On 5th April 2022, the European Council agreed to the introduction of Council Directive 2022/542 – the Reduced VAT Rates Directive.
What will change as a result of the Reduced VAT Rates Directive?
The Reduced VAT Rates Directive was introduced with the aim of helping Member States strengthen the resilience of their health systems; improve their digital performance; and contribute to a climate-neutral and green economy. With this aim in mind, the Reduced VAT Rates Directive sets out new parameters within which Member States can establish reduced VAT rates and gives Member States more leeway in determining which goods and services could be eligible for reduced VAT rates or exemptions with credit. Goods and services which Member States may seek to subject to a reduced VAT rate or exemption without the need for a specific derogation include inter alia pharmaceutical products and medical equipment (with certain limitations), internet access services provided as part of digitisation policy and supply and installation of solar panels on and adjacent to private dwellings. The fact that Member States may apply a reduced VAT rate or exemption with credit on these items does not automatically mean that in Malta these goods or services will be subject to a reduced rate. Therefore, one needs to wait until the relevant Legal Notices are issued by the VAT Authorities transposing this Directive into domestic law.
Another change which is secondary in the context of the Reduced VAT Rates Directive but which could have significant impact on operators is the change to the VAT treatment of services falling under Article 53 and 54 of the EU VAT Directive.
Article 53 of the Principal EU VAT Directive deals with the business-to-business (‘B2B’) supply of services in respect of admission to cultural, artistic, sporting, scientific, educational, entertainment or similar events, such as fairs and exhibitions, and of ancillary services related to the admission. The place where VAT ought to be charged on such admission is the place where the event takes place. The Reduced VAT Rates Directive provides that these provisions do not apply where the attendance is virtual, meaning that in such case, general B2B place of supply of services rules should apply.
Article 54 of the Principal EU VAT Directive deals with the business-to-customer (‘B2C’) supply of services and ancillary services relating to cultural, artistic, sporting, scientific, educational, entertainment or similar activities, such as fairs and exhibitions. VAT on such services ought to be charged where the activity takes place. The new Directive will not change the VAT treatment of activities held in person. The new Directive will, however, impact the place of supply of activities which are streamed or made virtually available – indeed the place of supply of services which are streamed or otherwise made virtually available will be where the non-business customer receiving the service is based.
The Reduced VAT Rates Directive is scheduled to apply from 1st January 2025.
How can we help?
Even though the Maltese VAT Authorities have to publish the list of goods or services subject to reduced rates, one cannot underestimate the change to Article 54 of the Principal EU VAT Directive. Whereas this change is in line with the ‘destination principle’ of taxation which the EU is heading towards, this change could have significant impact on businesses providing B2C services which services do not qualify as electronically supplied services such as businesses offering online tuition or certain gambling operators offering virtual entertainment.
At KPMG we would be happy to help in carrying out an analysis on whether services offered by your business could be captured or impacted by the new rules and assisting you with compliance aspects if your business is indeed impacted.
Senior Manager, Tax Services
KPMG in Malta