In a period of increased instability in the global energy market, the issue of regulating energy prices has once again become a focal point of fiscal and economic policy. It is precisely in this context that amendments to the Value Added Tax Act have been proposed, which would allow the introduction of a variable, or so-called “floating”, VAT rate on certain energy products.

This is a model that would enable the Government of the Republic of Croatia to respond more flexibly in extraordinary market circumstances, particularly in situations involving sudden disruptions in fuel and energy prices.

Such a change represents a significant shift from the previous approach to VAT taxation, which has traditionally been regarded as one of the more stable and predictable forms of taxation.

What does a “floating” VAT rate imply?

The proposed amendments to the VAT Act envisage the possibility for the Government of the Republic of Croatia, under special circumstances and for a limited period, to prescribe a different VAT rate for energy products subject to excise duties by way of a regulation.

In other words, the VAT rate would no longer be determined exclusively as a fixed statutory rate, but could, in certain situations, become a temporarily adjustable fiscal instrument.

The primary purpose of such a measure would be:

• to mitigate the consequences of disruptions in the energy market,
• to protect consumers,
• to stabilize retail prices,
• and to preserve economic stability.

In this way, the state would gain an additional tool for short-term market interventions alongside the existing mechanisms for regulating prices and excise duties.

Which energy products could be subject to a variable VAT rate?

The possibility of changing the VAT rate would apply exclusively to energy products subject to excise duties under the applicable regulations.

In practice, this would most likely include:

• motor gasoline,
• diesel fuel,
• blue diesel,
• liquefied petroleum gas (LPG),
• as well as certain other energy products already covered by the state price regulation system.

Considering the Government’s existing fuel price control model, it is likely that any VAT rate adjustments would primarily apply to energy products whose retail prices are already periodically regulated through government decrees.

Special circumstances as a prerequisite for intervention

It is important to emphasize that the variable VAT rate would not be applied on a regular basis, but exclusively in so-called special circumstances.

Such circumstances may include:

• serious disruptions in the energy market,
• sudden increases in energy prices,
• significant economic disturbances,
• or other situations requiring an urgent fiscal response from the state.

The intention is to ensure that such a measure remains an exceptional instrument rather than becoming a standard taxation model.

To what extent could the VAT rate be reduced?

Currently, the general VAT rate of 25% applies to most petroleum products.

However, the European regulatory framework stipulates that the standard VAT rate may not be lower than 15%, which also represents the lowest possible rate that could be applied to energy products such as gasoline and diesel.

According to current analyses, a temporary reduction in the VAT rate could have a visible impact on retail fuel prices.

For example, reducing the VAT rate from 25% to 15% could result in:

• a decrease in the price of standard diesel of approximately €0.15/l,
• and a decrease in the price of gasoline of approximately €0.13/l.

Although these may not appear to be substantial amounts individually, the overall effect could be significant for households and businesses with high fuel consumption.

New challenges for businesses and accounting

Although such a model could contribute to market stabilization, its practical implementation raises a number of operational and administrative issues.

The introduction of a variable VAT rate would require:

• adjustments to accounting and ERP systems,
• more frequent updates of tax rates,
• precise recording of transitional periods,
• and additional control over VAT and input VAT calculations.

A particular challenge could arise in the booking of incoming invoices during periods of rate changes, especially for businesses with a high volume of fuel and energy-related transactions.

The risk would also increase regarding:

• incorrect VAT calculations,
• improper deduction of input VAT,
• and possible discrepancies in VAT records and returns.

Under such circumstances, the timely alignment of business processes and systems becomes extremely important.

Who would benefit the most from this measure?

The most noticeable effect of a reduced VAT rate would likely be experienced by:

• citizens,
• small businesses not registered for VAT purposes,
• and certain self-employed professionals.

On the other hand, businesses operating within the VAT system and entitled to deduct input VAT may already deduct VAT on fuel purchases used for taxable business activities.

For them, this measure would primarily mean:

• a short-term reduction in cash outflows,
• or a more favorable cash flow when purchasing energy products.

Conclusion

The possibility of introducing a variable (“floating”) VAT rate on energy products represents one of the more significant potential changes to the domestic VAT system in recent years.

Although the primary objective of this model is to enable a faster governmental response to market disruptions and mitigate increases in energy prices, its implementation also brings certain challenges for businesses, accounting practices, and tax administration.

Should such measures come into force, businesses will need to pay particular attention to:

• the timely adjustment of business systems,
• the correct calculation of VAT,
• the continuous monitoring of regulatory changes,
• and the accuracy of tax records and reporting.

brandom continuously monitors tax and regulatory developments in order to provide clients with timely, professional, and reliable information for secure and compliant business operations. Contact us if you have any questions.