Germany, Spain and The Netherlands are experiencing a significant decrease in VAT rates on energy and fuel costs, and all the more EU member states are following suit.
In response to a historical inflation spike in the EU, multiple member states have confirmed temporarily reduced VAT rates on domestic energy, fuel, and foods.
What is the reasoning behind the sudden subsidies? An attempt to relieve consumers during a time of noteworthy price inflation. However, the VAT rate reductions haven’t come without a fair share of criticism.
EU member states have the freedom to reduce VAT rates on gas, electricity, and basic supplies without the need to consult the EU. This was confirmed following VAT rate freedom reforms, enforced on 6 April 2022. However, each country still has a different set of bylaws that apply. The most common rule is that although they can decrease their VAT rates, the rates may stay within the 5% threshold.
As it currently stands (November 2022), these reduced rates are expected to be effective until 31 December 2022, but some will be in effect until mid-2023 or later.
In 2020, only a handful of EU member states were granted the right to reduce VAT rates on certain goods and services to cushion the economic blow of the COVID-19 pandemic.
Austria and Germany were some of the selected few.
However, following recent VAT rate Freedom reforms, many countries have implemented reduced VAT rates to combat two main issues; the high energy, fuel, and gas prices and, secondly, the climbing inflation. As previously mentioned, the most recent amendments to the EU VAT directive have allowed all countries within the EU to reduce VAT rates where they feel necessary. However, this has subsequently increased the complexities of VAT systems that are already challenging to navigate.
Upon review of VAT reductions and other policy remedies, the International Monetary Fund (IMF) and The Organisation for Economic Co-operation and Development (OECD) have raised additional criticism towards the reduced VAT rates.
The main point of concern has been that cutting taxes on natural gas can reduce energy-saving initiatives and could benefit consumers from higher-income households.
Navigating EU VAT rates in an ever-changing environment can be challenging without guidance. For expert, industry-specific guidance, download VAT IT’s latest EU Refund Directive VAT Rate Guide if your company is based outside the EU. Alternatively, chat with our experts, who will help you with your specific VAT treatment and queries.
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