INSIGHT: VAT Aspects of the EU’s Package for Fair and Simple Taxation

We live in challenging times. Covid-19 continues to cause disruption to economies around the world and it is not clear when there will be a return to the pre-Covid norm, if ever. Alone, it would be a significant barrier for governments, businesses and individuals to overcome but it joins an already long list of challenges that must be faced: the climate emergency, a digital revolution, growing inequality and a geopolitical shift.

It is against this background that the European Commission has set out its Package for Fair and Simple Taxation which has three elements:

• Action Plan for fair and simple taxation supporting the recovery;
• revision of the Directive on Administrative Cooperation (DAC 7); and
• communication on Tax Good Governance in the EU and beyond.

Tax Action Plan

The Tax Action Plan covers a number of taxes but there are a several measures that particularly focus on value-added tax (VAT). This is unsurprising given that the EU VAT Gap, which is the difference between the expected revenues and the amount of VAT actually collected, was 137 billion euros ($161 billion) in 2017. Crucially, this included an amount of 50 billion euros in respect of cross-border fraud which is higher than the estimated 36 billion euros lost to corporate tax evasion and evasion of 46 billion euros by individuals in respect of their personal taxes.

The Covid-19 crisis means that governments will receive reduced tax revenues at a time when their expenditure on public health and supporting the economy and citizens has reached unprecedented levels. The need to increase revenue is therefore paramount and collecting amounts lost to fraud is clearly a priority as this reduces the need to increase the burden on compliant businesses and individuals by increasing taxes.

This new package sits along existing initiatives such as the Action Plan on VAT which was launched by the Commission in 2016 and is still in the process of being implemented with several significant measures not yet in place. Covid-19 has had an impact already on one of these measures with the E-Commerce Directive being delayed by six months to July 1, 2021. This changes the place of supply rules for intra-EU B2C supplies of goods so that VAT is due in the country of delivery for all but the very smallest businesses. This will result in considerably more businesses having to account for VAT across the EU and thus requires an accounting mechanism to minimize the administrative burden. This is to be achieved by the extension of the existing Mini One Stop Shop (MOSS) which currently applies to intra-EU B2C supplies of telecoms, broadcasting and electronically supplied services into a wider ranging One Stop Shop (OSS).

There is speculation that the e-commerce changes may be delayed further due to problems with a number of member states not being ready to implement the new regime despite the delay.

There are 25 initiatives in the plan which will be implemented up to 2024 in order to make taxation fairer, simpler and in line with modern technologies. The measures can be grouped into a number of categories:

• Simplification: to reduce obstacles and minimize administration for businesses in the Single Market to improve competitiveness and contribute to economic growth;
• Compliance: to help tax authorities to collect the tax that is due by enforcing existing rules and improve compliance;
• Digitalization: to help tax authorities better exploit existing data and share new data more efficiently, in a way which will improve the enforcement of tax rules and help combat tax fraud and evasion more effectively; and
• Taxpayers’ rights: by increasing awareness of their rights under EU law, simplifying their obligations and facilitating compliance.

Revision of the Directive on Administrative Cooperation

In an increasingly digital world in which intra-EU e-commerce continues to grow rapidly, administrative cooperation between member states is key in ensuring that businesses account for VAT in the correct place. Provisions already exist but these are not being uniformly utilized by member states and requirements vary across the EU.

Digital platforms are increasingly being used to sell goods and are consequently being targeted so that tax authorities can collect tax efficiently. This is being applied in the U.K. post Brexit and is also a feature of the OSS for non-EU sellers where rather than seeking to collect tax from individual sellers, the platform has the liability to account.

Platforms collect huge amounts of data in respect of their sellers which can provide tax authorities with crucial information on the amount of VAT due. We have seen some member states use data from these platforms in the past but the Commission proposes to extend its transparency rules so that digital platforms will have to provide detailed information which will be automatically shared between member states. Platforms will have to report to a single member state and the proposed date of implementation is January 1, 2022.

Communication on Tax Good Governance in the EU and Beyond

This focuses on promoting fair taxation, preventing unfair tax competition and promoting the application of internationally agreed standards. It proposes reform of the Code of Conduct which looks at harmful tax practices within the EU and improvements to the EU list of non-EU countries that fail to meet internationally agreed standards.

