Why VAT requires EU involvement

Taxation

National governments are responsible for raising taxes and setting tax rates. The amount of tax you pay is therefore decided by your national government, not the EU.

The EU's role is to oversee governments' national tax rules and decisions on tax rates (on company profits, personal income, savings and capital gains), to ensure that:

• they are consistent with the EU's goals of job creation
• they not impede the free flow of goods, services and capital around the EU
• they do not give businesses in one country an unfair advantage over competitors in another
• they do not discriminate against consumers, workers or businesses from other EU countries.

For some taxes, such as the value added tax (VAT) or taxes on petrol, tobacco and alcoholic beverages, all 28 national governments have agreed to set minimum tax rates so as to avoid a distortion of competition across borders within the EU.

Common rules on petrol tax ensure fair trade and prevent harmful tax competition

The EU also has nothing to say about how much countries spend - provided their budget balance and public debt stay within reasonable limits.

However, if countries overspend and go into too much debt, they could jeopardise economic growth in other EU countries and the stability of the eurozone.

Fair tax competition between EU countries

The EU pays particular attention to company taxation because of the risk that tax breaks or very low tax rates in one country might unfairly lure firms away from competitor countries, or otherwise erode the tax base in other countries. EU countries are politically bound by a code of conduct not to do this.

For similar reasons minimum tax rates for VAT and excise duties on petrol, tobacco and alcohol have been agreed upon by all EU countries, and all are obliged to comply with the rules they have designed and agreed upon at the European level.

Why VAT requires EU involvement

VAT is fundamental to a properly functioning single market and fair competition across the EU.

So the EU has set:

• EU-wide rulesfor the operation of VAT and
• a minimum VAT rate.

This still leaves considerable leeway for differences in national VAT rates: there are no upper limits on VAT rates. Although the general rule is that a single standard rate should be applied to all sales of goods and services, governments are also free to apply reduced rates to a narrow range of goods/services and some countries are temporarily exempted from some of the rules.

Date: 2015-12-11; view: 1506