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The European Commission has launched plans (Brussels, 4 October 2017) for the biggest reform of EU VAT rules in a quarter of a century. The reform would improve and modernise the system for governments and businesses alike.

Commission proposes to fundamentally change the current VAT system by taxing sales of goods from one EU country to another in the same way as goods are sold within individual Member States. This will create a new and definitive VAT system for the EU.

Background

The common Value Added Tax (VAT) system plays an important role in Europe's Single Market. The first VAT directive dates from 1967: it was originally put in place to end the previous turnover taxes which distorted competition and hindered the free movement of goods and to remove fiscal checks and formalities at internal borders. VAT is a major and growing source of revenue in the EU, providing over €1 trillion in 2015, corresponding to 7% of EU GDP. One of the EU's own resources is also based on VAT; as a consumption tax, it is one of the most growth-friendly forms of taxation.

Despite many reforms, the VAT system has been unable to keep pace with the challenges of present global, digital and mobile economy. The current VAT system dates from 1993 and was intended to be a transitional system. It is fragmented and overly complex for the growing number of businesses operating cross-border and leaves the door open to fraud: domestic and cross-border transactions are treated differently and goods or services can be bought free of VAT within the Single Market.

The Commission has consistently pressed for the reform of the VAT system. However, for companies trading across the EU, borders are still a fact of daily life when it comes to VAT. Current VAT rules are one of the last areas of EU law which are not in line with the principles underpinning the Single Market.

Overall, over €150 billion of VAT is lost every year, which means that the EU states miss out on revenue that could be used for schools, roads and healthcare. According to Commission’s estimation, out of this, around €50 billion - or €100 per EU citizen each year - is due to cross-border VAT fraud.

It is estimated that this sum would be reduced by 80% thanks to the proposed reform.

The proposed VAT reform would also make the system more robust and simpler to use for companies. The Commission wants a VAT system that helps European companies to reap all the benefits of the EU Single Market and to compete in global markets. Businesses trading cross-border currently suffer from 11% higher compliance costs compared to those trading only domestically. Simplifying and modernising VAT should reduce these costs by an estimated €1 billion. See: http://europa.eu/rapid/press-release_IP-17-3443_en.htm?locale=en

A definitive VAT system that works for the Single Market has been a long-standing commitment of the European Commission. The 2016VAT Action Plan explained in detail the need to come to a single European VAT area that is simpler and fraud-proof.

See: http://europa.eu/rapid/press-release_IP-16-1022_en.htm

Commission’s opinion

European Commissioners are unanimous in approaches to a new VAT system. Thus, Commission Vice-President, Valdis Dombrovskis, responsible for the Euro and Social Dialogue commenting the proposal said that it was necessary to renew existing VAT system, which was set up a quarter century ago on a temporary basis. He added that the member states needed a new and clear system dealing more efficiently with cross border VAT fraud, which at the EU level, causes an annual tax revenue loss of around €50 billion.

Another Commissioner for Economic and Financial Affairs, Taxation and Customs, Pierre Moscovici underlined that, 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, he added.   

The new draft would change this anachronistic system based on national borders; thus, the EU states should consider cross-border VAT transactions as domestic operations in the EU single market by 2022. The 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. 

New VAT principles

There are four fundamental principles or “cornerstone ideas” of a new EU VAT reform:

= Tackling fraud: VAT will now be charged on cross-border trade between businesses. Currently, this type of trade is 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: It will be simpler for companies that sell cross-border to deal with their VAT obligations thanks to a ‘One Stop Shop”. 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. The EU states will then pay the VAT to each other directly, as is already the case for all sales of e-services and e-trade.

= Greater consistency: A move to the principle of “destination” whereby the final amount of VAT is always paid to the EU state of the final consumer and charged at the rate of that member state. This has been a long-standing commitment of the European Commission, supported by the EU states; it is already in place for sales of e-services/e-trade.

= Less red tape: 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 have to prepare a list of cross-border transactions for their tax authority (the so-called “recapitulative statement”).

The new proposal also introduces the notion of a Certified Taxable Person – a category of trusted business that will benefit from much simpler and time-saving rules. Four “quick fixes” have also been proposed, to come into force by 2019. These short-term measures were explicitly requested by the EU member states to improve the day-to-day functioning of the current VAT system until the definitive regime has been fully agreed and implemented.

New legislative proposal will be sent to the EU states in the Council for agreement and to the European Parliament for consultation. The Commission will follow this initiative in 2018 with a detailed legal proposal to amend the so-called “VAT Directive” at technical level so that the proposed new VAT regime can be smoothly implemented.

More information: = Q&A on VAT reform; = Link to Communication; = 2016 VAT Action Plan; = 2017 VAT Gap Study; = Commission proposals on VAT for e-commerce (December 2016); = Impact Assessment

New rules for VAT in e-trade

There are the following key actions in e-trade and commerce:

= New VAT rules for sales of goods and services online. Currently, online traders have to register for VAT in all the EU states to which they sell goods. Often cited as one of the biggest barriers to cross-border e-commerce, these VAT obligations cost businesses around €8,000 for every EU country into which they sell. The Commission is now proposing that businesses make one simple quarterly return for the VAT dues across the whole of the EU, using the online VAT “One Stop Shop”.

This system already exists for sales of e‑services such as mobile phone apps, and has been proven successful with more than €3 billion in VAT being collected through the system in 2015. Administrative burdens for companies will be reduced by a staggering 95%, giving an overall saving to EU business of €2.3 billion and increasing VAT revenues for the EU states by €7 billion.

= Simplifying VAT rules for micro-businesses and startups. A new yearly threshold of €10,000 in online sales will be introduced under which businesses selling cross-border can continue to apply the VAT rules they are used to in their home country. This will make complying with VAT rules easier for 430,000 companies across the EU, representing 97% of all micro-business trading cross‑border.

A second new yearly threshold of €100,000 will make life easier for SMEs when it comes to VAT, with simplified rules for identifying where their customers are based. The thresholds could be applied as early as 2018 on e‑services, and by 2021 for online goods. Other simplifications would allow the smallest businesses to benefit from the same familiar VAT rules of their home country, such as invoicing requirements and record keeping. The first point of contact will always be with the tax administration where the business is located and businesses will no longer be audited by each Member State where they have sales.

= Action against VAT fraud from outside the EU. Small consignments imported into the EU that are worth less than €22 are currently exempt from VAT. With around 150 million parcels imported free of VAT into the EU each year, this system is open to massive fraud and abuse, creating major distortions against EU business.

Firstly, EU businesses are put at a clear disadvantage since unlike their non-EU competitors; they are liable to apply VAT from the first eurocent sold. Secondly, imported high-value goods such as smartphones and tablets are consistently undervalued or wrongly described in the importation paperwork in order to benefit from this VAT exemption. The Commission has therefore decided to remove this exemption.

= Equal rules for taxing e-books, e-newspapers and their printed equivalents. Current rules allow the EU states to tax printed publications such as books and newspapers at reduced rates or, in some cases, super-reduced or zero rates. The same rules exclude e-publications, meaning that these products must be taxed at the standard rate. Once agreed by all EU states, the new set-up will allow – but not oblige – EU states to align the rates on e-publications to those on printed publications.