Scope:

Evaluation of EU rules on VAT rates

Evaluation findings

The current rules were designed for an origin-based VAT system and are no longer fit for purpose in a destination-based VAT system.

Estimated savings and benefits

The constraints to the VAT rate-setting ability of Member States represent a cost, in particular in case of infringement procedures without any economic relevance, by creating uncertainty for businesses. The only benefit for Member States lies in the fact that the restrictions imposed by EU law may reduce pressure by special interest groups.

The rules on VAT rate-setting had been put in place with an origin-based VAT system in mind, given that rate convergence is a prerequisite for the successful functioning of an origin-based VAT system. Indeed, the plan of introducing an origin-based VAT system necessitated to put in place stringent constraints, limiting Member States' freedom to change the level of VAT rates. Given the subsequent decision to establish a destination-based VAT system, these restrictions no longer have other benefits than a minor one, which is revenue protection. However, even within the origin-based VAT system, it is questionable whether costs incurred by such constraints could still be considered proportionate in comparison to the intended benefits. The Commission is required to launch an infringement procedure for any infringement of the VAT rates system, and this in principle irrespective of the often limited economic impact of the infringement. Such infringement procedures tie resources both at Member State as well as at European Commission level, while achieving little benefits in terms of limiting the risk of tax competition, given the limited economic relevance of most infringements.

Which objective(s) did the Commission pursue?

The initiative aims at simplifying the rules on VAT rates. It will ensure the coherence of the rules on VAT rate setting in a destination-based VAT system. Moreover, it could prepare the ground for the adoption of the definitive regime by providing a solution to the fact that derogations to the general rules will expire when the definitive regime is adopted.

Estimated savings and benefits

Granting Member States more flexibility in setting VAT rates will not result in any savings. There could even be a risk of revenue erosion, which has required a budgetary safeguard to be inserted in the proposal. However, the increase in flexibility is intrinsically linked to the definitive VAT system (ensuring equal treatment of Member States once the definitive system enters into force by allowing all Member States to (continue to) apply around 150 VAT rates that are for the moment only temporarily allowed for certain Member States).

Besides, the increase in flexibility to set VAT rates that goes beyond the increase required for the purposes of the definitive system aims at avoiding unnecessary constraints for Member States. Such flexibility would reduce litigation costs in case of infringement procedures with minor economic impact and would increase legal certainty for businesses. Furthermore, eliminating unnecessary restrictions is in line with the subsidiarity principle and could result in clearer rules and less red tape.