At the end of 2017, the EU Commission presented a proposal for an extensive VAT reform as regards B2B supplies of goods within the EU. Here, we describe what has happened since then and which aspects of the proposal that need to be addressed by companies undertaking EU trade prior to the reform coming into effect.
Proposed VAT reform
In a previous article, we described the basis of the Commission’s proposal for VAT reform. In brief, the proposal implies that reverse tax liability, that is, the purchaser calculates and reports VAT, is not to apply to intra-union B2B supplies of goods. Instead, the seller is to invoice with VAT on the basis of the VAT rate applying in the purchaser’s country.
In May 2018, the Commission announced a proposal which, amongst other things, stipulated an estimation of the amount of increased administrative costs which will be incurred by the companies in complying with this new regulations. During the year of implementation of the reform, it is estimated that compliance costs for all companies in the EU undertaking intra-EU trade will increase by a total of 457 million Euro. These costs refer, for example, to the updating of reporting and invoicing systems and to training. However, in the year after implementation, it is expected that the companies’ costs for complying with the VAT rules will decrease by 938 million Euro.
Below is a description of some of the proposed changes:
- The requirement to file EC sales list will no longer apply. Instead, intra-Union sales will be reported in an EU-wide portal (”One Stop Shop”).
- It will be mandatory to issue invoices for intra-union supplies of goods and the member states will not be allowed to use simplified invoices for B2B sales. Invoices are to be issued in accordance with the invoice requirements applying in the seller’s member state.
- Definition of ”intra-union delivery” is expanded to include, amongst other things, deliveries to non VAT liable legal entities.
Lack of agreement regarding a fifth quick fix
The Commission’s proposal for VAT reform includes four so-called ”quick fixes”, described in our previous article. After the Commission presented its proposal, France has demanded that a fifth quick fix should be added. This would imply that the application of the regulation regarding VAT exemption in so-called cost sharing would be expanded. The regulation on cost sharing states that the net sales of services provided within independent groups of physical persons or legal entities can, under certain circumstances, be exempt from VAT.
In order that the reform can be implemented, there is a requirement that all member states approve of the proposal. The member states’ delegates in the Ecofin Council have not been able to agree on the proposal for a fifth quick fix. Some of the member states are of the opinion that the proposed fifth quick fix is acceptable only if a ”territoriality clause” is applied, limiting the scope of this cost sharing mechanism. Other member states believe that this fifth quick fix should not be introduced at all because it was not a part of the original proposal and also because it has not been investigated.
Sweden’s approach is that EU should proceed with the four quick fix proposals that has been agreed upon so that the reform can proceed, and that a separate process should be established to address the suggested fifth quick fix.
New proposal from the Commission regarding simplification rules for SME and VAT rates
The Commission has also presented two new proposals for changes in the VAT regulation. The first proposal is a simplification initiative to reduce VAT administration costs for small and medium-sized companies (so-called SME companies). The other proposal would give the member states a greater degree of flexibility in terms of being able to change their VAT rates.
The next step is that the proposals are presented to the European Parliament. The proposals need to be approved by all of the member states in order to be implemented.
In our previous article, we noted that the reform would entail an increased administrative burden for companies undertaking EU trade both as they will need to have systems to handle the various VAT rates depending on the purchaser in question, and also since they need to monitor other countries’ VAT rates.
It is positive that the Commission has calculated the compliance costs which will arise for companies due to this VAT reform and that these calculations show that there can be savings already during the first year after the new rules come into effect. However, we wish to bring attention to the fact that this reform can, in addition to incurring increased costs during the year of implementation, result in major practical problems.
Companies undertaking EU trade will either need to develop their existing systems or change to new systems. The implementation of new systems can be particularly time consuming and difficult for companies that has old systems, who sells many different types of products and/or who sells to purchasers in a larger number of EU member states. If the reform is accepted, companies undertaking intra-union trade should plan how to adapt their systems and also create a plan on how to monitor VAT rates in other EU member states on an ongoing basis. These steps should be undertaken in good time prior to the VAT reform coming into effect in 2022.
As regards the fifth quick fix proposal, cost sharing according to current regulations is not very common in Sweden. This is because Swedish practice is very restrictive and few companies can fulfil the requirements to implement cost sharing. If the fifth quick fix is accepted, it will likely entail that more Swedish companies starts to use cost sharing in order to decrease VAT costs.
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