On 4 October 2017, the EU Commission published its proposals for fundamental changes to the EU VAT system and a move further towards a definitive system based on the destination principle which seeks to replace the current intra-Community supply regime introduced in 1993, at a time just after the creation of the Single Market, and which was meant to be only transitional.
This announcement should nevertheless not come as a surprise to EU established businesses. It is in many ways the anticipated outcome of the rigorous focus placed and investment made by the Commission on formulating and launching its Action Plan on VAT that was adopted by the Commission on 7 April 2016. The Action Plan sets out immediate and high priority actions to tackle the VAT gap – the result of a tremendous level of VAT fraud estimated at EUR50 billion per annum – and, in doing so, it proposes options for attaining a modernised policy on EU VAT rules. The Commission is clear in this objective. It wants a fraud-proof VAT system that helps European companies to compete in global markets while at the same time simplifying and modernising the VAT collection process. It aims to adapt the VAT system to the digital economy, the various technological developments, the changes in business models resulting from the globalisation of the economy and, ultimately, the needs of the SMEs. It goes further to also propose options for a modernised policy on EU rules governing VAT rates.
At its highest level, the Action Plan has been structured on the following 4 pillars:
- Recent and ongoing policy initiatives
- Urgent measures to tackle the VAT gap
- Towards a modernised VAT rates policy
- Towards a robust single European VAT area
The proposal for a definitive VAT regime for cross-border trade, is the subject of the last of these pillars. It is founded on 4 "cornerstones" and 4 "quick fixes" and it introduces the new concept of a Certified Taxable Person. We will next consider each of these principles.
Key components of the Proposal
Under the proposed reform, businesses will charge VAT on cross-border B2B transactions at the rate of VAT in force in the customer's Member State and account for such VAT domestically. They will be able to make declarations and payments using their own jurisdiction's templates and according to their domestic rules and administrative procedures. Member States will then need to transfer the VAT collected to the Member State to which the goods were destined (the destination Member State).
The Commission is proposing a series of fundamental principles or"cornerstones" which, in essence, comprise key reforms for the EU's VAT area. It is specifically seeking consensus on:
- Tackling fraud – VAT should be charged on cross-border trade between businesses inside the EU
- One Stop Shop – the online portal currently existing for e-services will be extended, allowing businesses to take care of their cross-border VAT obligations in their own country in their own language. Member States will then settle VAT due to each other directly
- Greater consistency – a move to the "destination" principle where the final amount of VAT is paid to the final consumer's Member State at the rate applicable in that Member State
- Less red tape – simplification of invoicing rules whereby sellers will prepare invoices in line with their own country's rules even when trading across borders. In addition, companies will no longer be required to prepare a recapitulative statement to report cross-border transaction to their tax authority
Furthermore, the Commission is proposing four "quick fixes" that will come into force as from 2019 to help Member States deal with VAT fraud. These entail:
- simplification of the rules dealing with sales of goods stored in another Member State (call-off stock arrangements)
- simplification of rules in order to ensure legal certainty regarding chain transactions which do not involve the physical movement of goods
- new harmonised and uniform rules for proof that goods have been transported cross-border within the EU; and
- clarification that, in addition to proof of transport, the VAT number of the business at the receiving end is required for the cross-border VAT exemption to be applied
It must be highlighted that the first three quick fixes will strictly apply to and may only be enjoyed by Certified Taxable Persons.
The notion of a Certified Taxable Person ("CTP")
On the condition that taxpayers successfully meet a set of criteria they will be awarded a CTP certificate, allowing them to be considered as reliable VAT taxpayers throughout the EU. They will need to apply to their national tax authorities for this purpose and prove compliance with pre-defined criteria such as the regular payment of taxes, reliable internal control systems in place and a proof of financial solvency. These are similar to the criteria for obtaining Authorised Economic Operator (AEO) status for customs purposes and, in fact, AEO certified operators will by default be deemed to meet the CTP criteria. CTPs will enjoy a number of simplified procedures for the declaration and payment of cross-border VAT.
The next steps
The proposals have been published in the form of a Directive and two Regulations to take effect from 1 January 2019, and they require unanimity to become effective in the EU. They will next be forwarded to the European Parliament and to the Council of Ministers, supported by the European Economic and Social Committee, to provide clear political guidance on the options put forward in the Action Plan and to confirm their support for the proposed reforms. A second directive overhauling the whole VAT Directive is then expected to be proposed. In this one, the 4 cornerstones will be implemented and the current transitional articles will be replaced or deleted. Finally, further changes regarding the administrative cooperation rules and substantial IT developments will be needed in order to ensure the proper operation of the overall system.
The adoption of the aforementioned second directive is currently scheduled for 2018 and the definitive VAT regime should enter into application in 2022. Furthermore, in its Communication accompanying the proposals, the Commission has also stated that following the due monitoring of the implementation for cross-border supplies of goods, an extension to all cross-border services may be envisaged. In this way, it will have accomplished its objective for a modernised and fraud-proof Single VAT Area.
For more information, please contact Varnavas Nicolaou, Partner, Indirect Tax, or Chrysilios Pelekanos, Partner, In charge of Indirect Tax, PwC Cyprus
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
