The future of VAT in cross border trade | Deloitte


The future of VAT in cross border trade

Why, what and when?

On 4 October 2017, the EC published details of its plan for reform of the EU VAT system in respect of cross border trade. This article gives an extensive outline of the plans focusing on why we need a new VAT system, what will change, when it will change and what the consequences are.

17 October 2017

The reform plan was accompanied by a proposal to adapt the VAT Directive, a proposal to adapt the VAT Implementing Regulation and a proposal to adapt the Regulation on administrative cooperation and combating fraud. These proposals lay down the corner stones for the definitive VAT regime, introduce the concept of Certified Taxable Person (CTP) and introduce some quick fixes to the current system. These are therefore the first, but not the last proposals to introduce the definitive VAT regime for cross border trade.

Why does the VAT system need to change?

The current VAT system for cross border supplies of goods exists since 1993 and was envisaged as a temporary system of four years, before the definitive VAT system would come into place. Back then the idea was that supplies of goods should be subject to VAT in the Member State of origin (e.g. in case the goods were transported in relation to the supply in the country of departure). If the customer was a taxable person that was established abroad it could offset the VAT on this supply as deductible VAT in its VAT return (in another Member State) regardless of the origin of the goods. It was up to the Member State of the customer and the Member State of the supplier to settle balances between them. This was called clearing. However due to a lack of trust between Member States and to technology that was not so much developed back then the transitional system was implemented instead.

Under the transitional system the origin principle is applied. However if the goods are transported from one Member State to the other in relation to the supply and the customer is a taxable person the supply is exempt (read: zero rated), the so called intracommunity supply. The customer needs to report an intracommunity acquisition in the Member State of arrival, paying local VAT in that Member State. If he has a full right to deduct VAT he can offset this VAT as deductible VAT in the same VAT return, so on balance there is no VAT that needs to be paid.

The transitional system has a big downside. That is that the system is very susceptible to VAT fraud. This is because goods can be purchased VAT free in other Member States. When a fraudster then sells the goods locally he can disappear with the VAT he received from his customer. It is estimated that in 2015 the VAT revenue lost in whole the EU due to VAT fraud amounts up to € 50 billion. VAT fraud not only results in revenue losses for Member States, but also disturbs competition and increases compliance costs for businesses. Because fraudsters do not pay VAT they can charge lower prices. By taxing instead of exempting intracommunity supplies the proposals intend to mitigate the VAT losses due to VAT fraud. It is estimated that the VAT losses as a result of VAT fraud will be reduced by € 41 billion.

Another reason for amending the VAT system for cross border trade is the complexity of the current transitional VAT system. This leads to additional costs for businesses involved in cross-border trade. It is estimated that VAT compliance costs for intra-EU trade are 11% higher compared with domestic trade. The main areas of complexity for intra-EU trade are the additional VAT obligations associated with the current transitional VAT system and the divergent application of the VAT rules across Member States.

What will change?

The European Commission - together with stakeholders - looked into several options for a definitive VAT regime for cross border trade. Using the parameters fraud, administrative costs, cash flow of Member States, compliance costs, cash flow for businesses, internal market perspective and the macroeconomic impact the European Commission came to the conclusion that a combination of option 1 (limited improvement of current rules) and option 2 (taxation following the flow of the goods) would be best, where the improvements to the current system of option 1 are to be introduced first in 2019 and the definitive VAT system based on option 2 in 2022. The 2019 changes already introduce the concept of a certified taxable person (CTP). A concept that is used for the 2022 changes as well.


Most of the improvements to the current system that should come into force as of 1 January 2019 rely on the concept of a CTP. A CTP is in short: a reliable taxable person. The CTP concept is also relevant for the application of the reverse charge rule under the definitive VAT regime. The CTP concept is based on the AEO concept that is currently being used to identify compliant and reliable businesses for customs purposes. Under the proposal AEOs are granted the CTP status upon request. Business that do not have the AEO status can become a CTP when there is no serious infringement or repeated infringement of taxation rules and customs legislation, no record of serious criminal offences relating to the economic activity of the taxable person, a high level of control of the operations and flow of the goods and evidence of financial solvency of the taxable person. It is up to Member States to set up a framework which they use for granting, testing and withdrawing the CTP status. The CTP status is only open to taxable persons established in the EU. Each taxable person that has been granted the CTP status by its Member State of establishment must be treated as a CTP by other Member States.

