Before the pandemic, the European Union’s leaders were drawing strategies for the unification of the region’s VAT system. It was focused on minimizing VAT reductions and creating limitations for VAT exemptions. However, since then, the geopolitical and economic outlooks have changed dramatically, and the European countries have begun a process incompatible with the previously set direction for the VAT regime.
Below, you will find a summary of the recent and suggested shifts in the VAT policy, as well as our thoughts on what it could mean for the EU at large.
Here are some of the most significant VAT system changes that have taken place in the EU since the beginning of the COVID-19 pandemic:
- The Czech Republic has breached the VAT system and exempted gas and energy from VAT in November and December of 2021.
- Lithuania has reduced VAT on catering and takeaway services to 9% (the standard rate in the country is 21%) and is planning to hold it until December 2023.
- The Netherlands has a VAT cut on energy from April to December 2022. The rate was reduced from 21 to 9%.
- Belgium has implemented a similar tax reduction (from 21% to 6%) that lasts from April to the end of September 2022.
- Italy implemented a VAT reduction on gas (rate reduced to 5%) in the Q4 of 2021. It listed energy as tax-exempt in April and cut the fuels’ VAT rate to 5%. These reductions should be in place until July.
- Spain was also among the countries that cut VAT on energy in 2021. The cut, which lasted a year from June 2021, reduced VAT on energy by 11%.
- In April 2022, Poland approved the Retail Sales Tax Act and ratified the previously implemented VAT exemption on food, gas, and fertilizers. The country has also cut VAT on petrol and diesel to 8% for the duration of six months.
- Croatia reduced VAT on the country’s essential economic activities – accommodation, energy, and gas to 13% and also cut VAT on food, medical products, natural gas, and books to 5%.
- Cyprus’ VAT reductions took place from November 2021 to April 2022 and included cutting the VAT rate on energy for all households to 9% and vulnerable ones to 5%.
- Portugal implemented a VAT reimbursement mechanism on fuel until a VAT cut is approved. However, the public also expresses calls for implementing VAT cuts on essential items.
Some countries are still considering changing their VAT rates to accommodate the most vulnerable parts of the society:
- Malta called to reduce the standard VAT rate from 18% to 15.5% and expects to collect the same amount of taxes due to inflation and rising prices.
- Austrian trade unions and some political parties initiated a dialogue on reducing the VAT on essential items, including a zero VAT on food. Such changes would relieve the soaring inflation, say the supporting parties.
How did the EU react?
Following the national initiatives in many European countries, the heads of the union have updated the EU VAT Directive allowing for lower than the previous 5% minimum VAT threshold reductions and a broader array of goods and services to which the reductions can be applied.
What do these changes mean to Europeans?
The sudden shift of the European VAT Directive is a natural reactionary step to the changes in the global economy. The changes impacted by the pandemic and an outbreak of war led to rising inflation. The European officials understand that it is of utmost importance to secure the most vulnerable members of the society from possibly catastrophic effects of inflation and an economic slowdown.
However, the decision to utilize VAT reductions as a means to help the people in need is a matter of heated discussion. While temporarily cutting VAT might be used as an easily administered tool for securing some household incomes, it can and likely, will backfire with lower tax revenues and a shrinking EU budget as more and more countries will choose to lower the standard VAT rate, too.
As an alternative to VAT cuts, some experts suggest using a more individualized approach that focuses on increasing the incomes of the poorest households, such as refundable tax credits. Some countries are also eyeing another alternative – an income tax relief for people in the low-income brackets. The future will show which policies will prove to be more popular and effective in times of economic disturbances.
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