On the 4th of October 2017 a press release was published which announced the European Commission’s plans for the biggest reform of EU VAT rules in a quarter of a century. According to the European Commission the reboot would improve and modernise the system for governments and businesses alike.
The proposed VAT reform would also make the system more robust and simpler to use for companies. The Commission wants a VAT system that helps European companies to reap all the benefits of the Single Market and to compete in global markets. Businesses trading cross-border currently suffer from 11% higher compliance costs compared to those trading only domestically. The calculations show that the costs of businesses may decrease by around € 1 billion with the introduction of reforms.
Тhe Commission proposes to fundamentally change the current VAT system by taxing sales of goods from one EU country to another in the same way as goods are sold within individual Member States. This will create a new and definitive VAT system for the EU.
These are the four fundamental principles, or ‘cornerstones’ of a new definitive single EU VAT area:
- Tackling fraud:VAT rate applicable to the recipient will be charged. The charging will be done by the supplier.
- One Stop Shop: It will be simpler for companies that sell cross-border to deal with their VAT obligations thanks to a ‘One Stop Shop’. Traders will be able to make declarations and payments using a single online portal in their own language and according to the same rules and administrative templates as in their home country. Member States will then pay the VAT to each other directly, as is already the case for all sales of e-services.
- Greater consistency: A move to the principle ‘destination’ whereby the final amount of VAT is always paid to the Member State of the final consumer and charged at the rate of that Member State. This has been a long-standing commitment of the European Commission, supported by Member States. It is already in place for sales of e-services.
- Less red tape: Simplification of invoicing rules, allowing sellers to prepare invoices according to the rules of their own country even when trading across borders. Companies will no longer have to prepare a list of cross-border transactions for their tax authority (the so-called ‘recapitulative statement’).
A new notion was introduced, i.e. a Certified Taxable Person – a category of trusted business that will benefit from much simpler and time-saving rules. Four ‘quick fixes’ have also been proposed, to come into force by 2019. These short-term measures were explicitly requested by Member States to improve the day-to-day functioning of the current VAT system until the definitive regime has been fully agreed and implemented.
Next steps
This legislative proposal will be sent to the Member States in the Council for agreement and to the European Parliament for consultation. The Commission will follow this initiative in 2018 with a detailed legal proposal to amend the so-called ‘VAT Directive’ at technical level so that the definitive VAT regime proposed today can be smoothly implemented.