EU VAT reform to crack down on fraud
Pierre Moscovici - Photo EC
(BRUSSELS) - The EU Commission set out plans Wednesday for the biggest reform of EU VAT rules in a quarter of a century, hoping to crack down on an estimated EUR 50 billion in tax revenue lost to cross-border VAT fraud.
Overall, over €150 billion of VAT is lost every year, of which around €50 billion - or €100 per EU citizen each year - is estimated to be due to cross-border VAT fraud. This money can be used to finance criminal organisations, says the Commission, including terrorism. It is estimated that this sum would be reduced by 80% thanks to the proposed reform.
The proposed VAT reform would make the system more robust and simpler to use for companies. Businesses trading cross-border currently suffer from 11% higher compliance costs compared to those trading only domestically. Simplifying and modernising VAT should reduce these costs by an estimated €1 billion, says the Commission.
Taxation Commissioner Pierre Moscovici said "companies and consumers still face 28 different VAT regimes when operating cross-border. Criminals and possibly terrorists have been exploiting these loopholes for too long, organising a €50bn fraud per year."
Mr Moscovici maintained that EU Member States should be considering cross-border VAT transactions as domestic operations in the EU our internal market by 2022: "Today's proposal is expected to reduce cross-border VAT fraud by around 80%. At the same time, it will make life easier for EU companies trading across borders, slashing red tape and simplifying VAT-related procedures," he added.
With today's package, the 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.
The EU executive says it will seek agreement on four fundamental principles, or 'cornerstones' of a new definitive single EU VAT area:
- Tackling fraud: VAT will now be charged on cross-border trade between businesses. Currently, this type of trade is exempt from VAT, providing an easy loophole for unscrupulous companies to collect VAT and then vanish without remitting the money to the government.
- 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 of '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').
Today's proposal also introduces the notion of 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.
The legislative proposal will be sent to the Member States in the Council for agreement and to the European Parliament for consultation. The Commission says it 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.
VAT reform in the EU - background guide