EU Commission plans to reform EU VAT system

The EU Commission has revealed plans to reform the EU VAT system. The reform to be introduced by the end of 2022 will be the most far reaching modification of the current system since introduction of the current model in 1993. The main purpose of the changes is to cut the amount of VAT frauds across Europe and making the VAT system more roboust and friendly for the taxpayers.

Single EU VAT area

One of the main objectives of the reform is to abolish the intra-community supply / acquisition system which was implemented when the customs borders disappeared within EU in 1993. At the moment, supplies of goods performed by taxpayers between particular Member States are exempt from VAT with a right to recover VAT paid on previous stage, which – according to the Commission – is used for the purposes fraudulent transactions performed by companies who collect VAT and vanish without paying it to the government. According to the new system (single EU VAT area) cross-border transactions will be taxable according to a domestic VAT rate which is deemed to reduce overall VAT fraud by 80%. Currently the amount of VAT being lost across European Union due to fraudulent transactions is estimated to exceed €50 bln annually. “Twenty-five years after the creation of the Single Market, companies and consumers still face 28 different VAT regimes when operating cross-border. Criminals and possibly terrorists have been exploiting these loopholes for too long, organizing a €50bn fraud per year. This anachronistic system based on national borders must end!”- said Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs.

New system’s four cornerstones

According to the press release published at the European Commission’s official website, there are four main cornerstones of the single EU VAT area:

  • Tackling VAT fraud – to be achieved by abolishing VAT exemption on cross border transactions (see above);
  • One-Stop Shop–the Commission plans to createa mechanism enabling companies to declare and pay VAT on transactions performed in other Member States using a dedicated portal operating in taxpayers’ own language and using the same rules and administrative templates as in their home country;
  • Greater consistency–which is to be achieved by moving the place of VAT taxation to the Member State of final consumer;
  • Less red tape – which is to be achieved by simplification of invoicing rules, abolishing obligation to prepare so called recapitulative statements (lists of cross border transactions performed by a tax payer).

Apart from these changes, a notion of “Certified Taxable Person” – a category of trusted business that will benefit from number of VAT simplifications will be introduced. Single EU VAT area regulations are due to come into force by 2022. In 2018 draft of amended VAT Directive will be sent to the Member States and European Parliament.