European Commission proposes far-reaching reform of the EU VAT system
On 4 October 2016, the European Commission launched plans for a far-reaching reform of EU VAT rules. The new proposal includes four fundamental principles that focus on tackling VAT fraud, introducing a system for payment of VAT in one place, greater consistency as to country of payment and simplification of invoicing rules.
VAT is a major source of revenue in the EU Member States. In 2015, the VAT revenue yield in the EU amounted to more than EUR 1 trillion, corresponding to 7% EU GDP. VAT is the Danish State's greatest source of revenue and amounted to DKK 186bn in 2015, corresponding to 42% of the Danish State's total proceeds from taxes and duties.
The current EU VAT system dates from 1993, and the Danish VAT Act dates from 1994. The purpose of the reform is to modernise and improve the system for governments as well as businesses for the benefit of the Single Market and for the European businesses' competitiveness in the global market.
Overall, it is estimated that EUR 150bn of VAT revenue is lost every year. Of this, around EUR 50bn can be traced back to cross-border VAT fraud. The Commission estimates that fraud will be reduced by 80% thanks to the proposed reform.
The proposal includes four fundamental principles:
- Tackling fraud: VAT will be charged on cross-border trade. Under the current rules, this type of trade is exempt from VAT, which means that companies purchasing goods in another country receive VAT from its buyers when reselling such goods without having paid a compensatory amount to the seller. Instead of paying VAT to the State, a fraudulent company can collect VAT and then "vanish" (a so-called missing trader).
- One-Stop Shop: A system will be introduced that allows companies with cross-border activities to pay VAT in one place, in their own language and according to the same rules as in their home country. EU Member States are subsequently to distribute such VAT among the Member States.
- Greater consistency as to the country of payment: The final amount of VAT is always paid to the Member State of the final consumer and at the rate of that Member State.
- Less red tape: Invoicing rules are simplified. For instance, a company may prepare invoices according to the rules of its own country even when trading across borders. Companies will no longer have to files lists of cross-border transactions.
The proposal also introduces a new category - a Certified Taxable Person, ie a category of business that will benefit from much simpler and time-saving rules.
Until the new regime is in place, a few provisional quick fixes will be introduced.
The European Commission will send the proposal for the Member States for discussion in the Council and to the European Parliament for consultation. In 2018, the Commission will submit a formal proposal to amend the VAT Directive. Plesner will be following developments.
Read the European Commission's press release