On 7 April 2016 the European Commission released its VAT Action Plan, which provides a pathway to the creation of a single Value Added Tax (VAT) area in the European Union. The Commission considers the current VAT system to be a core element of the single market that should assist in facilitating trade within the single market. However, the Commission believes that the VAT system has been unable to keep pace with the development of the globalized modern digital and mobile economy.
Indeed, the VAT Action Plan contains some harsh judgments of the current VAT regime: in particular that it is too complex, fragmented and overexposed to fraud. The Commission believes the regime needs to be simplified for business, overhauled to eliminate the risk of fraud (with current estimated revenue lost due to fraud at EUR 170 billion), and generally increased in efficiency, in particular for the opportunities presented by digital technologies.
Nevertheless our view is that whether the VAT Action Plan will result in new legislation cannot be reliably predicted. The (anticipated) opposition of the Member States’ tax authorities may challenge many of the proposals it contains. Nonetheless, the VAT Action Plan shows the willingness and the motivation of the Commission to use the VAT regime to develop the EU’s single market.
The VAT Action Plan and e-commerce
The VAT Action plan covers a range of different aspects which the Commission considers needs to be revised in order to mitigate the downsides of the current VAT regime. The major theme is the elimination of fraud due to tax exempt cross-border supplies. The Commission wants to assist the Member States’ tax administrations to establish more modern and efficient arrangements relating to the compliance and administration of VAT.
With regard to e-commerce, Commission will present a legislative proposal by the end of 2016 to modernize and simplify VAT for cross-border e-commerce, in particular for SMEs. Further related legislative proposals will be published in 2017.
The 2016 proposal will include:
- extending the One Stop Shop mechanism to EU and non-EU countries online sales of tangible goods to end consumers;
- introducing a common EU-wide simplification measure (VAT threshold) under which no registration is required;
- allowing for home country-checks, including single audits of cross-border business; and
- removing the VAT exemption of small consignments from non-EU suppliers (i.e., introduction of a VAT taxation from third country suppliers).
The VAT Action Plan and the DSM
Establishing a new taxation system for B2B cross-border supplies is a major change to the current VAT regime. The business making the supply would be responsible for collection of VAT on its supply in a foreign Member State (as opposed to the current system of tax-exempt B2B cross-border supplies). However, the Member State in which the goods have been delivered would receive the VAT collected in the other Member State in which the business making the supply is resident. As a consequence, a system needs to be established pursuant to which Member States will work together with regard to the collection and transfer of VAT triggered by cross-border supplies. The Commission intends to accompany this new approach with improved cooperation between EU and non-EU countries, and enforcement of the efficiency of the tax administration of Member States.
Furthermore, the Action Plan addresses the issue of different VAT rates (standard rate and reduced rate) referring to the example of e-books which cannot benefit from reduced VAT rates available for physical publications. Two proposals (updating a list of reduced rate products only or, alternatively, giving Member States full discretion to set VAT rates accompanied by a set of basic rules) are included and are subject to further political discussions.
Preliminary assessment of the VAT Action Plan
The Action Plan demonstrates the intention of the Commission to tackle the current issues of the VAT system, in particular regarding cross-border e-commerce. The measures proposed show that the Commission aims to reduce VAT fraud, and it does not focus exclusively on the Digital Single Market. A substantial change in the tax treatment of cross-border supplies for online-sales to end consumer and B2B supplies can be expected from the measures proposed. Third country suppliers who are using the small consignment exemption rule will have to register and levy VAT on their supplies.
The Action Plan is a noteworthy demonstration of the Commission’s desire to reform the current VAT regime. However, reading between the lines, the Commission also signals that it is well aware of the Member States’ reluctance to shift their autonomy over VAT arrangements to the Commission.
It can be predicted that many of the Action Plan’s proposals will face significant resistance from the Member States’ tax administrations. Many of the interesting and helpful aspects of the VAT Action Plan may not be continued in the legislation process. However, the broad thrust of the Commission’s analysis regarding the status of the VAT regime in a digitized world will ring true for many. This being so, all stakeholders should assist in achieving a modernized VAT regime which can form a basis of a real digital single market in Europe by removing the current administrative and legal hurdles for the e-commerce sector.