Taxation, customs union and anti-fraud

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Towards a definitive VAT system for cross border trade

Overall state of Play

Evaluation finalised: SWD(2017)325, 4.10. 2017

Commission Proposals setting out the cornerstones of the definitive VAT system for the taxation of trade between Member States and harmonising and simplifying certain rules in the current VAT system: Adopted, 4.10.2017, COM(2017)569, COM(2017)568 and COM(2017) 567; Commission Proposal containing the detailed technical provisions for the operation of the definitive VAT system: Adopted, 25.05.2018, COM(2018)329
Legal acts: Adopted: Council Directive (EU) 2018/1910, Council Regulation (EU) 2018/1909, Council Implementing Regulation (EU) 2018/1912; 4.12.2018
Legal act: 1 pending in legislative procedure

Summary:

The VAT system has been unable to keep pace with the challenges of today's global, digital and mobile economy. The current VAT system for intra-EU business-to-business trade, which was intended to be a transitional system, is fragmented, 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. Therefore, compliance costs are significantly higher in single market trade than in domestic trade, while complexity is stifling business, especially small and medium-sized businesses. Cross-border fraud accounts for around EUR 50 billion of revenue loss each year.

As set out in the Commission Action Plan on VAT, the Commission adopted several legislative proposals in October 2017. The proposals set out the cornerstones for the future VAT system where the principle of taxation at destination is extended to cross-border business-to-business supplies of goods. In addition, businesses making intra-EU cross-border supplies of goods will be able to declare and pay the tax through the One Stop Shop (OSS). However, compliant businesses, certified by their tax administrations as reliable taxable persons (the so called Certified taxable person -CTP), will continue to be liable for VAT on goods purchased from other EU countries. As compliant businesses represent the vast majority of taxable persons involved in cross-border transactions, this would significantly reduce the amounts of VAT channelled through the One Stop Shop and would make it easier for businesses to adapt. These initiatives constitute the first step towards the implementation of the definitive VAT regime for cross-border supplies under which taxation will cover all cross-border supplies so all supplies in goods and services within the single market, either domestic or cross-border, will be treated the same way.

Further, the proposals adopted in October 2017 also contain four so-called "quick fixes". These aim at improving and simplifying the current transitional VAT system regarding certain situations that have been identified as problematic for businesses, namely: chain transactions, call-off stock arrangements, the VAT number as a substantive condition for the exemption of intra-Community supplies of goods and the proof of transport in relation to these supplies.

Finally, the proposal adopted in May 2018 (COM(2018)329) aims at laying down the detailed implementing rules needed for the cornerstones of the definitive VAT system to work in practice.

Estimated savings and benefits

Such a system should reduce cross-border fraud by about EUR 40 billion (80%) a year in the EU. This will enable tax administrations to concentrate resources on other challenges. Some significant simplification measures will be taken to accompany this change. Collectively, businesses could save an average of around EUR 1 billion a year.

More information on savings is available in the impact assessment accompanying the proposals.

REFIT Platform

In the REFIT Platform opinion on reverse charge within VAT the Stakeholder group recommended to withdraw the use of the reverse charge mechanism and replace it with a simpler and more basic VAT regime in the EU. Some members of the Government group consider that reverse charge may continue to be necessary to combat fraud or that other measures would be required to achieve the same objective.

The Platform also adopted an opinion on the documentary proof required for VAT in intra-EU trade. The Stakeholder group recommends reducing the burden on businesses of producing different documents in relation to intra-EU trade. Some members of the Government group consider that reducing documentary obligations is too risky in light of VAT fraud, while others agree with the Stakeholder group recommendation.

This Commission initiative took note of the opinion, as well as the opinion of the REFIT Platform on improving the efficiency of VAT in which the REFIT Platform makes several recommendations relating to chain transactions, the simplification rules for warehouses, the tax exemption on intra-community deliveries and avoiding the duplication of value-added tax.

State of Play:

Finalised SWD(2017)325, 4.10.2017

Scope:

Evaluation of Council Directive 2006/112/CE on the Common System of Value Added Tax

Evaluation findings:

A comprehensive evaluation of the key elements of the EU VAT system was conducted by an external consultant in 2011 and its findings have been used as a starting point for the examination of the current VAT system. The findings have been confirmed by further consultations of stakeholders and by the Commission analysis.

The evaluation of the current VAT system:

(i) underlined the revenue losses that Member States face as a result of high levels of cross-border VAT fraud, which has increased at EU level over the years because of the growth in the phenomenon of Missing Trader Intra- Community fraud following the abolition of the EU's internal fiscal frontiers;

(ii) confirmed the complexity of the current transitional VAT rules which result in much higher compliance costs for businesses than when only engaging in domestic trade, which discourages them from trading across the borders and from taking full advantage of the EU single market.

State of Play:

COM(2017)569, COM(2017)568 and COM(2017) 567 adopted by the Commission on 4.10. 2017 and COM(2018)329, adopted by the Commission on 25.05. 2018

Which objective(s) did the Commission pursue?

The creation of a simpler and more fraud-proof EU VAT system supports a deeper and fairer single market. The objectives pursued by COM(2017)569 are:

(i) to simplify the current transitional VAT system regarding certain situations, which have been identified as problematic for businesses, namely: chain transactions, call off stock and documentary proof of intra-EU transport of goods; and

(ii) to introduce the cornerstones of the definitive VAT system for intra-EU business to business (B2B) supplies of goods, which would be achieved by: introducing simplification measures including the Certified taxable person ("CTP") concept and the extension of One Stop Shop; avoiding multiple registration and burdensome reporting obligations and therefore reducing administrative burdens and compliance costs for businesses.

As for COM(2018)329, the objective is to lay down the detailed implementing rules needed for the cornerstones of the definitive VAT system to work in practice.

This initiative would also have a positive impact on VAT revenues in Member States, as it would address the inherent weakness of the existing transitional arrangements as regards the risk for cross-border VAT fraud.

By reducing administrative burdens and compliance costs, this initiative would benefit businesses, including SMEs, established in all Member States, with a positive impact on economic growth and competitiveness.

Estimated savings and benefits

The system proposed is expected to reduce cross-border fraud by about EUR 41 billion (approx. 80%) a year in the EU. This will enable tax administrations to concentrate resources on other challenges. Some significant simplification measures will be taken to accompany this change. Collectively, businesses could save an average of around EUR 1 billion a year.

More information on savings is available in the IA accompanying the Proposal.

State of Play:

Adopted: 4.12.2018; Council Directive (EU) 2018/1910; Council Regulation (EU) 2018/1909 and Council Implementing Regulation (EU) 2018/1912.
Pending: COM(2018)329

Outcome of Legislative Procedure

The legal acts adopted by the Council include only the four so-called “quick fixes” presented in the original proposal of the Commission, which aim at improving and simplifying the current transitional VAT system regarding certain situations, which have been identified as problematic for businesses, namely: chain transactions, call-off stock arrangements, the VAT number as a substantive condition for the exemption of intra-Community supplies of goods and the proof of transport of goods in relation to these supplies.

The cornerstones of the definitive VAT system and the certified taxable person have been deleted from this proposal in order to speed up the adoption of the four “quick fixes” and they are currently being discussed in the framework of the May 2018 (COM(2018)329) technical proposal on the detailed arrangements for the definitive system.