Inequalities in applying the exemptions by the tax rates of VAT Among Member States underlines a new report of Commission.
Specifically, the Commission’s report shows important inequalities in the way in which EU Member States apply derogations from VAT tax rates, raising questions about transparency and justice in the Block tax system.
The analysis reveals that only 3 countries – Luxembourg, Ireland and Italy – represent the 75% of 64 derogations in force today, while 7 others – Malta, Cyprus, Greece, France, Portugal, Spain and Austria – cover the rest of 25%.
Focus per sector
The construction sector dominates the deviations, accounting for almost 30% of all exceptions, followed by culture and tourism, public services, food and housing and financial services (collectively 40%). It is worth noting that the extremely reduced parking rates represent over 90% of the derogations, with 31 and 28 exceptions, respectively.
Trends by country
Luxembourg leads with 45% of derogations under Annex III (goods and services such as books and medicines).
Ireland is the only country that applies zero VAT rates on children’s clothing and shipping services, while leading the derogations for goods outside Annex III (50% of 28 exceptions).
Italy holds the monopoly on derogations that do not relate to social housing, using a 10% VAT rate for construction and renovation projects.
Low cross -border adoption
Despite the availability of derogations from other Member States since 2021, their adoption was minimal. Only Cyprus, Greece and Malta chose nine derogations, citing incompatible conditions.
The report emphasizes concern about the fragmentation of VAT political, which leads to calls for harmonization to ensure equitable conditions of competition.
Historical
According to the EU VAT Directive, Member States have the flexibility to define VAT rates and apply them to specific goods and services within a structured framework.
The normal rate should be at least 15%, while reduced rates – up to two with a minimum of 5% – can be applied to supplies of up to 24 categories listed in Annex III (eg books, medicines). Following the Reformation of Council 2022 (EU (EU) 2022/542), Member States may also apply an extremely reduced rate of below 5% or zero rate for up to seven categories of basic goods and services, such as food and medicinal products. In addition, derogations allow certain Member States to apply reduced “parking coefficients” (minimum 12%) to goods and services outside Annex III, with transitional provisions for the gradual abolition of preferential treatment for environmentally harmful supplies.