Analysis: “ECOFIN draft report to the European Council on VAT – will the definitive VAT system become true?” by Jordi Sol
On 5 June 2020, the ECOFIN draft report on recent tax issues was published. The document provides an overview of the progress achieved under the Croatian presidency as well as the state of play of the most important dossiers under negotiation in the area of taxation. In this Analysis, I look at the information related to the areas in the field of VAT.
Definitive VAT system
On 7 April 2016, the Commission published the VAT Action Plan with the firm aim to remove obstacles to e-commerce and SMEs, tackle VAT fraud, move to a definitive system for cross-border trade and modernise the existing VAT rates policy.
Concerning the definitive VAT system, a two-step legislative approach has been taken.
First, the approval of the so-called four quick fixes (namely call-off stock arrangements, chain transactions, zero-rate in intra-community supply of goods and proof of its transport). The early application of those quick fixes was necessary in order to advance the work on the core of the Commission proposals.
Second, a proposal on detailed technical measures for the operation of the definitive system of VAT was published. The discussion among the Member States in this area has focused on six key components:
- Principle of taxation in the country of destination of the goods;
- Replacement of the current splitting into two taxable events (intra-community supply and acquisition of goods) with a single intra-Union transaction;
- Definition of the Certified Taxable persons (CTP) status;
- Collection mechanisms; and
- Extension of the one-Stop-shop (OSS) to intra-EU transactions.
In that regard, Member States agree with the following:
- The VAT definitive system should outbalance its costs (that is, have positive effects on tax revenues and at the same time, proportionate effects on compliance costs for both businesses and tax authorities); and
- Further work should be carried out having in mind the principle of destination as well as the idea of a single-Union transaction.
On the other hand, the majority of the Member States expressed their opposition with regard to the:
- introduction of a common definition of CTP and application of different rules depending on whether the customer is a CTP or not;
- abolition of the recapitulative statements for intra-Union supplies of goods, if there is no effective replacement of this reporting obligation (if other reporting options have been put on the table but are not yet clear).
- collection mechanism, which in the case of switching to the supplier’s VAT liability, should be supplemented with solid and proportionate accompanying safeguard measures. In particular, Member States are concerned about extra administrative burden and costs for businesses and tax authorities, non-compliance by non-established suppliers and VAT refund of the input VAT to the recipients in cases of VAT fraud or undesired functioning of the system.
As a way forward, all Member States agree that, in particular, the areas which should be further technically developed are the analysis of reporting obligation (for example automated transaction base reporting) and the measures linked to the person with the right to deduct its input VAT (such as to restrict the right to deduct if VAT is not paid by the supplier, introducing joint and several liability, split payment system, and so on).
VAT rates reform
On 18 January 2018, the Commission published a proposal on VAT rates which, essentially, proposed:
- more freedom for Member States in their setting of rates; and
- removal of Annex III of Directive 2006/112, and the introduction of a new Annex IIIa including a non-exhaustive negative list on which application of reduced VAT rates is not permissible.
This proposal is coherent with the definitive VAT system. As the Commission plans to move to a destination principle there would be no real need to control the VAT rates policy within the EU. For that reason, Members States see the need for both proposals to be discussed together. Some Member States are however of the view that the VAT rates proposal should be given priority. In this context, it is worth pointing out that on 4 December 2018 the amendment to Directive 2006/112 aligning the VAT rates applicable to electronic and physical publications entered into force, by allowing Member States to extend the scope of the reduced or super-reduced VAT rates to publications in electronic format as well.
Mandatory transmission and exchange of VAT-relevant payment information
Legislative packages have been adopted on new obligations of information for cross-border payment service providers (entering into force on 1 January 2024) and to measures to strengthen administrative cooperation in order to combat VAT fraud. Both shall apply from 1 January 2024. The two adopted legislative measures are in line with the Commission and EU aim to tackle VAT fraud.
Simplification of VAT rules for small enterprises
On 1 January 2025, new changes will apply to the special scheme for small enterprises and administrative cooperation and exchange of information for the purpose of monitoring the correct application of this special scheme. These changes are in accordance with the Commission’s aim to support SMEs.
On 8 May 2020, the European Commission published a series of proposals concerning the dates of application of the so-called VAT e-commerce package (extension of the OSS to distance sales of goods and to all services supplied to non-taxable persons as well as the removal of the VAT exemption on the importation of low value goods, VAT reporting obligation and payment liability for online platforms) due to the outbreak of the COVID-19 crisis. According to the proposals, the original entry into force date of 1 January 2021 will be postponed by six months and the new rules will enter into force on 1 July 2021.
In my view the approval of the VAT quick fixes is a milestone. However, for the proposed VAT definitive system to move forward, discussions among all the Member States on the basic principles (such as the definition of the CTP and reporting obligations) should go on. In this framework, the VAT rate reform will probably have to wait until the technical features of the VAT definitive system are more concrete. Last but not least, external factors like COVID-19 and Brexit will probably play a role in slowing down the adoption of the pending proposals. However, businesses need time to prepare for the coming changes and must be certain about when they will take place.
Jordi Sol is an international VAT consultant and founder at VATinsights.org