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Malta’s VAT exemptions hang in the balance

February 11, 2016

Malta could soon have to defend again a crucial concession it won prior to joining the EU in 2004 as Brussels mulls the possibility of doing away with zero rate VAT exemptions.

Together with the UK and Ireland, Malta is the only other EU member state which, so far, does not charge VAT on foodstuffs and medicinal products. However, things could soon change because the European Commission is again eyeing the abolition of this privilege in new proposals to be presented to member states later this year.

European Taxation Commissioner Pierre Moscovici last week let the cat out of the bag when he said the EU Executive would soon come up with a new legislative package to simplify VAT. He added that, although the proposals were still in an embryonic state, “zero rate is not the best idea”.

Although, later, Mr Moscovici stressed that no final decisions had been taken yet, his declaration revived EU plans in this direction. 

In a green paper published by the Commission in 2012, Brussels had stated that zero rates should be abolished to lower the risk of distorting competition in the EU.

As Brussels discusses a new package with the UK on its new status as an EU member prior to a referendum, Commission sources said “this might be the right occasion to review the zero rate concession”.

The concession had been granted to the UK and Ireland in the 1990s and was successfully negotiated by Malta prior to accession. However, during the negotiations it was made clear that Malta could only retain the concession as long as the UK and Ireland had it.

An agreement with the EU to end the exemption in the UK would mean that Malta would probably have to follow suit.

Observers told this newspaper the introduction of VAT on foodstuffs and pharmaceuticals was likely to have a devastating effect on Malta’s inflation and, particularly, on the country’s low-wage earners.

The UK government has already said it would veto the proposal if it was made by the Commission. Malta could also opt to follow suit since taxation issues need unanimity at EU level.