Annexes to COM(2017)566 - Follow-up to the Action Plan on VAT - Towards a single EU VAT area - Time to act

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dossier COM(2017)566 - Follow-up to the Action Plan on VAT - Towards a single EU VAT area - Time to act.
document COM(2017)566 EN
date October  4, 2017
agreement on 8 June 2017. The European Parliament will now have

to give its consent before the Regulation can be adopted.

See: http://www.consilium.europa.eu/en/press/press-releases/2017/06/08-eppo/

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criminal investigation and prosecution of VAT fraud connected with the territory of two or more Member States that involves a total damage of at least EUR 10 000 000.

As regards international relations, the Commission has been negotiating an EU-Norway Agreement for administrative cooperation, combating fraud and recovery of claims in the field of VAT. The Agreement will enter into force after the adoption by the Council of the Decisions for its signature and conclusion. Furthermore an administrative arrangement for cooperation was signed between the Commission services and the Intra-European Organisation of Tax Administrations (IOTA) in order to exchange best practices between the Member States and the IOTA members.

Finally, various Member States have requested support to enhance tax administration capacity. Support actions under the Structural Reform Support Programme are closely coordinated under the FISCALIS programme13.

2.2.2     Temporary derogation

On 21 December 2016, the Commission fulfilled its commitment to present a proposal for a Council Directive14 as regards the temporary application of a generalised reverse charge mechanism in relation to supplies of goods and services above a threshold of EUR 10 000 per invoice. Under such a system, VAT is ‘suspended’ along the whole economic chain (between businesses) and is charged only to final consumers. This measure is intended to help Member States particularly affected by fraud to fight against carousel fraud15 while a comprehensive and EU-wide solution is put in place. Negotiations are ongoing in Council.

3. IMPLEMENTATION OF UPCOMING PROPOSALS

3.1        Towards a robust single European VAT area

3.1.1      Implementing the first step of the definitive VAT system

As announced in its VAT Action Plan, the Commission proposes to replace the current transitional arrangements for the taxation of trade between Member States by definitive arrangements. In line with requests of the European Parliament16 and the Council17, this

Member States can request the Commission for technical assistance in tax policy and tax administration

matters. These requests are coordinated, analysed and monitored by the Structural Reform Support Service

(SRSS). Such assistance can be financed under the Fiscalis Programme.

Proposal for a Council Directive amending Directive 2006/112/EC on the common system of value added tax

as regards the temporary application of a generalised reverse charge mechanism in relation to supplies of

goods and services above a certain threshold (COM(2016)811 of 21.12.2016)

See: https://ec.europa.eu/taxation_customs/sites/taxation/files/com_2016_811_en.pdf

Carousel fraud is a particular type of VAT fraud committed by organised crime gangs which exploit the fact

that, under the transitional arrangements, trading between EU jurisdictions is VAT-free.

European Parliament Resolution of 13 October 2011 on the future of VAT (P7_TA(2011)0436):

http://www.europarl.europa.eu/sides/getDoc.do?type=TA&language=EN&reference=P7-TA-2011-0436

Council conclusions on the future of VAT - 3167th Economic and Financial affairs Council meeting,

Brussels, 15 May 2012 (see in particular point B 4):

http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/130257.pdf

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definitive VAT system will be based on the principle of taxation in the Member State of destination18.

In order to allow a soft transition for tax administrations and businesses, this change will be made through a gradual two-step approach19.

As a first legislative step, the VAT treatment of intra-Union B2B supplies of goods would be settled. The implementation of this first legislative step would be further divided into two sub-steps (see Sections 3.1.1.1 and 3.1.1.2 below), comprising a set of proposals to be adopted by the Commission this year (sub-step 1) and another one to be adopted next year (sub-step 2).

As a second legislative step, the new VAT treatment would be extended to all cross-border supplies, therefore also covering supplies of services. The implementation of this second legislative step would be proposed by the Commission after due monitoring of the implementation of the first step, the functioning of which would be evaluated by the Commission five years after its entry into force. The definitive system would then be fully implemented.

