European Commission issues detailed technical proposal for the definitive VAT system
On 25 May 2018, the European Commission released a proposal containing the detailed technical amendments to the EU VAT Directive that supplement the recently proposed overhaul of the system to make it more fraud-resilient.
29 May 2018
In this Indirect Tax Alert we will highlight the main amendments. We will provide you with a further analysis of the proposal in a Deloitte Perspective which will be published later.
Under the proposal, intra-EU cross border supplies of goods between businesses would no longer be exempt from VAT but would be subject to VAT. Applying VAT on cross-border trade should put a halt to a large part of the VAT fraud in the EU, especially missing trader intra-Community (MTIC) fraud. At the same time, the changes would reduce the amount of administrative steps needed when businesses sell to companies in other Member States and eliminate specific reporting obligations under the current transitional VAT regime for the trade in goods. The Commission intends for these rules to enter into force on 1 July 2022.
The present proposal is a follow-up to the October 2017 proposal, which introduced 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 VAT regime (Deloitte Perspective 5 October 2017).
The proposal has the intention to overhaul the whole VAT Directive and will replace or delete the current transitional articles. With the publication of these technical amendments, the European Commission provides the long-awaited details that are required to start discussion between Member States on how to shape the definitive VAT regime.
The Commission reiterated also its intention to work on the adoption of the initially proposed changes for the so-called "quick fixes", which should enter into force well ahead of the present technical proposal (in principle on 1 January 2019). For more background on the quick fixes see our Perspective on chain transactions, Perspective on call-off stock, and Perspective on proof of intracommunity supply.
In this Indirect Tax Alert, we zoom in on the most important changes towards the definitive VAT regime.
Key proposed changes
The 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 shall mean a supply of goods with cross-border transport carried out by one taxable person for another taxable person or for a non-taxable legal person (e.g. a public authority or holding).
Under the principle of taxation at destination, the intra-Union supply will be taxable in the country where the dispatch or transport of the goods to the customer ends. A supply will only qualify as an intra-Union supply if it is linked to the cross-border transportation of the goods by either the supplier or the purchaser. The VAT on the intra-Union supply must in principle be paid by the supplier.
This means that the seller will have to charge VAT at the rate of the Member State of destination. This will result in additional administrative burden for suppliers operating cross-border (determine VAT rates) and would have a significant cash flow impact, as currently no VAT is charged on cross border supplies due to the exempt status of intra-Community supplies.
Where the customer is a CTP (see below), the latter will be liable for VAT under a reverse charge mechanism, in all situations where the supplier is not established in the Member State of destination. This mandatory reverse charge will apply not only on intra-Union supplies, but also on domestic supplies where the supplier is not established in the Member State of taxation. If the customer is not a CTP, the seller will have to pay the VAT through the One-Stop-Shop (OSS).
Transfers of own goods by a business from one Member State to another will be assimilated into an intra-Union supply, in the same way as they are currently assimilated into an intra-Community transaction. The taxable person performing such a transfer will have to self-assess VAT in the country of arrival where the transport of the goods ends.
The concept of “Certified Taxable Person” (CTP)
The October 2017 proposal introduced the concept of a ‘Certified Taxable Person’ (CTP). A business established in the EU that carries out or intends to carry out cross-border goods trade (sell or buy side) can apply to its national tax authorities and become a CTP by proving compliance with certain pre-defined criteria. Member States will mutually recognize the status as a CTP. For more background on the CTP see our Perspective on the CTP.
The criteria remain the same as announced in the initial proposal, confirming that non-EU established traders will not be able to obtain CTP status, nor will fully exempt taxable persons or non-taxable legal persons.
A single intra-Union OSS
Following the statement on the definitive VAT regime included in the October 2017 proposal, an online reporting mechanism or ‘One Stop Shop’ (OSS) will be introduced to allow the declaration, payment and deduction of VAT for all business-to-business (B2B) goods transactions of traders operating in the EU. The current proposal describes in detail this OSS, which has the potential to redefine the VAT obligations that businesses face when engaging in cross border business. The OSS will allow to report supplies of goods for which VAT is payable by the supplier or the buyer, as well as VAT deductible, 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 this scheme.
The intra-Union OSS will allow to deduct input VAT incurred outside of the home country, however limited to VAT of Member States where the business has (within a certain timeframe) taxable outgoing transactions reportable in the OSS. If not, a taxable person will have to rely on the traditional refund procedures provided by the VAT legislation.
The OSS return will in principle have to be filed on a quarterly basis. For companies with an overall EU turnover exceeding a threshold of € 2,500,000, a monthly filing will be required.
Intra-Union supplies included in the OSS will no longer have to be reported in the currently existing intra-Community Sales Listing for intra-Community supplies. A limited set of information on the trade flows will however still have to be reported per Member State of destination in the OSS. It is important to note that the intra-Community Sales Listing will be maintained for services.