The EU’s VAT Revamp: An In-Depth Update

The European Commission (EC) wants to create a simple and fraud-proof value added tax (VAT) system. Here’s what you need to know.

The VAT rules for intra-EU trade date back to 1993 and were never intended to be permanent. The system is showing increasing signs of strain, with revenue losses from various factors, notably fraud, amounting to 147 billion euros in 2016 – more than 12 percent. A new Tax Notes International article by Aleksandra Bal, senior product manager at Vertex, looks at the European Union’s (EU) action plan for an overhaul.

It’s an in-depth report, so I’ll cover just a handful of the most salient points here. Aleksandra examines the plan, published in 2016, under four headings:

1. Removing VAT obstacles to e-commerce. The first measures of an e-commerce VAT package were implemented on Jan. 1; they relate to (among other things) the turnover thresholds for intra-EU supplies of telecom, broadcasting and electronic services. The main measures will come into force in 2021, and “will implement far-reaching changes that require the adaptation of IT systems and electronic interfaces.” They will impact, for example, providers of electronic platforms that are used by other companies to sell goods and services.
2. Establishing a definitive VAT system. The current concepts governing intra-EU trade may be replaced by the principle of a “single intra-Union supply,” in which the supplier is required to charge the VAT rate of the country of arrival of the goods and then remit the tax to his or her local tax authority. It will require “a substantial amount of trust and cooperation among tax administrators because the member states where the goods arrive will have to rely on the member states of departure to collect and remit the VAT due on the cross-border supply.”
3. Simplifying compliance obligations for small and medium-size enterprises. This would allow member states to introduce simplified compliance for businesses with an annual EU turnover of up to 2 million euros.
4. Modernizing the VAT rate policy. The current rules allow reduced VAT rates, but only to a specified list of goods and services. Under the reform proposal, that list is replaced by a list of goods and services that must be taxed at the standard rate of at least 15 percent, giving member states more leeway in applying reduced rates.

Will the action plan achieve its goals? Aleksandra is skeptical. “The bottom line is that even if the definitive VAT system is implemented,” she concludes, “there will still not be a single, simple, fraud-proof EU VAT as envisaged by the European Commission.”