After due consultation of all stakeholders and detailed analysis of the different options to implement the destination principle, the Commission opted for taxation rules according to which, for intra-Union cross-border supplies of goods, the supplier would charge the VAT to his customer at the rate of the Member State of arrival of the goods. The VAT would be declared and paid in the Member State where the supplier is established via a one-stop-shop mechanism. However, during the first step of the definitive VAT system and as an exception to this general principle20, if the customer is certified as a compliant business by its tax administration (a possibility also opened to SMEs), this customer would continue to be liable for the VAT on goods purchased from other Member States as is currently the case21.

Additionally, Council conclusions22 and discussions with the Member States and other stakeholders on the VAT Action Plan showed a need to introduce certain short-term improvements to the current VAT system ("quick fixes"). Those four quick fixes are proposed this year together with the legal cornerstones of the definitive VAT system (sub-step 1 below). A proposal in 2018 (sub-step 2 below) will further provide detailed technical provisions for the actual implementation of the first step of the definitive VAT system.

A "destination-based" VAT system means that goods traded across borders are taxed in the country where

they are consumed (the destination country) and at the destination country’s tax rate, rather than where they

are produced (the origin country).

See Section 4 of the VAT Action Plan.

See footnote 27.

In the second legislative step of the definitive VAT system, taxation would cover all cross-border supplies of

goods and services (and therefore the supplier, and not the customer, would be liable for the VAT on all

goods and services purchased from other Member States) so that all supplies of goods and services within the

single market, either domestic or cross-border, will be treated the same way.

Council conclusions of 8 November 2016 on Improvements to the current EU VAT rules for cross-border

transactions (Doc. 14257/16 FISC 190 ECOFIN 1023);

See: http://data.consilium.europa.eu/doc/document/ST-14257-2016-INIT/en/pdf

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3.1.1.1.      First sub-step: the October 2017 definitive VAT

system package

The October 2017 definitive VAT system package consists of the following three pieces of legislation:

A] A proposal for a Directive amending the VAT Directive

The proposal introduces the following:

a) The notion of certified taxable person, modelled on the existing concept of authorised

economic operator in the field of customs. The concept of certified taxable person allows for an attestation that a particular business can globally be considered to be a reliable taxpayer. Certified taxable persons would benefit from certain simplifications23. The proposal lays down the criteria to be fulfilled in order to be granted the certified taxable person status, the cases of exclusion, the Member State competent to grant and withdraw the certified taxable person status, the right of taxable persons to appeal against administrative decisions on this matter and the obligation of mutual recognition by Member States.

b) Three "quick fixes" requested by the Council, namely:

- simplification and harmonisation of rules regarding call-off stock arrangements24;

- recognition of the VAT identification number of the customer as a substantive condition in order to exempt from VAT an intra-Community supply of goods25;

simplification of rules in order to ensure legal certainty regarding chain

transactions26.

Simplifications provided for by certain "quick fixes" - see point A], b) and point B], and the simplification regarding the liability rule for certified taxable person-customers under the new taxation system – see point A], c).

Call-off stock refers to the situation where a supplier moves stock to a Member State where he is not established, in order to sell it at a later stage to an already known buyer. Currently this gives rise to the following complex treatment: (i) a deemed intra-Community supply made by the transferor, (ii) a deemed intra-Community acquisition in the Member State of arrival of the goods made by the transferor who has to register there and (iii) a domestic supply.

Providing a valid VAT identification number of the purchaser would become a substantive condition for the supplier to apply the VAT exemption in case of intra-Community supplies of goods. This modification would allow for better monitoring of the flow of goods through improved quality of exchanged recapitulative statements (recapitulative statements to be submitted by the supplier and exchanged between Member States via the VIES system include the VAT identification number of the acquirer).

