a 
substantial  overestimate  in  most  cases,  because,  as  a  rule,  not  all  sales  from  a  given 
sector will be affected.  

Infringement cases on horses in Ireland 

Bloodstock Sales at Public Auction 

EUR 164.2 million 

Export Sales at Public Auction  

EUR 272.9 million 

(Source:  http://www.hri.ie/press-office/press-releases/2016-irish-thoroughbred-industry-
statistics/) 

Horse sector turnover in France: ~EUR 300 million in 2013 (source: DG BUDGET data) 

Horse sector turnover in Italy:  ~EUR 300 million in 2011 (source: DG BUDGET data) 

The size of the distortion is represented by the following formula: 

(1)  

𝐷 = 𝑇 ∙   ∆𝑟 ∙ 𝑆  

Where T is the sectoral turnover, S is the % share of sectoral turnover affected, and ∆𝑟 is 
the difference between the unlawfully applied rate and the lawful rate. S is typically an 
unknown  parameter,  but  it  cannot  exceed  1,  whereas  ∆𝑟 will  depend  on  the 
circumstances  of  each  case,  but  it  cannot  exceed  the  difference  between  the  lowest 
applied rate in the country and the standard rate. For simplicity we assume the maximum 
value  of  the  product  S∆𝑟  to  amount  to  0.1.  This  would  give  the  following  maximum 
turnover impacts:  

IE: EUR 43.7 million 

IT: EUR 30 million 

FR: EUR 30 million 

These values represent respectively 0.017%, 0.002%, and 0.0015% of 2015 GDP in the 
Member States considered90 and 0.36%, 0.03% and  0.02% of 2015 VAT revenues.  

CZ Diapers 

Average per capita consumption of diapers per child for the first three years of life was 
965 units in the Czech Republic in 201691. Taking into account that in 2013 in the Czech 

90 Source: http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=nama_10_a10&lang=en  

113 

 
 
 
 
 
 
 
 
 
                                                 
Republic 107000 births were registered, the total market size of baby diapers is estimated 
at  310  million  units.  At  0.3  EUR/piece,  the  total  market  turnover  can  be  roughly 
estimated at EUR 93 million. Applying formula (1) with a S∆𝑟 parameter of 0.1 yields an 
estimate of EUR 9.3 million. This is equivalent to 0.076% of 2014 VAT revenue. 

Energy saving materials 

GFCF  on  energy  saving  materials  in  all  homes  was  estimated  at  GBP 148.5 million  in 
2010 in the UK (source: internal data by DG Budget). Applying formula (1) with an 0.1 
value for 𝑆∆𝑟 yields GBP 15.0 million, equivalent to 0.012% of VAT revenue.  

Other  estimated  costs  in  terms  of  VAT  revenue  loss    in  GBP  million,  2016  are  as 
follows: 

Reduced rate of VAT on children’s car seats  

Reduced rate of VAT on contraceptive products 

Reduced rate of VAT on smoking cessation products 

Reduced rate of VAT on women’s sanitary products   

Zero rate of VAT on cycle helmets 

25 

15 

20 

40 

20 

Source: 
structural-reliefs 

https://www.gov.uk/government/statistics/minor-tax-expenditures-and-

In terms of the impact on VAT revenues, these amounts range from 0.012% to 0.03% of 
the total.   

91  Source: http://www.euromonitor.com/nappies-diapers-pants-in-the-czech-republic/report  

114 

 
 
 
 
 
 
 
                                                                                                                                                 
9.8.  Overview of risks 

Risk 

Option 

Factors increasing 

Factors decreasing 

Overall assessment 

to 

linked 

factors 

Risk 
a 
complication  of  provisions  could 
prevail, leading to more complexity 
in  the  VAT  Directive  than  at 
present. 

to  a 

depending 

from  a 
Outcomes  could  vary 
substantial  
deterioration 
improvement 
on 
various circumstances. Overall, the 
simplifying effect of the web portal 
should  prevail  as  easy  looking  up 
of  the  applicable  rate  makes  the 
number of rates less relevant. This 
however  depends  on  proper 
implementation  of  the  CPA/web 
portal; 
improper 
implementation  could  lead  to  a 
short-run  increase  in  complexity. 
The  increase  in  complexity  also 
depends  strongly  on  how  many 
new  rates  Member  States  will 
introduce.  

