Malta may be in for a tough time hanging on to its VAT exemptions and reduced rates, as the EU embarks on an overhaul of its 40-year old value added tax system.

In 2008, Malta had won the right to keep its zero-rated exemptions on food and pharmaceutical products, as long the UK and Ireland kept theirs.

It actually has one of the longest lists of zero and reduced rates in the EU. Besides applying zero rates on food and medicine, water supplies and public transport, it has reduced rates on an array of goods and services including hotel accommodation, education, books and newspapers, cultural activities and domestic care services.

But Brussels yesterday signalled that it wants to reduce to a minimum the number of VAT exemptions, which are seen to distort the internal market.

“Broadening tax bases and limiting the use of reduced rates could generate new revenue for member states without the need for rate increases,” Taxation Commissioner Alexander Semeta said in a communication on VAT reform.

“The standard VAT rate could even be reduced in some member states, without any impact on revenue, if exemptions and reductions were removed.”

Without singling out any particular country, Commissioner Semeta said the Commission wanted the same VAT rates to apply on similar goods and services across the bloc.

Brussels will review all the VAT rates in its 27 member states and make legislative recommendations by the end of next year or the beginning of 2013.

Although changing VAT legislation at EU level requires unanimity, something which is considered to be difficult under the current treaty due to the UK’s stiff opposition, the abolition of zero rates across the EU has been long under the radar.

Last year, when the Commission started discussions on the VAT review through the launch of a green paper, it made it clear that “zero and reduced VAT regimes do not make any more sense in today’s economy and it would be more beneficial to remove these derogations”.

Commissioner Semeta yesterday reiterated this argument: “Our studies show that, if all reduced rates were removed, the standard rate could actually be reduced by up to 7.5 percentage points in some cases, without any impact on overall revenues,” he said.