In focus: An EU VAT system tailored to the internal market and today's challenges
Donato Raponi looks at the Eu VAT system and how it needs to be ugrently modernised.
The reform of the VAT system has been the subject of contentious discussion for many years. The common EU VAT system which currently applies dates back to the 1970’s and since then it has not been significantly modified. The change of the place of supply of electronic services and the implementation of an electronic one-stop-shop constitute a rare exception.
Yet the current system urgently needs to be modernised because it does not take account of technological developments, globalisation, digitalisation of the economy and the emergence of new business models.
The Commission has for many years stressed the need for a significant reform of the EU VAT system. It has proposed concrete actions to Member States. The Green Paper presented in 2010, followed by a Communication in 2011 to implement a simpler, more efficient and robust system has been an important step in this respect, particularly as regards the decision to abandon the origin principle for the taxation of intra-EU transactions. It is regrettable that it was not fully acknowledged by Member States. While it is true that the EU VAT system has been a model at global level, one can rightfully fear that it becomes an example for its archaism!
The EU VAT system was decided by six member states in 1967 and designed in 1977 by 9 member states. The fact that its reform requires the agreement of twenty-eight member states demonstrates the difficulty of the undertaking!
Priority needs to focus on the simplification of VAT compliance obligations for businesses. It is important to recall that the VAT system is based primarily on the key role played by taxable persons. A taxable person collects the VAT — which is normally paid by the final consumer – on behalf of the State. Furthermore he has to fulfil this task for free — in fact it is worse as he bears a cost estimated between 3 to 7 % of the VAT dueand in addition in doing this he takes a significant risk to the extent where he does not correctly perform his task he can face significant penalties! This is the reason why the taxable person should be treated fairly, as a partner. Reducing compliance costs for the taxable persons should be a priority, in particular for small and medium sized enterprises (SMEs). Moreover treating the “tax collector” fairly would constitute a huge incentive to be more compliant. The fight against fraud should be based primarily on prevention rather than on repression.
In this respect, this is the key role that the VAT Expert Group and the VAT Forum try to play. Their primary goal is to improve the relationship between businesses and tax administrations.
The simplification of the VAT system and the fight against VAT fraud also depends on the implementation of the definitive VAT system for intra-EU supplies. Maintaining the coherence of the VAT system - its main characteristic being the fractioned payment – is a key issue. Based on a recent study, it seems obvious that the taxation of intra-EU supplies is the solution which would guarantee this coherence. It has been estimated that it would reduce cross-border fraud by about 40 billion Euros (80 % of the carousel fraud) a year in the EU.
The question of VAT rates is only the consequence of the choice of a system based on the destination principle. Whereas the approximation of VAT rates was an essential condition for the establishment of a VAT system based on the origin principle, it is clear that such an approach is no longer relevant. Moreover the present VAT rates rules do not reflect the technological progress for certain products such as books and newspapers. Giving greater freedom to Member States would not hamper the functioning of the VAT system in the EU if it is properly framed.
The modernisation of the European VAT system should take into account the explosion of cross-border ecommerce and new patterns of economic activity. The consumer buys more on-line, he purchases outside his country, inside and outside the European Union, he makes use of services provided by new actors, he pays with credit cards, he uses virtual currencies. In order to facilitate trade, these new developments require a deep review of the existing rules, especially the way the VAT is declared and paid.
Continuing to collect VAT as designed fifty years ago makes no sense and would in any case harm the traders but also the national tax administrations. Making greater use of the new technologies is the only way ahead, there are no alternatives.
The Action Plan of the Commission should invite the Member States to reflect and take decisions.
By shilly-shallying, wondering and dilly-dallying, Member States have given the legislative power to the European Court of Justice, which is frequently called to fill the shortcomings of the European legislator – namely the Member States. *Editor’s note: All views expressed in this article are those of the author and are by no means binding upon the European Commission