EU-based businesses supplying goods and services across the bloc's internal borders are gearing up for profound changes to EU VAT rules as the EU seeks to bring about a "definitive VAT regime".
The Current Situation
VAT is substantially harmonised among member states in the EU, under the EU VAT Directive (Council Directive 2006/112/EC). However, the system is far from perfect. The legislation allows scope for many national variations, called derogations, and as the European Commission has observed, the regime is fragmented, overly complex, and leaves the door open to fraud.
The current VAT rules for cross-border trade between businesses in EU member states date back to 1993, just after the creation of the Single Market. At the time, they were meant to be transitional. The rules do not take into account technological developments, changes in business models or the globalisation of the economy — and they foster fraud.
Generally, goods sold by an EU business to another EU business in another member state are zero-rated (subject to no VAT). Under the new regime, VAT will be charged on sales that are made across borders to another country in the EU. The rate applicable in the country of destination (where the goods are consumed) will be charged.
This is intended to counter VAT fraud in particular, where an EU business acquires goods from another EU business without VAT, onsells the goods with VAT, and fails to remit that tax to the tax agency and disappears.
The Definitive VAT Regime's Cornerstones
Under the new regime, the VAT on cross-border sales would be collected by the tax authority of the originating country (that of the supplier) and transferred to the country where the goods or services are ultimately consumed. To allow a soft transition for tax administrations and businesses, the first step of the definitive VAT system will focus only on transactions in goods.
It is intended that VAT rules will become more simple and harmonised across the EU, which, in turn, will make it easier for companies to do business across borders. For example, businesses will be able to make their declarations and payments for cross-border VAT through one online portal and in their own language, the One Stop Shop.
There will also be simplified invoicing rules, allowing sellers to prepare invoices according to the rules of their own country even when trading across borders.
The Commission terms these different reforms "cornerstones" of the new regime. Once in place, VAT should be collected and paid in the same way as for domestic transactions, dramatically decreasing the risk of non-payment of VAT to governments, says the Commission.
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Certified Taxable Persons
The Commission has also proposed the introduction of the concept of a Certified Taxable Person, for those businesses with a strong history of compliance with VAT law. This measure would entail the creation of a category of "trusted" businesses that meet certain criteria, which would benefit from simpler and time-saving rules. It is not clear whether this somewhat controversial concept will be included in the final package adopted by member states.
The Commission has also proposed four "quick fixes" intended to improve the day-to-day functioning of the VAT regime before the definitive regime is in place. These include:
- Simplifying the rules around the storage of goods in one member state by a company located in another member state;
- Simplifying the rules around chain transactions when goods move directly from the original seller to the final buyer;
- Harmonising the rules for Certified Taxable Persons to allow them to prove more easily that goods have been transported from one member state to another;
- Clarifying that the electronic EU VAT-number verification system (VIES) is required for the existing cross-border VAT exemption to be granted.
According to the Commission, the reforms will cut the €50bn lost annually to cross-border VAT fraud by 80% and cut business compliance costs by €1bn.
A proposal to amend the existing VAT Directive and bring about the "definitive" VAT regime was published by the Commission on 25 May 2018. It would involve changes to about 200 articles of the current legislation.
It is intended that the transitional measures and the so-called "quick fixes" will take effect in January 2019, while the definitive VAT regime is expected to apply from 2022. However, given the scale of the changes in question, and that they must be agreed by member states, this timetable could well slip.