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European Commission releases detailed proposal for definitive VAT system.

On 25 May 2018, the European Commission released a proposal containing detailed technical amendments to the EU VAT directive. The amendments would supplement the overhaul of the system proposed in October 2017 to reduce cross-border VAT fraud and to improve and modernize the VAT systems for governments and businesses alike, in line with the 2016 EU VAT action plan (for prior coverage, see World Tax Advisor, 27 October 2017).

The commission estimates that around 200 of the 408 articles in the VAT directive would need to be adapted.

Under the new system, cross-border sales of goods within the EU would be taxed in the same way as sales within a single EU member state, i.e. VAT would be imposed on cross-border sales between businesses (which currently are exempt from VAT) under a destination-based system. Applying VAT on cross-border trade should significantly reduce VAT fraud in the EU, particularly missing trader intra-Community (MTIC) fraud. At the same time, the changes would reduce the number of administrative steps needed when businesses sell to companies in other EU member states, and would eliminate specific reporting obligations under the current transitional VAT regime for trade in goods.

The commission aims for the rules to become effective on 1 July 2022.


The new proposals follow through on the October 2017 proposals, which included a series of fundamental principles or “cornerstones” for a definitive VAT regime for cross-border trade of goods, as well as a series of “quick fixes” to the current regime.

The intention is to overhaul the VAT directive and replace or delete the current transitional articles. The 46 pages of legislative provisions contain the actual changes constituting the definitive VAT regime for goods, as well as textual modifications to reflect the “Union” concept throughout the VAT directive and some other minor changes.

The commission also reiterates its intention to work on the adoption of initially proposed changes for the quick fixes that should become effective well ahead of the technical proposals, i.e. in principle, on 1 January 2019.

Key proposed changes

Intra-Union supply: The European Commission’s proposal would put an end to the current split of all intra-EU cross-border movements of goods into two different transactions: an exempt intra-Community supply in the member state of departure and an intra-Community acquisition taxed in the member state of destination. Instead, it proposes the concept of an “intra-Union” supply of goods, which would mean a supply of goods with cross-border transport carried out by one taxable person for another taxable person or for a nontaxable legal person (e.g. a public authority or holding).

Under the destination principle of taxation, the intra-Union supply would be taxable in the country where the dispatch or transport of goods to the customer ends. A supply would qualify as an intra-Union supply only if it is linked to the cross-border transportation of goods by the supplier or the purchaser. Hence, under the definitive VAT regime, it would be important to allocate transport to a specific supply in chain transactions. All supplies preceding or following the intra-Union supply would be taxed as domestic supplies, either in the country of dispatch or the country of arrival. The simplification rule for triangular supplies would cease to exist.

The current thresholds under which cross-border supplies of goods to nontaxable legal persons or to fully exempt taxable persons are taxed in the country of dispatch would be abolished, and taxation at destination of these supplies as intra-Union supplies would apply in all cases.

Certain types of supplies (e.g. supply of goods with installation) would not fall within the scope of the new rules for intra-Union supplies, but would remain subject to their own specific place-of-supply rules.

Transfers of own goods by a business from one member state to another would be assimilated to an intra-Union supply in the same way as they currently are assimilated to an intra-Community transaction. The taxable person completing such a transfer would have to self-assess VAT in the country of arrival.


Concept of Certified Taxable Person (CTP): The October 2017 proposal introduced the concept of a CTP. A business established in the EU that carries out or intends to carry out cross-border goods trade (sell or buy side) would be able to apply to its national tax authorities to become a CTP, by demonstrating compliance with certain pre-defined criteria. Member states would mutually recognize CTP status. Non-EU-established traders, fully exempt taxable persons and nontaxable legal persons would not be able to obtain CTP status.

The CTP concept, which has not been well received by businesses and member states, would become very important under the definitive VAT regime, as it would allow buyers to apply a reverse charge on their cross-border business-to-business (B2B) purchases of goods in many cases, following significant changes to the chargeability rules.


Persons liable to pay VAT on supplies of goods: The principle under EU VAT legislation that sellers should charge VAT due on the sale of goods to their customers and pay this VAT over to the member state of taxation would remain unchanged.

