The European Commission has published information on a new set of reforms to the current EU VAT framework, with the aim of tackling tax evasion and reducing friction for businesses that trade cross border.
The current VAT system was designed and implemented alongside the creation of the EU Single Market, with the view of introducing a harmonised VAT framework that was supposed to address the free movement of goods and services by:
- ensuring that double taxation of the same goods / services did not occur but also that the goods did not go about untaxed either; and
- ensuring that VAT fraud did not increase once border controls no longer existed.
The European Commission stated at the time that the rules were transitional and would therefore undergo changes in the future. These new proposals represent this change envisaged almost 25 years ago.
Taxation of intracommunity B2B supply of goods
Currently, a business shipping goods from one EU Member State to another typically zero rates the supply in the country of shipment whilst the customer is required to account for VAT by means of acquisition tax. Under the new rule, the business dispatching the goods would be required to charge VAT at the rate applicable in the country of destination. The resulting VAT would be paid to the tax authorities in the originating country, which would be required to pay it on to the country of destination.
To facilitate this change in rules the European Commission is intending to set up a One Stop Shop to simplify the registration and compliance procedures. The proposal draws heavily on the Mini One Stop Shop (MOSS) system, which applies to companies selling electronic services to individuals. The One Stop Shop approach essentially means businesses would use a portal in their country of establishment to file and pay liabilities related to all EU Member States instead of having to register with tax authorities in each individual country.
It is also envisaged that input tax incurred in the local country would be recoverable in the One Stop Shop. However, it is not yet clear how this system would cope with all the additional reporting requirements imposed by some EU Member States (e.g. SAF-T in Poland, 394 in Romania, SII in Spain etc.) or how the system would handle all the exceptions and special rules that apply to B2B transactions (e.g. domestic reverse charge, domestic exemptions). This is one of the reasons that the new rules will not apply until 2022 at the earliest.
Certified Taxable Persons and Quick Fixes
As a transitional arrangement ahead of these new rules the Commission intends on granting certain businesses the possibility to use several simplification measures to ease VAT compliance. These simplifications will only be available to taxpayers which obtain “Certified Taxable Person” (“CTP”) status, a new concept set out in the EU’s proposals.
Businesses obtaining CTP status will be able to benefit from the “quick fixes” that will include:
- Harmonised and uniform rules on providing proof of transport for goods shipped between EU Member States;
- Avoiding VAT registration and payment in cases where businesses hold stocks in other EU VAT jurisdictions to be sold directly to customers there (call off stock scenarios); and
- Simplification measures in cases where a business is part of a cross border chain transaction supply with several sales but just one transportation of the goods.
The only “quick fix” that is not specifically aimed at CTP’s refers to clarifying the need for the partners’ EU VAT ID being recorded in the VIES system as an additional condition for zero rating goods shipped between EU Member States (currently, as a principle matter, only evidence that goods have moved out of the Member State is required).
When will these changes come into force?
The CTP concept and quick fixes are envisaged to be in effect by 1 January 2019. The new rules whereby VAT will become due at the place of destination are hoped to have effect from 1 January 2022. However, all changes are subject to agreement by the EU Member states and hence these time scales may change, with a possibility that like the once proposed single VAT return it doesn’t actually get agreement from all the relevant EU Member States.