Towards a new and definitive VAT system for the EU

The Commission adopts new proposals for the most far-reaching VAT reform in the EU for a quarter of a century VAT is a major and growing source of revenue in the EU, raising over €1 trillion in 2015, corresponding to 7% of EU GDP. 

However, despite many reforms, the VAT system has been unable to keep pace with the challenges of today's global, digital and mobile economy. The current VAT system dates from 1993 and was intended to be a transitional system.

It is fragmented and overly complex for the growing number of businesses operating cross-border and leaves the door open to fraud: domestic and cross-border transactions are treated differently and goods or services can be bought free of VAT within the Single Market.

Overall, over €150 billion of VAT is lost every year, meaning that Member States miss out on revenue that could be used for schools, roads and healthcare.

Of this, around €50 billion - or €100 per EU citizen each year - is estimated to be due to cross-border VAT fraud. This money can be used to finance criminal organisations, including terrorism.

With today's package, the Commission proposes to fundamentally change the current VAT system by taxing sales of goods from one EU country to another in the same way as goods are sold within individual Member States. This will create a new and definitive VAT system for the EU.

It is estimated that the €50 billion figure due to cross-border fraud would be reduced by 80% thanks to the proposed reform.

According to the Commission's proposals, VAT will now be charged on cross-border trade between businesses. Currently, this type of trade is exempt from VAT, providing an easy loophole for unscrupulous companies to collect VAT and then vanish without remitting the money to the government.

It will be simpler for companies that sell cross-border to deal with their VAT obligations thanks to a 'One Stop Shop' (OSS).

Traders will be able to make declarations and payments using a single online portal in their own language and according to the same rules and administrative templates as in their home country. Member States will then pay the VAT to each other directly, as is already the case for all sales of e-services.

The Commission also proposes a move to the principle of 'destination' whereby the final amount of VAT is always paid to the Member State of the final consumer and charged at the rate of that Member State. 

This has been a long-standing commitment of the European Commission, supported by Member States. It is already in place for sales of e-services.

The proposal foresees a simplification of invoicing rules, allowing sellers to prepare invoices according to the rules of their own country even when trading across borders. Companies will no longer have to prepare a list of cross-border transactions for their tax authority (the so-called 'recapitulative statement').

The proposal introduces the notion of a 'Certified Taxable Person' – a category of trusted business that will benefit from much simpler and time-saving rules. 

Focus on B2B transactions and definitive VAT system through a gradual two-step approach

Value Added Tax (VAT) is a general tax on consumption applied to supplies of goods and services along the whole production and distribution process. It is a major and growing source of tax revenue in the European Union (EU). VAT raised slightly more than EUR 1 trillion in 2015, which corresponds to 7% of EU GDP or 17.6% of total national tax revenues

In recent years, however, the VAT system has been unable to keep pace with the challenges of the global economy and the opportunities offered by new technologies.

Therefore, the Commission adopted on 7 April 2016 an Action Plan on VAT setting out ways to modernise the VAT system so as to make it simpler, more fraud-proof and business-friendly.

In this context, the Commission announced its intention to adopt in 2017 four VAT-related proposals including a definitive VAT system for intra-EU cross-border trade based on the principle of taxation in the Member State of destination in order to create a robust single European VAT area.

The initiative that is being assessed is focussed exclusively on transactions between businesses ("B2B" transactions").

The purpose of this initiative is to put in place a definitive VAT system so as to pave the way for the creation of a genuine single EU VAT area for the internal market.

This means a VAT system simpler for businesses trading across the EU while at the same time more robust to fraud, to the benefit of the Member States and also of compliant businesses.

The efficiency of the VAT system needs to be further improved, in particular by exploiting the opportunities of digital technology and by enhancing greater trust between business and tax administrations and between EU Member States' tax administrations.

The introduction of the definitive VAT system will be made through a gradual two-step approach.

• As a first legislative step, the VAT treatment of intra-EU B2B supplies of goods would be settled.
• As a second legislative step, this treatment would be extended to all cross-border supplies, therefore also covering supplies of services.

Only the first legislative step is the subject of the initiative is assessed.

There are several reasons for this.

