Filenews 23 April 2023 - by Eleftheria Paizanou
One year after the amendment of the European Directive 2022/542, which now allows member states to reduce or zero VAT rates on certain consumer products, Cyprus is doing exercises on paper to implement/utilize tax relief.
The European Commission had signalled last year to the Republic and all other member states that they can proceed with a haircut of the tax burden on some products, in order to cope with price increases due to the disruptions brought to international trade by the pandemic and the Russian invasion of Ukraine.
According to the decision taken in April 2022, "Directive 2006/112/EC should be amended to allow reduced rates to be applied in a limited number of specific cases for social reasons, for the benefit of the final consumer and to achieve an objective of general interest. Therefore, the list of goods and services eligible for reduced rates in Annex III to Directive 2006/112/EC should be extended to include a limited number of such existing derogations."
Member States should be free to apply a reduced rate, lower than the minimum threshold of 5% and an exemption with deductibility of input VAT, but only to the supply of goods and services to a maximum of seven points of Annex III to Directive 2006/112/EC, which they have chosen between supplies of goods and services considered to meet basic needs. i.e. those relating to the supply of foodstuffs, water, medicinal products, pharmaceuticals, health and hygiene products, to the transport of persons and to the supply of certain cultural goods (books, newspapers and periodicals) or between other supplies of goods and services listed in Annex III to Directive 2006/112/EC, to which other Member States apply reduced rates, lower than the minimum threshold of 5% or exemptions with the right to deduct input VAT, provided that they respect the applicable deadlines'.
According to Directive 2022/542, Member States may also reduce VAT on the supply and installation of solar panels on and next to private dwellings, as well as on dwellings and other public and non-public buildings, used for activities in the public interest.
Despite suggestions from Brussels, few countries have reduced or reduced VAT to zero, opting for other measures to mitigate prices, including targeted bonuses to small and medium-sized and vulnerable consumers. In fact, some countries that have adopted the reduction or zero of VAT on specific products found that some producers - traders - sellers "pinched" prices upwards, resulting in a subtle or non-existent reduction that ended up to the consumer.
Increases of up to 31% in olive oil
In Cyprus, food prices in February this year had "run" by about 10% compared to February '22, while a slight drop in the rate of increases -compared to February '23- was recorded in March, which also recorded increases compared to last year's corresponding month. As a result, many households can hardly afford to buy the necessary goods.
European data reveal the prevailing situation, according to which bread and cereal prices have increased by 12.6% compared to last year, the price of meat rose by 17.8% (in Cyprus the price of lamb and kids at Easter was 25% higher than last Easter), seafood by 11.8%, milk, cheese and eggs by 15.2%, olive oil and margarine by 31.1% and sugar by 13.1%.
Needs EU approval
Soon, as Finance Minister Makis Keravnos stated, the final proposal from the Ministries of Finance and Energy will be ready in relation to the products that will be included in the list of those who will reduce or zero VAT. It is a given that if the measure is finally implemented, VAT on everyday consumer products, such as milk, baby food, baby milk powder, diapers, etc., will be reduced to zero.
In order for the measure to be implemented, Cyprus will have to forward to Brussels its final proposal with the products that will be subject to a tax reduction, as the European Commission also receives VAT revenue. The measure is expected to be temporary and last 6 to 12 months, as in other countries.
Prevention of profiteering
What the Ministry of Finance seeks to ensure is that the reduction or zero of VAT will not affect public finances and at the same time there will be no cases of profiteering, that is, where prices are reduced by taxes are increased by traders. A competent source told us that due to the free market it is difficult to prevent such behaviour.
What Greece and other countries are doing
"F" presents the "weapons" used by some European countries to curb inflation and high prices. Greece did not adopt European recommendations to reduce or eliminate VAT on some products, as the government estimated that citizens with high consumption would also benefit and not to a satisfactory extent vulnerable groups of the population.
Since last February, Greece has been implementing the digital market pass card. This digital card covers part of the increased cost of purchasing food products. The aid amounts to 10% of the monthly purchase amount and starts from €22 per month for single-member households and is increased by €10 for each additional household member. But income criteria apply. Each month, the state will credit the digital debit card with the appropriate amounts, which will remain activated until August 31.
France has also not adopted a reduction in VAT on food, as it was felt that the measure would disproportionately affect government revenues, but it has made energy cuts and provided vouchers for meals. The French government is also working on an "anti-inflationary" basket, under which food companies will be asked to choose 20 items they could offer at reduced prices.
Italy, while focused on energy price cuts, is also considering cutting taxes on staple foods such as pasta, bread and milk.
Germany has taken general measures against inflation, without focusing on food. Among the measures was the provision of higher financial aid for students. It has, however, also subsidised the prices of energy products for some time.
Austria has adopted measures for cheaper energy, as well as financial support for children and vulnerable groups.
Spain has reduced VAT on certain consumer products, while it has reduced VAT to zero on basic foods such as milk, bread, olive oil, fruit and vegetables. The VAT reductions will apply until the end of June. Similar tactics were used by Portugal and Poland. Last year, Bulgaria cut VAT on bread and flour, but the benefit did not reach consumers due to additional increases imposed by businesses.
