The EU Commission on April 7 presented its VAT action plan, designed to update the EU VAT system to make it more fraud-proof, reduce administrative burdens, account for the digital and mobile economy, and return more power to member states to set VAT rates.
Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, said the biggest problem with Europe’s VAT system is fraud, which each year results in about €170 billion of lost tax revenue. Of that, € 50 billion is attributed to cross-border transactions between businesses, Moscovici said.
New rules, to be proposed in 2017, would put in place definitive rules for a single European VAT area. Cross-border transactions would be taxed at the rates of the member state of destination and collection of taxes would gradually be transitioned to a more fraud-proof system, requiring the supplier of goods to collect VAT from his customer.
An EU-wide web portal would also be implemented to ensure a simple VAT collection system for businesses that trade with other states. The system would allow VAT to be collected by the country where the sale is made and transferred to the country where the goods are consumed.
“Such a system of taxation of cross-border supplies will ensure consistent treatment of domestic and cross-border supplies along the entire chain of a production and distribution, and re-establish the basic features of the VAT in cross-border trade i.e. the fractionated payments system with its self-policing character,” the Commission said.
Moscovici said that the scheme should allow member states to immediately gain about € 40 billion each year through fraud prevention.
Setting rates
Other rules would give more power to the states to set zero or reduced VAT rates.
Two options are suggested. Under one option, the 15 percent minimum VAT rate would be maintained but the list of goods and services to which member states can apply reduced rates would be expanded.
Under a second option, which Moscovici said he favored, the minimum rate and list would be scrapped and replaced with rules allowing greater autonomy for states to set rates, supplemented with safeguards to prevent fraud, undue complexity, and unfair competition.
VAT gap & SMEs
To more immediately tackle VAT fraud, measures will be introduced in 2016 to improve cooperation between tax administrations, including non-EU countries. Measures will also be proposed to improve voluntary compliance and cooperation between business and tax authorities, and to encourage states to share knowledge with other states on how improve the performance of VAT tax administration.
The action plan also calls for the release in 2017 a comprehensive simplification package for SMEs. The goal is to create an environment that is conducive to SME growth and favorable to cross-border trade, Moscovici said.
E-commerce
As announced in May 2015, a legislative proposal will be introduced by the end of 2016 to modernize and simplify VAT for cross-border e-commerece by extending the current One Stop Shop concept to all cross border e-commerce; introducing simplification measures to help small start up e-commerce businesses; removing the VAT exemption for small consignment from suppliers in third countries; and streamlining audits.
Moscovici also said that, before the end of year, the Commission will take steps to align VAT rules for online books and newspapers with rules applicable to physical publications.
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