Following up on the VAT Action Plan of April 2016, the European Commission published a comprehensive proposal aimed at adopting a definitive VAT system for intra-EU cross border trade based on the “destination principle”, i.e. taxation in the Member State of destination of the goods. The definitive VAT system shall replace the transitional VAT system of 1993, which is no longer fit for purpose in today’s more dynamic and highly digitalised economy. In its present form of operation, the VAT system is fragmented, susceptible to fraud and disrupts the cross-border operations of digital businesses and SMEs.
Arrange an → Appointment!
Destination principle / One-stop-shop
The change to a destination-principled VAT system will substantially impact all businesses trading in the EU Single Market. The Commission have now proposed the first step in implementing the definitive VAT system. Under a destination-based VAT system, the supplier shall be liable for VAT at a rate applicable in the Member state of destination. Goods traded cross-border will be taxed in the country where they are consumed (the destination country) and at the destination country’s tax rate, rather than where they are produced (the origin country). Under the proposal, the supplier will be obliged to account for VAT at the rate applicable in the destination Member State.
The suppliers will not be required to register in the destination Member State for purposes of VAT, but can avail of the ‘one-stop-shop’ digital portal. By means of the ‘one-stop-shop’ portal businesses will be able to file declarations and declare VAT on cross-border transactions in a single return and the same rules and the language of their state of establishment. Member states will accordingly settle their VAT that is due directly.
Cross-border B2B transactions
Under the current rules, B2B cross-border supply of goods is exempt from VAT, in the sense that the transaction is split between an exempt intra-EU supply of goods in the Member state of origin, and, a taxable intra-EU acquisition in the Member state of destination. This design of the VAT system amounted to substantial revenue losses, with the VAT gap estimated at cca 50 billion per year. The Commission thus propose introduction of a single taxable supply in the member state of destination.
Certified taxable person
The Commission propose a new Council regulation for a certified taxable person. This is one of the steps towards a full destination based VAT system. Under this concept, certain simplification rules, which could be fraud-sensitive, will apply only where a certified taxable person is involved in the relevant transaction. In this sense, only where a business is certified, it could apply the EU reverse charge mechanism on intra-EU supplies. On basis of this concept, no fraud should occur as a result of VAT not being charged on intra-Union supplies made for a certified taxable person, as the certified taxable person by definition is a reliable taxpayer. A Council Implementing Regulation will need to be adopted on basis of Article 397 of the VAT Directive to ensure that the authorisation procedure for certified taxable person status is sufficiently harmonised throughout the EU.
On basis of a Council mandate to introduce certain ‘quick fixes’, the Commission is proposing the following three quick reforms:
- simplification and harmonisation of rules regarding call-off stock arrangement
- recognition of the VAT identification number of the customer as a substantive condition in order to exempt from VAT an intra-Community supply of goods
- and simplification of rules in order to ensure legal certainty regarding chain transactions
This proposal introduces additional, fourth ‘quick fix’ required by the Council, namely, the harmonisation and simplification of rules on the proof of the intra-Community transport of the goods in order to be exempt from VAT an intra-Community supply of goods. This simplification would also be available for certified taxable persons only. The “quick fixes” shall only be available to certified taxable persons, except for the VAT number quick fix which cannot be restrictive.
A modernisation of the existing VAT system shall be made operational in phases:
- A legislative package on the definitive VAT system for intra-Union business-to-business (B2B) trade (the ‘definitive VAT system’), proposed on 4 October 2017
- A proposal on the reform of the VAT rates (forthcoming in 2017)
- A proposal to reinforce the existing instruments for VAT Administrative Cooperation (forthcoming in 2017)
- A proposal to simplify the VAT rules for SMEs (forthcoming in 2017).
The first part of the Commission proposal (under “a”) is at the agenda of tomorrow’s ECOFIN Council meeting. The Council shall discuss the 4 October 2017 Commission proposal on the definitive VAT system (the destination principle and introduction of one-stop-shop), a proposal for Council regulation on certified taxable persons, proposal for Council implementing regulation regarding certain exemptions, the proposal on the follow-up VAT action plan.
The three other aspects (under “b”, “c” and “d”) are yet to be proposed by the end of 2017. This plan will be followed by a comprehensive VAT Directive forthcoming in 2018, which sets the detailed technical guidance for operation of the definitive VAT system.