The drop in VAT to 5%, which will leave Spain with the cheapest tax in the EU, is a new tax cut that tries to cushion the rise in electricity, as the Government has tried in the last year
In the last 12 months, the electricity bill has been lifted practically all the tax burden that weighed on electricity bills. The runaway prices that the energy market has marked since last summer, with spikes in September, December, and especially from March due to the war in Ukraine, has forced the Government to intervene in taxation whose weight represented almost a third part of any receipt. With the announcement by the President of the Government, Pedro Sánchez, that the Council of Ministers on Saturday will reduce VAT to 5%, taxes will hardly have a leading role.
In fact, Spain will be the European country with the lowest VAT for electricity after this year of energy crisis. The reduction to 5% will mean, on average, a saving of about 5 euros per month for a bill of about 100 euros. That same receipt would be more than 130 euros, with all the taxes that existed then.
The tax lever is one of the tools available to the Executive to appease unstoppable prices linked to the stratospheric cost of gas in international markets. Just one year ago, another extraordinary Council of Ministers approved the first measures to placate the rise in electricity bills. Then, it applied the first reduction of the electric VAT of 21% in which it was until then to 10%, the so-called reduced section.
VAT is a tax that is especially monitored by the European Union, which ensures its harmonization to avoid distortions between member states. In fact, any modification is supervised by Brussels. This obligation is the one that the Minister of Finance, María Jesús Montero, clung to at the beginning of 2021 to rule out any VAT reduction on electricity or other products or services. “It is an issue that would not be in line with what is marked by Europe”, she came to assure her in January of last year. However, a few days later the Ministry itself clarified that "at no time did Montero speak of prohibitions or sanctions and he limited himself to recalling a recurring opinion of the European Commission when it analyzes the Spanish economy and its tax system."
With the first reduction of VAT on electricity, there was also a suspension of electricity generation taxes paid by electricity producing companies, around 7%. A measure that is still in force after the extensions of the different economic action plans.
The next significant tax reduction came from September 2021. After a summer of record prices, the Government acted again with a reduction that left the Special Electricity Tax, which is also included in all invoices, at the minimum possible 0.5%. This tax is also monitored by the EU, which establishes that floor from which the receipt cannot be detached. Until then, it was at 5%.
With the VAT at 10% and the Electricity Tax at 0.5%, citizens and companies have spent these winter and spring months. The effect is there, but on many occasions the rise in electricity prices, triggered in months like March after Putin's intervention in Ukraine, has practically eaten up the tax cut. Many citizens have stopped noticing these measures. Although, without them, they would be paying more money for their electricity each month.
Among other measures, although not linked to taxes, a reduction in electricity charges is in force. That is, the fixed part that is paid in each receipt -regardless of whether the light in a house is turned on or not-, which is used to pay for the old renewables, insularity or the electricity deficit accumulated in more than two decades.