VAT system gets total overhaul
Commission proposes deep reforms to stop cross-border fraud
6 October, 2017
The Commission launched last Wednesday plans for the biggest reform of EU VAT rules in a quarter of a century, the EU press service reported. The change aims at improving and modernising the system and lessening the loss, estimated at about €150bn of VAT annually. Of this, around €50bn is due to cross-border VAT fraud. With the proposed reform, the amount would be reduced by up to 80%. To change this, the Commission proposes to tax sales of goods from one EU country to another in the same way as when goods are sold within individual Member States.
The proposed VAT reform would also make the system more robust and simpler to use for companies. Businesses trading cross-border currently suffer from 11% higher compliance costs, compared to those trading only domestically. Simplifying and modernising VAT should reduce these costs by an estimated €1bn.
“Twenty-five years after the creation of the Single Market, companies and consumers still face 28 different VAT regimes when operating cross-border. Criminals and possibly terrorists have been exploiting these loopholes for too long, organising a €50bn fraud per year. This anachronistic system based on national borders must end! Member States should consider cross-border VAT transactions as domestic operations in our internal market by 2022,” Economy Commissioner Pierre Moscovici said.
The proposals will seek agreement on four fundamental principles of a new definitive single EU VAT area – tackling fraud, One Stop Shop, greater consistency and less red tape. If agreed, VAT will now be charged on cross-border trade between businesses. Currently, this type of trade is exempt from VAT, providing an easy loophole for unscrupulous companies to collect VAT and then vanish without remitting the money to the government.
In the future, it will be simpler for companies that sell cross-border to deal with their VAT obligations thanks to a 'One Stop Shop'. Traders will be able to make declarations and payments using a single online portal in their own language and according to the same rules and administrative templates as in their home country. Member States will then pay the VAT to each other directly.
The third principle bets on the 'destination', whereby the final amount of VAT is always paid to the Member State of the final consumer and charged at the rate of that Member State. The reform also provides a simplification of invoicing rules, allowing sellers to prepare invoices according to the rules of their own country even when trading across borders.