By Davide Anghileri, University of Lausanne
The EU Commission on 25 May presented two proposals to amend the EU VAT directive, one providing technical amendments for a definitive VAT system and one on the reverse charge mechanism.
“The proposals we are presenting today represent the final building blocks in the overhaul of the EU’s VAT system. They will open the way to simpler rules, less red tape, and a more user-friendly system, thanks to the online one-stop-shop for traders,” EU Tax Commissioner Pierre Moscovici said.
Definitive VAT system
The European Commission submitted detailed technical amendments to EU rules on VAT to simplify compliance obligations for businesses and to make the system less prone to fraud.
As previously announced, the EU’s plans are far-reaching, involving changes to about 200 articles of the EU VAT Directive (on 408) creating a new destination principle under which supplies of goods and services would be taxable in the location in which they are effectively consumed under that State’s tax rules.
To reduce VAT fraud, the Commission suggests moving from the existing system where trade in goods between businesses is split into two transactions, namely, a VAT-exempt sale in the Member State of origin and a taxed acquisition in the Member State of destination. Instead, the EU proposes a system where the cross-border trade of goods would be seen as a single taxable supply and taxed in the Member State where the transport of the goods ends.
The reform proposes to put in place an online portal, called “One Stop Shop,” for all business-to-business EU traders to administer their VAT.
This system will also be available to companies outside the EU who want to sell to businesses within the Union and who would otherwise be required to register for VAT in every Member State.
Once the One Stop Shop is in place, these businesses will simply need to appoint one intermediary in the EU to take care of VAT.
The EU Commission intends to reduce the administrative steps needed when businesses sell to other companies in other Member States. The specific reporting obligations of the transitional VAT regime would no longer be required for trade in goods. Further invoicing regarding EU trade would be governed by the rules of the Member State of the seller, which should be less burdensome.
The proposal clarifies that it is the seller that should charge VAT due on a sale of goods to a customer in another EU country at the rate of the Member State of destination. Only where the customer is a Certified Taxable Person (i.e., a reliable taxpayer, recognized as such by the tax administration) will the acquirer of the goods be liable for VAT.
“It is time for our member states to trust each other when it comes to VAT collection on intra-EU transactions. We estimate that our proposed reform could reduce by 80 percent the EUR 50bn lost each year in cross-border VAT fraud. I hope that member states will now seize this opportunity to put in place a quality VAT system for the EU,” Moscovici said.
Reverse charge mechanism
EU European Commission also proposes to extend the reverse charge mechanism on a defined list of goods and services, provided for in Article 199a(1) of the VAT Directive.
Further, the Quick Reaction Mechanism in Article 199b(1), would be extended until 30 June 2022.
The aim is to help EU Member States tackle VAT fraud until the EU VAT system reform enters into force.
The purpose of the two measures is to allow member states to quickly tackle missing trader fraud through enabling member states the option of applying the reverse charge mechanism for listed supplies (in Article 199a) and by offering a faster procedure for the introduction of the reverse charge mechanism in case of sudden and massive fraud (Article 199b) – the so-called Quick Reaction Mechanism.
A missing trader intra-community fraud artificially manipulates the EU place of supply rules and occurs when a trader acquires goods, transported or dispatched from another Member State, by means of a supply exempt from VAT and sells them on including VAT on the invoice to the customer.
After having received the VAT amount from the customer such trader disappears before paying the VAT due to the tax authorities. At the same time, the customer, acting in good faith or not, can deduct the VAT he paid to the supplier through his VAT return.
With the reverse charge mechanism, a Member State is allowed to designate the recipient (taxable person) of the supply as the person liable for the payment of VAT.
Therefore, once the trader is obliged to use the reverse charge mechanism for such domestic supplies, he cannot charge VAT on its invoice. He will subsequently not receive the VAT amount from his customer and, as a result, he cannot disappear with the amount of VAT received. Therefore, the potential for missing trader fraud and other permutations of the scheme will be eliminated.
Davide Anghileri
Davide Anghileri is a PhD candidate at the University of Lausanne, where he is writing his thesis on the attribution of profits to PEs. He researches transfer pricing issues and lectures for the Master of Advanced Studies in International Taxation and Executive Program on Transfer Pricing.
Anghileri, a Contributing Editor at MNE Tax, previously worked as a policy advisor to the Swiss government on BEPS issues.
Davide can be reached at [email protected].
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