Why tax rules hinder the repair of consumer electronics

Unforeseen tax obstacles to repairs 

As VAT and customs duties can, in theory, be levied on every product delivery and repair, the researchers analysed the entire supply/repair chain from a tax perspective. In this context, it is important to realise that repairs do not stand alone. For example, the shop where a product was purchased often does not carry out the repair itself, but sends the product to the party responsible for the warranty. That party may in turn subcontract the work to a repairer, who purchases parts from a third party to carry out the actual repair. The repair has VAT implications for all these parties. If the product is repaired outside the EU, customs duties also come into play. VAT and customs rules largely date back to the 1960s and were not designed with complex international supply and repair chains in mind, such as those now common in the consumer electronics sector. According to the researchers, this leads to a number of recurring bottlenecks. 

For example, if a manufacturer moves parts between EU countries for the purpose of repairs, this may result in a VAT registration obligation in those countries. A few years ago, the European Commission estimated that the cost of maintaining a VAT registration obligation ranged from 2,400 to 8,000 euros per year, per VAT registration. Another example is exchanging a faulty product for a new or repaired one. In practice, this happens regularly to ensure consumers are not left without a working product for too long. Exchanging a product may result in the relevant product supplier becoming liable for VAT, whilst no payment is made by the consumer in return. The VAT due then constitutes a cost item for the relevant product supplier. 

It also happens that products are repaired outside the EU, such as relatively expensive headphones. In such situations, any import duties and import VAT due cannot always be reclaimed and therefore constitute a cost. Furthermore, there is no reliable method for determining the basis of assessment (i.e. the customs value) for repaired products, which can lead to disputes and administrative burdens. 

The researchers make specific recommendations to address these issues. For instance, a policy adjustment could reduce the number of VAT registration obligations. Policy recommendations are also made regarding faulty products that are exchanged for a working one, so that businesses are not necessarily burdened with additional VAT costs. With regard to repairs carried out outside the EU, the researchers propose extending the right to a refund of import VAT and introducing guidelines to enable the taxable amount (customs value) for repaired products to be determined more accurately and simply. With these and other recommendations, Merkx, Schippers and Boonstra hope to gradually lower the tax barriers to repair, so that tax rules no longer inadvertently discourage the choice to repair. 

Why a lower VAT rate is not the solution 

An obvious measure would be to introduce a reduced VAT rate on repairs, for example 9 per cent instead of 21 per cent. The researchers examined this option in detail but advise against it. Under current European rules, the Netherlands can in any case only introduce a reduced rate for repairs to domestic appliances, not for consumer electronics in general. Furthermore, a lower VAT rate would make no difference to repairs carried out under warranty, as VAT is not payable on these in the first place. A consumer survey also shows that most people only opt for replacement rather than repair when the costs fall by around half. A rate reduction from 21 to 9 per cent does not, in itself, achieve that effect. The researchers suggest a more specific statutory warranty period and targeted repair subsidies as alternatives that may be more effective, although further empirical research is needed to confirm this. 

A package of measures is needed  

The overarching conclusion of the study is that there is no single tax measure that can make repair more attractive in one fell swoop. Instead, a package of measures is needed to encourage consumers to repair items more quickly rather than replace them. The aim is that when a washing machine, vacuum cleaner or pair of headphones breaks down, repair should become just as natural an option as buying something new. 

In doing so, the study touches on a broader societal challenge. The path to a circular economy lies not only in technology or changes in consumer behaviour, but also in tax rules which, as yet, have taken repair flows into account only to a limited extent. Targeted changes to legislation and regulations – ranging from stricter product design requirements to amended tax rules and more stringent warranty conditions – can thus help reduce raw material consumption and waste, as appliances are given a second life more often rather than ending up in the rubbish.