The European Commission is currently drafting and internally circulating legislative changes to the 2006 VAT (value added tax) directive, which forms the basis for a common system for VAT. Several important amendments to the rates applied to green services and certain products have been proposed, while the Commission has said it will not offer more energy-efficient products more tax reductions.

The Commission is resisting calls by Member States including France and the UK, to reduce the amount of VAT applied to greener products such as energy-efficient light-bulbs. The current directive allows countries within the EU to apply VAT rates below the Community wide minimum of 15% to certain green products provided it is agreed at EU level. National authorities are then permitted to choose the level,  taking a maximum reduction threshold of 5% into account. Under proposed changes these reductions would be reserved for a limited number of green products requiring special installation, such as wind turbines.

The Commission’s reluctance to allow more widespread tax breaks for greener products, arises due to fears that if countries apply different tax rates for the same product, this will create a distortion in the market.

It has meanwhile been suggested that other products such as pesticides and fertilisers should have their VAT cuts abolished. The executive branch of the EU also recommended that green services such as environmental certifications should be able to receive reduced VAT rates.

The Commission is expected to table its final proposal in late March or early April, after which it will have to be endorsed by national governments of the EU.