For an intra-Union supply, sellers would have to charge VAT at the rate applicable in the destination member state. This would result in an additional administrative burden for suppliers operating cross-border (determination of VAT rates) and would have a significant cash flow impact, since no VAT currently is charged on cross-border supplies due to the exempt status of intra-Community supplies.

Where the customer is a CTP, the latter would be liable to VAT under a reverse charge mechanism in all situations where the supplier is not established in the destination member state. This mandatory reverse charge would apply on both intra-Union supplies and on domestic supplies where the supplier is not established in the member state of taxation.

To achieve consistent VAT treatment based on the principle of effectively charging VAT (unless a CTP is involved), member states no longer would have the option to apply domestic reverse charge rules for supplies of goods. As such, domestic reverse charge rules would be aligned with the rules on cross-border supplies, i.e. non-established suppliers would apply a reverse charge only if their customer qualifies as a CTP. For services, domestic reverse charge rules still could be applied at the national level.

This change regarding the VAT liability on domestic sales by non-established suppliers could have a positive effect in chain transactions where all parties after the initial supplier are CTPs, since entire chains could be without VAT.


Time of supply rules for intra-Union supplies: The chargeability of VAT on intra-Union supplies would follow the same rules as are currently applicable for intra-Community supplies and acquisitions. The chargeability of VAT on cross-border supplies occurs when the invoice for the supply is issued, which should take place before the 15th day of the month following that in which the supply occurs. If no invoice is issued by that date, VAT would become due on the 15th day of the month following the supply. No VAT would be due for payments on account (advances) received in connection with intra-Union supplies.

This approach would allow the same time of supply for all intra-Union supplies, but could mean that VAT included in payments on account for taxable intra-Union supplies could be retained by the supplier until the actual time of supply.


Single union one-stop shop: Following the statement on the definitive VAT regime included in the October 2017 proposal, an online reporting mechanism or “one-stop shop” (OSS) would be introduced to allow the declaration, payment and deduction of VAT for all B2B goods transactions of traders operating in the EU. The current proposal describes this OSS in detail, which has the potential to redefine the VAT obligations of businesses when conducting cross-border business.

Technically, the OSS would be an extension of the intra-EU OSS that will apply as from 1 January 2021 for the declaration and payment of EU distance sales (cross-border business-to-consumer (B2C) sales) by EU or non-EU taxable persons. It would allow the reporting of supplies of goods for which VAT is payable by the supplier or buyer, and the claiming of deductible VAT, in a single portal in the member state of establishment of an EU-based business, or, for non-EU based businesses, in a member state where they appoint an intermediary to benefit from the regime.

At first glance, taxpayers opting for this scheme no longer would have local VAT registration and reporting obligations for their trade in goods, but would limit their VAT reporting to the domestic VAT return in their country of establishment and the OSS for their foreign-taxed transactions.

The intra-Union OSS would allow the deduction of input VAT incurred outside of the home country; however, this would be limited to VAT of member states where the business has (within a certain timeframe) taxable outgoing transactions reportable in the OSS. If there are no such transactions, a taxable person would have to rely on the traditional refund procedures provided by VAT legislation.

In principle, the OSS return would have to be filed quarterly, but a monthly filing would be required for companies with an overall EU turnover exceeding EUR 2.5 million.

Intra-Union supplies included in the OSS no longer would have to be reported in the intra-Community Sales Listing for intra-Community supplies, but limited information on trade flows still would need to be reported in the OSS, per the member state of destination. It is important to note that the intra-Community sales listing would be maintained for services.


The European Commission proposal gives “food for thought” on the future direction of the European VAT system. To achieve the goal of a robust system of taxation at destination, the commission makes clear choices on the effective application of VAT on cross-border supplies and the centralization of reporting obligations in the home country of a business.

Whether the EU VAT system is ready for such a drastic change in the short-to-medium term remains to be seen. For businesses, the technical proposals allow a detailed study of the impact that these changes, if adopted, could have on trade flows, financial cash flows, processes and systems.

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