1. First, the introduction of the definitive VAT system means, above all, doing away with the transitional arrangements. These arrangements basically refer to goods. This owes to the fact that prior to 1 January 1993 only cross-border intra-EU supplies of goods (and not of services) gave rise to imports and exports. The transitional arrangements were a practical means of accommodating this situation. Therefore any attempt to replace those transitional arrangements will have to focus essentially on goods.
2. Second, the application of the principle of taxation at destination becomes particularly necessary when it comes to goods. As regards services, on 4 December 2007 the Council reached a political agreement on two draft Directives and a draft Regulation (the socalled "VAT package") aimed at changing the rules on VAT so as to ensure that VAT on services accrues to the Member State where consumption occurs , i.e. according to the principle of taxation at destination. Its adoption by the Council on 12 February 2008 was an important step towards simplification for businesses. The rules regarding B2B supplies of goods remained however unchanged. Despite the fact that, in practice, their taxation effectively occurs at destination (i.e. where the goods arrive) the logic of the origin principle with its two transactions still remains.
3. Third, intra-EU B2B trade in goods still requires a number of obligations which do not exist for services (e.g. proof of intra-EU transport of the goods, need to register in another Member State for particular transactions like consignment stocks, need to ascribe the intra-EU transport to a specific supply in the case of chain transactions. There is therefore now a particular need to simplify the rules for goods.
4. Fourth, as will be seen further the preferred option for the definitive VAT system builds on certain new technical solutions (a one-stop-shop mechanism (OSS) which includes the right to deduct input VAT. It seems reasonable to provide for a staged application of these solutions so that once they have proven to be efficient on transactions in goods, they will be also extended to intra-EU supplies of services. Such an approach has the advantage of limiting to one category the number of transactions that will be affected by the new rules and of reducing the amounts of VAT channelled through the OSS. 
   
   In this regard, the staged approach is consistent with the one taken in VAT matters regarding the OSS. Initially a Mini One Stop Shop (MOSS was established for B2C telecommunications, broadcasting and electronic services provided by third country suppliers. That MOSS was later extended to intraEU cross border supplies of those same services. 
   
   Next, it is foreseen in the e-commerce proposal for the OSS to be extended to intra-EU B2C supplies of goods and services and to supplies of goods imported from third countries or third territories. The initiative means a further step in this direction targeting intra-EU B2B supplies of goods. Finally, the process will be completed at a later stage with the extension of the OSS to intra-EU B2B supplies of services.

In any event, the stage embodied by the initiative is an essential one since, as  goods remain the main elements that are being traded across the EU as services represent only one third of the share of goods' transactions. In focussing on goods, as a first step, the objective of reducing VAT losses resulting from cross-border fraud would also be better targeted.

The initiative will also propose certain improvements to the current VAT legislation. These improvements (hereafter the "quick fixes") are meant to address specific concerns with the current rules and are without prejudice to the more fundamental reform aimed at.

One of the problems the initiative intends to tackle is VAT cross border fraud. However, since the full operation of the initiative will take some time, it is necessary to already improve the mechanisms in place in order to fight this type of fraud.

Improved administrative cooperation between the Member States and a better functioning of the VIES system (which will allow enhancing the quality and reliability of the information exchanged between the Member States) are elements which, at the same time, will in the short term improve the fight against fraud and in the medium term will support each step of the implementation of the definitive VAT system.

Further, it will allow building trust between the Member States, which will facilitate the proper operation of the initiative.

The initiative will, independently from the proposal on VAT rates, provide for a central web-portal that will include information on the VAT rates applicable in all Member States.

VAT fraud and complexity of current transactional system explained

A comprehensive retrospective evaluation of the EU VAT system was conducted in 2011.

The evaluation provided solid analysis of the problems underlying the current transitional VAT system, the results of which have been confirmed.

It looked in particular into the design and implementation of the most important elements of the current VAT system, including the functioning of the transitional VAT arrangements, and assessed their effectiveness and efficiency in terms of results (meeting objectives they were serving) and impacts (direct, indirect, expected and unexpected) they had created.

It also examined their relevance and coherence with the smooth functioning of the single market and the requirement to avoid distortion of competition.

