By Sébastien Blanchard. VAT reform. The reform of the rules on the posting of workers, the implementation of the DGPP, are in the spotlight. Let us assume that another European issue will soon make headlines as well.
Indeed, the work of redesigning the single VAT area in the European Union is accelerating. At the beginning of October, the European Commission presented a follow-up communication to its action plan published in April 2016. As well as three legislative and implementing proposals aimed at laying the foundations for the new regime. While ensuring its efficient operation.
A modernisation of VAT that has become urgent
The modernisation of the European Union’s VAT system is a strong objective. It is worn by Pierre Moscovici, as European Commissioner for Economic Affairs and Taxation. A list of innovative measures and solutions adopted in the short and medium term. Some have already emerged, such as proposals to modernise VAT for cross-border e-commerce. Or the proposal on VAT rates for books, newspapers and periodicals published electronically.
Reform is of an urgent nature. Indeed, the Member States of the Union recorded losses of VAT revenue for a total amount of 152 billion euros in 2015. For France, the VAT gap would thus be in the order of 12%.
The Communication and the Commission’s legislative proposals describe the different steps needed to establish a single VAT area in the Union by 2022. They provide for how to adapt the system to the realities of the European internal market, developments in the digital economy and the needs of SMEs. They also take stock of the actions already undertaken and set out the new technical measures presented in spring 2018.
A final VAT regime based on taxation in the destination state
Intra-Union trade between companies (“B2B”) will be based on a final VAT system, which will replace the current “transitional” regime. The adjective is largely inappropriate. Indeed, the regime introduced 25 years ago is inherently obsolete. What is more , in the face of new modes of exchange and consumption and the digital transition of the economy.
The new final system will be based on the principle of taxation in the destination Member State. This means that goods that are the subject of a cross-border transaction will in future be taxed in the country where they are consumed and at the tax rate of the destination country, rather than in the country where they are produced. It is therefore a real Copernican revolution that companies will have to face.
In practical practical ways, the supplier will have to charge VAT to its purchaser at the rate in force in the Member State of arrival of the goods. VAThe declares and is paid in the Member State in which the supplier is established. This is done through the online single window mechanism. A mechanism already active since January 2015 for the cross-border provision of electronic services .
The stages of this transformation
Two major milestones will mark this important transformation, ensuring a smooth transition for tax administrations and businesses. First of all, the regime applied to intra-Union supplies of goods between undertakings. During this stage, the principle of taxation in the Member State of destination tempers. Indeed, if the purchaser is certified as a reliable taxpayer by his national administration (status of “certified taxable person”), then he will continue to be liable for VAT on goods purchased cross-border.
Then, within five years and after an evaluation of the functioning of this first stage, the definitive VAT regime will extend to all cross-border transactions in order to also cover the supply of services.
In addition, there are several simplification measures to improve the functioning of the current VAT system, in particular for certified taxable persons, before the implementation of the definitive scheme is complete. CLet us simplify the rules on proof of intra-Community transport of goods. Or simplifying the rules on chain transactions.
According to the Commission, the implementation of these ambitious measures will reduce cross-border VAT fraud by 80%. Compliance costs for businessese will be reduced, to the tune of one billion euros according to the calculations of the European executive.
On administrative cooperation, freedom of setting rates and SMEs
A second package of proposals addressing these complementary issues will appear in November and December.
On the one hand, the Commission proposes to improve administrative cooperation between member states. The capacities of national authoritiese strengthen to speed up joint analyses of the risks of VAT fraud. Just as much as increase follow-up actions and share information more effectively with EU law enforcement agencies, in particular Europol. This new proposal complements the first measures proposed in December 2016.
On the other hand, the Commission wants to modernise the rules governing the freedom of member states to set rates. Coupled with the new definitive VAT regime, this reform will avoid gaining an unfair advantage from an establishment in a Member State with a low VAT rate.
Finally, SMEs figure prominently in the redesign. The European Commission is planning a set of simplification measures. It aims to create an environment conducive to their growth and promote their cross-border trade.
Tax Outlook
As unanimity among the Member States is required in matters of taxation, we must be cautious about the fate of this package of measures. In this area, many European sea snakes remind us of the difficulties in reaching agreements on these subjects intimately linked to the sovereign powers of states.
However, the preservation of national finances and the future of the internal market, particularly through effective support of the digital market, are two priorities shared by all European countries. In addition, the economic and financial affairs ministers of the 28 Member States themselves had asked the Commission, as early as 2012, to work on the establishment of a definitive VAT regime based on the principle of taxation in the destination Member State.
The year 2018 will therefore be a pivotal year on this issue. The end of the current Commission’s mandate and the United Kingdom’s exit from the Union are two incentives for a relatively rapid adoption of this reform.
Sébastien BLANCHARD
Egemone Consulting