Incomplete  or 

The combination of one lower rate 
and  the  introduction  of  the  new 
CPA  in  the  portal  should  offset  or 
more  than  offset  any  possible 
greater 
of 
negative 
complication in Annex III. 

effect 

As  in  Option  2,  possible  outcomes 
range  from  a  deterioration  to  a 
clear  improvement,  depending  on 
the  implementation  of  the  web 
portal  and  on  Member  States' 
actions. 

As  in  Option  2,  possible  outcomes 
range  from  a  deterioration  to  a 
clear  improvement,  depending  on 
the  implementation  of  the  web 
portal  and  on  Member  States' 
actions. 

No  improvement  from  status  quo 
expected 

Option 1 

of 

Increase 
complexity/ 
business 
costs 

Option 2 

aggregation 

of 
The 
different 
many 
some  of 
provisions, 
which  national,  will 
yield 
very 
a 
complicated Annex III  

Member  States  may 
introduce  a  substantial 
number of new reduced 
rate categories 

The  regular  review  in  the 
VAT Committee may yield 
simplification of wording 

on 

The  new  CPA  and  the 
web  portal  provide  a 
powerful tool for creating 
transparency 
the 
applicable  rate.  This  will 
allow  operators  to  profit 
fully  from  the  extension 
the  One-stop-shop 
of 
introduced  with 
the 
definitive regime.  

Sub-option 
2a 

Similar  to  Option  2,  but  somewhat  better  given  a 
lower total number of rates. 

one 

(with 
less rate) 

Sub-option 
2b 

Similar  to  Option  2  as  the  5%  minimum  for  the 
average rates does not reduce complication 

Sub-option 
2c 

Similar  to  Option  2  as  the  extended  negative  list 
would not reduce complication 

Risk 
litigation 

of 

Option 1 

regular 

The 
review 
should  provide  greater 
opportunities 
for 
technical  review  of  the 
norms 

by 

The increase in the range 
of  reduced  rates,  and 
the  new 
even  more 
made 
wording 
the 
indispensable 
all 
inclusion 
derogations  in  Annex  III, 
heighten 
risk  of 
the 
litigation on the definition 
of  the  boundaries  and, 
fiscal 
potentially, 

on 

of 

115 

 
 
Option 2 

neutrality 

Member 

States 
If 
introduce 
too  narrow 
reduced  rates  categories, 
there is a risk of inducing 
litigation on tax neutrality 
grounds. 

Sub-option 
2a 

As for option 2 

Sub-option 
2b 

Sub-option 
2c 

As for option 2 

As for option2 

(e.g. 

on 
Litigation 
boundaries  should  be 
reduced by the removal 
of  finalities  from  VAT 
categories 
'for 
social purposes'), which 
under the new CPA will 
be  mostly  based  on 
product categories, and 
by a stronger alignment 
to customs definitions. 

Marginally less than for 
Option  2  on  account  of 
the 
lower  number  of 
rates 

The  overall  effect  will  depend 
strongly  on  Member 
States' 
actions,  which 
in  turn  may  be 
influenced  by  political  factors.  As 
such,  it  is  hard  to  come  to  a 
For 
definitive 
cautionary  reasons,  we  assume 
here  a  worsening  of  the  risk  of 
litigation from status quo.  

conclusion. 

As for option 2 

of 

Option 1 

Risk 
revenue 
erosion 

The  scope  of  goods  and 
which 
for 
services 
reduced 
super-
and 
reduced rates is widened. 
Sectors  benefiting  from 
reduced  rates 
in  other 
country  will  lobby  for  a 
similar 
at 
home.  

treatment 

Past  experience  shows 
that  the  extension  of  a 
reduced  rate  is  often 
offset  by  equivalent 
revenue-raising 
measures, 
commonly 
leading to an equivalent 
increase 
the 
of 
standard rate.  

VAT  is  a  central  revenue-raiser  in 
all  countries  and  this  role  will  not 
change. Thus, erosion is likely to be 
gradual and manifest itself through 
a  higher  standard  rate  or  even  in 
higher 
revenues. 
Nevertheless,  it  is  possible  that  as 
successive  sectors  are  granted 
treatment,  VAT 
rate 
reduced 
somewhat 
revenue  may 
affected 
run 
in 
compared to status quo. 

non-VAT 

longer 

the 

be 

Option 2 

VAT  rates  can  be  applied 
on  any  supply  not  falling 
in 
list. 
the  negative 
Sectors  benefiting  from 
in  other 
reduced  rates 
countries  will  lobby  for  a 
similar 
at 
home.  New  merit  good 
categories 
be 
established. 

treatment 

may 

Overall,  some  revenue  erosion 
may occur over the long run due to 
the 
cumulative  effect  of  an 
extension  of  reduced  rates.  This 
erosion will probably be limited by 
actions  to  offset  the  revenue 
erosion within and outside the VAT 
system.  

