VAT reduction measures vs Covid-19

Introduction

The global pandemic, caused by Covid-19 disease, has had a huge and sudden impact on all spheres of life. All countries around the world have faced with two main problems: protecting the health of the population and sustaining economic activities. In order for state and local budgets to maintain a certain level of revenue for servicing public expenditures, which has been deepened by the global crisis, the measures taken by states have been leveled to the last financial limits with the help of borrowing and/ or assistance from available funds. Tax measures are vital for immediate assistance to the economy and entrepreneurs. As a rule, measures in the field of VAT referred to deferral of payment, postponement of deadlines for filing VAT returns, payment of VAT in installments, etc., but after these first measures, countries also decide to reduce VAT rates. This is especially true for activities that are significantly affected by the global pandemic, but it is also about activities such as restaurants and catering that are aimed at protecting human health in the sense of distancing and lockdown. The faster transition to the digital economy, digitalization, online payments … has been profiled by the emergence of a global pandemic, which is still uncertain. But what is now on the horizon, that the world is moving towards a new economy.

Measures to reduce the VAT rate in some countries (especially for hospitality services and tourism)

European Union

Austria – temporarily reduction in the VAT rate to 10% (standard rate 20%) on non-alcoholic beverages until the end of 2020. This applies for supplies made after 30 June 2020 and before 1 January 2021. Further support measures, a reduced VAT tax rate of 5% (from 10%) for the catering, tourism and culture sectors. This tax reduction will apply from 1 July 2020 to 31 December 2020.[1]

Belgium – temporarily reduce the VAT-rate that applies to certain restaurant and catering services from 12% to 6% (as from the 8th of June 2020 up to and including the 31st of December 2020). Reduced rate also applies to the supply of beverages without meals at all possible outlets in drinks (cafes, taverns, etc.). Alcoholic beverages (i.e. beers with an actual alcoholic strength by volume exceeding 0.5% vol. and other beverages with an actual alcoholic strength by volume exceeding 1.2% vol.) are specifically excluded from this reduced VAT-rate.[2]

Bulgaria – the reduced rate of VAT of 9% (from 21%) applies for hotel and restaurant-related services supplied from 1 July 2020 through 31 December 2020.[3]

Czech Republic – after the 1 May, supplies of drinking water and draining of sewage water, catering services, cleaning, care for elderly people and kids and others are subject to 10% VAT rate (from 15%).[4]

Cyprus – during the period July 1, 2020, until January 10, 2021, tourist accommodation and catering services are subject to 5% rate of VAT, down from 9%.[5]

Germany – the German Finance Ministry has issued guidance on the tranisiont for the temporary VAT rate cut from 19% to 16% from 1 July until the end of 2020. The reduced VAT rate is also to be cut from 7% to 5%. Restaurant, café and other catering services will enjoy a VAT rate cut from 7% to 5% between 1 July 2020 and 30 June 2021.The rate change comes into force on 1 July 2020 for all taxable supplies, including intra-community supplies.[6]

Greece – public transport, taxis, ferries: VAT rate cut from 24% to 13% from 01 June 2020 until 31 October 2020; transport and non-alcoholic beverages VAT will be reduced from 24% to 13% from 01 June 2020 until 31 Oct 2020; accommodation and hotels, restaurants, cafes and catering, passenger transport VAT rate will be reduced from 9% to 5% from 01 July 2020 until 9 January 2021.[7]

Ireland – Ireland is reviewing reducing its tourism and hospitality Value Add Tax rate from 13.5% to 9% to support the business during the coronavirus pandemic.[8]

Lithuania – VAT rate cut considered on catering services for food and non-alcohol drinks from 21% to 9%[9]

United Kingdom – guidance on the introduction of the temporary 5% reduced rate of VAT that will apply between 15 July 2020 and 12 January 2021 in relation to certain supplies that are currently taxable at the standard rate of VAT: catering and takeaway food.[10]

Examples of reducing the VAT rate in some non-EU countries

Colombia – reduction in the consumption tax rate for restaurants, cafeterias, and other similar food and beverage services is reduced from 8% to 0% until 31 December 2020.[11]

Costa Rica – Costa Rica’s Legislative Assembly is considering Bill 22.013, which was presented on 2 June 2020 and provides for a temporary 30% reduction in VAT on the supply of taxable goods and services. The reduction is meant to support the economy in light of the impacts of the COVID-10 pandemic. If approved as drafted, the 30% reduction will enter into force from the date of publication and will apply for a period of one year.[12]

Kenya – the Government has implemented the Tax Law (Amendment) Act, 2020 with effect from 25th April, 2020, among others, reduction of VAT rate from 16% to 14%.[13]

Norway – the “low” VAT rate which applies for domestic travel, hotels and similar accommodations, and cultural and sporting events has been reduced from 12% to 6% as from 1 April 2020 through 31 October 2020.[14]

Turkey – The VAT measures already announced, in place until November, include:

The VAT rate on airline travel is to be cut on domestic flights from 18% to 1%.
Hotel accommodation and services are to be zero-rated.[15]

Conclusions

Two global crises have hit the world in a relatively short period of time. In the period 2009-2014, at a time of global economic and financial crisis, there was an increase in the standard VAT rate in many countries. The lack of budget revenues is usually compensated by raising the VAT rate, because the revenue from VAT is generous and it is easy and quick to collect. The result at the OECD level was an increase in the average standard VAT rate from 17.7% in January 2009 to record 19.3% on 1 January 2015.[16] In the global Covid-19 pandemic, business activities are declining significantly, especially in tourism, transport, services … Increase VAT rates would be without results, In the global Covid-19 pandemic, business activities are declining significantly, especially in tourism, transport, services … Increase VAT rates would be without results, because entrepreneurship needs help and adaptation to new circumstances. It is therefore not surprising that some countries have started reducing VAT rates.

Article written by Ksenija Cipek, Dame of Honour and Professor Dr. Manuel Pereira

[1] https://www.globalvatcompliance.com/austria-covid-19-vat-implications/

[2] https://wts.com/global/publishing-article/20200320-covid-19-measures~publishing-article?language=en

[3] https://home.kpmg/us/en/home/insights/2020/06/tnf-bulgaria-temporary-vat-rate-reduction.html

[4] https://www.vatupdate.com/2020/04/07/vat-rates-changes-in-the-czech-republic-from-1-may-2020/

[5] https://www.tax-news.com/news/Cyprus_Announces_More_COVID19_Tax_Breaks____97722.html

[6]https://www.avalara.com/vatlive/en/vat-news/german-vat-cut-implementation-rules.html

[7] https://www.avalara.com/vatlive/en/vat-news/greece-4-month-vat-payment-deferment-for-coronavirus.html

[8] https://www.avalara.com/vatlive/en/vat-news/ireland-covid-19-tourism-and-hotels-vat-cut-.html

[9] https://www.globalvatcompliance.com/lithuania-covid-19-vat-implications/

[10] https://www.gov.uk/guidance/catering-takeaway-food-and-vat-notice-7091

[11] https://www.globalvatcompliance.com/colombia-covid-19-vat-implications/