The European Commission published on 18th January its long-awaited new VAT package consisting of two core elements…
Commission proposes reform of VAT rates and SME special scheme
The European Commission published on 18th January its long-awaited new VAT package consisting of two core elements:
- A proposed reform of VAT rates, giving member states more leeway on setting their national rates. The proposal is accompanied by an Annex listing the goods and services on which reduced rates and exemptions may not be applied
- A proposed reform of the special VAT scheme for SMEs Next steps:
Both proposals will have to be adopted by unanimity in the Council. As always with tax files, the European Parliament will be consulted but its eventual opinion is legally non-binding. The whole process will take several months at best.
Especially on the reduced VAT rates proposal and its links to the definitive regime, the negotiations in the Council will not be easy. Many member states are reluctant to introduce a definitive regime. A particular point of contention is the application of a reverse-charge mechanism if one of the taxpayers involved in a transaction is a “Certified Taxable Person” (CTP). It appears that there is currently no unanimity on the provisions related to CTPs.
The proposal to reform VAT rates contains the following elements of main interest:
- Why: The Commission reasons that with the move towards the ‘definitive regime’ and the destination principle, there is no need to continue restricting member states’ VAT policies. This is why the VAT rates proposal specifies that its provisions will enter into force at the same time as the definitive regime
- Existing rates/derogations: these will disappear after the destination principle has been introduced, but the proposed VAT rates reform will enable member states to apply reduced rates and derogations at their own discretion and within the proposed boundaries
- Main changes:
- A minimum standard 15% VAT rate will continue to apply, and the weighted average VAT rate should be at least 12%
- Member states will be required to ensure that reduced rates benefit the final consumer
- For products, member states will be allowed to set:
- Two separate reduced rates of between 5% and the standard rate (15%) chosen by the Member State
- One exemption (with credit) from VAT (‘zero rate’)
- One reduced rate set at between 0% and the reduced rates
- The current list of goods and services to which reduced rates can be applied would be abolished and replaced by a new list of products (such as weapons, alcoholic beverages, gambling and tobacco) to which the standard 15% rate or above would always be applied. The full list would be evaluated every five years, and is presented in the Annex to the proposal
The proposal on a special scheme for SMEs contains the following elements of main interest:
- Current SME simplification measures are only available to those small companies which qualify and use the VAT exemption
- They are also only available nationally, meaning that firms that trade cross-border cannot access exemptions and simplification measures in another country
- Small businesses bear proportionally higher VAT compliance costs than large businesses as many of the costs are fixed, rather than proportional to turnover. Small businesses that have no access to VAT simplification measures suffer from a competitive disadvantage to those that do
- Objectives: reduce SMEs’ VAT compliance costs by 18% per year, leading to an increase in their cross-border trading activity by about 13%. The Commission estimates that it should also have a positive revenue impact in the longer term due to the general positive effect on small enterprises’ output
- Main changes:
- Possibility for member states to free all small businesses that qualify for a VAT exemption from obligations relating to identification, invoicing, accounting or returns
- National exemption thresholds will be maintained
- A €2 million revenue threshold across the EU, under which small businesses would benefit from simplification measures, whether or not they have already been exempted from VAT. This should expand the number of companies that can benefit from simpler rules
- A turnover threshold of €100,000 which would allow companies operating in more than one member state to benefit from the VAT exemption
- Simplification measures:
- Simplifications to VAT registration, VAT record keeping as well as the possibility of benefitting from less frequent filing of VAT returns
- In addition, VAT-exempt companies will enjoy the relief from VAT registration or simplified registration and from invoicing obligations
Commission publishes monthly infringements package – 25 January 2018
The European Commission has published its latest monthly infringements package. This month’s cases include the Commission ordering the UK to align its national practices regarding the VAT Mini One-Stop-Shop (MOSS) scheme with EU rules.
The Commission feels that the UK has failed to collect and transmit to other member states the bank account details for each taxable person registered for the MOSS system. At the moment, member states who want to refund taxable persons in the UK have to collect additional information on a case-by-case basis, which delays refunds. If the UK does not act within the next two months, the Commission may send a reasoned opinion to the UK authorities.
