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European Commission unveils proposals for EU VAT reform

Gareth Bevan 5 October 2017 No comments

The European Commission has revealed proposals for reforming EU VAT on cross-border trade.  Following the adoption of its Action Plan on VAT last year the Commission has now launched plans for its definitive VAT system for the EU.  The current system which has been in place since 1993 was only ever intended to be transitional.

Why the change?                   

Of the €150 billion VAT lost every year (the so-called VAT Gap), about €50 billion is estimated to be as a result of cross-border VAT fraud. The new definitive system is intended to be less susceptible to this type of fraud.  The Commission has estimated that cross-border VAT fraud could be reduced by 80%.

It is hoped the new system will also be more robust, simpler for businesses to use, result in greater EU harmonisation and reduce compliance costs.

What is being proposed?

The Commission’s proposal is to move to a system based on the “destination principle”, that is taxation based on the VAT rate applicable in the country of the customer.  Currently VAT is not charged on sales between businesses in different EU Member States and the customer self-assesses local VAT on the supply.

Under the new system the supplier will charge VAT on intra-EU cross-border sales at the rate applicable in the country of destination.  This VAT will be declared and paid over to the supplier’s home tax authority who will then transfer it to the relevant overseas tax authority.  This One Stop Shop concept will be an extension to the current arrangements in place for e-services.  Under the One Stop Shop businesses will make the relevant declarations and payments via an online portal in their own language and according to the rules in their home country.

It is proposed that businesses will prepare cross-border invoices according to the invoicing rules of their own country and no longer be required to submit EC Sales Lists.

Certified Taxable Person  

The Commission is also planning to introduce the concept of a Certified Taxable Person (CTP).

A business can apply to its home tax authority to become a CTP by proving compliance with pre-defined criteria such as:

  • regular payment of taxes
  • internal controls
  • proof of solvency

Once certified, the company will be considered a reliable tax-payer.

Both the CTP and the companies that do business with it will enjoy a number of simplified procedures for the declaration and payment of cross-border VAT.

The status of Certified Taxable Person will be mutually recognised by all EU Member States.

Short-term fixes

The definitive VAT system should enter into force in 2022.  The proposals will however require the unanimous agreement of all Member States.

The Commission also presented four short-term measures to improve the day-to-day functioning of the current VAT system, until the definitive regime has been fully agreed and implemented.

  • Simplification of VAT rules for companies moving goods from one Member State to another Member State where they are to be stored before being supplied to a customer known in advance (“call-off stock arrangements”). This simplification is limited only to CTPs
  • Simplification provided for chain transaction situations identifying the supply with which the intra-Community transport of goods should be linked. This simplification is limited only to CTPs
  • Simplification of the proof of transport of goods between two Member States needed for the application of the exemption to intra-Community supplies. This simplification is limited only to CTPs
  • Clarification that, in addition to the proof of transport, the VAT number of the commercial partners recorded in the electronic EU VAT-number verification system (VIES) is required in order to apply the cross-border VAT exemption under the current rules.

The adoption of these measures is scheduled for 2018.

Announcing the proposals, Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, said:

“Twenty-five years after the creation of the Single Market, companies and consumers still face 28 different VAT regimes when operating cross-border. Criminals and possibly terrorists have been exploiting these loopholes for too long, organising a €50bn fraud per year. This anachronistic system based on national borders must end! Member States should consider cross-border VAT transactions as domestic operations in our internal market by 2022. Today’s proposal is expected to reduce cross-border VAT fraud by around 80%. At the same time, it will make life easier for EU companies trading across borders, slashing red tape and simplifying VAT-related procedures. In short: good news for business, consumers and national budgets, bad news for fraudsters.”

Further information

Further details of the proposals are available at the following links:

http://europa.eu/rapid/press-release_IP-17-3443_en.htm

http://europa.eu/rapid/press-release_MEMO-17-3444_en.htm

https://ec.europa.eu/taxation_customs/sites/taxation/files/factsheet_futurevat.pdf

http://europa.eu/rapid/press-release_MEMO-17-3444_en.htm