EU’s VAT ‘reboot’ proposals light on details

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Heather Burns
Digital Law Specialist
WebDevLaw
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Business as usual resumed in Brussels on 7 April as the European Commission’s tax bods revealed a four-pillar action plan to modernise VAT across the EU. The plan has been framed as the biggest “reboot” of VAT rules on cross-border trade since 1993. While the plan is bursting with ambition, few details were provided.

The VAT Action Plan, announced by commissioner for economic and financial affairs, taxation and customs Pierre Moscovici, has four key elements:

  • A single definitive EU VAT system
  • Measures against VAT fraud
  • Autonomy for member states to choose their own rates policy
  • Support for e-commerce and SMEs

One single EU VAT area

The loftiest ambition in the plan is to create one single EU VAT area under a system similar to MOSS. Businesses would need to register for VAT only in their home country, a system the EC estimates would save €1bn in administrative costs every year.

The plan calls for a transition period where “trustworthy businesses” would be certified by their tax administrations to purchase goods free of VAT in other countries and pay VAT in their own system.

SME threshold

The most specific goals in the plan pertain to e-commerce and SMEs. These call for the establishment of a VAT-free threshold for startups and microbusinesses. This has been the central demand in calls for reform by campaigners such as the EU VAT Action Group.

Paradoxically, the plan also calls for extending the MOSS system to all cross-border e-commerce, including distance and physical sales; it makes little sense to plan to extend the MOSS system before issues as fundamental as thresholds have been addressed.

The SME plans also call for ensuring that businesses are only audited by the tax administrations of their home countries, a response to MOSS-impacted micros receiving nonsensical audit demands from other member states over sums as small as 7p. Ebooks are also in the commission’s sights, with plans being made to align rates across the EU with the rates on printed books. 

Finally, the plan would remove the VAT exemption for the import of small consignments from suppliers in third countries, an issue which has cost platforms dearly.

VAT fraud

Plans for tackling VAT fraud, which contributes to an estimated €170bn 'VAT gap', include increased sharing of information between tax administrations and customs and law enforcement, modernisation of tax systems, and increased cooperation between businesses and tax bodies.

The EC has also proposed giving member states two options for setting their own rates policy: One would allow states to maintain the minimum standard rate of 15% and regularly review the list of goods and services eligible for reduced rates, while the other would abolish the list altogether.

Triggering debate

The VAT action plan was announced just days after the Panama Papers revelations, and indeed, the papers dominated journalists’ questions in the press conference. With tax policies now triggering resignations and protest marches, will the EC’s plan go some way to assuage public anger? It will not.

The goal of the VAT Action Plan is to “trigger a debate”, not to take action. The plan aims for the proposals ensuing from that debate to be made throughout 2016 and 2017. Any real changes are therefore at least two years away.

The only practical relief for businesses in the interim will need to come from member states enacting concessions such as HMRC’s simplifications on place of supply data requirements - actions which will further fragment the digital single market rather than unifying it. In short, things will get better after they get worse.

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