What to expect from the Commission on taxing the digital economy? – 30 January 2018
The Commission’s proposal for taxing the digital economy is expected on the 21st March 2018. It appears that DG TAXUD has submitted its draft proposals to other DGs for their consideration.
Currently, it appears that two parallel proposals will be launched: an amendment to the CCTB Directive to introduce the concept of a digital permanent establishment (PE), and a new Directive proposing a common EU system for taxing digitalised business activities a so-called short-term measure for the EU.
The short-term measures, as currently envisaged by the Commission, is based on taxing the advertising revenue of digital businesses. Additional measures are planned for online platforms, whose profits stem from intermediation rather than advertisement and customer data collection activities. In order to avoid the measure hitting small, innovative businesses hard, the Commission is likely to propose a threshold of possibly EUR 750 million as already proposed for the EU’s CBCR initiatives.
At the OECD-level, work continues to come up with initial recommendations for a long-term solution. An interim report of this work will be presented to G20 finance ministers on 19-20 April, but it appears that the ministers will have a preliminary discussion already in March, on the request of Europeans.
Commission publishes position paper on UK and VAT/customs post-Brexit – 30 January 2018
The European Commission has published a so-called Notice to stakeholders on Brexit that focuses on EU VAT and customs rules potentially applicable to the UK after Brexit. The document notes that, caeteris paribus, EU’s customs and VAT rules will cease to apply to the UK from 30 March 2019 onwards (subject to any transitional arrangements). The document lays out a number of practical implications in both areas, in the absence of a special deal between UK and the EU after Brexit.
European Commission publishes sectoral management plans for 2018 – 31 January 2018
On VAT, the Commission will:
- Propose in Q2 2018 a technical Directive implementing the legal cornerstones of the definitive VAT system for the taxation of B2B trade between member states
- Publish a new VAT gap study in Q3 2018
- Evaluate VAT invoicing rules in Q4 2018
European Commission presents different options for EU’s long-term budget, including CCCTB – 14 February 2018
The European Commission has presented various options – and their financial consequences – for a new long-term EU budget for the post-2020 and -Brexit period.
The options do not reflect the Commission’s own proposals or preferences. The Commission merely quantifies the financial impact of various possible policy choices based on ideas frequently put forward in the public debate. The objective is to inform member states and wider discussions on the future of the EU budget.
Of particular interest, the financing options include provisions around VAT-based own resources and financing through a CCCTB.
On VAT, the Commission argues that a reformed Own Resource could be levied from a simplified VAT base. Revenues from the current VAT-based Own Resource are currently around EUR 105- 140 billion over seven years and could be adjusted by calibrating the call-rate in function of required levels.
Commission launches compliance check to assess whether businesses are refunded VAT quickly enough in all Member States – 15 February 2018
The European Commission has launched a compliance check to assess whether VAT refunds to business in EU member states are in line with current EU law and case law of the European Court of Justice.
The Commission states that a lack of access to a simple and fast VAT refund procedure can have a major impact on cash flows and on the competitiveness of businesses, and in particular smaller ones. Therefore, over the next eight months tax provisions in each member state will be scrutinised to ensure that refund procedures allow businesses to quickly and easily recover VAT credits both in their own country and in other EU countries.
The study will examine, for example, the length of time it takes to complete procedures in each country and any unnecessary hurdles in the system which can create financial risks for business. The Commission could decide to launch infringements procedures in cases of non-compliance with the rules.
Bulgarian Presidency announced ambitious plans for tax – 8 January 2018
The Bulgarian Council Presidency has ambitious plans for key tax files during its six-month term. First, the Presidency will aim for a political agreement on the tax intermediaries file at the 13 March ECOFIN. During recent tax attaché meetings on the file, a number of contentious points have been resolved, and the main remaining ones are the hallmarks and ensuring consistency with the OECD. The Presidency also wants to see progress on CCTB and to build political support for the Commission’s digital tax proposal expected for 28 March.
On VAT, the Presidency wants to achieve “significant progress” with the first step of the definitive regime and the proposal enhancing administrative cooperation to fight VAT fraud. Finally, the Presidency wants to start work on the SME scheme proposal that was recently published (see article above).
