EU destination-based VAT reform hitch

Mon 16th Apr 2018

Progress on the EU’s ambitious proposals for a ‘Definitive VAT System’ by 2022, grounded on a leap to a destination-based VAT regime to combat fraud, is being delayed over a proposed exemption for large companies.

The current rotating EU presidency is held by Bulgaria which had hoped for next-stage agreement by May. But this now looks likely to move to June or later.

Certified Taxable Person exemption proving controversial

It has been proposed by the European Commission that larger companies, with a clean tax history, would be exempted from the new proposed 2022 destination requirement to charge and collect foreign EU VAT in the case of B2B goods.  Also, would gain other ‘quick fix’ remedies sooner. However, several countries have complained this ‘Certified Taxable Person’ citation is unfair on small companies and start-ups. There is now a strong chance of the relief having to be withdrawn for the reforms to progress.

Current origin-system – €50billion fraud

Currently, the B2B goods VAT regime is an origin-based system, meaning tax is charged where the vendor is located on cross-border EU sales (‘intra-community transactions’).  There is however a simplification, the reverse charge, which shifts the reporting of the sales VAT to the foreign customer. This means the customer reports both the sales and purchase VAT in their return, which cancels out the transaction from a cash movement point of view.

However, this zero-rating of intra-community transactions has been used to highly damaging effect by criminal gangs. To fraudulent collect VAT, they declare a zero-rated intra-community sale, but actually sell locally with full VAT and pocket this undeclared tax. This missing trader fraud, which has a complex and much big variation, carousel fraud, is estimated to cost EU member states over €50 billion each year.

The origin-based system was only intended as a 4-year short-term fix when introduced with the EU Single Market in 1993.

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