EU now open to VAT exemptions for green products

This allows for an expansion of reduced or so-called "super-reduced" rates to more categories of products - while also formalising the process across the bloc, thereby limiting the proliferation of low rates.

These rules will allow for "more flexibility for member states to set their own rates, while respecting core environmental policy objectives," commissioner for economy Paolo Gentiloni said in a statement.

Green initiatives, food, electricity and other categories that "aim at the benefit of the final consumer and pursue objectives of general interest" are included in the document as options for reduced rates or exemptions.

Solar panels are highlighted as one of the products member states can exempt from VAT, as part of a more general push to "increase consumers access to green energy", with electric bicycles and recycling also making the list.

But reduced rates or exemption for fossil fuels will be allowed until 1 January 2030. The time window for chemical fertilisers and pesticides is until 1 January 2032, "to give small-scale farmers more time to adapt," the council wrote.

"The phase-out is a good step forward in line with Green Deal objectives. Of course, we would have preferred a quicker phase-out," Johan Bernardo Langerock, policy advisor for the Green group in the European Parliament, said in response.

But some journalists at the council press conference questioned if such a generous timeline for fossil-fuel electricity is aligned with the EU's climate change goals.

Vice-president Valdis Dombrovskis rejected that, insisting the "phase-out of fossil fuels and chemicals is exactly aligned with Fit for 55 goals" - referencing the bloc's landmark climate policy aimed to reduce greenhouse gas emissions by 55 percent before 2030.

In the wake of Covid-19, member states can now also formally change rates in the case of a pandemic or crisis - allowing countries to reduce VAT for electricity bills or healthcare products like face masks.

Losing revenue?

However, VAT is one of the largest sources of state revenue in the EU. In 2019 member states on average raised 19 percent of their tax revenues from VAT.

By allowing states to increase the number of exemptions, Dombrovskis was pressed to show the new system of increased flexibility will not eat away at the tax base.

Evading the question, he simply said "it is the member states that decide to use the categories to ensure a broad enough tax base."

But tax law professor at the University of Leeds, Rita de la Feria, remained very critical of the proposal.

Contradicting Dombrovskis, she said the new rules will corrode tax income. "Until now member states used the cover of EU law to deny reduction of rates in their own countries. Pressure [to reduce rates] will be almost impossible to resist now, with grave consequences for revenues, at a time when we need them the most," she told EUobserver by email.

"The majority of consumption is done by the richest, so against what most may think, when you give a reduced rate of VAT, you are often making the tax system more regressive by giving tax breaks to the richest. The assumption [that lower rates of VAT] are reflected in the price, is often not the case," she added.

According to her, the system will also lead to more exceptions and exemptions ("dis-harmonisation"), increasing complexity and costs.

"The fact that [the rules] are not easy to understand, proves my point that it will just increase compliance and administrative costs," she wrote.

Finally, she raised the issue that the current rules may not be legal under the treaty on the functioning of the European Union (TFEU), which requires the proposal is approved for the "establishment and the functioning of the internal market", which according to De La Feria is "a true question mark."

The council will formally adopt the directive once the European Parliament has issued its opinion, which could take until March 2022.