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EU promotes VAT rate increases

  • Nov 19, 2012 | Richard Asquith

EU promotes VAT rate increases

The EC’s Taxation Commissioner, Aldirdas Semeta, has today called for the 27 member states of the European Union to continue to raise EU VAT rates across the region to respond to globalization. It coincides with the UK’s Institute’s warning last week that the UK may have to raise VAT from 20% to 25%.

In the past three years, the average EU VAT rate has risen from 17% to over 21% as governments have tried to cope with falling revenues as rising sovereign debts.

Why does the EU want countries to raise VAT?

Raising taxes on consumers, voters, is a big political gamble. So why do governments do this rather than use other taxes?

  • VAT is a tax on consumption, rather than on savings which helps fund investment and future growth
  • If is fast and cheap to collect as it is the role of the companies
  • VAT rises fund reductions in corporation taxes, which helps attract global industry
  • With nervous funding markets threatening to increase borrowing rates, raising consumer taxes is a clear sign of countries’ intent to take on difficult deficit management decisions

Major increases have included:

  • Spain VAT increased from 16% in 2009 to 21% by 2012
  • UK Raised VAT 2.5% to 20% in 2010
  • Italy Increasing VAT from 20% to 22% by 2013
  • Greece VAT rose from 19% to 23% by 2010
  • Hungary Hit the EU record high of 27% (from VAT in 2012
  • Netherlands Increased VAT from 19% to 21% in 2012
  • Germany Imposed a 3% rise in VAT to 19% in 2007
  • France Will raised its standard VAT rate from 19.6% to 20% in 2014

Aside from underpinning falling revenues, it helps also enables countries to avoid raising taxes on

VAT on consumers is now viewed as the least damaging way of taxing the economy. It funds cuts in businesses taxes, which helps promote job-creation and growth. Governments especially like it because is fast and cheap to administer. We are probably only half way through the current VAT-raising cycle that started with Germany in 2007. There is more to come.

VP Global Indirect Tax
Richard Asquith
VP Global Indirect Tax Richard Asquith
Richard Asquith is the former VP Global Indirect Tax at Avalara