ONLY TWO countries from the EU have one VAT rate: Denmark and Slovakia. The most common form of VAT taxation in the EU is a system with three different tax rates, according to the type of product.
Over the past three years, Portugal has changed its rates twice. In June 2002, when Manuela Ferreira Leite was the Finance Minister, the normal rate was increased to 19 per cent, from 17 per cent (at that time the measure was taken to solve the financial and economic problem of Portugal). The rate has now changed again this month from 19 per cent to 21 per cent.
VAT first came into existence in Portugal in 1986, when Portugal entered the EU (at that time called EEC), and 20 years after its emergence, it has been changed several times. The rates at the beginning were eight per cent, 16 per cent and 30 per cent. In March of 1992, the first change occurred. The minimum rate was reduced to five per cent, which includes primary need products, and some health products. The second change only took another two years to happen – in January of 1995 the maximum rate of 30 per cent that had been levied on luxury products, became extinct.Up until the alteration in 2002, there had been no further significant changes.
Our problems, in terms of Portugal’s finances and economy still remain. Therefore, the new government and Finance Minister, Luis Campos e Cunha have just recently proposed and approved a new change in the normal rate of VAT, by increasing that rate to 21 per cent. This change directly affects more that 50 per cent of products that all consumers need. It also directly affects the private consumer, and therefore all activities that are included in retail business. The construction industry will also be affected by this increase, as all the materials, and services provided by the sub-contractors will be higher, and the VAT is paid but not deductible.
Other activities that are exempt from VAT will also be affected by this change, and they now have two options: support the increase and not affect their prices, or increase their prices to consumers. All other activities will be affected indirectly by this increase.
Looking to VAT rates in other EU countries, Portugal now has the same normal rate as Belgium and Ireland. Only countries like Denmark, Finland, Hungary, Poland and Sweden have a higher normal rate of 25 per cent. By the end of this year, the minimum rate for normal VAT will be 15 per cent, as ruled by EU Directive 2001/4 dated January 19, 2001.The EU countries that have this rate are: Cyprus and Luxembourg. Next year the EU must change or keep this rate. However there is no maximum limit for this rate. At the moment, the maximum in EU countries is 25 per cent, as mentioned above, but each government can increase it without breaking any EU rule.
Take a look below at the different rates for VAT in the 25 EU countries, and you can see how consumers will be affected directly by VAT.
As mentioned earlier, the system of three rates, with the exception of Denmark and Slovakia, is fixed according to the type of product. However, in different countries the same kind of products can be taxable for VAT at different rates.
For example, pharmaceutical products are taxable in Austria at 20 per cent, but in Portugal, they can be taxed at five per cent or 21 per cent. While in the UK, pharmaceutical products are exempt. In Germany their tax rate is 16 per cent.
Food expenses in Portugal can be taxable at five, 12 and 21 per cent. In Finland, there is only one rate which is 17 per cent.
Public water in Portugal is taxable at a five per cent rate of VAT, and in the UK it is exempt. While in Finland, water is taxed at 22 per cent. The examples mentioned so far only relate to the old EU members. For example, food expenses in Estonia attract 18 per cent of VAT. Also water is taxed at 18 per cent in Estonia. In Slovenia the rate is 8.5 per cent for both these products.
The examples mentioned above are just a small proportion of the product range. In this small section, we have seen lots of examples of different taxation in different EU countries. This is one of the reasons that normalisation of taxation (and the examples here were just related to VAT, but there are lots of different taxes) is very difficult to achieve, and will take many years to be properly discussed.