European Commission offers tax incentives for EU arms projects –

EU plans to waive value added tax (VAT) when buying defense equipment produced in Europe to promote joint arms projects, according to a defense policy proposal tabled by the Commission European Tuesday 15 February.

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

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

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

According to the European Defense Agency (EDA), EU member states spent 37 billion euros on armaments in 2020, of which oOnly 4.1 billion euros were spent on projects on which two or more states worked together.

“The [European] The Commission will explore a number of instruments to encourage the joint purchase of collaboratively developed defense capabilities within the EU, including by offering an exemption from Value Added Tax (VAT),” reads the text. of the proposal.

The EU executive’s proposal also states that it will “put in place new financing solutions and revise the EDF bonus mechanisms to encourage commitments for joint purchases of equipment, maintenance and operation, as well as the joint development of relevant defense technologies”.

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

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 duties in the receiving country. Similar regulations apply to the NATO procurement agency.

A VAT exemption would ensure fair competition between the European and American defense industry, say experts from the European Commission.

Moreover, it could also give an incentive for the effective implementation of European military projects.

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

Of the sum available, €2.7 billion is earmarked for research, while the remaining €5.3 billion is reserved for the development of prototypes, which will be co-financed by the Member States.

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

VAT relief could potentially incentivize 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 defense proposals, which also include the development of common European capabilities in space and cyberspace, will still need to be approved by EU member states and the European Parliament.

Momentum of the “strategic compass”

Common defense ambitions have gained momentum in recent years, and all but two EU countries have signed up to the EU’s Permanent Structured Cooperation (PESCO), which aims to help fund, develop and deploy together of the armed forces and to make the EU defense sector more flexible and independent of the United States.

The EU defense industry has welcomed the recent moves, hoping for competitive support from dominant US rivals.

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

The proposal comes against the backdrop of the end states of the EU’s “strategic compass”, the bloc’s next military strategy document, which is expected to be adopted by EU leaders at their next summit in late March.

The document includes a series of new tools and investment mechanisms, such as the proposal to create a Defense Innovation Center within the European Defense Agency by 2022.

The plan also refers to a recent assessment which had urged EU governments to focus on “six next-generation capabilities” such as a new battle tank (MBT), patrol boats, defense in space, air systems and improved military mobility.

It also indicates that national defense budgets should increase in the coming years, but does not ask for concrete commitments.

[Edited by Nathalie Weatherald]

Aurora J. William