Bulgarian Presidency publishes detailed Roadmap on tax policy – 30 January 2018
On VAT, the following are on the Presidency menu:
- Conduct technical and political negotiations on the proposal for a definitive VAT regime. The Presidency document refers to this as one of the priorities
- Seek an agreement on the Commission’s proposed measures to strengthen administrative cooperation on VAT
- Seek an agreement on the proposed maintenance of the 15% minimum standard VAT rate Seek agreement on a (possible) legislative proposal for the prolongation of the sectorial reverse charge if it is tabled in due time by the European Commission during the first half of 2018
- Launch first technical discussions on the recently proposed special VAT scheme for SMEs and the VAT rates reform
ECON Committee hearing with Estonian and Bulgarian Finance Ministers – 24 January 2018
Hearing with the Bulgarian finance minister
During the session, the Bulgarian finance minister elaborated on the current Presidency’s plans for tax. This includes achieving a single European VAT area for cross-border trade, and introducing effective tools for integrated VAT management, with enhanced administrative cooperation between member states’ tax administrations to curb VAT fraud. Bulgaria will also work on the CCTB, aim to make progress on the forthcoming proposal for taxation of the digital economy (NB expected for 28 March), and advance the discussions on possible sanctions to bolster the EU’s list of non-cooperative jurisdictions.
In response to a question from the MEP Tom Vandenkendelaere (EPP/BEL), the minister also briefly discussed the Commission’s proposal to grant e-publications the same VAT treatment as physical ones. The negotiations are still stalling as France and Czech Republic have fundamental political differences. As a reminder, Czech Republic is blocking the e-publications proposal which is strongly supported by France allegedly because France is blocking attempts to introduce the VAT reverse charge mechanism in turn supported by Czech Republic. The minister stated that the Presidency will mediate between these two countries to find a compromise.
On VAT rates reform, the minister welcomed the recent Commission proposal (see above), but maintained that there is no social value in further fragmenting the common VAT area. Thus, he stated that Bulgaria would not, under his term at least, make use of the increased VAT rate freedom proposed by the Commission. Moreover, he strongly welcomed the definitive regime proposal, seeing it as an effective tool to fight VAT fraud.
Plenary hearing on VAT reform, Commission confirms further measures for definitive regime – 5 February 2018
The European Parliament Plenary has held a public hearing on the Commission’s recently proposed VAT measures.
During the hearing, a number of MEPs expressed their views on VAT developments. The majority of MEPs supported the reforms, although some concerns were raised on the potential distortion of the single market due to the proposals on reduced rates. For example:
- Ludek Niedermayer (EPP/CZE): welcomed that the Commission has made VAT a priority. VAT is one of the largest sources of government revenues and a lot of money has been lost. He welcomed measures simplifying tax compliance. He demanded that additional VAT raised should be invested in the reduction of public debt and as a means to lower other taxes that impede growth
- Pervenche Beres (S&D/FRA): welcomed the proposals and noted that the focus should be on helping SMEs deal with complex tax systems. On reduced rates, she noted that the Commission has proposed more flexibility for the member states and this may create a danger for the single market as the member states will go in different directions. She then asked how the minimum standard VAT rate was decided upon
- Lieve Wierinck (ALDE/BEL): welcomed the proposals as an opportunity to simplify procedures and reduce the administrative burden especially for SMEs
- Sven Giegold (Greens-EFA/GER): welcomed the Commission’s ambitious proposal but fears that the proposed further liberalization of VAT rates will lead to more exemptions, thus distorting the single market. There should be common VAT rates
- Jeppe Kofod (S&D/DEN): national laws enable VAT fraud – the more rules and exemptions there are, the easier it is to find loopholes
In reply to the MEPs, the Commission Vice-President Valdis Dombrovskis stated that the Commission will come forward with two legislative proposals before the summer 2018, including one on addressing VAT fraud in online sales and another one putting into place the cornerstones of the definitive regime.