Improvements to the current system

The improvements to the current system are indicated as four quick fixes. It concerns:

  1. Simplification of VAT rules for “call-off stock arrangements”.
    Under the proposed simplification in cases where both the supplier and customer are CTP’s the simplification allows for the supplier to report an intracommunity supply (in the Member State of origin of the goods) at the moment the goods are extracted from the stock by the customer, at which moment the ownership of the goods is transferred from the supplier to the customer. The customer reports an intracommunity acquisition at that same moment (in the Member State where the stock is held). Under the simplification the supplier is no longer obliged to report a deemed intracommunity supply in the Member State of departure and a deemed intracommunity acquisition in the Member State of arrival at the moment the goods are transferred from one Member State to the other. The simplification thus prevents a VAT registration of the supplier in the Member State of arrival of the goods. Both supplier and customer must comply with certain conditions.
  2. Simplification for chain transactions.
    In case of chain transactions (ABC-transactions) there are multiple taxable supplies for VAT. However in case goods are transported from one Member State to the other the transport and intracommunity supply can only be ascribed to one of those supplies. A proposed simplification helps CTPs to ascribe the transport to one of the supplies. The simplification that applies when both party A and party B are CTPs, provides for a simplification to determine which supply is the intracommunity supply. When party B communicates to party A the name of the Member State of arrival (exact location in that Member state is not necessary) and party B is identified for VAT purposes in a different Member State than the Member State where the transport of the goods starts, the A-B supply is considered the intracommunity supply. The B-C supply is then a local supply in the Member State of arrival. In case the conditions are not met, the B-C supply is considered the intracommunity supply. The A-B supply is then a local supply subject to VAT in the Member State of departure.
  3. Simplification of the proof of transport of goods.
    A supplier that wants to apply the exemption (zero rate) for intracommunity supplies needs to prove that its customer is a taxable person and the goods are (being) transported from one Member State to another Member State in relation to the supply. For CTPs a simplification is proposed. Under the simplification the supplier must collect two pieces of non-contradictory evidence to prove the transport to another Member State. Documents that qualify as pieces of evidence are for example: a declaration of the customer of the receipt of the goods, transport documents, contract between vendor and customer indicating the destination of the goods, correspondence between the parties involved in the transaction indicating the destination of the goods and the VAT return of the person acquiring the goods in which the intracommunity supply is reported.
  4. New material requirements for an intracommunity supply.
    The last quick fix is motivated by Member States. An addition is proposed to the current requirements to apply the exemption for intracommunity supplies. Under the proposed rules the supplier must also have the valid VAT number of the customer and a reference in the Intracommunity Sales Listing of the person acquiring the goods. Currently the later requirements are only formal requirements meaning that the taxable person does not lose its right to the exemption when those conditions aren’t met if he can otherwise prove that he meets the requirements for an intracommunity supply.

According to the European Commission the quick fixes are requested by the Member States with unanimity. It would thus seem that Member States can easily agree on the proposed quick fixes. Still, the way that they are formulated might give reason for a debate.

The definitive VAT system as from 2022

Under the proposed definitive VAT system B2B supplies of goods will be subject to VAT in the Member State of arrival of the goods, as if it is a local supply in that Member State. There will be one single supply that needs to be reported. The concepts of intracommunity supply and intracommunity acquisition will be abolished. The proposed definitive VAT regime is a taxation model meaning that both local and cross-border supplies are taxed. The One Stop Shop System (OSS) will be extended to cover cross-border B2B supplies of goods when the supplier is not established in the Member State where VAT needs to be paid. This means that a taxable person can file in his own Member State one VAT return for VAT to be paid to other Member States in his own language and also pay the VAT due to his own Member State. The OSS will also cover VAT deduction meaning that the taxable person can offset (foreign) deductible VAT in the OSS return and does not have to file refund requests. It is yet unclear if this only applies when the supplier is on balance in a VAT paying position in the Member State in question or also when he is on balance in a refund position in that Member State. We assume the latter is not the Commissions intention.

In what seems to be a transitional period with an unknown duration, the supplies to CTPs will be reverse charged to those CTPs. What is unclear is whether this applies independent of the supplier being established or VAT registered in the Member State at hand or not.

It seems that the European Commission envisages a future where supplies are not reverse charged at all, but VAT needs to be paid by the supplier regardless of the customer’s status and the place of taxation.

Phase 2 – beyond 2027?

