Europe, Macroeconomics and macroeconomic policy, Research

Reform of rules on EU VAT rates


Reform of rules on EU VAT rates




As stated in its ‘Action Plan for VAT’, by 2017 the Commission aims to outline the key principles and design features for a simple, efficient and fraud-proof VAT regime based on the country-of-destination principle. This could include reforms that would allow Member States greater autonomy in the composition of their domestic VAT systems (including rate-setting powers and capacity to define which subsets of goods and services fall under which rate categories). The reform would aim at replacing the existing system of negotiated country-specific derogations from the EU’s overarching VAT legislation with rules applicable to all Member States, and at the same time limit or eliminate requests from Member States to create additional derogations in the future.


As part of the preparation for these policy proposals, the Commission has requested that we investigate the impact of such “enhanced flexibility” on the proper functioning of the internal market in a multi-jurisdictional context, the distortions that may arise, the risk of tax competition, and the simplicity and efficiency of the VAT system (in individual jurisdictions and intra-EU). This impact assessment is to be conducted mainly on the basis of case study analysis of current instances where there is scope for distortion in the location of sales and tax revenues, i.e. cases where:

·         significant VAT differentials, and/or pricing differentials, exist between Member States on certain categories of goods/services; and

·         the origin principle still applies in practice, despite the implementation of the destination principle to date.


Building on the case studies, we will analyse a range of potential options for reforming the EU VAT regime, as identified by the Commission. These will include:


1.         Allow for full flexibility of VAT rates and classifications;

2.         Extend the scope of Annex III of the VAT Directive;

3.         Allow rates below 5%;

4.         Allow for regionalisation, i.e. for differentiation of VAT rates by region within a given Member State;

5.         Allow more than two reduced rates.



Sponsor: Directorate General Taxation and Customs Union (DG TAXUD)


Consortium leader: IHS, Institute for Advanced Studies


Project leader: PwC – PricewaterhouseCoopers LLP, London


Project partner: IEB – Institute of Economics, Barcelona


Experts: Grzegorz Poniatowski, Christopher Hartwell


Project Manager: Karolina Zubel