As 
In 
for  option  1. 
addition,  the  budgetary 
safeguard  and  of  the 
list  prevents 
negative 
falling 
from 
revenue 
certain 
below 
a 
The 
threshold. 
the 
extension 
reduced 
to  all 
rate 
supplies  outside  of  the 
list  might 
negative 
for 
reduce  pressure 
individual 
granting 
favourable 
sectors  a 
treatment.  

of 

Sub-option 
2a 

Similar to option 2 

As 
in  option  2.  Overall,  some 
revenue  erosion  may  occur  over 
the long run due to the cumulative 
effect  of  an  extension  of  reduced 
rates.  

Sub-option 

Similar to option 2 

Compared  to  option  2, 
the  addition  of  a  5% 

Overall somewhat lower risks than 
under  option  2  on  account  of  the 

116 

 
 
 
 
 
 
 
 
 
 
2b 

Sub-option 
2c 

Similar to option 2 

additional revenue safeguard.  

Lower risks than under option 2 on 
account  of  the  extended  negative 
list.  

provides 

minimum  for  reduced 
an 
rates 
safeguard 
additional 
from  revenue  erosion. 
This safeguard may play 
an 
role 
important 
particularly in offsetting 
impacts  of  zero-
the 
rating. 

Compared  to  option  2, 
the  extended  negative 
an 
list 
provides 
additional 
safeguard 
from  revenue  erosion. 
This safeguard may play 
important  role  of 
an 
granting  flexibility  only 
in so far as derogations 
are concerned. 

117 

 
 
 
 
10.  GLOSSARY  

Abbreviations: 

B2B 

B2C 

Business-to-business 

Business-to-consumer 

CGE 

Computable General Equilibrium 

CN 

CPA 

DG 
TAXUD 

EC 

EU 

EUR 

GFV 

Combined Nomenclature 

Classification of products by activity  

Directorate-General for Taxation and Customs Union 

European Community 

European Union 

Euro 

Group on the Future of VAT 

MOSS 

Mini One Stop Shop 

MS 

Member State 

NACE 

Statistical classification of economic activities 

PwC 

TBE 

PricewaterhouseCoopers 

Telephony, Broadcasting and Electronically Supplied Services 

TFEU 

Treaty on the Functioning of the European Union 

TOMS 

Tour Operators Margin Scheme 

UK 

VAT 

VEG 

United Kingdom 

Value-Added Tax 

VAT Expert Group 

118 

 
 
Administrative costs 

Costs for tax administrations. 

Administrative  costs  for  a  tax  administration  will  include 
costs  relating  to  the  following  activities:  processing  VAT 
registrations,  undertaking  VAT  audits,  reviewing  VAT 
returns,  reviewing  recapitulative  statements,  helpline  and 
written  query  handling,  and  the  implementation  of  new 
legislation. 

Compliance costs 

Costs for businesses. 

Cross-border trade  

Compliance costs for businesses will include costs relating to 
the  following  activities:  registration  for  VAT,  completion  of 
periodic  VAT  returns,  dealing  with  a  VAT  audit,  obtaining 
completing 
registration 
customer’s  VAT 
recapitulative statements, and obtaining proof of the intra-EU 
movement of goods. 
Refers solely to intra-EU cross-border B2B trade. 

details, 

The terms ‘trading across the EU’, ‘trading cross-border’, 
‘trading in another Member State’, ‘doing business in other 
Member States’ doing business across the EU’, ‘intra-EU 
transactions’, ‘intra-EU trade’ refer to any situation where a 
business makes supplies of goods taxable in a Member State 
other than that in which he is established, acquires goods 
from a business established in another Member State or 
supplies goods to a customer established in another Member 
State.   

Member States experts  Members of the GFV 
Members of the VEG 
Expert stakeholders  
Missing Trader Intra-Community (MTIC) fraud 
MTIC fraud  
Under  Article 398  of 
(Directive 
VAT Committee 
2006/112/EC), the VAT Committee deals with the obligatory 
consultations required by certain Articles of that Directive. In 
addition,  it  examines  questions  on  the  application  of  the  EU 
VAT provisions raised by the Chairman on his own initiative 
or at the request of a Member State. The VAT Committee is 
also  a  forum  for  the  exchange  of  views  in  order  to  reach 
guidelines on a uniform application of common practices with 
regard to VAT provisions. 

the  VAT  Directive 

119