On reduced rates, he accepted that the Commission is proposing more freedom for members’ states, but in a framed manner. This should not lead to revenue erosion or distortion of competition. This is why the Commission proposed a minimum effective VAT rate and a negative list which includes those goods that are most liable to be shifted across borders.
Mandate of the new tax Committee approved – 8 February 2018
The European Parliament’s Conference of Presidents has unanimously approved the mandate for a new special Committee on tax, provisionally titles “TAXE III”.
The mandate’s scope is wide, covering corporate and personal income taxes, VAT (possibly due to some of the VAT-related schemes revealed by Paradise Papers), golden passports, taxation of the digital economy, money laundering, “tax havens” and more. The Committee will also study “newest developments” such as the Paradise Papers. The main target will again be tax optimisation practices of multinationals as with the previous TAXE Committees, but with an additional money laundering dimension as with PANA Committee.
The Committee will consist of 45 MEPs, will put forward a report with recommendations prepared by two rapporteurs, and will run for a period of 12 months – until February 2019.
In terms of next steps, the European Parliament Plenary will vote on 1 March on the responsibilities, numerical strength and term of office of the new Committee – a mere formality now that the Conference of Presidents has approved the mandate. The Committee will aim to hold its first meeting on the same week.
Court of Justice of the EU – Rulings
C‐249/15: Vehicle registration tax – 18 January 2018
The Ninth Chamber of the CJEU has ruled in for restricting member states’ legislation concerning the tax treatment of registering vehicles leased from another member state.
C‐463/16: Single supply and VAT – 18 January 2018 – see above
The Ninth Chamber of the CJEU has ruled that a single supply which comprises of two distinct elements (principal and ancillary) which, if they were supplied separately, would be subject to different rates of VAT, must be taxed solely at the VAT rate applicable to that single supply. That rate would be determined according to the principal element, even if the price of each element forming the full price paid by a consumer in order to be able to receive that supply can be identified.
Lithuania Enacts Corporate Tax and VAT Changes – 17 January 2018
Lithuania has approved a number of major overhauls to its tax system.
On VAT, thermal energy equipment qualifies for a reduced 9% rate. Moreover, all non- reimbursable prescription medicines are subject to a 5% VAT, a measure reportedly intended to increase access to medicines.
PwC and Microsoft publish report on digitalization of tax administrations – February 2018
Tax industry experts from Microsoft and PwC have collaborated to author a new series of white papers that illustrate
and discuss how tax administrations are tackling the challenges of digital transformation as a vital step in their countries’ economic growth aspirations.
The most recent report looks into how tax administrations can cope with the increasing amount of data available to them through digitalisation. To render tax administrations into data-intelligent actors, they will need to enhance their operational excellence and introduce technical transformation components.
MEP Questions & Answers
Creation of a one-stop shop VAT system for small and medium-sized enterprises – 31 October 2017
The European Commission has replied to a question asked by the MEP Jérôme Lavrilleux (EPP/FRA) with regard to the OSS VAT system for SMEs.
In his question, Mr. Lavrilleux refers to SMEs selling products to end-users online all over the EU, and the difficulty that such smaller companies have in producing 27 different declarations. He therefore calls on the Commission to introduce an OSS system managed by an EU agency for such SMEs and small producers.
In his reply, Commissioner Moscovici reminds that the Commission proposed in December 2016 proposals to modernize VAT for cross-border B2C e-commerce. This proposal includes extending the VAT OSS previously applicable to supplies of telecommunication, broadcasting and electronically supplied services to intra-EU distance sales of goods and other services. In addition, the Commission proposed a VAT simplification aimed for SMEs.
VAT fraud by online retailers from third countries 16 November 2017
The European Commission has replied to a question asked by the MEP Pascal Arimont (EPP/BEL) with regard to VAT fraud by online retailers from third countries.
In his question, Mr. Arimont refers to tax fraud committed by companies from third countries – chiefly China – who sell goods to Europe online without paying the corresponding VAT to the member states. The fraud involves declaring the goods as being in transit when they arrive in the EU – for example at ports or airports. This means that they are not subject to VAT in the member state of transit, but rather in the country of destination. In many cases, however, there is no such country of final destination and the goods disappear without any VAT having been paid. According to estimations, Europe is losing around EUR 5 billion in taxes every year as a result of such practices. Mr. Arimont therefore asks the Commission what measures it is planning to address such VAT fraud.
