A view from Europe on the VAT Action Plan
A couple of months ago the European Commission announced its VAT Action Plan, a Pathway Towards a Single EU VAT area.
The common VAT system is a core element of the operation of Europe’s single market today. However, the current VAT system, which was intended only to be a transitional regime, is too fragmented, too burdensome, and too complex for the growing number of businesses operating across borders. Due to a different treatment of domestic and cross-border transactions, and the fact that goods and services can be bought free of VAT within the single market, it also leaves the door open for fraud.
The current level of the so called VAT gap, i.e. the gap between expected VAT revenues and VAT revenues actually collected, is estimated around 170 billion euro, and it simply calls for action. The growing risk of fraud must be contained, and the current rules need to be modernised, simplified, and adapted to the technical developments and challenges of today’s global digital and mobile economy.
In order to reach this goal, the European Commission has announced its VAT action plan. A legislative proposal will be presented in order to put in place a definitive VAT system based on the principle that taxation will take place in the country of destination of the goods.
As preparing and implementing these major changes in the current VAT system requires major changes, and will take some time, some parallel initiatives will also be taken as an answer to the immediate challenges of today.
In order to remove VAT obstacles to e-commerce in the single market, the One Stop Shop system will be extended to online sales of tangible goods to final consumers, a simplification measure for small start-up e-commerce businesses will be implemented, and the VAT exemption for imports of small consignments from non EU-suppliers will be abolished. More generally, in order to simplify VAT for small businesses, the special scheme for small enterprises will be reviewed. To combat the current level of the VAT gap, improved administrative corporation should be achieved. The tools for administrative corporation between tax administrations should be used more widely, and the performance of the European tax administrations should also improve. In addition, a new approach to tax collection and the improvement of voluntary compliance between businesses and tax authorities is required.
The current system, which analyses every cross border transaction into an exempt cross-border supply and a taxable cross-border acquisition, is not only complex, but also lacks controls and leaves the door open to fraud. A robust single European market would combat this fraud by shifting the point of taxation to the destination of the goods, and treating local and cross-border transactions the same way.
As the system will change from one based on the origin principle towards a destination principle, also the policy related to VAT rates needs to be modernised and adapted.
In order to do so, two main options have been outlined. Either the list of goods and services eligible for reduced VAT rates will be extended and reviewed on a regular basis, or the member states will be allowed a greater freedom on the number of VAT rates and the level by simply abolishing the list.
The announcement of the VAT action plan is just the start of the reform, and it is to be continued over the next few years in order to reach the goal of a single robust European VAT area. Decisions on all these actions are needed together with political leadership and support for reform.
Contributed by
Katrien Huysse
VGD Belgium
newsletter_october_2016_f.pdf (871.13Kb)
