EU countries advised to increase VAT

Posted on: 10/12/2012

The EU’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 companiesVAT 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

Many EU countries have already been forcing through labour reforms, backed by sharp rises in VAT, this year:

  • Spain has increased its VAT rate by 5% to 21% in the last three years;
  • Netherlands has just raised its VAT rate 2% to 21%;
  • Italy has planned to increase its VAT by 2% to 22% by July 2013; and
  • Finland will increase its upper VAT rate to 24% at the start of 2013.

France announced on the 6th November 2012 plans to increase its standard VAT rate from 19.6% to 20%.  In addition, the 7% reduced rate, relating to restaurants, construction, and ebooks, will rise to 10%.  The 5.5% VAT rate, which applies to food, hotels and entertaining will fall to 5%.  The measures will help fund a limited range of industry investment credits.  The implementation date will be 1 January 2014. The measures have been announced in response to the publication of the Louis Gallois report on French competitiveness.  This was set-up by the new President, M. Hollande, at the start of this summer.  The primary recommendation of this report, published on 5 November, was a large cut in payroll taxes, funded by a rise in VAT.  This measure was proposed to give a “competitiveness shock” to the French economy which has been stalled over the past few years – although it did not go into recession.  France’s share of the EU export market has fallen from 17% to 13% in under ten years, and it continues to fall behind Germany's strong performance.  The country suffered a credit downgrade to its much-prized AAA rating by Standard & Poor’s.


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