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INSIGHT: VAT and the Virus

April 9, 2020, 7:01 AM

Once again, the EU, in the midst of an unforeseen crisis, finds itself under immense structural pressure.

How will the bloc manage the conflict between the different needs of its member states, now that those needs have become life and death matters? As the Covid-19 pandemic began to grip in earnest and the death count started its inexorable and appalling rise, the prognosis did not look good.

Free movement arrangements collapsed as borders between members states were closed; Germany and France were accused of withholding vital medical supplies from Italy. Speaking a few days ago, Ursula von der Leyen, the new president of the European Commission, was philosophical, trying to be both honest and hopeful about the EU’s response: “it’s in our own hands. At the beginning, we looked into the abyss but then we quickly saw positivity and cohesion in the crisis.”

Von der Leyen’s emphasis on “cohesion” may strike one as a little odd in the circumstances; it sounds almost as if cohesion were not merely a means to the alleviation of suffering, but a valid end in itself. In truth, though—and whatever its moral savor—Von der Leyen was striking a familiar note: opportunist technocratism has been part of the EU’s ideological make up since its very inception.

“The problems that our countries need to sort out are not the same as in 1950. But the method remains the same: a transfer of power to common institutions, majority rule and a common approach to finding a solution to problems are the only answer in our current state of crisis.”

This was Jean Monnet—a brilliant bureaucrat and the man considered by many to be the EU’s architect—writing in 1974. Monnet believed that European integration would always be driven by crisis (the originating catastrophe being the second world war): it would take major disruptions for narcissism about the small differences of national identity to be overcome and for the European polity to accept the “only answer” to its problems: “common institutions, majority rule.”

Indeed, a core assumption of the engineers of the euro (Jacques Delors among them) was that financial turbulence would inevitably lead members of the common currency to adopt some kind of unified treasury function. Debt and risk would then be pooled and shared across the continent, in the purest expression of European solidarity.

North-South Divide

Of course, when the last crisis hit in 2007–08, there was no such revolutionary moment. Instead, all the stereotypes of national character were put on intense display during the interminable sturm und drang over austerity and a potential Greek default. Brexit may have provided a paradoxically unifying distraction, but the conflict between the EU’s supposedly feckless suffering south and its allegedly calculating numb north has never been resolved.

Tax policy has, naturally, always been a particular concern of the EU’s harmonizing and integrating tendency. Von der Leyen has herself recently expressed the aspiration to see the EU’s tax decision making become a matter of majority voting, rather than requiring unanimous assent from member states.

The fiscal reaction of member states to the pandemic shows how far from that endpoint we may still be. VAT is the EU’s very own tax: invented in Europe, it has become an essential component of both the EU’s trading framework and its social model (VAT enables huge amounts of member state spending).

One might have expected, then, some kind of “cohesion” in the European VAT response to Covid-19. The European Commission suggested earlier this month that member states consider implementing a consistently applied VAT payment holiday. In practice though, measures have been individual, guided by the immediate needs and culture of the member state concerned, and consequently diverse. There cannot be any definitive central diktat from Brussels.

Member states have indeed turned to VAT as an economic policy lever, but the lever pulled is pulled to a different level in every case.

Harmony, Discord and Statistical Differences

Italy swiftly announced the suspension of VAT payment deadlines with a due date between March 8, 2020 and May 31, 2020 to June 30, 2020.

At present, this appears to be restricted to resident companies (although there is ongoing debate about whether nonresident businesses may also be included); by contrast, businesses will have to provide evidence to the French tax authority of being affected by Covid-19 in order to secure a direct tax payment suspension; it is not yet clear if this will be extended to VAT.

The Spanish, notes my colleague Russell Hughes, “have introduced the possibility for certain businesses to apply for a deferral of the payment of the VAT due for returns that have to be submitted in the period from March 13, 2020 to May 30, 2020”; whereas in Hungary “businesses may apply for tax (including VAT) payment deferrals.”

The Bulgarian tax authorities have explicitly said that the deadlines for VAT returns and payments will not be extended, whereas Greece is “planning for a four-month VAT payment holiday regarding VAT return payments due up to April 30, 2020.” It is, to put it mildly, a mixed bag (a country-by-country summary is available to view here).

Fundamental differences among EU member states are currently on all too lurid display. Coronavirus death rates vary sickeningly widely, with thoroughly unharmonized statistical methodologies possibly distorting the awful numbers, along with variations in styles of healthcare provision, attitudes and capacity for testing and widely different cultures of family life.

In France, Spain and Italy “lockdowns” tighten week by week; whereas leading Dutch and Swedish epidemiologists speak of the ultimate need for “herd immunity” to repel the virus, and suggest less restrictive controls.

Southern Europe has again appeared to be hit harder than the north; and EU integrationists had hoped that the clear image of unbearable human suffering, a crisis in full flow, would finally provoke (or shame) northern Europe—and Germany and the Netherlands in particular—into agreeing “a transfer of power to common institutions.”

The European economy, argued France, Italy and Spain, required a huge boost; their proposed means of delivery was through “corona bonds,” a common debt instrument, which would allow the south to take advantage of the creditworthiness of the north. But the video conference held last Thursday to discuss the package descended into increasingly familiar acrimony. The Dutch Prime Minister has said that he will never agree to such a plan; the Italian Prime Minister has implied that he cannot see how the EU can continue without one. The distancing was not sociable.

The leaders agreed to meet again in two weeks, where some kind of fudge will be anticipated, but the trick of unity is becoming harder and more painful to pull off.

In this context, it will be interesting to see how far the European Commission is willing to push on with its plans to introduce its one-stop-shop (OSS) VAT e-commerce package on January 1, 2021.

The laudable aim of the package is to simplify VAT reporting around EU e-commerce (particularly as it affects marketplace sellers and companies based in one member state selling directly to consumers in another); improve tax collection; and limit the opportunities for fraud. But the timing of the project is now under pressure, and not only from the general impact of the coronavirus.

The Brexit Deadline Approaches

January 1, 2021 happens to be the date the U.K. is due to exit the Brexit transition period, which (if it happens) means that authorities will be adapting to the new arrangements with the estranged behemoth a few miles away.

Several tax authorities, most notably the Dutch, have expressed the view that they may in any case not have the technology ready by the deadline. One of the great long-term European Commission strategic objectives is met by the package: it introduces, through the means of the OSS, a significant level of mutual tax collection by member states. Yet VAT payment schedules have just been thrown into short- and medium-term disarray by member state responses to Covid-19.

The U.K. has been praised for its action on VAT payment deferral, but has had to exclude payments to the existing EU mini-one-stop-shop as those payments are not its money to defer. And as the video-summit failure showed, the politics around mutual collection are likely to become rancorous. Still, the Commission may fear delay more than disorder: and affected businesses (including U.K. businesses) should start planning how they will meet their new EU OSS obligations in good time, or else potentially face a greatly increased VAT compliance burden, with VAT registration requirements in every EU member state into which they sell, irrespective of value.

After the grinding confusion of the years of Brexit debate, British business has, as mentioned above, generally applauded the directness of Chancellor Rishi Sunak’s Covid-19 interventions—not least his holiday for VAT payments due in the period from March 20, 2020 to June 30, 2020. (The deferral of the VAT due is until March 31, 2021). But another melancholy by-product of the pandemic is that Sunak’s previous aspiration for a “global Britain,” a country taking advantage of hyper-flexible supply chains around the world, seems (whatever its original merits) already from a different era. We can expect the pressure of politics to draw us closer to home. And that means, whether the U.K. desires it or not, new engagement with Europe and the EU.

Nicholas Hallam is Chairman of Accordance.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.