Wednesday, May 18

The European Commissioner for the Economy asks the States to discard the energy tax reductions requested by the PP


“Reducing indirect taxation is not necessarily the most effective solution to address energy affordability, especially if high prices persist.” With these arguments, the European Commissioner for Economy, Paolo Gentiloni, has sent a letter to the governments of each country of the European Union where he rejects the reduction of taxes on energy, as the Popular Party has repeatedly requested from the Government.

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In a letter dated April 23, to which elDiario.es has had access, Gentiloni highlights the position against reducing energy taxes following three criteria that are framed within “relevant political considerations that should guide action” of the EU countries. On the one hand, he highlights the limited effectiveness of the tax reduction, on the other, he recalls that this measure would be incoherent to meet the climate objectives for 2030 and 2050 that the European Commission has imposed. Finally, he points out that this tax reduction is an inequitable measure since it does not help the neediest sectors of the population.

“VAT rate cuts, in particular, have a poor track record of translating into low prices for consumers, as tax cuts may be offset by higher rates from energy providers. In these cases, non-energy companies could be even worse off: they do not benefit from the lower rates (since they deduct VAT anyway) and suffer from the increase in prices, ”he explains in his letter.

In addition, Gentiloni questions the effectiveness of reducing indirect taxes on the lowest incomes: “In terms of social equity, let me also stress that reducing indirect taxation is not necessarily the most effective solution to address the affordability of energy, especially if high prices persist.

Faced with the reduction in VAT, the European commissioner proposes that “the reuse of the higher income from taxes on energy or the abnormal profits of energy companies can finance specific aid to vulnerable households and companies”. Depending on the country, this aid can be “in the form of checks or reimbursements, taking into account the regressive impact of increases in energy prices.”

Reuse of higher revenues from energy taxes or abnormal profits from energy companies can finance targeted support to vulnerable households and businesses

Paolo Gentiloni
European Commissioner for the Economy

In this sense, the Commissioner for the Economy of the European Union takes a position similar to that of institutions such as the International Monetary Fund (IMF), which recommends avoiding a tax cut and focusing on direct aid for the most vulnerable sectors of the population, or the Bank of Spain, whose governor Pablo Hernández de Cos has repeatedly stressed that “it is important that national fiscal policy make use of its ability to act in a very granular and targeted manner, and focus its efforts on supporting households, companies and sectors that are being affected the most”, in addition to emphasizing that “it is important that the measures be temporary, so as not to further increase the structural deficit”, with which “a generalized fiscal impulse must be avoided” since “it could translate into an increase in the existing bottlenecks in the most stressed sectors that will end up filtering through to prices”.

Last Friday, the PP sent a document to the Government containing a series of economic proposals, which experts point out would mean add fuel to the fire of inflation. Among the tax measures for energy, they propose a reduction in the tax rate of VAT on electricity and natural gas to below 10% and a reduction in the tax rate of the special tax on hydrocarbons. The popular now propose this reduction despite the fact that in July 2021 they voted in Congress against the royal decree of the Government that reduced VAT on electricity from 21% to 10%.

Gentiloni recalls in his letter that “the European Commission is well aware of the need to cushion the impact of high energy prices on households and businesses, in particular on the most vulnerable, while avoiding interruptions in supply” , as a result of the war in Ukraine. To do this, he points out that there is a new regulation on VAT, which has been in force since April 6, 2022, to later emphasize that “the new directive on energy taxation is currently being debated in the Council, where the objective is align the taxation of energy products with the energy and climate policies of the EU, favoring clean technologies over fossil fuels”.

The new directive in place since April 6, says the European commissioner, “allows the application of reduced VAT rates (respecting a minimum of 5%) to natural gas and electricity” as well as “reduced rates are applied to solar panels and certain heating systems”. Furthermore, he points out that “Member States cannot have more than two different reduced rates” and that “automotive fuels cannot benefit from reduced rates”.

However, despite the fact that a country could reduce the rate applied to energy, Gentiloni warns of the ineffectiveness of this measure and understands that some countries have assumed proposals of this nature more for the ease of their implementation than for their effectiveness. “The reduction of energy taxes is easy to apply and this is probably the reason why fiscal measures have been used extensively in the first weeks and months of the crisis. However, should prices be persistently high, the benefit to businesses and consumers is more uncertain,” he reiterates.

Coherence with climate objectives

On the other hand, the European commissioner adds that the energy policy of the EU countries “must be consistent with the general objectives of energy autonomy and the climate objectives for 2030 and 2050. The achievement of any of these objectives requires that the measures of Tax cuts on fossil fuels are temporary and aimed at improving the affordability of energy products for businesses and households while prices are high. This is important also to protect the ability of the Member States and the EU to generate adequate tax revenues to finance the recovery and the double transition in a fair way.”

In short, the European Commissioner for the Economy warns that a reduction in taxes on energy would be ineffective, incoherent and would promote inequality.



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