European Commission proposes final technical measures to create the EU Definitive VAT system
carolineheath 31 May 2018 No comments
The European Commission has proposed the detailed technical amendments to EU rules on value added tax (VAT) that supplement the proposed overhaul of the system to make it more fraud-resilient. The package of measures substantially modifies the rules relating to VAT, putting an end to 25 years of a ‘transitional’ VAT regime in the Single Market.
Last October, the Commission proposed the main principles for the creation of a single EU VAT area which would help to shut down the estimated €50 billion in VAT fraud currently affecting EU Member States (see our blog article for further details). With these technical measures, the Commission hopes that Member States will kick-start discussions on the broader principles or ‘cornerstones’ of a simpler and resilient definitive EU VAT system for the trade in goods within the EU.
Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, said:
“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. 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% the €50 billion 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.”
Main Elements of the Proposal
Putting the cornerstones of the definitive VAT system into operation gives rise to important changes to the Principal VAT Directive (2006/112/EC). Of the 408 articles in the VAT Directive, around 200 will need to be adapted to bring about the following changes:
- Simplifying how goods are taxed
In the current VAT system, trade in goods between businesses is split into two transactions: a VAT-exempt sale in the Member State of origin and a taxed acquisition in the Member State of destination. The proposal puts an end to this artificial split of a single commercial transaction. Once agreed, the amendments contained in the VAT rules will define the cross-border trade of goods as a ‘single taxable supply’ which will ensure that goods are taxed in the Member State where the transport of the goods ends. It is hoped that as a result VAT fraud should be dramatically reduced.
- A single online portal (‘One Stop Shop’) for traders
In order to make the change to VAT rules as seamless as possible for businesses, the amendments would introduce the necessary provisions to put in place an online portal or ‘One Stop Shop’ for all business-to-business (B2B) EU traders to comply with their VAT obligations. This system will also be available to companies outside the EU who want to sell to other businesses within the Union and who would otherwise have to register for VAT in every Member State. Once in force, non-EU businesses will simply have to appoint one intermediary in the EU to take care of their VAT obligations.
- Less red tape
The changes reboot the self-policing character of VAT and will reduce the amount of administrative steps that need to be taken by businesses when they sell to other companies in other Member States. Specific reporting obligations linked to the transitional VAT regime will no longer be needed for trade in goods, i.e. intra-EU sales of goods would no longer need to be included in European Sales Listings (ESLs). In addition, invoicing regarding EU trade will be governed by the rules of the Member State of the seller, which should be less burdensome.
- Seller is usually responsible for VAT collection
The announcement clarifies that it is the seller that should charge the 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.
If the proposals are agreed by the EU Member States, the EU Definitive VAT System is due to enter into force in 2022.
For more detailed information on the EU Definitive VAT System proposals see our white paper here.