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Action plan on VAT published - towards a single EU VAT area

On 7 April 2016 the Commission adopted an Action Plan on VAT. The Action Plan sets out immediate and urgent actions to tackle the VAT gap and adapt the VAT system to the digital economy and the needs of SMEs. It also provides clear orientations towards a robust single European VAT area in relation to the definitive VAT system for cross-border supplies and proposes options for a modernized policy on EU rules governing VAT rates. The Commission now calls on the European Parliament and the Council supported by the European Economic and Social Committee to provide political guidance and to confirm their willingness to support the actions as reported in the Action Plan as soon as possible.

The Action Plan sets out the pathway to the creation of a single EU VAT area that can support a deeper and a fairer single market fit for purpose in the 21st century; a genuine single EU VAT area. The current VAT system is too complex for the growing number of businesses that trade across the borders and leads to VAT fraud and substantial compliance costs in case of cross border business. As the current system for intra EU trade was meant to be a transitional system (when introduced in 1993) it urgently needs to be modernized and reformed. Below a summary of the required steps as communicated by the Commission.

E-commerce

The Commission now plans to present a proposal for a definite system based on the principle of taxation in the country of destination of the goods. As the process to get here will take time, in parallel more initiatives will be taken forward to help resolve current challenges. In addition by the end of 2016 the Commission will present a legislative proposal to modernize and simplify VAT for cross-border e-commerce. The commission mentions extending the One Stop Shop mechanism to EU and non-EU countries online sales of tangible goods to final consumers and allowing for home country checks including a single audit of cross border businesses.

SME VAT package

In 2017 a SME VAT package should be presented, they mention a special scheme for small enterprises as SMEs bear proportionally higher VAT compliance costs than large businesses.

VAT Gap

The commission indicates urgent measures to tackle the frequent discussed VAT gap are required and calls for action measures, new models of sharing of information and jointly analyzing information are required, also it should be possible to launch joint audits. Furthermore, the administrative cooperation should be extended to non-EU countries. The commission will also analyze the need to find practical and short-term solutions to tackle VAT fraud (derogations). Such derogations are however serious and require a thorough assessment of legal, political and economic implications.

Definite VAT regime for cross-border trade

A medium term measure to tackle the VAT Gap is a system of taxation of cross border supplies where B2B supplies of goods within the EU are treated in the same way as domestic supplies. Along with simplification measures such as the One Stop Shop system, so that businesses only need to register for VAT in the MS where they are established. To create this simplification more trust and cooperation between tax administrations is required as the MS of departure of the goods will collect the VAT due, and the MS of arrival of the goods needs to trust the VAT collection takes place in the MS of departure. A gradual implementation is therefore advocated by the Commission.

VAT rates

Finally, the Action plan indicates that the technological and economic developments should be taken into account, for example differences in VAT rates between electronic newspapers and e-books and physical books, newspapers should be addressed. The plan provides for two main options. Option 1 is an extension and regular review of the list of goods and services eligible for the reduced rates, where the minimum standard rate of 15% would be maintained and the list of goods and services that can benefit from the reduced rate would be reviewed in the context of the transition to the definitive system at regular intervals. Adjustments would be suggested by MS and analyzed by the Commission.

Option 2 is more ambitious; an abolition of the current list of goods and services that can benefit from the reduced rates, which would provide MS with greater freedom on the number of reduced rate that can be applied and their level, thus greater rate-setting power. This option would call for a number of basic rules to frame the lower rate cases.

It is also emphasized by the Commission that political leadership is needed to overcome the obstacles that have blocked progress in the past. This is a key remark as we have learned that it is difficult to align all EU Member States, which also lead to the withdrawal of the standard VAT Return proposal. Change is required and now is the time. We look forward to the proposals.

More information on this topic can be found here.

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