Updated on May 25, 2022
Value-added tax (VAT) is imposed in more than 170 nations around the world, including all European countries. Although the European Union (EU) has attempted to standardise VAT rates among its member states, this is not always the case.
The value added at each stage of manufacturing is the basis for the VAT, which is levied as a consumption tax. Businesses that have already paid VAT get a tax credit for it. It is a tax on final consumption because it is not paid by the end user.
Hungary, Croatia, Denmark, and Sweden have the highest standard VAT rates in the EU (all at 25 percent). Following Luxembourg, Malta, Cyprus, Germany, and Romania, the usual VAT rate is 17 percent (all at 19 percent). The average standard VAT rate in the EU is 21%, which is six percentage points greater than the EU regulation’s minimum standard VAT rate.
Consumption taxes, in general, are a cost-effective technique to raise tax income. Ideally, all final consumption should be taxed at the same rate, with as few exceptions as feasible, in order to reduce economic distortions. EU countries, on the other hand, charge lower VAT rates and exempt some goods and services from the tax.
Lower-income households tend to spend a bigger percentage of their income on products and services like food and public transportation. This is one of the key reasons for lowered VAT rates and VAT-exempted goods and services. The promotion of local services (such as tourism) and the correction of externalities are also among the other reasons for boosting the use of “merit commodities” (such as books) (e.g., clean power).
It’s not clear, however, whether these policies will be achieved via lowering VAT rates or by exempting some goods and services from the tax. Economic distortions can be caused by reduced rates and exemptions, which can increase administrative and compliance expenses. A recent analysis found that eliminating VAT reduced rates in EU countries would allow the standard rate to fall below 15%.. Instead, the OECD suggests policies aimed directly at raising the real incomes of lower-income households in order to meet equity issues.
|VAT Rates Among European Union Member States and the United Kingdom, as of January 2022|
|Country||Super-reduced Rate (%)||Reduced Rate (%)||Parking Rate (%)||Standard Rate (%)|
|Austria (AT)||–||10 / 13||13||20|
|Belgium (BE)||–||6 / 12||12||21|
|Croatia (HR)||–||5 / 13||–||25|
|Cyprus (CY)||–||5 / 9||–||19|
|Czech Republic (CZ)||–||10 / 15||–||21|
|Finland (FI)||–||10 / 14||–||24|
|France (FR)||2.1||5.5 / 10||–||20|
|Greece (GR)||–||6 / 13||–||24|
|Hungary (HU)||–||5 / 18||–||27|
|Ireland (IE)||4.8||9 / 13.5||13.5||23|
|Italy (IT)||4||5 / 10||–||22|
|Latvia (LV)||–||5 / 12||–||21|
|Lithuania (LT)||–||5 / 9||–||21|
|Malta (MT)||–||5 / 7||–||18|
|Poland (PL)||–||5 / 8||–||23|
|Portugal (PT)||–||6 / 13||13||23|
|Romania (RO)||–||5 / 9||–||19|
|Slovenia (SI)||–||5 / 9.5||–||22|
|Sweden (SE)||–||6 / 12||–||25|
|United Kingdom (GB)||–||5||–||20|
According to the EU VAT directives published in 1991, certain EU nations were applying reduced, super-reduced or zero rates to goods and services that were not designated as being within the zero-rate or reduced-rate categories by the laws. A so-called “parking charge” was established to smooth the transition to a common rate for these goods and services. Some countries continue to use it, despite the fact that it was supposed to be phased out.
“Taxes in Europe Database v3” by the European Commission; and “2021 global VAT & GST rate adjustments” by Richard Asquith (https://ec.europa.eu/taxation customs/tedb/vatSearchForm.html). For the first time, Avalara has released a list of adjustments to the global VAT rate for 2021.