In his reply, Commissioner Moscovici refers to a myriad of measures announced in its 2016 VAT Action Plan that the Commission has undertaken to tackle such fraudulent activities. More recently in November 2017, the Commission proposed ways to implement an automated access to relevant information between tax and customs authorities.
Furthermore, the Commission recently launched an expert group with tax administrations and intermediaries to enhance cooperation between businesses and tax administrations. To this end, by early 2018 the group will issue guidelines on data exchange between tax administrations and intermediaries.
VAT revenue shortfalls – 22 November 2017
The European Commission has replied to a question asked by the MEPs Ivan Jakovčić (ALDE/CRO) and Jozo Rados (ALDE/CRO) with regard to VAT revenue shortfalls.
In their question, the MEPs ask the Commission what it is planning to do to address the VAT gap across the EU. In his reply, Commissioner Moscovici lists the relevant VAT reform proposals published in the past two months, and confirms that further developments will be published in 2018.
Reform of VAT rules for cross-border cooperation – 22 November 2017
The European Commission has replied to a question asked by the MEPs Ivan Jakovčić (ALDE/CRO) and Jozo Rados (ALDE/CRO) with regard to cross-border cooperation on VAT. In their question, the MEPs ask the Commission what measures it is considering to reform VAT rules for cross border cooperation.
In his reply, Commissioner Moscovici refers to the definitive regime proposal, and states that the full details of the destination-based VAT system will be revealed in 2018 (NB most likely before the summer).
The Commissioner lists a number of benefits that the definitive regime would bring, including better addressing VAT fraud, making life easier for businesses operating across borders, and reduce compliance costs.
Tax loopholes and the Paradise Papers – 20 December 2017
The European Commission has replied to a question asked by the MEP Dimitrios Papadimoulis (GUE-NGL/GRE) with regard to the Paradise Papers.
In his question, Mr. Papadimoulis asks the Commission whether it will publish data on the scale of tax avoidance and evasion in the EU, how the Commission will overcome the resistance of certain member states in tax policy making, and what tax harmonisation measures the Commission is considering.
In his reply, Commissioner Moscovici confirms that the Commission does not have data on tax avoidance and evasion since such information is difficult to quantify. He moreover reminds that member states have diligently reached progress on a number of tax files, but that further work e.g. on public CBCR is still needed.
Amazon invoices which fail to state the amount of VAT due – 22 December 2017
The European Commission has replied to a question asked by the MEP Pascal Arimont (EPP/BEL) with regard to Amazon’s invoice that fail to disclose the amount of VAT due.
In his question, Mr. Arimont claims that an increasing number of Amazon invoices fail to disclose the amount of VAT due for the transaction, even though the products are being delivered from an Amazon warehouse within the EU.
He asserts that Amazon is facilitating VAT fraud from EU-based warehouses, and maintains that the UK’s obligation for online platforms to be held liable for VAT seems to be the best option. He asks the Commission whether the UK’s approach could be adopted at the EU-level as well.
In his reply, Commissioner Moscovici confirms that the Commission is aware of the described form of VAT fraud.
Moreover, he points out that the measure taken by the UK is already available for member states to adopt, in accordance with the VAT Directive, if they so wish.
Furthermore, on 5 December 2017 the Council adopted the Commission proposals concerning VAT on ecommerce. The new provisions provide, inter alia, that where an electronic interface such as a marketplace, platform or portal facilitates the supplies of goods within the EU by businesses established outside the EU, that marketplace, platform or portal shall be directly liable for the correct application of VAT on those sales.
And finally, the Commission is exploring new ways for enhanced cooperation between tax administrations and intermediaries such as online market places. This work is carried out in the framework of a Commission expert group composed of representatives from Member States and businesses.
The report of the group will be published in early 2018 and will provide for guidelines addressed to the EU Member States and businesses in order to exchange relevant information to combat e- commerce VAT fraud.