The Commission also intends in time to extend the rules that it proposes as a definitive VAT system for goods to the supply of services, after an evaluation of the definitive VAT regime for goods when it has been in place for five years. It is unclear whether this only relates to B2B supplies of services which would mean that exceptions to the general place of supply rule for B2B-services will be abolished. It seems to me that it cannot relate to B2C-services since that would for example mean that when I enjoy a coffee in an Italian restaurant the restaurant owner must establish that I live in the Netherlands so he can charge me Dutch VAT.

When will it change?

It is important to note that the proposals that have been released now are only a first step in the direction of the definitive VAT system. Furthermore the proposals are linked to other proposals that will be published soon or that were already presented, like the digital single market proposal. The timeline on the right-hand side (click to open) shows the timeframe in which we can expect new legislative proposals or development in the area of VAT.


In its proposal for a modernized system of setting VAT rates the European Commission will give greater flexibility to Member States as regards VAT rates. The proposal to reinforce administrative cooperation intends to enable Member States to share information more quickly and cooperate more. In its proposal for SMEs the Commission will table rules on how to ease VAT obligations for SMEs.


  1. In its digital single market proposals the European Commission proposes five simplifications. The intention was that they would enter into force as of 1 January 2018. I have however not yet heard that Member States have reached an agreement on the proposal so it is unclear whether or not the simplifications will enter into force as of 1 January 2018. 
  2. The European Commission intends to table a full technical proposal for adaption of the VAT Directive in the Spring of 2018. Some questions that I raised in this article may be answered then.


If Member States can reach an agreement on the quick fixes they will enter into force on 1 January 2019.


In its digital single market proposals the European Commission proposes new rules for distance selling of goods and the abolition of the exemption for import of small consignments. The intention is that the changes take effect as of 1 January 2021 if Member States can reach an agreement on the proposed rules.


2022 is the year in which the European Commission intends to have the definitive VAT regime in place for the supply of goods.

What are the consequences?

Business costs:

It is expected that in the system of taxation of cross-border B2B supplies of goods there will be an initial increase of costs for business in the year of implementation of the new system. This will include changes in the ERP and other administrative systems and training of staff. After the year of implementation according to the European Commission business costs are expected to be decreased compared to the current situation. But it of course depends on the individual situation of the taxable person. The quick fixes will provide for an expected decrease in compliance costs for businesses. However only 13% of the businesses is expected to have a positive impact of the new rules.

I do have some doubts as regards the complexity of the new rules and the related business costs. It seems to me that applying the VAT rules of 27 (in 2022 I presume the UK will have left the EU) Member States with all their peculiarities is very complex to apply and will result in higher research and advisory costs for businesses. The reverse charge rule may however shift this responsibility to the customer when he is a CTP. Therefore it may be interesting for business to deal with CTPs only, which are to be considered reliable taxable persons.

Simplicity and consistency:

The Commission also seems to envisage standardized definitions of products eligible for the reduced VAT rate, which would make it easier for business to determine whether or not a reduced VAT rate applies in the Member State where goods are taxed with VAT. Information on VAT rates will be published on a website. It is yet unclear if this information will be binding to tax authorities. The simplifications also provide more simplicity and consistency within the EU, which should make matters simpler for businesses.

Less red tape:

One of the objectives of the European Commission is also to decrease red tape. Proposals in this area include simplification of the invoicing rules and abolishment of the recapitulative statements (Intracommunity Sales Listing) for cross-border transactions. We expect more clarity on this in the Spring 2018 proposals. These simplifications will be welcomed by businesses.

Reduction of VAT fraud:

A reduction of the VAT fraud is expected. However, the CTP status still allows taxable persons to purchase goods abroad without actually paying VAT, the flaw in the current system that leads to VAT fraud. It is therefore important that Member States monitor the CTP status of the inhabitant businesses carefully and take action in case of irregularities. It will be more difficult for fraudsters to operate, but they can still first show compliant behaviour to gain the CTP status and then disappear again or buy a business that already has a CTP status. So ultimately we will in my opinion maybe need actual payment of VAT on cross-border supplies to mitigate VAT fraud. However, since cross-border trade in the EU includes considerable amounts the cash flow impact of such a system is massive.

It therefore remains to be seen whether such a system will be implemented at all and it is important for the EU to consider other methods such as split payment method, real time reporting and SAF-T in the battle against VAT fraud in the near future.

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