The Executive Body of the European Union is committed to deliver on its 1993 promise of a single VAT area – a final proposal is announced to be agreed and published for 2017. In addition the Commission wants to close the VAT gap – the difference between tax due and tax collected. Lastly, a “modernized rates policy” shall reflect recent trends of digitization and tackle unfair tax rate competition.
On April 7, 2016, the Commission has approved the Action Plan. Three trends appear to be the root cause and call for action:
- Under financial pressure, the Member States claim underpaid VAT totaling € 170 bn annually (“VAT Gap“). They want to take action to close the difference between VAT due under current legislation and VAT effectively collected.
- Digitization has produced new products and services as well as new distribution channels. The current VAT legislation cannot keep up with the developments. Legislative changes are necessary to appropriately tax the consumption arising from the digitized economy.
- The efficiency of VAT regulation remains a concern, not only for multinationals but particularly for Small and Mid-sized Enterprises. The administrative cost of compliance for the taxpayers has been estimated at € 79.5bn annually. Also the tax administrations spend significant tax euros on collecting the tax. The Commission wants to help improve the efficiency of Member States’ tax administrations.
Replacing the transitional regime of intra-community supplies and acquisitions
Since 1993, the transitional regime is waiting to be replaced. In essence, mistrust among the Member States has put an international barrier to what should be a key feature of VAT as a consumption tax: Tax collection by the supplying business and tax to be borne at the place and the rate of the consumption. If Member States shall continue to have the say on their tax rate, this key feature requires a clearing system for the distribution of fiscal revenue, as far as this arises from Intra-EU transactions across Member States.
The EU has successfully passed a first test of such a clearing system with the introduction of the Mini-One-Stop-Shop (MOSS) for Telecommunications, broadcasting and electronic services, as of January 1, 2015. This regime may now be extended to include online sales of any product (webshop) to private individuals (final proposal expected by the end of 2016).
In recent discussions with Member States, the commission has decided that a general reverse charge system is not a desirable option. The extended reverse charge system was discussed for B2B sales up until the level of the retailer. It would have been hardly any different from a one-stage sales tax comparable to U.S. sales tax or the abolished Swiss Turnover Tax on Goods (WUST).
In the view of the Commission, the best option should be for the supplier’s Member State to collect VAT even for intra-community sales. To maintain Member State’s autonomy in setting the tax rates and earning the fiscal revenue on domestic consumption (only), the clearing of VAT collected and VAT to be earned for domestic consumption will have to be extended.
The abolishment of the transitional regime will require significant investments from taxpayers (VAT processes, IT infrastructure) and administrations. The implementation therefore shall unfold gradually, i.e. it shall be delayed for “compliant businesses, certified by their tax administrations, including SMEs”.
Critics will notice that the transitional step in the abolishment of the transitional regime will trigger additional administrative costs (IT, processes), particularly for businesses that should be relieved from more administrative burden and uncertainty for taxpayers making part of an intra-EU delivery.
Measures against tax fraud
A final proposal shall be made by 2017 to improve the collaboration amongst EU and Non-EU tax administrations. Improvements shall be made to the exchange of information (real time, across national borders), the network of Eurofisc (including joint risk management), the deployment of state-of-the-art technology and cross-border tax claim enforcement (debt collection).
Other measures will aim at easing voluntary disclosures, tax collection (including a review of the roles of marketplaces and intermediaries). Measures taken on a country-by-country basis shall be endorsed by the EU.
Other actions include:
- Extending the One-Stop-Shop mechanism to EU- and Non-EU businesses who sell online to EU based private individuals (legislative proposal due by the end of 2016)
- Introduction of a common registration threshold for non-domestic SMEs to prevent SME’s for having to operate multiple registrations
- Home country checks, including a single audit of cross-border businesses,
- Removing the import VAT exemption of low value products (current €22-threshold)
- Simplification package for SMEs (2017) to drive down the cost of compliance.
Tax rate modernization
Endeavors for tax rate modernization appears to be at a crossroads. The Commission proposes 2 basic options, either the extension and regular review of the list of products eligible for a reduced rate, or the abolition of this list.
- Proposal for removing VAT obstacles to cross-border e-commerce (Digital Single Market – REFIT) – e-publications
- Measures to improve cooperation between tax administrations and with customs and law enforcement bodies and to strengthen tax administrations’ capacity
- Evaluation report of the Directive on the mutual assistance for recovery of tax debts
- SME VAT Package
- Proposal to enhance VAT administrative cooperation and Eurofisc
- Proposal for the definitive VAT system for cross-border trade (single European VAT area – first step – REFIT)
- Reform of VAT rates (REFIT)
(REFIT is the European Commission’s Regulatory Fitness and Performance program)