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EU approves maxi reduction in VAT rates

Maltese businesses are calling for a reduction in VAT. To mitigate the effects of inflation, the Malta Chamber of SME’s has called for a reduction in the tax from 18 percent to 15.5 percent. The Chamber’s chairman believes this tax measure will maintain the current level of tax revenue, as the increase in prices of some goods will offset the reduction in the VAT rate.

This proposal comes after the European Union (EU) gave the final approval last month to update the EU Value Added Tax (VAT) Directive, expanding the list of goods and services to which two reduced VAT rates can be applied and allowing for the first time a reduced VAT rate below 5 percent.

Before the COVID-19 pandemic, the EU intended to harmonize VAT rates and phase out reduced and super-reduced rates. Now, the EU has changed course in favor of additional reduced VAT rates. It believes that in order to cope with future exceptional circumstances such as pandemics, humanitarian crises or natural disasters, reduced rates on basic necessities “would benefit low-income households and, as such, address the regressivity of the VAT system.” However, recent research shows that reduced rates and exemptions are not an effective way to support low-income households and may even increase the regressivity of the system if overall VAT rates are increased to meet revenue targets.

In 2020, only countries such as Austria and Germany cut VAT rates on some goods and services to reduce the economic impact of the COVID-19 pandemic. However, in the second half of 2021 and especially in the first half of 2022, more EU countries began to apply a range of reduced VAT rates on certain goods and services to counter high energy, fuel and gas prices, first, and soaring inflation, second. The recent amendment of the EU VAT Directive has opened the door for all EU countries to implement more exclusions and, as a result, increase the complexity of their VAT tax systems.

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