The findings of the evaluation are therefore still valid and relevant for use in this impact assessment. According to the evaluation and further research, there are two fundamental problems regarding the current transitional VAT system:

• The existing levels of VAT fraud within the EU caused by fraudulent activities such as Missing Trader Intra-Community fraud (hereinafter MTIC fraud).
• The complexity of the current transitional VAT system leading to additional costs for those businesses which engage in intra-EU cross-border trade.

It results from the analysis of the problems that the functioning of the current transitional VAT system is causing disturbance to both Member States and businesses.

The problems are interrelated since complexity creates opportunities for fraudsters and increased fraud leads to more complexity.

These are problems that are exacerbated by the increase in cross-border activity that is the result of globalisation of the economy and the extension of the EU VAT area (from 12 to 28 Member States) since these rules entered into force in 1993.

VAT fraud - roadmap to avoid risks by implementing proper client acceptance processes

 

MTIC fraud

In domestic trade, as a rule, the collection of VAT is based on fractioned payments. VAT is collected at each stage in the production and distribution chain and this ensures the self-policing character of this tax.

Customers pay the VAT due on their purchases to their suppliers who will remit it to the Treasury after deduction of the VAT charged to them by their own suppliers.

The collection of VAT on behalf of the Treasury is therefore ensured by suppliers through direct payments received from their customers.

In intra-EU trade in goods, this fractioned payment system is broken.

The rules of the current transitional VAT system split every cross-border sale of goods between businesses into an exempted supply in the Member State of origin (i.e. no VAT is charged by the supplier to his customer) and a taxable acquisition in the Member State of destination (i.e. the customer is liable to pay the VAT due to the Treasury but no VAT is actually paid as he has an immediate right of deduction).

It is like a customs export-import scheme, but lacks equivalent border controls and is therefore at the root of MTIC fraud, the typical intra-EU cross-border fraud.

MTIC fraud exploits the endemic weakness of the current VAT system (which was meant to be transitional, that allows for goods to be bought cross-border VAT-free because of the break in the fractioned payment chain.

The basic MTIC fraud scheme involves a cross-border purchase of goods by a fraudster, followed by a domestic supply by that fraudster. The cross-border purchase of goods allows the fraudster to make a VAT neutral purchase (no payment of VAT, either to the supplier or to the Treasury). The subsequent domestic supply allows the fraudster to charge and collect the VAT from his customer. Instead of paying the whole of this VAT over to the Treasury, he takes the VAT with him and disappears.

Another type of fraud which must be mentioned here is "diversion fraud". Although not considered as typical intra-EU cross-border fraud because it mainly happens regarding exportation of goods to third countries , diversion fraud also exploits the rules of the current transitional VAT system.

Intra-EU diversion fraud occurs when a fraudster reports an intra-EU supply of goods but then "diverts" the goods to the domestic market so that they remain in the same Member State and are sold without leaving the territory. The VAT fraud is crystallised in the amount of VAT charged by the fraudster to the customer, which is not accounted for to the Treasury (since the fraudster has reported to the authorities a fake intra-EU supply exempt from the VAT).

MTIC fraud can be committed in many different ways and the schemes become more elaborated every time. During the nineties of the last century, the fraudsters started their fraudulent activities in the simplest way. The typical MTIC fraud was committed by three or four companies involving two Member States.

The most serious form of the fraud – known as carousel fraud – involves a series of contrived transactions within and beyond the EU, with the aim of creating large unpaid VAT liabilities and fraudulent VAT repayment claims.

Similar to how a carousel goes round and round, the goods are passed around between companies and jurisdictions, generating each time losses for the Treasuries involved.

 

Improve fight against VAT fraud

In order to improve their fight against intra-EU cross-border VAT fraud, it is expected that Member States will continue reinforcing their cooperation in order to speed the exchange of quality information between them. The following upcoming proposals will soon be tabled by the Commission:

• A set of 20 measures fronts: by which urgent action will be taken on the following
  • Improving cooperation within the EU and with non-EU countries
  • Moving towards more efficient tax administrations
  • Improving voluntary compliance and tax collection
• Directive on the fight against fraud to the Union's financial interests by means of criminal law
• Regulation on the establishment of a European Public Prosecutor's Office

These measures are expected to help improve the fight against fraud in general.

