The European Commission proposed fundamental changes to the current Value Added Tax (VAT) regime, aimed at delivering a definite pan-European VAT system in order to tackle tax fraud as well as to unify and simplify VAT requirements for companies while lessening red tape.
Why is a reform of the current EU VAT system needed?
VAT is a growing source of revenue in the EU and accounts for about 7 % of GDP in the EU. The current VAT regime, dating back to 1993, is not just outdated but also leaves the door open to fraud. According to EU estimates, over EUR 150 billion of VAT is lost every year; of this around EUR 50 billion due to cross-border VAT fraud.
With its recent proposal for the biggest reform of EU VAT rules in a quarter century, the European Commission, by amending the principal VAT directive (2006/112/EC), intends to introduce a definitive VAT regime. The main goals are to:
- simplify the application of the VAT system for companies;
- enhance competitiveness in a global market;
- reduce compliance costs by an estimated EUR 1 billion; and above all
- fight cross-border VAT fraud by cutting down the VAT loss due to fraud by 80 %.
The cornerstones of the proposed reform in a nutshell
The four fundamental principles the EU seeks agreement on include:
- Tackling VAT fraud: Currently, the supplier carries out VAT-exempt intra-EU cross-border trade, while the recipient has to pay VAT on such trade to the tax authorities, providing a loophole for unscrupulous companies to collect input VAT and then vanish without remitting money to the tax authorities ("missing trader"). Under the proposed rules, VAT on such trades will be charged directly by the supplier.
- Extension of the "one-stop shop": Cross-border registrations and compliance will be avoided. Traders will be able to make payments and declarations using a single online portal in their own language. VAT payments will then be transferred to the respective EU Member State by the tax authorities.
- Greater consistency: Currently, some supplies are taxed at the place of origin (Ursprungslanndprinzip). A shift to the principle of taxation at destination (Bestimmungslandprinzip) will be introduced, meaning that the final amount of VAT will always be paid to the tax authorities of the Member State of the final consumer, charged at the rate of that Member State.
- Less bureaucracy: Invoicing rules will be simplified to enable sellers to prepare invoices according to their domestic rules even when trading cross-border. Most significantly, companies will no longer have to file (in addition to the tax returns) the so-called recapitulative statement (Zusammenfassende Meldung), which is basically a list of cross-border transactions.
Example illustrating differences between the current and proposed system
Example case: A, a company registered for VAT purposes in Austria, sells tablets to G, a company registered for VAT purposes in Germany. The tablets are delivered from A to G.
Current VAT regime: A's supply of goods transported to G is generally exempt from Austrian VAT and invoiced accordingly. The acquisition of goods by G is subject to German VAT. G must pay VAT at the German general VAT rate of 19 % to the German tax authorities and may deduct input VAT.
Proposed VAT regime: A's supply of goods transported to G would still be subject to VAT at the German general VAT rate of 19 %. However, A must charge German VAT (an exemption is no longer available). To facilitate compliance, A may apply Austrian rules and domestic administrative templates and pay German VAT to the Austrian tax authorities. This VAT amount is then transferred from the Austrian tax authorities to the German tax authorities. G may deduct input VAT. Recapitulative statements no longer have to be filed.
What are the changes in the short term?
The Commission has introduced a series of temporary measures (so-called "quick fixes") that are intended to improve the current VAT regime, while the proposed reforms are being discussed, negotiated and eventually implemented. Furthermore, the proposal has led to the release of related proposals by the Commission regarding:
- the reinforcement of the existing instruments for administrative cooperation in the field of VAT;
- the obligation to respect a minimum standard VAT rate;
- the modernisation of the system of setting VAT rates; and
- a simplification of VAT rules for SMEs.
What will happen next?
The European Commission is expected to soon release a proposal to amend the current principal VAT directive (2006/112/EC), detailing the technical provisions and outlining relevant implementation measures needed for the operation of a definitive VAT system. The ultimate goal of a single EU VAT area, where companies can consider cross-border VAT trade as domestic operations, is intended to be achieved by 2022.