Chain transactions are successive supplies of the same goods where the goods supplied are subject to a single intra-Community transport between two Member States. In this situation, the transport is to be attributed to only one supply within the chain so as to determine to which of the transactions the exemption for intra-Community supplies should be applied in accordance with Article 138 of the VAT Directive. Member States have asked for legislative improvements in order to increase legal certainty for operators in determining the supply within the chain of transactions to which the intra-Community transport must be ascribed.

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Those "quick fixes" would only be available to certified taxable persons (except the "VAT number quick fix" which, by its own nature, cannot be so restricted).

c) The legal cornerstones of the definitive VAT system. They include, in particular, the

introduction of the principle of taxation in the Member State of destination and of the liability of the supplier as a rule (except where the customer is a certified taxable person)27. They also introduce a One Stop Shop (OSS) that would allow suppliers to account for the VAT due on their supplies of goods to other Member States in their Member State of establishment. This OSS would allow offsetting output VAT due on supplies made against input VAT incurred on purchases made within the EU.

B] A proposal amending Implementing Regulation (EU) No 282/2011 to introduce the fourth "quick fix"

This proposal introduces the fourth “quick fix” required by the Council, namely, the harmonisation and simplification of rules on the proof of the intra-Community transport of the goods in order to exempt from VAT an intra-Community supply of goods. This simplification would only be available where a certified taxable person is involved.

C] A proposal amending the VAT Regulation on Administrative Cooperation

This proposal is needed to ensure the inclusion of the certified taxable person status in the VIES system28. It will provide the legal basis for an efficient technical IT tool allowing Member States and operators to immediately check electronically whether an operator has been granted that status.

3.1.1.2.      Second sub-step: the 2018 detailed technical provisions for the definitive VAT

system

The above mentioned legal cornerstones of the definitive VAT system would constitute the agreement of principle of the Member States to move from the current VAT transitional arrangements to a definitive VAT system based on the principle of taxation at destination. The Commission will adopt in 2018 a proposal for a Directive, accompanied by the relevant implementing measures, laying down the detailed technical provisions needed for the operation of the definitive VAT system.

The 2018 proposal will introduce the specific provisions for the implementation of the legal cornerstones. Implementing measures will also be proposed to form the basis of the IT developments necessary for the functioning of the new system by 2022.

Similar to domestic transactions, in intra-Union transactions in goods, the supplier would charge the VAT due (the one of the Member State of destination of the goods) to his customer. However, if his customer is a certified taxable person, he will not charge the VAT due to him. The customer will, as is currently the case, self-assess the VAT due in his domestic VAT return. For the purpose of these changes, the concept of "intra-Union supply of goods" will be introduced and the notion of "intra-Community acquisition of goods" will be abolished.

The VAT Information Exchange system (VIES) is an electronic means of validating VAT identification numbers of economic operators registered in the European Union for cross-border supplies of goods or of services. See more info on: http://ec.europa.eu/taxation_customs/vies/

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3.1.2.     Fighting VAT fraud today:

better administrative cooperation for faster results

Several recent press reports across Europe as well as investigations by national authorities have highlighted the decisive link between large-scale VAT fraud cases and organised crime. These have shown that the proceeds from the fraud are feeding money laundering schemes before being invested in other criminal activities, and possibly terrorism financing. In this context, and as recognised by the European Parliament29, the Member States30 and the European Court of Auditors31, the instruments for administrative cooperation in the field of VAT must be reinforced.

By November 2017 the Commission will table a legislative proposal to reinforce the existing instruments for administrative cooperation. One of the objectives will be to strengthen the Member States' capacity to conduct faster joint risk analysis of available information within Eurofisc, launch follow-up actions and share VAT intelligence with law enforcement bodies at EU level, such as Europol OLAF and the EPPO. The proposal should also contain measures to tackle the loopholes in the importation system under the so-called procedure 4232, by facilitating the systematic access to the relevant information by tax and customs authorities.

All these measures would help to build a greater mutual trust between tax administrations which will be needed to fully implement the definitive VAT system.

