European Union states will have more powers to set sales tax rates, the European Commission has said, presenting a broad reform of VAT rules, which also aims to curb widespread fraud involving VAT.
The plan follows repeated pressure from EU states to scrap the existing system based on a centralised EU-wide rate-setting mechanism, which limits countries' powers to decide reduced levies for specific products, ranging from ebooks to sanitary products.
Two options remain under discussion, the bolder of which would give states the freedom to set rates as they prefer "so long as it does not generate tax distortions", the Commission said in its plan.
EU Economics Commissioner Pierre Moscovici told reporters that he favoured the more ambitious option. A definitive decision will be made by next year.
In either case Britain will retain its right to apply zero rates of VAT, a legacy entitlement that it shares with other older member states but which London is unusual in using so widely, notably on foods and medicines.
The Commission will also make a proposal by the end of the year to increase the number of products and services exempt from VAT.
"This would solve the tampon tax issue," an official said, explaining that this measure would allow Britain to charge no VAT on female hygiene products, which are currently taxed at a reduced 5% rate.
This follows a commitment made at the EU leaders' summit in March to end the tampon tax row that had become a political football for Britons campaigning to leave the EU in a June referendum.
The Commission will also propose this year a cut in VAT on ebooks and online news publications to align prices with their paper versions.
Plans aimed at clamping down on fraud
The Commission's action plan on VAT also proposes changing the way the tax is collected on trade between EU states.
At the moment the tax is collected by the state where the goods or services are sold and exporters are exempt.
The system is prone to fraud and causes revenue losses of €50bn a year in the EU, Commission data shows.
The new VAT regime under consideration would make exporting countries responsible for collecting the tax at the rate applied by the states where the final sale occurs.
The proposed system could reduce fraud by 80%, the Commission estimates, but greater trust and cooperation between national tax administrations will be required, and businesses are likely to face more red tape.
"Companies will have to make sure they understand the VAT rules in other jurisdictions," said Chas Roy-Chowdhury, head of tax at ACCA, a global accounting body.
"This is likely to affect more small businesses, for which compliance costs are always more difficult to bear."
The Commission's definitive proposal on the new VAT regime will only come in 2017 and will need the backing of the EU parliament and all 28 EU states to become law.