European Commission proposes major EU VAT reform

by Davide Anghileri

The EU Commission on October 4 unveiled its plan for the reform of the EU Value Added Tax (VAT) system, aimed at creating a more robust, simpler, and fraud resilient system and one based on increased trust and cooperation between tax administrations.

The aim is also to help European companies to compete in global markets, the Commission said. Compliance costs for all businesses would be reduced through simplifying and modernising VAT obligations and the VAT collection process.

The Commission proposal provides a series of fundamental principles and key reforms for the EU’s VAT area which will improve and modernise the system for governments and businesses alike.

In particular, the reform provides a legislative package on the definitive VAT system for intra-Union business-to-business (B2B) trade, a reform of the VAT rates, a reinforcement of the existing instruments for VAT administrative cooperation, and a simplification of the VAT rules for small and medium-sized entities.

Broken VAT system

The current system is inadequate to solve issues given by the digital economy and globalisation. In fact, it dates back to 1993, just after the creation of the Single Market.

The rules do not take into account technological developments, changes in business models, or the globalisation of the economy. Moreover, the scheme provides two completely different VAT regimes: one for domestic transactions and another for cross-border transactions.

The consequence is that, on the one hand, cross-border transactions have higher compliance costs, but, on the other, these transactions are free of VAT within the Single Market and hence are easily the subject of fraud.

Moreover, there are no adequate cross-border control systems that can operate quickly enough, and thus the VAT system gives rise to a significant amount of fraud.

The EU Commission estimates that in 2015, EUR 151 billion, representing 12.8% of the VAT liability, was lost due to fraud and other shortcomings.

In this regard, it has been estimated that EUR 50 billion is due to cross-border VAT fraud, a fraud committed in large part by criminal organisations and which, according to recent press reports, has also been used to finance terrorism.

The EU Commission believes that the reform will reduce cross-border VAT fraud by EUR 41 billion and compliance costs for businesses by EUR 1 billion.

The EU Commission intends to reach an agreement on four fundamental principles, or “cornerstones” of a new definitive single EU VAT area: tackling fraud on cross-border VAT, One-Stop Shop, destination VAT, and lowering red tape.

Tackling fraud on cross-border VAT

In particular, the Commission aims to introduce VAT on cross-border trade between businesses inside the EU to tackle fraud.

Currently, cross-border transactions are exempt from VAT, providing an easy loophole for unscrupulous companies to collect VAT and then vanish without remitting the money to the government.

One Stop Shop

The Commission wants that every EU Member open an online web portal (or “One Stop Shop”) in their home country for companies that sell cross-border to deal with their VAT obligations. Hence, traders will be able to make declarations and payments using a single online portal in their own language and according to the same rules and administrative templates as in their home country.

Member States will then pay the VAT to each other directly, as is already the case for all sales of e-services.

In addition, there will be easier and more harmonised procedures and less administrative burden for the tax authorities. The definitive regime will put in place the self-policing function of the VAT system at EU level, making VAT auditing and collection easier for tax administrations.

Greater consistency – destination VAT

The Commission proposes to move to the principle of “destination.” Thus, the final amount of VAT will be always paid to the Member State of the final consumer and charged at the rate of that Member State.

Less red tape

The Commission intends to arrive at a simplification of invoicing rules, allowing sellers to prepare invoices according to the rules of their own country even when trading across borders. Companies will no longer be required to prepare a list of cross-border transactions for their tax authority (the so-called “recapitulative statement”).

Certified Taxable Person

The Commission’s proposal also introduces the notion of a “Certified Taxable Person” to facilitate trade and make life easier for companies operating cross-border in the EU.

Provided that a company, small or big, meets a set of criteria, it can receive a certificate allowing it to be considered throughout the EU to be a reliable VAT taxpayer.

A business can become a Certified Taxable Person by applying to their national tax authority and proving compliance with a set of sufficiently harmonised and standardised pre-defined criteria, like regular payment of taxes, reliable internal control systems, and proof of solvency.

Once certified, both a Certified Taxable Person and the companies that it does business with will enjoy simplified procedures for the declaration and payment of cross-border VAT. The status of Certified Taxable Person would be mutually recognised by all EU Member States.

Short-term measures

The Commission also proposed a number of short-term measures to improve the functioning of the VAT system until the definitive regime has been fully agreed and implemented.

In particular, these quick fixes intend to simplify VAT rules for companies in one Member State storing goods in another Member State to be sold directly to customers there and is limited to Certified Taxable Persons who will no longer need to register and pay VAT in another Member State when they store goods there.

Moreover, the Commission aims to simplify rules for transactions which do not involve the physical movement of goods, in cased where Certified Taxable Persons are involved in these transactions. These measures are designed to harmonise and make uniform rules regarding the transport of goods from one EU country to another, in cases where Certified Taxable Persons are involved.

Next steps

The VAT proposal will be forwarded to the European Parliament for consultation and to the Council of Ministers for their agreement. It will require unanimous agreement from all Member States in the Council before it can enter into force.

A second directive overhauling the whole VAT Directive will be proposed in which the cornerstones will be implemented and the current transitional articles will be replaced or deleted.

Further changes regarding the administrative cooperation rules and substantial IT developments will be needed to ensure the proper operation of the system. The adoption of this second proposal is currently scheduled for 2018, and the definitive regime should enter into application in 2022,