On 2 October, the EU Member States reached a political agreement on a number of fundamental changes to the EU VAT system.
The most important changes are the so-called 'quick fixes.' The purpose of these quick fixes is to facilitate cross-border trade and tackle VAT fraud. These changes are the next step in a broader initiative of the European Commission to fundamentally modernize the current EU VAT system.
In addition, EU Member States will be allowed to introduce a reduced VAT rate for electronic publications, such as e-books. This change is vital in order to achieve a VAT-level playing field for electronic and physical publications.
Below, we summarize the upcoming changes, which should apply as of 2020.
The Council agreed on a simplified and uniform treatment for 'call-off stock.' Call-off stock is an arrangement whereby a vendor transfers stock to a warehouse at the disposal of a prospective acquirer in another EU Member State. Under the current EU VAT system, the transfer of stock from one EU Member State to another generally results in a 'deemed supply' in the Member State of departure and a deemed intra-EU acquisition in the EU Member State in which the goods arrive, followed by a local supply in the EU Member State of arrival. Businesses making call-off stock supplies therefore face multiple VAT-compliance issues in many EU Member States, which causes distortion. Only a number of EU Member States currently provide for simplifications whereby an intra-EU supply and EU acquisition is deemed to be made once goods are transferred by the seller to the purchaser. The purpose of the new call-off stock regime is to provide for such a simplification throughout the entire EU.
For intra-EU chain transactions, a regime is being introduced to link the intra-EU transport (and thus the 0% VAT rate) to any of the successive supplies. Chain transactions relate to the successive supply of goods where there is only one intra-EU transport. The intra-EU supply of goods can only be linked to one of the supplies that also benefit from the VAT exemption. The other supplies in the chain should be treated as local supplies subject to local VAT. To avoid EU Member States taking different approaches and to enhance legal certainty, a new rule will be introduced to ascribe the transportation (and thus the 0% VAT-rate) of the goods to a single leg of the transaction chain.
Evidence for 0% VAT rate for intra-EU transactions
A common framework is being introduced for the documentary evidence required to claim the 0% VAT rate for intra-EU transactions. To correctly apply the 0% VAT rate, suppliers of goods are required to have evidence of the goods' transportation to another EU Member State. The new legal framework appears to provide businesses with safe harbor rules of evidence for transportation between EU Member States.
VAT identification number
In addition to the condition of transporting goods to another EU Member State, a seller should also obtain a valid VAT identification number from the purchaser of the goods. Using an incorrect VAT identification number, whether knowingly or unknowingly, will trigger VAT exposure. A VAT identification number will therefore become mandatory to apply the 0% VAT rate to these supplies.
Reduced rate for electronic publications
The current VAT regime does not allow electronic publications (i.e., electronically supplied services) to benefit from the reduced VAT rate. Under the proposed regime, reduced VAT rates for electronic publications are allowed, which will contribute to aligning VAT rules for electronic and physical publications.
Generalized reverse charge
The Council agreed to allow EU Member States with unsustainable levels of VAT fraud to apply a reverse charge mechanism for domestic transactions above a threshold of EUR 17,500 per transaction. The reverse charge can only be introduced as a temporary measure until 30 June 2022. An EU Member State can only apply this measure if 25% of the VAT gap (the difference between the VAT due and the VAT collected) is due to carousel fraud.
Enhancing administrative cooperation
Finally, the Council agreed on a proposal to enhance the administrative cooperation between EU Member States in their fight against VAT fraud. This will result in more cross-border audits.
Earlier this year, EU Member States were not able to reach a political agreement on these VAT changes. The fact that the EU Member States managed to reach an agreement now suggests that they are also making progress with the introduction of the EU-wide Digital Services Tax.
The upcoming changes to the EU VAT system will have a significant impact on the indirect tax strategy and business model(s) of multinational enterprises. We can assist your organization map out the precise impact of the changes (opportunities and challenges) and determine a solid indirect tax strategy involving all of the relevant stakeholders within the organization