Can the EU VAT action plan make you dance?
It doesn’t happen much. Actually, it never happens that a paper published by the EC makes me want to dance. But this time I am not so sure. Reading the paper the first thought that enters my mind is that it feels like a house track (electronic dance music, or EDM), including the lyrics typically used in this kind of music. We are having a hard time, there is no love to come around, the world is in a desperate state and we feel like giving up. But then, then there is this beautiful music and suddenly everybody’s happy, singing and throwing their hands up in the air. We embrace each other and we are in love, real love. The world has never been so beautiful before, until the next song of course. What the song doesn’t tell you is that most people need a heavy dosis of stimulating products to reach this state of enlightment and that the hangover afterwards is at least at the same level as the happiness you experienced before.
Yes, the situation is bad at the moment. Some examples listed in the paper:
-compliance costs in cross border trade are much higher than domestic trade. Especially small and medium-sized companies feel the pain
-every year an amount of € 170 billion of VAT revenue is lost, the cross-border fraud is estimated at € 50 billion
-there is no trust between companies and tax administrations and among EU tax administrations themselves
-innovative business models and technological progress are blocked by the current VAT system
As the EC correctly stipulates, VAT rules need to be mondernised and rebooted. A new layer of obligations and checks doesn’t work anymore. This will only lead to increasing compliance costs and legal uncertainty and will further hamper the functioning of the single market. Action is needed, the time is now!
So, what does the EC propose?
-The definitive VAT system should be based on the principle of taxation in the member state of the destination of the goods
Some initiatives are already applicable such as the Quick Reaction Mechanism to fight VAT fraud and the MOSS for electronic services. Other initiatives are at hand i.e. extending the MOSS to EU and non EU online sales of tangible goods to final customers, a simplification of the VAT thresholds and removing the VAT exemption for imports of small shipments from non-EU suppliers. A special regime will be introduced for SME’s to create an environment that is conducive to their growth and favourable to cross-border trade.
-Urgent measures to tackle the VAT gap
As expected, new actions are announced in this perspective. First the cooperation within the EU and with non-EU countries must be improved. The role of Eurofisc will be strenghtened and the creation of an European Public Prosecutor’s Office will be proposed. Next, a common agenda for the tax administrations must be developed to build trust and to strenghten their capacity to tackle VAT fraud. Discussions will be set up (also with Customs) to build this agenda and minimum standards will be introduced for core tax administration functions. New reporting tools, new auditing tools and new roles for certain market intermediairies will be defined. Please already see the 2016 Budget plan of the UK government in this respect. Finally, the EC is going to help the weakest EU countries to improve their tax collection and inspection capacity (especially eastern and south eastern EU countries).
-Medium term measures to tackle the VAT gap
The EC is going to examine if the ‘destination principle ‘in B2B cross-border trade including a generalised reverse charge system can be implemented. Under a generalised reverse charge system VAT is suspended along the whole economic chain and is charged only to customers. Moreover, the B2B supplies of goods within the EU should be treated the same as domestic supplies. The MOSS will be even more widely implemented and companies will need to register for VAT in the member state where they are established only.This requires a high level of cooperation and administrative capacity on both sides, the tax offices and the businesses involved.
-Mondernised (reduced) VAT rate policy
Two options are given to mondernise the current VAT rate policies in the EU. The first the option is extension and regular review of the list of goods and services eligible for reduced rates. Under this option all currently existing reduced rates would be maintained and could be included in the list of optional reduced rates available to all member states, ensuring equal treatment.
The second option is to abolish the list of reduced rates and to allow member states greater freedom on the number of reduced rates at their level. This option requires safeguards to be put in place to avoid unfair tax competition within the single market while also guaranteeing legal certainty and reducing compliance costs.
So, having read the paper, what do I think of it? Certain measures sound good, such as implementing the destination principle and getting the tax offices cooperate with each other on a high and digital level. Other ideas look like we are going to be dragged into a swamp again, such as the idea to allow member states to set their own reduced VAT rate policy.
To stay in the music terminology, I am not a Belieber but must admit I made my first move. To be continued..
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