Response by T&E to EU consultation on VAT – there is no logical reason why air travel is exempt

The EU held a consultation recently, about VAT and changes to the European Directive on it. The consultation closed on 20th March 2017.  Some of objectives of the consultation were to ask if there should be greater freedom for Member States to fix VAT rates; the proper balance between harmonisation and Member States autonomy in setting VAT rates; problems of differentiation of VAT rates within the Single Market etc.  Air travel is zero rated for VAT across the EU.  The group “Transport & Environment” responded to the consultation, and a couple of their points were that: having no VAT on air travel means the most carbon intensive transport mode, aviation, has ticket prices which are artificially lowered, creating distortions between rail/bus and aviation/ferry. … all Member States must impose VAT on all passenger transport, especially aviation … where this cannot be agreed, it should be easy for some Member States to impose VAT on passenger transport …  for things that benefit society such as medicines there is a very strong argument to allow for super-reduced rates, however, climate intensive travel by air or cruise vacations are not among them. There is currently also no VAT on cruises – which are most definitely not essential items.
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The response from Transport & Environment is here

https://www.transportenvironment.org/sites/te/files/publications/2017_03_TE_response_Commission_passenger_VAT_consultation.pdf 

and this shows all the questions.

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Below are the main points made by T&E:

Could you specify what were the goods/services concerned and how the difference in VAT rates affected fair competition ?

Passenger transport VAT varies on the basis of the different modes of transport. In many cases bus and rail must pay VAT while aviation and maritime transport do not. This means that the most carbon intensive mode, aviation, has ticket prices which are artificially lowered, creating distortions between rail/bus and aviation/ferry.

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Could you specify what would be the goods or services concerned and why new distortion of competition would be created ?

Member States have long had discretion in the field of passenger transport and it has essentially resulted in a race to the lowest common denominator VAT rate. Environmental NGOs primarily support the position where all Member States must impose VAT on all passenger transport, especially aviation, the most carbon intensive mode of transport. However, where this cannot be agreed, facilitating (and encouraging by simplifying the place of supply rules) some Member States to move ahead with the imposition of VAT on passenger transport could be a supportable secondary solution.

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If you wish to add further information – within the scope of this questionnaire – please feel free to do so here.

Passenger transport is exempted through a complicated series of zero rating and exemptions throughout the VAT Directive so that aviation and maritime transport benefit from a super-reduced rate. This was supposed to be temporary when first introduced but was never abolished. It is time to do so now. Environmental NGOs take no position on the other goods and services that benefit from exemptions but for things that benefit society such as medicines there is a very strong argument to allow for super-reduced rates, however, climate intensive travel by air or cruise vacations are not among them.

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If you wish to add further information – within the scope of this questionnaire – please feel free to do so here.

Re Q33: We disagree strongly with the suggestion that “Under both options all currently existing reduced rates…would be maintained.” Passenger transport derogations must be abolished and standard rates applied in all MS.

Re Q34: We were not allowed to answer Q34 and Q35 because of our answer at Q33. However, we would like to answer: “prevent the application of reduced rates to high-value goods and services…”

Re Q35: We would like to answer: “Once intra EU derogations are abolished there can be no justification for taxing passenger transport at less than the standard rate – modes such as aviation and cruise ships should in particular be able to be taxed at the highest rate. No super reduced rates, certainly not for passenger transport.”

Re Q39: There is a grave danger of tax competition between MS as regards passenger transport rates and the accompanying erosion of revenue and tax base. As regards passenger transport we would strongly oppose the granting of greater flexibility.