European Commission releases proposals for an EU destination-based VAT system
On 4 October 2017, the European Commission published details of its plan for the reform of the EU VAT system. This is the first proposal of two (introducing the main principles) with the second proposal on details expected in spring 2018. The ultimate impact on business will depend on the detailed proposals.
5 October 2017
- Fundamental principles
- Quick fixes
- A new concept of ‘Certified Taxable Person’
- Next steps
In its 2016 VAT Action Plan, the European Commission outlined immediate and urgent actions to tackle the VAT Gap and combat VAT fraud. The current VAT regime for cross-border intra-EU trade allows goods and services to circulate VAT-free across borders, facilitating so-called missing trader fraud or carousel fraud. One action is the move towards a more robust, simpler and fraud resilient single European VAT area for which a definitive VAT regime for cross-border trade is required.
The proposals include a series of fundamental principles or ‘cornerstones’ for a definitive VAT regime. They also propose four ‘quick fixes’ to come into force by 2019, and introduce the concept of a ‘Certified Taxable Person’.
The fundamental principles or ‘cornerstones’ for a definitive VAT regime, are as follows:
- The principle of taxation at destination for intra-EU cross-border supplies of goods. As a result, the VAT exemption on cross-border trade will be abolished.
- The ‘One Stop Shop’ online portal currently existing for e-services will be extended, allowing businesses to take care of their cross-border VAT obligations in their own country in their own language. The extended portal will also allow to deduct input VAT outside a business’ home country. Member States will settle the VAT to each other directly.
- The confirmation that, as a general rule, the vendor is liable for charging and collecting the VAT of the Member State of destination.
- Simplification of VAT invoicing rules allowing sellers to prepare invoices according to the rules of their own country.
The Commission also presented four ‘quick fixes’ to improve the day-to-day functioning of the current VAT system, until the definitive regime is fully agreed and implemented:
- Simplification of VAT rules for “call-off stock arrangements” – only available for certified taxable persons.
- Simplification provided for chain transaction situations identifying the supply with which the intra-Community transport of goods should be linked – only available for certified taxable persons.
- Simplification of the proof of transport of goods between two Member States needed for the application of the exemption (zero rating) to intra-Community supplies – only available for certified taxable persons.
- 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 in order to apply the cross-border VAT exemption under the current rules. A reference in the Intracommunity Sales Listing of the person acquiring the goods is also required.
A new concept of ‘Certified Taxable Person’
A business established in the EU and that carries out or intends to carry out cross-border goods trade can apply to its national tax authority and become a Certified Taxable Person (‘CTP’) by proving compliance with certain pre-defined criteria.
Criteria for the CTP status cover the absence of a prior history or record of infringements on taxation and customs rules or serious criminal offences, the demonstration of a high level of control and evidence of financial solvency (or production of financial guarantees). These are similar to the criteria to obtain Authorized Economic Operator (‘AEO’) status for customs purposes and AEO certified operators are by law deemed to meet the CTP criteria.
Both the CTP and the companies that do business with it will enjoy a number of simplified procedures for the declaration and payment of cross-border VAT. The status of CTP will be mutually recognised by all Member States.
The proposals will be forwarded to the European Parliament and the European Economic and Social Committee for consultation, and to the Council for their agreement. They will require unanimous agreement from all Member States in the Council before they can enter into force.
Upon the ‘agreement in principle’ by the Member States on the fundamental principles contained in the proposal, a proposal for detailed technical adaptation of the VAT directive will follow in the Spring of 2018.
While no date is set for final adoption of the definitive VAT regime in the current proposal, the Commission intends for these rules to enter into force in 2022.
These proposals will be the basis for further discussion in legislative bodies of the EU, which ultimately might lead to changes in the EU VAT legislation. In the longer term, the definitive VAT regime constitutes a major overhaul of the EU VAT system for businesses, with a drastic impact on systems and processes. The ultimate impact will depend upon the detailed proposals.
In the following weeks we will keep you updated with our in-depth analyses and points of view regarding the practical consequences of the quick fixes and the definitive VAT regime in a series of Indirect Tax Alerts.