Improvements to the quality of information exchanged between the Member States and the speed of such an exchange through the use of electronic means will be particularly helpful in fighting against cross-border fraud.

However, these measures alone would not be sufficient to radically reduce the level of cross-border fraud as they are not targeted at putting an end to the endemic weakness of the current transitional VAT system leading to the specificity of MTIC fraud.

Complexity of the current transitional VAT system

The current transitional VAT system was designed to provide a one-off solution to the abolition of the fiscal frontiers in 1993 and was a short-term practical system meant originally for four years. This system quickly showed its shortcomings which the Member States tried to address each in their own way.

This has led to a fragmented VAT system, making intra-EU cross-border transactions difficult and risky for businesses, in particular SMEs. The consequence is that the VAT rules have the potential to see businesses refrain from trading across borders.

The development in recent years of e-governance has provided Member States' tax administrations new tools to improve their tax collection systems through better efficiency in collecting, processing, controlling and exchanging information.

The pace of development but also the type of Information and Communication Technology (ICT) used differ however from one Member State to another.

This entails challenges for the cooperation between Member States' tax administrations not only in terms of technological factors but also from an administrative, legal and institutional perspective.

If no fundamental solution is found at EU level, this might in turn entail that Member States focus on the development of own specific measures which deviate from the normal functioning of the VAT system.

The recent history of the VAT Directive shows the spill-over effect linked to the use of the reverse charge mechanism in an effort to combat MTIC fraud. Requests for derogating measures in order to introduce new methods for the collection of the VAT are also likely to continue.

The solutions sought by the Member States are not only likely to increase fragmentation of the VAT system, but they can also lead to disproportionate or even legally doubtful measures.

All this means a high risk that businesses will be faced with individual rules specific to each one of the Member States although the problem to solve is common to all of them. For these reasons businesses called for a common solution.

As long as an EU-wide systemic solution is not put in place to counter the problems created by the current transitional VAT system, fraudsters and Member States will continue the endless loop of efforts in which the former will develop more aggressive fraud schemes while the latter will need to implement new control measures that will increase costs for both businesses and Member States.

Without action at EU level, the endemic weakness of the current transitional VAT system will continue to be exploited by fraudsters.

Fraud levels might be stabilise but this will be to the detriment of compliant businesses that will pay the price through high compliance costs (already 11% higher than for domestic trade) or even increasing compliance costs.

The complexity of the current transitional VAT system will continue to negatively impact the functioning of the internal market by failing to capture new business models, new markets and technologies, which translates into losses of competitiveness of honest EU businesses and losses in efficiency of tax administrations.

The establishment in 1993 of the single market was meant to reduce compliance costs associated with intra-EU trade, chiefly through the abolition of customs procedures.

However, according to the evaluation of the EU VAT system, the parallel introduction of the current transitional VAT system resulted in a very complex system for intra-EU trade in goods (as compared with the previous one) which led, as a consequence, to higher compliance costs for businesses trading cross-border as compared to businesses trading only domestically.

According to the evaluation, this complexity arises not only from the new specific VAT rules but also from other related provisions. In this regard, the statistical requirements that were put in place to allow identification of VAT-taxable transactions and to help record trade between Member States (the Intrastat system) have resulted in a substantial burden for intra-EU traders (estimated at 5% of the value of trade, with wide variation according to size and country).

A recent study confirmed the findings of the evaluation: on average, the VAT cost of compliance per euro of turnover is 11% higher for intra-EU trade compared with the corresponding VAT compliance per euro of turnover for domestic trade.

The complexity of the current transitional VAT system is partly the result of the divergent application of the EU VAT rules by the Member States.

According to the evaluation of the EU VAT system, differential requirements for dealing with different tax administrations are the determinants of intra-EU additional transaction costs.

The evaluation also pointed out that so long as the application of the EU VAT rules across the Member States varies, small businesses will undoubtedly continue to have considerable difficulties with intra-EU trade.

This further impacts on key issues like the place of taxation, leading to potential double taxation (to the detriment of businesses) or non-taxation (to the detriment of Member States).

In this regard different application of the EU VAT rules by the Member States is seen by stakeholders as one of the most serious obstacles to benefiting from the single market.

