The biggest reform of the EU VAT rules in a quarter century is on its way. The current VAT system, which is outdated, will be reviewed, impacting businesses performing intra-Union cross-border trade.
The EU's VAT system needs reform. Every year, EU countries lose up to EUR 50 billion due to cross-border VAT fraud, significantly damaging EU state budgets. The new system is expected to reduce cross-border VAT fraud by around 80 %. At the same time, simpler and clearer VAT rules and procedures will be put in place to reduce costs and red tape for EU companies trading across borders. The principle of the new rules is that domestic and cross-border transactions of goods will be treated in the same way so as to create a robust single European VAT area.
It all started in October 2017, when the European Commission proposed a series of fundamental principles and key reforms for the EU's VAT area, with the aim to improve and modernise the current VAT system. The Commission proposed four "Quick Fixes" to improve the day-to-day functioning of the current VAT system until the definitive regime is fully agreed and implemented. Ultimately, several fundamental principles or "cornerstones" for a definitive VAT regime will be implemented. The Commission also recommended introducing the concept of a "Certified Taxable Person".
Certified Taxable Person
The concept of the "Certified Taxable Person" ("CTP") is to distinguish between reliable and less reliable taxpayers involved in intra-Community trade or in call-off stock arrangements. CTP status would be granted by applying to the national tax authorities and will be mutually recognised by all EU Member States. Although the proposal defines certain guidelines regarding the conditions required for granting CTP status, Member States might have different views in defining the actual conditions, which may lead to administrative complications.
The four "Quick Fixes"
Ths set of short-term measures is meant to improve the functioning of the current VAT system and address issues requested by both businesses and EU Member States, namely:
- The simplification of VAT rules for companies storing goods in different Member States to be sold directly to customers there (i.e. "call-off stock arrangements"). This simplification will apply if the transaction takes place between two CTPs, in which case the supplier will no longer need to register and pay VAT in another Member State when they store goods there.
- The simplification in determining the exempt supply in a chain of transactions which do not involve the physical movement of goods, for example when goods are sold via several traders, but physically the goods move directly from the original seller to the final buyer. More specifically, rules will be put in place for ascribing the transport made by or on behalf of one of the intermediate suppliers in the chain, either (i) to the supply made for that intermediate supplier under certain conditions or (ii) to the supply made by the intermediate supplier to the next operator in the chain. This simplification applies only if both the intermediate supplier and the person who supplied the goods to it are CTPs.
- New harmonised and uniform rules so that traders can more easily provide proof that goods have been transported from one EU country to another for the application of the exemption to intra-Community supplies. Namely, a list of eight means of evidence of the transport or dispatch is introduced, of which at least two items of non-contradictory evidence must be in the vendor's possession. This simplification is limited to CTPs.
- Clarification that, in addition to the proof of transport, the VAT number of the commercial partners recorded in VIES is a "substance" condition and is required to apply the cross-border VAT exemption under the current rules.
- The charging of VAT on cross-border trade between businesses meaning no more VAT exempt intra-Community supplies from the Member State of departure.
- One Stop Shop: companies that sell cross-border 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.
- The principle of taxation at destination for intra-EU cross-border supplies of goods, based on which the VAT rate of the Member State of destination is charged.
- The confirmation that generally, the seller should charge and collect VAT on intra-EU supplies of goods, at the rate of the Member State of destination.
- Less red tape: invoicing rules regarding EU trade will be simplified, as these will be governed by the rules of the seller's Member State.
One thing is clear: the VAT reform is set to benefit honest businesses, governments and end consumers, targeting fraudsters who currently exploit the existing VAT rules.
To get there, action needs to be taken in 2019, when taxable persons need to make sure they observe the new rules regarding the "Quick Fixes" and the possibility to apply for CTP status.
This article was up to date as at the date of going to publishing on 10 December 2018.