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Can we look forward to new VAT rates?

In mid-January, the European Commission submitted a proposal to amend VAT rate rules and adopt a number of VAT measures that should help small and medium-size businesses reduce their administrative burden in connection with cross-border transactions. This is part of an action plan aiming to introduce, inter alia, a definitive VAT system.

The current VAT rate rules are no longer suitable for member states, as they are restrictive. Nowadays, member states may only apply reduced VAT rates on a relatively limited number of specifically defined products. Some member states have also been enjoying exceptions to the rules that arose historically. It may therefore happen that whereas one member state applies a reduced or a zero VAT rate on a particular product, another member state must apply the standard VAT rate. 

Member states regard VAT rates as one of their most efficient tools to achieve their political goals. They welcome the European Commission’s response to their call for a greater flexibility in this area. This is part of the preparations for the adoption of a definitive VAT system that plans to tax the supply at the place of consumption. It will thus no longer be necessary to ensure the highest possible uniformity in applying VAT on individual commodities. To enhance flexibility, member states will be allowed to apply two reduced rates ranging from 5% to up to the basic rate amount, the zero rate and another reduced rate ranging from 0% to the reduced rates. The current list of products to which reduced rates may be applied will be cancelled. In its proposal, the Commission further defines supplies that should be liable to the basic VAT rate, such as arms, alcoholic beverages, hazardous games, smartphones, household appliances, fuels, consumer electronics and tobacco products. 

The proposal also contains VAT measures meant to support medium-size and small businesses by reducing their administrative burden connected with cross-border transactions and related duties. Administrative expenses incurred for cross-border transactions are approx. 11% higher than expenses of businesses operating on a local level. Generally, the proposal also extends the benefits that have so far been used only by smallest businesses to a wider range of medium-size and small businesses. 

In addition to the existing limits for mandatory registration, which are often applicable only to domestic entities, the Commission proposes other thresholds within which certain simplifications would take place. These involve a limit of EUR 100 thousand for businesses operating in several member states that could claim exemption from VAT or a limit of EUR 2 million allowing further simplification and the member states to determine relief for small businesses regarding tax registration, invoicing, accounting and frequency of tax returns. The proposals will be subject to further legislative procedures and will be effective only after the implementation of a definitive VAT system.