Businesses and civil society are calling for lower VAT rates for certain products to promote the circular economy as the European Commission starts its review of the current rules on EU VAT rates.
"There is an important role for economy-wide tax measures including differentiated VAT rates to boost the circular economy,” according to Ecopreneur.eu, a federation of more than 2,000 companies promoting environmentally sustainable business. It argued that these can help transfer price signals to consumers and producers throughout supply chains.
The businesses argued that the EU’s VAT Directive should be revised to include circularity as a criterion allowing for a product to benefit from a low VAT rate. It called on the Commission to produce a definition of circular economy products and services and to encourage all member states to set a zero VAT rate for these.
At the same time, governments should be prohibited from introducing low VAT rates for economic activities that would work against the circular economy, the association said.
Similarly, campaign group Green Budget Europe sees an opportunity to modify VAT rates in line with products' environmental impacts. This would mean applying reduced or zero rates to energy- and resource-efficiency products and taxing resource- or energy-intensive products and services at full rate, it said.
The VAT Directive currently allows member states to apply reduced VAT to certain goods and services, such as foodstuffs and pharmaceuticals, but the list “does not fully take into account technological and economic developments”, according to the Commission consultation document on the reform of the directive.
The Commission is considering two options: maintaining the standard 15% VAT rate while updating the list of goods eligible for reduced rates; or removing the minimum rate and abolishing the list.
The consultation document asks respondents whether the list of goods and services eligible for reduced VAT is adequate, or whether it should be updated for specific goods and services. Respondents are also asked whether the reform should prioritise giving member states more freedom to set VAT rates or limit rate differences.
The German environment agency UBA suggested last year that the EU VAT rules should be revised to allow for a reduced rate of 7% for resource-efficient products. Differentiated rates based on environmental criteria would help boost the attractiveness of products that waste fewer raw materials, it said.
The Commission plans to present its reform proposal in the autumn.