The €71 billion issue: EC progressing talks to reform VAT relief on donations of goods
The European Environmental Bureau estimated €71 billion of unsold electronics and clothing are destroyed each year in the EU. This is unsold goods dumped into landfill because this is cheaper than more sustainable alternatives such as charitable donations.
The European Commission is exploring reforming and harmonising the VAT liability on goods donated by businesses to incentivise more environmentally sustainable practises. Currently, any donations to charities and the like by businesses are treated as sales, and VAT must be assumed and remitted. This is to prevent fraud. The EU member states have varying, and complex reliefs for VAT on charitable donations.
The European Green Deal seeks to incentivise more sustainable outcomes. However in many member states companies must pay VAT when donating a product to charity, while product destruction is VAT free. This incremental cost makes it expensive for retailers to donate unsold stock to charities on a large scale.
The UK, post Brexit, is undertaking its own consultation on VAT relief for donations.
Good intentions may not be enough to get reform on agenda
In October, EU tax officials will resume discussions on harmonising VAT treatment for charitable donations of goods,. The European Commission’s Group on the Future of VAT will continue these talks, with a meeting scheduled for October 1.
Although member states generally charge VAT on donations but not on the destruction of goods, stakeholders argue that VAT relief on donations aligns with the EU’s sustainability goals. While member states are open to further work on the issue, they prioritise other VAT-related topics such as agreement on VAT in the Digital Age and the Future of VAT next round reforms. The Commission is considering the next steps and an explanatory document on VAT treatment.
General VAT Treatment of Donations
Under the EU VAT Directive, when a business donates goods, it must account for VAT as if it had sold those goods at their open market value. This means the business must calculate the VAT based on what it would have charged had the goods been sold in a typical transaction. The rationale behind this rule is to avoid situations where businesses might claim input VAT deductions on goods they later donate, thus avoiding the VAT liability that would arise if the goods were sold. The tax treatment ensures that the final consumer bears the VAT burden, aligning with the overall objectives of the VAT system.
Exemptions and Special Cases
Despite the general rule, there are significant exceptions, particularly concerning donations to charities or for humanitarian relief. The EU VAT Directive allows member states to exempt certain donations from VAT, particularly when the goods are donated to recognized charitable organizations or used for disaster relief efforts. In such cases, the donation is treated as a non-taxable event, meaning no VAT is due. However, this exemption is not automatically applied across all member states, and national tax authorities have considerable discretion in how they implement these provisions.
EU national variations
The application of VAT rules to donations varies significantly across the EU due to the flexibility allowed by the EU VAT Directive. Each member state has the authority to define the scope of VAT exemptions, leading to different practices:
- France: In France, donations of goods to charities are generally exempt from VAT, provided the charity meets certain conditions and the goods are used in a way that benefits the public good. French law requires that the goods should not be resold at a profit by the charity, ensuring that the exemption is used only for genuinely charitable purposes.
- Germany: Germany’s approach is more restrictive. VAT is generally due on donated goods unless specific exemptions apply. For example, donations to public-benefit organizations can be exempt from VAT if the goods are intended for use in non-commercial activities that benefit the public. However, if the goods are resold, even by a charity, VAT may be due.
- Italy: In Italy, VAT exemptions are available for donations to recognized charities, especially for goods like food, clothing, and medical supplies. These exemptions are part of broader efforts to reduce waste and support social welfare initiatives. However, the rules require strict documentation and proof that the donated goods are used for their intended charitable purpose.
- Sweden: Sweden provides exemptions for donations to charities, particularly those involved in international aid and disaster relief. Swedish law aligns closely with the EU Directive, allowing for broad exemptions when the donation supports humanitarian efforts, though businesses must still comply with documentation requirements to qualify for the exemption.
- Spain: Spain also offers VAT exemptions for donations to recognized charities, but the application can be more complex. Spanish law requires that the charity must use the goods directly in its charitable activities or distribute them to beneficiaries without profit. If the goods are resold, VAT is typically due.
Compliance and Documentation
One common theme across all member states is the emphasis on documentation and compliance. Businesses must maintain detailed records of any goods donated, including the market value of the goods, the nature of the charity receiving the donation, and how the goods will be used. This documentation is crucial for claiming VAT exemptions and avoiding penalties during audits.
