In December 2017, the European Commission has welcomed the agreement reached by the EU Member States on new rules that include detailed measures needed to simplify the VAT rules for sales of goods online, also ensuring that online marketplaces play their part in the fight against tax fraud.
The above-mentioned rules aim to keep pace with the challenges of today’s global, digital and mobile economy. That’s why they are targeted into the modernization of the current VAT system for cross-border trade, which enters into force in 1993 and was intended to be a transitional system. With these rules а single EU VAT area was created.
According to the new rules, cross-border transactions would continue to be taxed at the rates of the Member State of destination (‘destination principle’) as today, but the way taxes are collected would be gradually changed towards a more fraud-proof system. At the same time, an EU-wide web portal would be implemented to ensure a simple VAT collection system for businesses and a more robust system for Member States to gather revenue.
The foreseen updated electronic business portal for VAT (‘One-Stop Shop’) will allow the traders who sell goods online to deal with their VAT obligations in the EU through one easy-to-use online portal in their own language.
The main purpose of the online portal is to facilitate the traders, who otherwise will be obliged to make VAT registration in each EU Member State into which they want to sell. This requirement is cited by companies as one of the biggest barriers for small businesses, which trades cross-border. The same system is already in place for e-service providers since 2015 and is working well.
The new VAT rules will apply from 1 January 2021, as the Member States have to transpose the new rules of the VAT Directive into national legislation until the end of 2020. Businesses wishing to make use of the extended VAT ‘One Stop Shop’ can start registering in Member States as of 1st of October 2020.
Other measure which is provided in the rules is the transposition of more autonomy for Member States to choose their own rates policy. Under the current rules, Member States need to stick to a pre-defined list of goods and services when it comes to applying zero or reduced VAT rates. The Commission plans to modernize the framework for rates and to give Member States more flexibility in future. It proposes two options: one option would be to maintain the minimum standard rate of 15% and to review regularly the list of goods and services which can benefit from reduced rates, based on Member States’ input. The second option would abolish the list of goods and services that can benefit from reduced rates. This would, however, require safeguards to prevent fraud, avoid unfair tax competition within the Single Market and it could also increase compliance costs for businesses. Under both options, the currently applicable zero and reduced rates would be maintained.