Why does the EU's VAT system need reform?

The current VAT rules for cross-border trade between businesses in EU Member States date back to 1993, just after the creation of the Single Market. At the time, they were meant to be transitional. The rules do not take into account technological developments, changes in business models or the globalisation of the economy, making them outdated. Crucially, the current VAT regime exposes EU countries to an unacceptable and damaging level of VAT fraud. Revenue losses from this type of fraud are estimated at around €50 billion annually in the EU.Money which could have been used to build schools, roads and hospitals is instead spirited away by criminals to finance organised crime, and possibly terrorist organisations. Member States recently identified VAT fraud as one of their top ten priorities when it comes to the fight against organised and serious international crime (see separate section on fraud).

The VAT reform proposed today would make the system more robust, simpler and fraud resilient, a system based on increased trust and cooperation between tax administrations. The Commission wants a VAT system that helps European companies to compete in global markets. Compliance costs for all businesses should also be reduced by simplifying and modernising the VAT obligations and VAT collection process.

A definitive VAT system for the EU has been a long-standing commitment of the European Commission. Recently, the Commission's VAT Action Plan explained in detail the need to come to a EU single European VAT area that is simpler and fraud-proof. The rules also need to be rebooted so that businesses can reap all the benefits of the Single Market.

What is the Commission proposing today?

The Commission is today proposing a series of fundamental principles and key reforms for the EU's VAT area which will improve and modernise the system for governments and businesses alike. Once agreed, these principles or 'cornerstones' will form the backbone of a robust EU-wide system which can keep pace with today's digital and mobile economy. The new system would also be much more fraud-proof.

The cornerstones which will be sent to Member States for agreement include:

• Tackling fraud: VAT should be charged on cross-border trade between businesses inside the EU. 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.
• One Stop Shop: 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, as is already the case for all sales of e-services.
• Greater consistency: A move to the principle of '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. This has been a long-standing commitment of the European Commission, supported by Member States and the European Parliament. It is already in place for sales of e-services.
• Less red tape: Simplification of invoicing rules, allowing sellers to prepare invoices according to the rules of their own country even when trading across borders. Companies will no longer have to prepare a list of cross-border transactions for their tax authority (the so-called "recapitulative statement").

Today's proposal also introduces the notion of a Certified Taxable Person – a category of trusted business who will benefit from much simpler and time-saving rules.

THE DEFINITIVE VAT REGIME

What is the biggest change?

VAT is a tax levied on most goods, products and services available for purchase in the EU. In principle, everything we buy includes VAT in the price. When selling domestically (i.e. not across borders) companies also pay VAT on the goods that they buy and which they plan to sell on to another business or to consumers. VAT is not currently charged on sales between businesses in different EU Member States.

Today's proposal envisages a future VAT system where VAT will be charged on sales that are made across borders to another country in the EU. The rate applicable in the country of destination will be charged.

The VAT on cross-border sales would be collected by the tax authority of the originating country and transferred to the country where the goods or services are ultimately consumed. In order to allow a soft transition for tax administrations and businesses, the first step of the definitive VAT system will focus only on transactions in goods.

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