3.1.3.     Towards more efficient

tax administrations

By the end of 2017, the Commission will submit a separate package of two reports to the European Pa rl iam ent and Council :

• a report under Article 12 of Council Regulation 1553/89 on the procedures applied in the Member States for registering taxable persons and determining and collecting VA T, as well as on the modalities and results of their VAT control syste ms ;

• a report under Article 27 of Directive 2010/24/EU on the use of mutual assistance between Member States for the recovery of taxes — in particular VA T — that are not paid voluntarily by the taxable persons .

European Parliament resolution of 24 November 2016;

See:http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+TA+P8-TA-2016-0453+0+DOC+XML+V0//EN Council Conclusions of 25 May 2016;

See: http://www.consilium.europa.eu/press-releases-pdf/2016/5/47244641288_en.pdf Special Report No 24, Tackling intra-Community VAT fraud: More action needed, 2015; See: http://www.eca.europa.eu/Lists/ECADocuments/SR15_24/SR_VAT_FRAUD_EN.pdf

The procedure 42 is a customs procedure whereby goods are imported and put in free circulation in a Member State and it is clear at that time that the goods will leave the territory of that Member State to another Member State. As a result, the customs duties will be levied in the Member State of importation at the time of importation, but the VAT is exempted, since it will be paid later upon acquisition following the importation in the Member State of arrival of the goods. At the time of importation the person presenting the goods to customs will indicate a customs procedure code 4200 (for importation) or code 6300 (for reimportation) in the customs import declaration.

Council Regulation (EEC, Euratom) 1553/89 of 29 May 1989 on the definitive uniform arrangements for the collection of own resources accruing from VAT, OJ L 155/13 of 7.6.1989.

Council Directive 2010/24/EU of 16 March 2010 concerning mutual assistance for the recovery of claims relating to taxes, duties and other measures, OJ L 84/1 of 31.3.2010.

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These reports will shed light on the challenges for tax administrations to collect tax, in a changing social, economic and financial environment. Digitalisation, globalisation, new business models, tax fraud and avoidance and resource constraints urge tax administrations to review their practices and find modern or alternative ways of collecting taxes in the single market. This further provides an opportunity for the Commission to open a high level strategic dialogue with the national authorities, in order to design solutions that are consistent across the EU and that are aligned with EU rules.

3.2        Towards a

modernised rates policy

As announced in its VAT Action Plan, the Commission also plans to modernise the rules currently framing Member States' freedom to set VAT rates.

Further to the e-publications proposal, referred to in point 2.1.2 above, the Commission will by November 2017 propose a reform of VAT rates. This is consistent with the definitive arrangements based on the destination principle that will gradually replace the current transitional arrangements for the taxation of trade between Member States.

In fact, with goods and services being taxed in the Member State of destination, suppliers derive no significant benefit from being established in a lower-rate Member State. Diversity in VAT rates would therefore no longer disrupt the functioning of the single market, provided it is accompanied by safeguards to avoid potential risks like revenue erosion, distortion of competition, complexity and legal uncertainty.

3.3        Towards an SME VAT Package

SMEs bear proportionally higher VAT compliance costs than large businesses due to complexity and fragmentation of the EU VAT system. In an effort to alleviate those compliance costs, the Commission will by November 2017 prepare a comprehensive simplification package for SMEs to create an environment that is conducive to their growth and favourable to cross-border trade.

The existing special scheme for small enterprises aims at reducing compliance costs for SMEs but is not suited for a destination-based system. It should be adapted so as to ensure equal treatment of SMEs regardless of where they are established in the EU and to encourage them to engage in cross-border activities and fully seize the opportunities of the single market.

4. CONCLUSION

Modernising the VAT system and adapting it to the challenges posed by the fight against fraud is key for the future of our single market. The reform of the current VAT system should contribute to the development of the digital single market and complement the agenda set by the Commission for a fairer and more efficient corporate tax system in the EU.

In this context, it is both necessary and urgent to keep progressing on the path towards an EU-wide VAT system that can boost jobs, growth, investment and competitiveness and is fit for an increasingly digitalised economy. The Commission remains committed to deliver on these promises.