EU Commission proposes extensive VAT reform

The EU Commission has presented a proposal for the biggest VAT reform in a quarter of a century. The purpose of the reform is to improve and modernise the VAT system for EU member states, as well as for companies undertaking business operations in the EU.

The background of the proposal is that the EU states are estimated to lose lose €50 billion each year due to VAT fraud in EU trading. VAT fraud often takes place when a company in a EU state purchases goods from another EU state without incurring VAT on the purchase. The company resales the goods within their own state, charging VAT and, in ths manner, receives VAT revenue from the purchasers. The company then “disappears” without paying the output VAT to the government This type of fraud is called “missing trader”. The fraud can be repeated several times; a few companies work together and sell the same goods a number of times, back and forth between two EU countries.

According to the Commission, the VAT revenue which is lost due to this type of fraud can be used to finance criminal operations and terrorists. With the proposed reform, it is expected that missing trader fraud will be reduced by 80 percent.

In addition to reducing VAT fraud, the reform also aims at simplifying the VAT system. A company undertaking EU trading often incurs increased costs in ensuring that the VAT treatment is correct. The simplification of VAT treatment is expected to result in a reduction of such costs.

The Commission’s proposal implies, in brief, that in B2B sales of goods between two companies in different EU countries, reverse tax liability will no longer apply. Instead, these sales are to incur VAT just as domestic sales incur VAT, but the seller is to charge the VAT rate applicable in the purchaser’s home country.

The VAT is declared and paid by the seller via a ”One Stop Shop” mechanism established by the tax authorities in the selller’s home state. The tax authorities in the seller’s home country are, subsequently, responsible for transferring the paid in VAT to the tax authorities in the purchaser’s home country. VAT is, in other words, debited on the basis of the purchaser’s home country’s VAT rate and belongs to the purchaser’s home country, precisely as in current practice, but the seller is liable for this VAT, instead of the purchaser.

Provided the member states approve of the reform, it is expected to be implemented by 2022.

The Commission has also presented four ”quick fixes” in order to improve the current VAT system during the period until the reform has been approved and implemented. The Commission also introduces a concept they call certified taxable person, CTP. It will be possible for the EU states to implement the quick fixes already in 2019 and the quick fixes can only be utilized by companies which are registered as CTP’s. A CTP registration implies that the tax authorities in a member state have deemed that a company is a reliable taxpayer. When a member state has approved a company as a CTP, then, this company is recognized as a CTP in all of the EU countries.

The quick fixes imply, briefly speaking, simplified VAT rules in terms of proofs that that goods have been transferred from one EU state to another EU state, simplified VAT rules regarding sale of goods that is stored in the purchaser’s state prior to delivery and simplified VAT rules for chain transactions where goods are transferred directly from the original seller to the end customer.

After the reform has been implemented, a CTP registered company will be able to undertake EU purchases based on reverse tax liability. This possibility will exist also for purchases that the CTP performs to an EU state in which the CTP is not established. In this case, the CTP will declare and pay VAT by applying the One Stop Shop mechanism in the country in which it is established.

Comments

If the reform comes into effect, this would imply that a system is implemented for B2B transactions similar to the ”Mini One Stop Shop” (MOSS) which, today, is used in electronic services that are sold to private individuals within the EU.

Even if the purpose behind the proposed reform is positive, this will imply a major increase in the administrative work for companies. In practice, a new, additional customer category will need to be handled in a specific manner, which will require major adaptions in business systems. In addition, sellers must always have knowledge of the different VAT rates applying within the EU.

Even if the reform has been ”sweetened up” a bit with a number of proposals simplifying some of the processes, our assessment is that EU VAT reporting in general will not be less complicated for companies, but rather the opposite. However, something that is positive is that this type of uniform reform decreases the possibility for EU states to come up with their own rules and requirements as regards, for example, transport documentation.