To help fix EU budget, end aviation’s tax break

The Commission has now proposed reforms to VAT rates across Europe which, if agreed, will become the basis for the long-awaited definitive VAT regime in 2022.

One of the reasons most international trips are VAT-exempt is that the current rules make it very complex and difficult to raise VAT on trips that cross borders. Under the proposal that was issued in January, rules for calculating and collecting VAT on passenger transport will be simplified. The Commission proposes to change the way of calculating passenger transport VAT from 2022 – so that those tickets subject to VAT will be charged the VAT rate of the country of departure and for the entire cost of the ticket. This move to make it administratively easier to calculate and charge VAT on passenger transport is welcome and long overdue.

But instead of abolishing the long standing VAT exemptions for airline tickets – which were supposed to be “temporary” – passenger transport services will be eligible for reduced or zero VAT rates. That means the weekend flying break to Berlin will be treated the same as “necessities” such as foodstuffs, pharmaceutical products, medical equipment, children’s books, water supplies and undertakers.

While the administrative simplification may incentivise some member states to start charging aviation VAT, the Commission already recognises the clear danger that its proposal could lead to two unwelcome outcomes: member states are now potentially free to extend aviation tax subsidies by reducing existing VAT rates on domestic flights to zero (Germany currently taxes these flights at 19%); and pressure is likely to grow to zero-rate intra-EU bus and rail VAT which currently brings in half a billion euro in tax revenues. While the proposal contains safeguards on overall VAT revenue erosion, the danger of these downward moves is clearly acknowledged.

The Commission proposal is a missed opportunity. Both to make passenger transport VAT mandatory under much simplified rules and to boost tax revenues just when the EU is struggling to make its next seven-year budget add up. Under the definitive VAT regime in 2022, a negative list will be drawn up of goods and services which must be subject to standard VAT rates. This is to prevent revenue erosion under the new flexible rates regime. Passenger transport and aviation in particular should be added to that list.

‘Better regulation’ should be about more than equating aviation with baby clothes, children’s books and other necessities, especially since aviation emissions are out of control – growing 8% in Europe alone in 2016. The ETS aims to tackle aviation climate change and costs about €150 million per annum yet the Commission’s proposal potentially gives the sector a VAT subsidy of well over a hundred times this figure. Subjecting domestic, intra and extra-EU aviation tickets to VAT at, say, a rate of 15% would generate revenues of some €17 billion per year which would make a major contribution to solving the EU’s budget problem as well as addressing aviation’s enormous unpaid external costs.

The discussion about reforming VAT comes at a time when several EU governments are discussing or introducing ticket taxes for aviation. For example, the new Dutch government has announced it wants to tax aviation, but preferably at EU level. There is, of course, no reason for them to wait for the EU VAT reform. The UK has levied a passenger charge since the early 1990s, Germany since 2011 and, more recently, Sweden and Norway have introduced theirs.

But if EU governments such as the Netherlands want to address the issue of tax-free plane tickets at European level, the EU’s VAT rules are the right place to start, and with the discussion about the next EU budget in full swing, the time for action is now.