Indirect Tax – European Commission proposes reform of the EU VAT System
Background
The European Commission (EC) estimates a loss in VAT revenue of €50 billion every year as a result of cross-border VAT fraud. In an effort to combat this issue and introduce a ‘more modern, robust and simpler’ system, the EC published a series of fundamental principles and key reforms which, if embraced, will have a significant impact on current VAT practices and the relevant stakeholders.
The EC envisions the implementation of the long-term plan with effect from 1 January 2022, which includes the introduction of a new definitive single European VAT Area. Meanwhile, in preparation for such major overhaul, ‘cornerstones’, ’quick fixes’ and the concept of ‘certified taxable persons’ have been proposed and are foreseen to come into force on 1 January 2019 subject to consultation at European Parliament and unanimous agreement by the European Council.
Cornerstones
The following fundamental principles, or ‘cornerstones’, being proposed by the EC will change drastically the transitional VAT rules currently in place for cross-border supplies of goods.
- The principle of taxation at the Member State of arrival for intra-European Union (EU) cross-border supplies of goods.
Under this principle, the VAT rate of the Member State of destination is charged and the current VAT exemption on intra-community supplies of goods at the Member State of departure is abolished.
- The confirmation that, as a general rule, the responsibility of charging and collecting VAT in cross-border supplies of goods is vested upon the supplier.
The proposed rules allow an exception to the general rule where the buyer is a reliable taxpayer and meets the criteria of a ‘Certified Taxable Person’ (CTP), in which case the liability for payment of VAT in the Member State of destination is shifted upon the customer.
- Extension of the One Stop Shop, through which businesses will be able to submit declarations, pay VAT which is due in the Member State of destination as well as claim deductions via a single digital portal in their home Member State, as currently in place for electronically supplied services.
National tax administrations would transfer any VAT due to each other directly. This measure, in combination with a simplification of the VAT invoicing rules, whereby vendors would still be allowed to issue invoices in accordance with their local rules, shall facilitate VAT compliance and reduce red tape.
Quick Fixes
The EC presented the following four short-term quick fixes to improve the current VAT system:
- Simplifications of rules for ‘call-off stock arrangements’
Where goods are moved from one Member State to the other for storage purposes before being supplied to the customer, who would be known in advance of the transfer, the transaction is considered as a single supply rather than two distinct supplies. Such measure removes the need for a separate VAT registration in the Member State where the stock is located. The simplification is limited only to CTPs.
- Chain transactions simplifications
Applicable where supplies in a chain do not lead to the actual transfer of the goods. The simplification is limited only to CTPs.
- Simplification of the proof of transport required for the exemption of Intra-Community supplies
The simplification is limited only to CTPs.
4. Confirmation that, in addition to the proof of transport, the verification of the VAT number of the parties involved as per the EU VAT-number verification system (VIES) is an essential requisite in order for the cross-border VAT exemption to be applied under the current rules.
Certified Taxable Person
A business established in the EU can apply for the status of CTP from its national tax authority, which would allow the trusted VAT taxpayer to benefit from the simplified and time-saving measures. The pre-defined criteria to obtain such attestation are:
- Regular payment of taxes and absence of serious criminal offences or infringements;
- Reliable internal controls; and
- Proof of solvency
Such status is comparable to the Authorized Economic Operator status for customs purposes and is recognized across all Member states.
Concluding Remarks
These proposals represent a positive step forward towards the notion of a Single EU VAT area. Having said this, in order for the new rules to come into force, Member States must reach unanimous agreement at the European Council level, which itself is no mean feat. The tangible impact of the proposed changes can be determined upon the issuance of the detailed provisions, which are expected in Spring 2018.
For further information, please refer to the official EC website.
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