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EU Energy Policy:
Reduced VAT rates

Updated: May 2008

Index of this Page:

· Directive on Reduced Rates of Value Added Taxes (VAT) Amending Directive 77/388/EEC. 2006/18/EC Read

· Communication from the Commission on VAT Rates other than Standard VAT Rates, July 2007, COM(2007)380 Read

· Consultation on the Existing Legislation on Reduced VAT Rates. Read

· Reduced VAT Rates on Environmentally Friendly Products Read


The Value Added Taxes (VAT) is a tax applied on all goods and services sold in the Community. Each member state chooses the VAT rate it wants to apply on the different products. However, the EU set limits to how EU member states can raise VAT. In general standard rates are applied but member states can apply lower rates for some special products and services. Among products that can benefit from low VAT rates it comes natural gas, electricity and district heating. Passenger transport (including aviation) can be exempted from VAT.

The VAT rules are at the moment under discussion. The rule changed for the last time with the directive 2006/18/EC (link on this page). The EU Commission evaluated rules in 2007 in a Communication and made in 2008 a public consultation to get the views of the stakeholders on VAT rules.

INFORSE Europe is concerned that some countries are favouring fossil fuels and electricity over energy efficiency and renewable energy with low VAT rates. In general INFORSE Europe finds that VAT rates should rather favour the most environmental products and they should in no case give the most environmental products a disadvantage.
Read the entire response from INFORSE-Europe (pdf 80kB) to the EU consultation on VAT rates 2008.

Directive on Reduced Rates of Value Added Taxes (VAT) Amending Directive 77/388/EEC. 2006/18/EC
This directive adopted by the Council in February 2006 provides that “Member States may apply a reduced rates to supplies of natural gas, electricity and district heating provided that no risk of distortion of competition exists.” The council also asks the European Commission to prepare an assessment report by the end of June 2007 so as to evaluate the impacts of reduced rates.

Read the official document:
Direct link to the EC Official Journal: Council Directive 2006/18/EC, 2006 February 14
Copy of the document: (pdf 36kB)

Communication from the Commission on VAT Rates other than Standard VAT Rates, July 2007, COM(2007)380
In accordance with the 2006 Council request, this communication presents the results of the assessment report and aims to launch a debate on how to simplify the current legislation. The European Commission considers that there is a need for more simplification, rationalization and flexibility. It also argues that if economical criteria and the efficiency of the internal market are the most important ones, other elements should be taken into account. It especially mentions sustainability and policy coherence (does it make sense to allow reduced rates on gas and electricity if such a measure generate more energy consumption?). However, the European Commission proposes to extend most of the derogations until the end 2010, after which new common rules will be applied.
The communication is based on an analysis carried out by Copenhagen Economics, an independent think tank, which examined the impacts of reduced VAT rates and derogations.

Read the European Commission communication :
Direct link to the EC website:
Communication from the Commission COM(2007)380, July 2007
Copy of the document:
(pdf 62kB)

Read the full text of the analysis:
Direct link to the EC website: Study on reduced VAT rates, June 2007
Copy of the document: (pdf 697 kB)

Consultation on the Existing Legislation on Reduced VAT Rates
In March 2008, following its communication from July 2007, the European Commission launched a consultation to collect the views of the public and relevant stakeholders on the review of the current legislation on reduced VAT rates.
This consultation was closed on the 12th of May and the EC will publish a report summarising the outcomes of the consultation as soon as possible.

Read the text of the consultation on the EC website: Consultation on VAT reduced rates

Reduced VAT Rates on Environmentally Friendly Products
In July 2007, France and Great Britain announced their support for the extension of the reduced VAT list on environmentally friendly (e.g. energy efficient light bulbs or insulation materials). However, the European Commission underlined the risk for distortions in the internal market and the problem caused by different VAT rates in each member states. In addition, it will be quite difficult to choose which products will be on the list. The major pitfall is that technology is evolving and an energy efficient product today, won’t be tomorrow. Moreover, such measures can create an incentive in favour of energy consumption.
In March 2008, the final conclusion of the Spring Summit meeting invited the Commission to examine areas where the use of economic instruments can be determining to promote energy-efficient products. The Commission will announce its decision in the summer when it presents its plans for VAT rates.

Read the conclusions of the Council:
Direct link to the Council website: Presidency Conclusions, March 2008

Copy of the document:
(pdf 188kB)

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