Simplifying VAT—Single EU VAT Registration and Simplifying Reporting

The overriding principle of the Single Market is that it should be as easy to do business with customers in other member states as it is in their own. However, the VAT compliance obligations for businesses trading across the EU are frequently not in line with this principle. The European Commission has long sought to ease VAT compliance obligations for businesses trading across the EU by simplifying administrative burdens but this always has to be in the context of ensuring that member states are able to collect the amount of tax that is due to them. This has met with varying degrees of success.

The VAT Directive sets out overarching principles but gives member states choices in certain areas such as who has the liability to account for VAT, which results in challenges for businesses in determining their compliance obligations—they always have to consider the position in each country. Once they have done this, a business has to negotiate the complexities of the local system to be compliant. Having a liability to be registered in multiple member states means repeating this process which is clearly not in line with the concept of a Single Market, hence the Commission’s desire to simplify to bring the reality into line with the principle.

Once registered, the VAT return format differs substantially in each country, adding complexity. The desire to simplify resulted in the proposal for the single VAT return which would have standardized the information required by having common fields. Unfortunately, this did not come to fruition but other initiatives, such as the MOSS have been more successful which has resulted in its wider application. The concept of an OSS is crucial to the proposed future of VAT in the EU in a number of areas as it allows VAT to be accounted for on transactions in multiple member states to a single tax authority.

The OSS that will be introduced in July 2021 represents a simplification from the current requirements but will require careful consideration as to whether it provides the most appropriate solution. If it is used, it will require changes to current systems and processes in order to be implemented correctly. However, it only covers intra-EU supplies so local supplies, for example from a warehouse in a member state, would require a further VAT registration. The Tax Action Plan seeks to address this by proposing to extend the OSS to all B2C supplies of goods and services across the EU. The Commission will also look at making the Import OSS, for B2C imports up to 150 euros, obligatory and review the threshold.

On VAT reporting, the Commission will propose legislation to modernize reporting obligations with an aim of quicker exchange of intra-EU transactional data which will possibly be in real-time. This would be accompanied by streamlining the mechanism for domestic transactions. It will also look at the need for further expansion of e-invoicing.

The Action Plan also includes the concept of a single EU VAT registration which could be used to sell goods and services anywhere in the EU. The proposal for this measure is to be introduced in 2022–23. Until these measures come into place, businesses will continue to have to fully consider where they are required to be VAT registered and having done so, ensure that they can meet their ongoing compliance obligations.

Future of VAT

It is clear that there will be considerable changes to how businesses account for VAT in the EU in the coming years. In addition to the proposed changes in the Tax Action Plan, the 2016 Action Plan on VAT proposed a definitive VAT regime for intra-EU B2B supplies which would fundamentally change how such transactions are treated.

Currently, there is an exemption in the member states of dispatch with acquisition tax due in the member state of delivery and this exemption has led to carousel fraud generating significant VAT losses. The definitive system would remove this exemption and require the supplier to account for VAT in the country of delivery. This would be done by a further extension to the OSS with the change proposed for July 1, 2022. However, there is serious doubt as to whether this will be achievable given the delay to the implementation of the B2C OSS to July 1, 2021 and the potential for further delay to 2022.

In addition, there is considerable concern as to whether this mechanism will provide the appropriate solution—it removes the scope for fraud in its current guise by taxing the intra-EU supply but has the potential to allow other fraudulent activity to take place. It also utilizes the concept of the OSS which has, to date, been tested with relatively small amounts of VAT and whilst the Commission lauds it as a success, it is not entirely clear how efficient it has been in securing VAT revenues for tax authorities and therefore its suitability for use on such an expanded scale.

The other significant change will be the increasing use of technology by tax authorities across the EU and the requirement for Continuous Transaction Controls (CTC) to provide detailed transactional data often in real-time.

Implementation of CTC across the EU has been sporadic to date with a significant issue being the different systems in place in each member state that has introduced requirements. This is set to continue in the future with new mandates in the coming years. The EU recognizes the challenges that this creates for businesses but its legislative proposals for modernizing VAT reporting will not be published until 2022–23 so it will therefore be some time if they come to fruition, if indeed they do. In the meantime, businesses will have to navigate the maze of requirements ensuring they are met in all of the countries in which they have obligations.

Andy Spencer is Director of Professional Services at Accordance, U.K.

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