On December 7th, 2021, the European Union (EU) finance ministers agreed to update the current rules governing value added tax (VAT) for goods and services, by allowing reduced VAT rates subject to conditions. The EC approved the following:
- Updating the list of goods and services to which all EU Member States can apply reduced VAT rates (Annex III of the VAT directive), taking into account the digital transformation of the economy. As reported, the driver of the update was the benefit to the final consumer;
- Not allowing EU Member States to apply reduced rates and exemptions to goods and services deemed detrimental to the environment and to the EU’s climate change objectives (by 2030). The Council introduced environmentally-friendly goods and services in the list for which reduced rates are allowed, such as solar panels, electric bicycles and waste recycling services.
- Making available to all countries certain exemptions or derogations (departures) for specific goods and services, as currently in place for “historical reasons” in certain EU Member States (those derogations not justified by public policy objectives unless in support of EU’s climate action to end by 2032). This measure is to ensure all member states are treated equally.
Mr. Andrej Šircelj, Slovenian Minister for Finance, stated that “Today, we agreed on the proposal for a Council directive on rates of value added tax. This file has been discussed in the Council for a long while, and I’m glad that we have found a way to bring it to conclusion.” (https://www.consilium.europa.eu/en/press/press-releases/2021/12/07/council-reaches-agreement-on-updated-rules-for-vat-rates/)
A new provision in the VAT directive was also added to address possible future crises and to enable member states to respond swiftly to exceptional circumstances, like pandemics, humanitarian crises or natural disasters.
The updated rules will now be sent to the European Parliament for its consultation on the final text by March 2022. Once formally adopted by EU Member States, the legislation will become effective 20 days after its publication in the Official Journal of the EU.
For more information on the entry of this latest VAT rules and obligations, feel free to connect with our associate tax team at [email protected]