New EU rules on VAT – 23 December 2017
The European Commission has replied to a question asked by the MEP Ilhan Kyuchyuk (ALDE/BUL) with the Commission’s plans to move towards a definitive VAT regime on the EU.
In his question, Mr. Kyuchyuk asks the Commission how the definitive regime will affect the competitiveness of cross-border businesses, and whether it intends to introduce uniform VAT rules and rates across the EU.
In his reply, Commissioner Moscovici maintains that although its VAT reform plans would introduce uniform rules, VAT rates would still remain under the control of member states.
VAT reverse charge – 23 December 2017
The European Commission has replied to a question asked by the MEPs Monica Macovei (ECR/ROM), Patricija Sulin (EPP/SVN) and Tomas Zdechovsky (EPP/CZE) with regard to the VAT reverse charge mechanism.
In their question, the MEPs highlight the value of a temporary generalised reverse charge mechanism in fighting carousel fraud. They therefore ask the Commission whether it would support a transitional regime.
In his reply, Commissioner Moscovici reminds that the Commission has already put forward a proposal to allow for a temporal generalised reverse charge mechanism to be used under strict conditions (NB the proposal is still being discussed by member states). However, the Commission does not plan to introduce a transitional regime.
Proposal for a directive on modernising VAT for e-commerce and B2C – 12 January 2018
The European Commission has replied to a question asked by the MEP Fulvio Martusciello (EPP/ITA) with regard to modernizing VAT for e-commerce and B2C.
In his question, Mr. Martusciello refers to the abolition of the small consignment exemption applicable to goods with a value below EUR 22. He maintains that removing the exemption would impose significant additional costs on customs authorities and postal operators. He therefore asks the Commission what measures it intends to take to avoid such an impact and will it find a balanced solution for all stakeholders before the abolition on the “de minimis” exemption enters into force.
In his reply, Commissioner Moscovici claims that its impact assessment demonstrates that VAT losses stemming from maintaining the VAT exemption for small consignments exceeds the costs of removing it. Moreover, the Commissioner argues that the main additional costs accruing to postal operators will be because of the repeal, by the end of 2020, of the waiver currently allowing postal operators to submit paper-based CN22 or CN23 declarations for imports of goods in postal consignments for values below EUR 1 000.
Either way, detailed implementation rules will have to be laid down to support the application of the new provisions by 1 January 2021. In preparing these rules, the Commission will consult all stakeholders concerned, including postal operators.
VAT exemption for low-value imported goods – 22 January 2018
The European Commission has replied to a question asked by the MEP Luděk Niedermayer (EPP/CZE) with regard to the removal of the VAT exemption for small consignments.
In his question, Mr. Niedermayer asks the Commission what it thinks about claims that a VAT exemption for low value imported goods may actually harm European businesses, as it puts their products at a disadvantage because of a difference in tax regimes, even in the case of identical goods. Moreover, he asks the Commission for its opinion on an economic solution allowing the purchase of very low value goods with no postage fees, and whether this would not involve state aid.
In his reply, Commissioner Moscovici argues that the VAT exemption for low value consignments from outside the EU has a distortional effect in the context of booming e-commerce trade, since equivalent products sold by vendors established in the EU are subject to VAT irrespective of their value. Moreover, the elimination of postage fees for the purchase of low-value goods would lead to new problems, as to the compensation of postal operators for their services. On state aid, the VAT exemption for the importation of low value consignments into the EU is compulsory for member states as it directly derives from the VAT Directive. It is therefore not imputable to the member states and does not seem to constitute state aid.
VAT on online advertising activities – 31 January 2018
The European Commission has replied to a question asked by the MEP Alfred Sant (S&D/MAL) with regard to VAT applicable to online advertising.
In his question, Mr. Sant observes that when an advertiser spends money e.g. on Facebook advertising, VAT applies according to the purpose of the advertisement and the location of the business. He presents four different scenarios for what VAT is applicable. He asks the Commission for clarifications on the applicable VAT rules on each of the four cases, and wonders to what extent the criteria applied are relevant in circumstances where it is up to the user to state the location of his business. In his reply, Commissioner Moscovici elaborates for each of the scenarios who is liable for VAT, why and under which legislative provisions.