Single European VAT area - the plot thickens as the clock quickly ticks on
In further preparation for a single European VAT area, in October 2017 the European Commission released proposed measures which, if all ratified, will see the biggest reform to EU VAT rules in a quarter of a century.
Basic overview of the European Commission’s plans
The European Commission has outlined the measures to be implemented in preparation for a single European VAT area. These build upon the changes already proposed to the VAT system, in particular the 2016 VAT Action Plan and the digital economy proposals, and propose the following:
- The Cornerstones - a series of fundamental principles for a definitive VAT regime.
- Four Quick Fixes - on a short-term basis with a view to improving the day-to-day functioning of the current VAT system, while a definitive regime is agreed and implemented.
- Certified Taxable Person - a concept similar to the Authorised Economic Operator (AEO) status already in operation for customs purposes, to be granted by national tax authorities but mutually recognised by all Member States, allowing a reliable taxpayer to benefit from certain simplifications and time-saving mechanisms.
What are the proposed changes to the VAT system and are there transitional arrangements?
The cornerstones of the proposed VAT system are as follows:
- Tackling fraud – by introducing the principle of taxation at destination for intra-EU cross-border supplies (to be implemented initially for goods, then services).
- Greater consistency - the confirmation that, as a general rule, the vendor is liable for charging and collecting the VAT of the Member State of destination (already in place for e-services).
- One Stop Shop – the extension of the single online portal currently existing for e-services, allowing businesses to look after their cross-border VAT obligations in their own country and in their own language. Deduction of input VAT outside a business’ home country will also be allowed and Member States will remit the VAT to each other directly.
- Less red tape - simplification of VAT invoicing rules allowing sellers to prepare invoices further to the rules in operation in their own country and companies will no longer have to prepare a list of cross-border transactions for their tax authority (VIES / ESL / recapitulative statement).
Abuse of the current VAT system for business to business intra-EU trade has resulted in so-called missing trader fraud or carousel fraud.
In preparation for a definitive VAT regime, four quick fixes are proposed. The first three are simplifications available to certified taxable persons only in the areas of:
- “call-off stock arrangements”;
- chain transaction situations identifying the supply with which the intra-Community transport of goods should be linked; and
- proof of transport of goods between Member States needed for the application of the zero rate to intra-Community supplies.
The fourth will provide clarification that, in addition to the proof of transport, the VAT number of the commercial partners recorded in the electronic EU VAT-number verification system (VIES) is required for the cross-border VAT exemption to be applied under the current rules.
What are the benefits and possible downfalls of the proposed plans?
The phrase ‘Time to act’ in the title of the plans is an acknowledgement by the European Commission that 25 years after the 1993 creation of the Single Market it is time for the first major overhaul of the VAT regime to be instigated. However, it remains to be seen whether the proposed VAT reform leads to the creation of a simpler, more robust and fraud resilient single European VAT system, based on increased cooperation between the Member State fiscal authorities.
The proposed plans, if adopted, will have a significant impact on all stakeholders. Extension of the one stop shop should make it simpler for companies with intra-EU trade to manage their VAT compliance obligations, but these measures will place significant cost and resource burdens on businesses e.g. significant investment will be required in IT and infrastructure costs, training of staff etc. Timing will also be a challenge, as the Member States will have to agree on the practicalities of collecting and remitting VAT.
How will the proposed system help fight fraud?
Over €150 billion of VAT is lost every year, €50 billion from cross-border VAT fraud. In a definitive VAT regime, where the destination principle prevails, companies will charge VAT on intra-EU sales at the point of sale but at the VAT rate prevailing in the country of destination and as a result carousel fraudsters should no longer be able to exploit the inbuilt weaknesses of the current system to the same extent. Currently, goods are moved cross-border between Member States free from VAT with the tax only becoming due when in the hands of the purchaser or consumer. However, the implementation of a single, robust European VAT area where cross-border trade is treated in a similar fashion to domestic transactions should reduce opportunities for supply chain intermediaries to reclaim VAT they never pay.
When could we see this implemented?
With a view to facilitating a smooth transition and allowing time for fiscal authorities and businesses to ready themselves for the rebooting of the VAT system a two-step approach has been put forward. The technical provisions and formal proposal required to operate a definitive VAT system, envisaged to take effect by 2022, will be published in 2018.
However, the current plan foresees that the transitional measures (the four quick fixes and the concept of certified taxable person) should be operational by 2019, pending timely passage through the European Parliament and unanimous agreement of the Council of Ministers.”
It has long been acknowledged that VAT is not a simple tax. Even in 2001, in the well know words of Lord Justice Sedley, it was recognised that “Beyond the everyday world, lies the world of VAT; a kind of fiscal theme park in which factual and legal realities are suspended or inverted.”
However, despite the welcome attempt at simplifying EU VAT rules and the encouraging efforts that are being made to create a more efficient, definitive system that stamps out cross-border fraud it remains to be seen if the proposed new measures will in fact achieve the desired harmony.
While all stakeholders will be impacted by the current plans, there is a general consensus that the first significant challenge may be the timelines proposed for implementation. It is envisaged that the proposals will ultimately take effect by 2022. However, in a bid to create a smooth transition the four quick fixes and the concept of certified taxable person should be operational by 2019, leaving just over a year to implement these changes. To facilitate collecting and remitting VAT via the one stop shop, a cornerstone of the proposed VAT system, the Member States will have to come to agreement on how to practically implement this mechanism, which could lead to difficult, lengthy negotiations and compromises ultimately having to be made at National level.
The proposed changes will also place a significant burden on taxpayers, which cannot be underestimated. The simplifications outlined for intra-EU trade alone will require companies to invest considerably in their IT systems and infrastructure, not to mention ensuring that staff are trained in VAT compliance and fully conversant with all the nuances of the transitional and new VAT system, in particular from the point of view of ensuring all the necessary supporting documentation is obtained and retained to support the VAT treatment of individual transactions.
Given that three of the four quick fixes which are proposed are only available to a certified taxable person companies should now consider whether gaining this status will be of benefit to them and will ultimately lead to smoother running of VAT compliance obligations, in particular with EU supply chains in mind. 2019 is set to see another big change in the landscape with the UK set to depart the EU. In preparation for Brexit, companies should also consider the application of any customs simplifications and authorisations that could reduce the impact of a hard border. Availing of the customs concept of Authorised Economic Operator (AEO), which is somewhat similar to the certified taxable person concept, could prove very beneficial in terms of reducing delays to goods clearance and guarantees required to avail of special procedures e.g. warehousing and inward/outward processing.
It remains to be seen how the plans for the single European VAT area will progress through the legislator. However, with 2019 and in particular Brexit in mind, we continue to advise that the process of scenario planning gets underway to assess the potential impact for your business of both VAT and Customs. You should act now by implementing a plan for a scenario of maximum change.
If you have any queries or would like our assistance with regards to the above or any Indirect Tax related matter please contact Ciara McMullin, Pascal Brennan or any member of the Indirect Tax team. Extracts of this article originally appeared in a questions and answers piece in the 23 October 2017 edition of the Accountancy Ireland Briefly Newsletter.