You Know US Tax Reform—How About EU VAT Reform?

While the attention of U.S. tax leaders (and many in other countries around the world) has been glued to U.S. corporate tax reform, similarly momentous valued added tax (VAT) system reform is progressing in the European Union (EU).

The European Commission (EC) unveiled a package of proposals late in 2017, describing it in a press release as “the biggest reform of EU tax rules in a quarter of a century.” The long-planned reform applies only to business-to-business (B2B) transactions and only to goods (at least initially).

Perhaps the most notable proposal is a shift from an origin-based system to a destination-based system for VAT. Currently, when a company in one country sells goods to another in a second country, VAT is not added to the sale because intra-Community supplies of goods are in principle exempt from VAT. Instead, VAT is paid by the recipient of those goods through self-assessment in the acquisition country. If the supply chain gets more complex, the result can be a complex procession of transactions in which VAT is sometimes added to the sale price and occasionally exempted.

Under the new destination-based system, VAT would be charged by the vendor, also on cross-border sales, but at the VAT rate of the country in which the company making the purchase is based. Goods sold from one member country to another would therefore be taxed the same way goods sold within member states are currently taxed.

Other proposals include a major expansion of the EU’s Mini One Stop Shop (MOSS) web portal now in use on a limited basis for VAT payments on electronic services; and a significant simplification of invoicing rules which would allow sellers to issue invoices in compliance with their local rules, even when the underlying supply is cross-border.

The EC will now seek unanimous agreement on the proposals from all member states. A second VAT reform directive will be proposed by the Commission later this year. It will detail how the four principles or “cornerstones” of the new system – increased use of the One Stop Shop, more consistent rules, reduced red tape and more effective measures against fraud – will be implemented. It will also identify all current transitional articles that will be replaced or deleted. Additional work, including substantial IT-related development concerning the One Stop Shop and other aspects of the new system, will also be needed.

This reform has been a long time coming. The current rules date back to 1993 and even those were intended to be transitional. By simplifying the rules, the overhaul is intended to reduce the EU’s “VAT gap” – the shortfall between the expected tax revenue and the amount actually collected.