European Commission proposes tax incentives for EU armament projects

French-German-Spanish new generation fighter model at International Paris Air Show at Le Bourget Airport near Paris, France, 17 June 2019. [EPA-EFE/YOAN VALAT/POOL]

The EU is considering waiving Value Added Tax (VAT) when buying defence equipment produced in Europe in order to promote joint armaments projects, according to a defence policy proposal presented by the European Commission on Tuesday (15 February).

“We need to focus on reducing strategic dependencies, supporting innovation of the defence ecosystem, encouraging joint procurement of defence capabilities,” Internal Market Commissioner, Thierry Breton, said.

“And for this, we rely on the industrial defence and aerospace sectors, a high-tech ecosystem that is an essential driver for Europe’s strategic autonomy and technological sovereignty,” Breton continued.

One of the central ideas concerns additional incentives for joint armaments projects.

According to the European Defence Agency (EDA), EU member states spent €37 billion on armaments in 2020, out of which only €4.1 billion went into projects on which two or more states worked jointly.

“The [European] Commission will explore a number of instruments to incentivise the joint procurement of defence capabilities developed in a collaborative way within the EU, including by proposing a Value Added Tax (VAT) waiver,” the proposal text said.

The EU executive’s proposal also stated it will be “setting up new financing solutions and reviewing the EDF bonus mechanisms to favour commitments to joint procurement of equipment, maintenance and operations in addition to joint development of the relevant defence technologies”.

The target date would be early 2023, which would leave enough time to ensure that the proposal would be compatible with World Trade Organization (WTO) rules.

The idea is reminiscent of practices used in the United States, the world’s largest arms manufacturer, where ‘foreign military sales’ are not subject to VAT or customs fees in the recipient country. A similar regulation applies to NATO’s procurement agency.

A VAT exemption would ensure fair competition between the European and American defence industry, European Commission experts believe.

Moreover, this could also give an incentive to European military projects actually being implemented.

Last year, the European Commission had launched an €8 billion European Defence Fund (EDF), a new instrument designed to co-finance collaborative defence research and development projects across the bloc.

Of the available sum, €2.7 billion is earmarked for research, while the remaining €5.3 billion is reserved for the development of prototypes, to be co-financed by member states.

According to the EU treaties, the procurement of armaments from the common EU budget is prohibited.

A VAT break could potentially incentivise member states to acquire and export their jointly developed armaments. However, states would still have the hurdle of streamlining their national export requirements.

The EU executive’s defence proposals, which also include the development of joint European capabilities in space and cyberspace, will still require approval by EU member states and the European Parliament.

‘Strategic Compass’ momentum

Ambitions on common defence have gathered steam in recent years, and all but two EU nations signed up to the landmark EU permanent structured cooperation (PESCO), aimed to help fund, develop and deploy armed forces together and make the EU’s defence sector more flexible and independent of the US.

The EU’s defence industry has welcomed the recent moves, hoping for competitive support towards the dominating American competitors.

The European Commission’s ‘defence package’ was first announced by European Commission President Ursula von der Leyen in her State of the Union speech last September.

The proposal comes in the context of the final states of the EU’s ‘Strategic Compass’, the bloc’s upcoming military strategy document, which is meant to be adopted by EU leaders at their next summit at the end of March.

LEAK: What the EU's future military strategy could look like

The blueprint of the so-called Strategic Compass, the European Union’s upcoming military strategy document, seen by EURACTIV, will be formally submitted to EU foreign ministers next Monday (15 November).

The document includes a range of new tools and investment mechanisms, such as the proposal to establish a Defence Innovation Hub within the European Defence Agency by 2022.

The blueprint also refers to a recent assessment that had urged EU governments to focus on “six next-generation capabilities” like a new battle tank (MBT), patrol vessels, defence in space, air systems and enhanced military mobility.

It also states that national defence budgets should grow in the coming years, but falls short of asking for concrete commitments.

[Edited by Nathalie Weatherald]

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