EU considers VAT cut on energy saving light bulbs

Courtesy of EuActiv

Heads of state and government from the EU’s 27 member states agreed to consider a Franco-British proposal to cut value-added tax (VAT) on certain environmentally-friendly goods, such as energy efficient light bulbs and insulation materials.

The plan to change the EU’s tax rules – first pushed for by UK Prime Minister Gordon Brown and French President Nicolas Sarkozy in July 2007 – initially looked doomed to failure, due to a lack of support from other nations.

Yet, the final conclusions from the Spring Summit meeting, released on 14 March, invite the Commission to "examine areas where economic instruments, including VAT rates, can have a role to play to increase the use of energy-efficient goods and energy-saving materials" - a feat appararently achieved thanks to Brown's intense lobbying of other EU leaders.

According to him, products that could benefit from a reduced VAT rate of 5%, rather than the current minimum of 15%, include cars with reduced CO2 emission, insulation materials, efficient light bulbs and energy-efficient domestic appliances.

The move came as leaders restated their commitment to cutting greenhouse emissions and combating global warming (EurActiv 17/03/08).

However, the real test will come once the Commission – generally in favour of a greater harmonisation of VAT rates and the use of taxes as a tool for "greening" the EU economy – presents its new VAT plans in the summer.

They will require the unanimous backing of all 27 EU member states. Yet, any change in VAT rates across the EU remains a very sensitive issue, with many countries fearing the move could make them lose out on vast revenues generated by their VAT.

Another issue will be that of selecting which products are to be included in the list, with some saying a static list will not work, as technology evolves so fast that what is energy-efficient today won't be tomorrow.

Positions:

"I think people have been persuaded by the argument that we should look at this very carefully," said UK Prime Minister Gordon Brown, after the meeting, insisting the statement made by leaders on VAT was a sign of "substantial progress" on the issue.

"VAT is a uniquely European tax. Europe has now got an energy policy to cut carbon emissions […] If - whether it be lightbulbs, or fridges or household goods generally, or whether it be the insulation materials that make for more energy efficient homes - if we can cut the rates of VAT, then I believe that will be a good thing for Europe," he said.

"Over the next few months I think other countries will join the debate that France and Britain have already started," he added.

French President Nicolas Sarkozy said he was "very satisfied" that green VAT was mentioned in the summit conclusions, although he conceded that the debate was far from over and that a number of countries remained opposed.

"We have not taken the decision - not yet - but the Council is asking the Commission to reflect and make proposals on the matter. You know that [discussions on] reduced VAT are a hell of a fight, so we are not there yet. But I can see more density in the Council’s communications. When you recall the rigidity of debates on the issue of VAT, this is an event.

While green NGOs are generally favourable to such VAT reductions to support the purchase of energy-efficient products, industry is divided on the question. According to t he European Renewable Energy Council (EREC), the current VAT rules create a "perverse incentive in favour of energy consumption, which conflicts with the goals of the EU in terms of energy and environmental policy". But, the European association of household appliance manufacturers (CECED) cautioned against any reduction of VAT rates to promote the uptake of energy-efficient goods. It said this would "lower the value of the product in the eyes of the consumer […] contrary to the signal we should be sending out, which is that energy efficiency has a value".
Next steps:

* Summer 2008: Commission due to bring forward new legislative proposals on harmonising EU VAT rates EU to consider VAT cuts on green goods

Current EU rules on value-added tax (VAT), spelled out in the 2006 VAT Directive external Pdf external , specify that member states must subject supplies of goods and services to a rate of at least 15%.

However, they also allow countries to apply reduced rates (never less than 5%) in a broad range of areas deemed essential, like medicines, or labour-intensive services, including renovation of private dwellings, cleaning and hairdressing (EurActiv 27/07/06).

While reduced rates for energy consumption are also allowed to ensure poorer households have access to energy, social considerations rather than 'green' objectives have traditionally driven the selection of items on the list.

The EU executive is due to bring forward new legislative proposals on VAT rates in the summer of 2008 with a view to putting some order to this highly disparate and complex VAT structure and create some additional certainty for businesses and consumers.

Labels: 17.5% VAT, 5% VAT, condoms, energy efficiency, VAT