Action Plan on VAT
On 7 April 2016 the Commission adopted an Action Plan on VAT – Towards a single EU VAT area. The Action Plan sets out immediate and urgent actions to tackle the VAT gap and adapt the VAT system to the digital economy and the needs of SMEs. It also provides clear orientations towards a robust single European VAT area in relation to the definitive VAT system for cross-border supplies and proposes options for a modernised policy on EU rules governing VAT rates.
|Recent and ongoing policy initiatives|
Removing VAT obstacles to e-commerce in the single Market
The current VAT system for cross-border e-commerce is complex and costly for Member States and business alike.
The Commission will, as part of its Digital Single Market strategy, presented a legislative proposal on 1 December 2016 to modernise and simplify VAT for cross-border e-commerce. See VAT DSM Package:
SMEs VAT package
SMEs bear proportionally higher VAT compliance costs than large businesses due to the complexity and fragmentation of the EU VAT system.
Further to the new Single Market Strategy, the Commission is preparing a comprehensive simplification package for SMEs that will seek to create an environment that is conducive to their growth and favourable to cross-border trade. In particular, the special scheme for small enterprises will be subject to review. This proposal will be presented by the end of 2017.
|Urgent measures to tackle the VAT Gap|
The ’VAT gap’ between expected revenue and revenue actually collected by national authorities is estimated at around EUR 170 billion, which equates to 15.2% of revenue loss. This calls for urgent action on several fronts:
- Improving cooperation within the EU and with non-EU countries
- Towards more efficient tax administrations
- Improving voluntary compliance
- Tax collection
See the 20 measures to tackle the VAT gap.
In 2016, the Commission will present:
- Measures to improve cooperation between tax administrations including from non-EU countries and with customs and law enforcement bodies and to strengthen tax administrations' capacity for a more efficient fight against fraud.
- Evaluation report of the Directive on the mutual assistance for the recovery of tax debts
In 2017, the Commission will present:
- Proposal to enhance VAT administrative cooperation and Eurofisc.
|Towards a robust single European VAT area|
Definitive VAT regime for cross-border trade
The present VAT system, which has been in place since 1993 and was supposed to be transitional, splits every cross-border transaction into an exempted cross-border supply and a taxable cross-border acquisition. It is like a customs system, but lacks equivalent controls and is therefore the root of cross-border fraud. It is also complex for the growing number of businesses operating cross-border and leaves the door open to fraud: domestic and cross-border transactions are treated differently and goods or services can be bought free of VAT within the Single Market.
To this end, the Commission will present in 2017 a legislative proposal for a definitive VAT system for cross-border trade. This definitive VAT system will be based on the principle of taxation in the country of destination of the goods, as agreed by the European Parliament and the Council.
The Commission considers that in the definitive VAT system, the taxation rules according to which the supplier of goods collects VAT from his customer should be extended to cross-border transactions. This will ensure consistent treatment of domestic and cross-border supplies along the entire chain of a production and distribution, and re-establish the basic features of the VAT in cross-border trade i.e. the fractionated payments system with its self-policing character.
See the infographics on pages 2 and 3 .
|Towards a modernised VAT rates policy|
More freedom for Member States on rates policies
The VAT Directive sets out general rules limiting Member States' freedom to set VAT rates. These rules were designed over two decades ago in the context of a definitive VAT system based on the origin principle. They were intended to guarantee, above all, the neutrality, simplicity and workability of the VAT system and featured, notably, lower limits on the levels of the VAT rates and a list of the goods and services which could benefit from reduced rates.
However, the decision to implement a definitive VAT system based on the destination principle requires a reflection about the consequences to be drawn for the rules governing VAT rates. In line with the subsidiarity principle, Member States could be granted greater autonomy on setting VAT rates, subject to appropriate safeguards to prevent excessive complexity and distortion of competition, and to ensure that the operation of the Single Market is not affected.
The Commission has put forward two options for giving Member States more freedom. However, the degree of autonomy on rates to be granted to Member States is not purely a technical matter, but requires political discussion. The Action Plan aims at initiating such political discussion with the Member States in the Council, as well as in the European Parliament to allow the Commission to submit, in 2017, detailed legislative proposals based on a mandate from the Council.
See the infographic on page 4 .
Digital Single Market - Modernising VAT for cross border e-Commerce
On 1 December 2016, the Commission adopted a package of proposals to modernise VAT for cross border e-Commerce. See the dedicated webpage.
Generalised reverse charge mechanism
On 21 December 2016, the Commission adopted a Proposal for a COUNCIL DIRECTIVE as regards the temporary application of a generalised reverse charge mechanism in relation to supplies of goods and services above a certain threshold.
The measure is intended to help Member States particularly affected by fraud to fight against carrousel fraud. It fulfils the commitment made by the Commission at the ECOFIN Council held in June 2016 when agreeing on the overall anti-fraud policy within the EU and the Anti-Tax Avoidance Directive.
The Commission reiterates the risks it identifies as regards new types of fraud, increase in compliances costs to business and spill-over-effect. Therefore, the Commission would closely monitor the effects on the internal market and if needed take necessary action. The Commission calls on the Member States to pay attention to the potential negative effects of the application of the generalised reverse charge mechanism and continue working on improving the VAT system in the way suggested in its VAT Action Plan.
- Study on Implementing the ‘destination principle’ to intra-EU B2B supplies of goods
- 2014 Staff Working Document on the implementation of the definitive VAT regime for intra-EU trade
- Digital Single Market - Modernising VAT for cross border e-Commerce
- 2011 Communication on the Future of VAT and Follow-up
- Fight against tax fraud and tax evasion
- VAT Rates
- EU VAT Forum
- Guide on administrative cooperation between Member States and businesses
- Tax administration and compliance
- E-learning modules on VAT