Nicholas Hallam, of Accordance VAT, looks at the future of VAT including VAT fraud and the role of the EU Commission.
The International VAT Association (IVA) gathered in Munich in May 2019 to consider what could become “the new foundations of VAT.”
All conference organizers like to have an important sounding theme for their events (who, after all, is going to travel to attend “VAT: Business as Usual for the Foreseeable Future”?), but, in this case, the IVA weren’t overselling the significance of the topics to be discussed. Value-added tax (VAT), like the European political structure that produced it, is at a turning point, a crossroads, a spaghetti junction.
The U.K.’s roaring perma-crisis over how (or whether) to leave the EU has largely deafened it to what is actually happening in Europe. Leavers and Remainers are united in obsessing about a relationship with an entity that may soon be unrecognizable to the one that was the subject of the 2016 referendum.
Even committed British Article 50 revokers might blanch, for instance, at renewed European Commission attempts to introduce qualified majority voting (QMV) in crucial areas—like taxation. The right to be able to unilaterally veto centralizing and harmonizing taxation measures has been a paradoxical but key element of the U.K pro-EU set’s defense of continued membership.
Of course, the U.K. could, as a member, still veto Commission proposals to implement QMV, thus giving the lie to paranoid hard Brexiteer claims about the U.K.’s supposed current lack of sovereignty. And even those hard Brexiteers themselves may eventually notice that insurgent centrifugal forces within member states as core to the EU project as France and Italy are going to make it far, far harder to achieve the European federal super-state of the European Research Group’s nightmares.
Disjunction between the terms of debate and the underlying facts being debated is a common feature of European political and economic controversy.
Events move and circumstances change far more rapidly than EU political structures—themselves ever shifting compromises between member states—can adapt. Technological innovation, in particular, is a challenge to the European Commission. Its proposals on this subject often have a certain hubristic but moth-eaten quality, feeling like bold solutions to the problems of a previous era.
Technology is changing commerce at breath-taking speed. Aside from the visible disruption (for both good and ill) that this is causing, technology poses serious questions about tax and tax collection, and, as a consequence, provokes deeper concerns about the long-term viability of the “European Social Model,” dependent as it is on a relatively high tax base.
VAT, invented in Europe, and a direct contributor to the EU’s “own resources” is, according to the Organization for Economic Co-operation and Development (OECD), by some distance the world’s fastest growing tax.
Capital today is extremely mobile; profits and incomes can be shifted across continents in a swipe. Indirect consumption taxes, tethered in principle to a transaction and location, are contrastively attractive to national governments and tax authorities, as they hold out the hope of some kind of local order and control in a global world.
For this reason, attending to the collection of VAT generated by cross-border trade within the EU is a major priority for both the European Commission and the EU’s member states. The EU’s annual VAT gap (the difference between VAT due and VAT collected) stands at over 150 billion euros ($168 billion); and European political leaders are desperate to ensure that problem becomes no worse, as their dependence on VAT increases.
The Commission has long argued that fraud is a crucial contributor to the VAT gap, and has, over the years, proposed various centralizing measures—a standard EU VAT return, for example—which, by making VAT procedures and processes more consistent across the bloc, would in theory drastically limit the opportunities for criminal activity.
Member states, however, ever alert to the Commission’s empire-building tendencies, have historically pushed back and defeated such schemes. Germany, in particular, has maintained a tough line, insisting that such proposals are outside the Commission’s area of competence: it has been highly resistant to pooled sovereignty when it comes to tax collection.
Nevertheless, proposals for VAT rationalization still flow from the Commission on a constant basis. Having accepted that it will never persuade member states to accept a “one size fits all” origin-based VAT structure, it is instead working towards an (from its point of view) undesired but “definitive” destination based scheme.
There are many component parts to this offering. In the short-term, “quick fixes” to currently intractable cross-border VAT dilemmas around call-off stock, chain transactions, transport and VAT identification numbers are proposed.
The Commission would like to see these come into effect in January 2020. In this spirit of simplifying VAT treatments and making them consistent across the EU, the Commission also requests deeper administrative cooperation between tax authorities.
Looking to the future, the Commission desires to introduce a comprehensive One Stop Shop (OSS) for VAT on all cross-border transactions in the EU.
There are several staging posts to the desired end state of this project (including, in the initial proposal of the Commission, temporary requirements for Certified Taxable Person status for users that apply the simplifications under the quick fixes and the OSS), but the overall direction of travel is clear.
Rather than having multiple VAT registrations across the EU, businesses would be registered in their “home” member states and enter all information relevant to their VAT activity across the whole of the EU on the online portal of that member state. Member states would then share information, and, crucially, collect and disburse VAT on each other’s behalf.
The target date for the introduction of this structure is January 2022. In parallel (in return, one might almost say), the Commission proposes to enable member states to review VAT rates and have considerably greater flexibility in the setting of rates in the future.
It is not going to be plain sailing, to put it mildly, to get these measures implemented on time or at all.
Experts are skeptical about the practical application of the “quick fixes”; there is continued resistance to administrative cooperation, and nobody—including in the Commission—seems to believe that the issues around the OSS could be resolved by 2022.
As for rate reviews: member states continue to be nervous about this “concession”: governments have long liked to blame the EU for forcing them to charge VAT on certain products and at certain levels, despite being dependent on the income generated. They are not keen to take responsibility now.
The Commission proposal—due for implementation in January 2021—that does appear to have traction is an extension of an existing Mini One Stop Shop (MOSS) for VAT on electronic services to cover VAT on e-commerce “distance sales”—that is, business-to-consumer (B2C) sales where the business is in one member state and the consumer in another.
This is seen by the Commission as a kind of proof of concept for the larger business-to-business (B2B) OSS, but also addresses its immediate fears about being left behind by the digital economy.
The politics are also important. Gaining acceptance for the MOSS was a big win for the Commission, as it seems to indicate that Germany is now willing to compromise its tax sovereignty to at least some extent.
Under the MOSS, Greece, for example, will collect German VAT. Yet, even with the MOSS, the devil may be in the detail. One unresolved issue is how digital marketplace platforms—chief among them Amazon—will be treated from a VAT perspective. How liable for their clients’ VAT should they be? Do they or don’t they own their clients’ goods in the regular sense?
Senior members of the IVA are unpersuaded that the Commission’s proposals in this area are completely coherent; and an e-commerce MOSS without Amazon is a case of Hamlet without the prince. Implementation guidelines are due by the end of 2019; it will be interesting to see whether the January 2021 target date is still in place when they are published.
The Commission may see technology as an opportunity to bring uniformity to VAT, but member states are not waiting to find out if its grand plans are successful.
Spontaneously, erratically and quite against the current of the proposals around the Commission’s “definitive” scheme, member states are introducing their own non-standardized, uncoordinated versions of fraud-busting electronic VAT reporting.
The U.K.’s Making Tax Digital is just one example. France, Hungary, Sweden and Spain are among those countries that have either already implemented or plan to implement electronic reporting. It is not easy to say where this will leave the traditional VAT return; Poland, for one, plans to do away with the VAT return altogether.
We are, as Mike Cunningham, Head of the VAT & Excise team at HM Revenue & Customs, said at the Munich conference, in something of a hiatus.
Few people believe the VAT system will look exactly like it does today in 10 years time; but tax authorities and supranational organizations like the European Commission, desperate to protect the VAT base, are nonetheless having to make reactive piecemeal adaptations to digitization, rather than waiting for a new settled state—which may never come.
Only one thing in this area is certain: VAT will be a hot issue for European tax authorities for the foreseeable future.