Such differences stem firstly from the numerous derogations and options in the VAT Directive, secondly from the discretion left to the Member States in their implementation and application and thirdly from divergent interpretations.

These differences can affect the scope of the tax, the scope and number of exemptions, the chargeability of the tax, the structure of the VAT rates applied, formal obligations such as invoicing, the rules on deduction or the organisation and efficiency of the tax authority.

However, the focus of the initiative that is here being assessed, and of the in-depth discussions held with the Member States and expert stakeholders, is limited to the complexities resulting from differences that are specifically linked to the functioning of the current transitional VAT system.

The main differences can be grouped in the following two categories:

• divergences in obligations and procedures imposed on businesses by the different Member States and
• divergences in the qualification of certain transactions and their VAT treatment between Member States.

Definitive VAT system

The legal cornerstones of the definitive VAT system. They include, in particular, the introduction of the principle of taxation in the Member State of destination and of the liability of the supplier as a rule (except where the customer is a certified taxable person). They also introduce a One Stop Shop (OSS) that would allow suppliers to account for the VAT due on their supplies of goods to other Member States in their Member State of establishment. This OSS would allow offsetting output VAT due on supplies made against input VAT incurred on purchases made within the EU. 

The concept of Certified Taxable Person does not currently exist in EU VAT legislation but would be introduced as part of the definitive VAT system. Both for the definitive VAT system and also as regards certain of the aforementioned improvements to the current system taxable persons should be able, under certain conditions, to obtain the status of a certified taxable person (CTP).

The concept of certified taxable person should allow for an attestation that a particular business can globally be considered to be a reliable taxpayer.

Certain simplification rules related to call-off stock arrangements, chain transactions and the proof of transport of goods transported or dispatched to another Member State which could be fraud-sensitive, should apply only where certified taxable persons are involved in the relevant transaction.

The certified taxable person concept should in addition allow for a gradual implementation of the definitive VAT system because during the first step of that definitive system reverse charge would apply where the acquirer, in case of intra- Union supplies of goods, is a certified taxable person.

The justification is that, the certified taxable person being by definition a reliable taxpayer, no fraud should occur as a result of VAT not being charged on intra-Union supplies of goods made for a certified taxable person.

In this context, it is essential for businesses and tax administrations that the certified taxable person status of a business can be checked immediately and online.

To that end, it is necessary that all Member States store information on businesses and their certified taxable person status in an electronic system and that the competent authorities of each Member State ensure that confirmation is provided of the certified taxable person status of any business. 

Issues related to the storage of, and the provision of access to, information regarding the certified taxable person status of businesses can, by their nature, not be decided by individual Member States since businesses and tax administrations in all Member States should, in a standardised way, be able to check the certified taxable person status of businesses established in other Member States.

This requires a common framework and an initiative in this respect requires a proposal by the Commission to amend the VAT Administrative Cooperation Regulation.

The proposal simply defines a framework regarding the certified taxable person status, while operational control and application measures remain the responsibility of the Member States. In particular, the granting or repealing of the certified taxable person status of individual taxable persons, based upon commonly agreed conditions, remains the sole competence of the Member States.

The aim is to provide the basis for the integration of the certified taxable person status into the VIES system (VAT Information Exchange System).

Currently, the VIES system is, inter alia, used to check the validity of the VAT number of a client in another Member State in order to ascertain that a supply of goods, transported or dispatched to that customer outside the Member State of supply, can be exempt from VAT.

From a practical point of view, the checking of the certified taxable person status of the customer in order not to charge VAT in case of an intra-Union supply of goods under the definitive system is quite similar as the checking of a VAT number.

Since the certified taxable person status is relevant in cross-border situations and since the IT infrastructure is already in place and used by all tax administrations, it is suitable to use the existing infrastructure and to extend its functioning in order to include the certified taxable person status of taxable persons.

To integrate the certified taxable person status, it is first necessary that Member States, who are in charge of granting and withdrawing the certified taxable person status of businesses that are established in their territory, collect this information and store it electronically.

To that end also information on the certified taxable person status of taxable persons is stored. It will be ensured that confirmation of the certified taxable person status of a particular person can be obtained by electronic means.

In the first step towards a definitive VAT system as proposed by the VAT Action Plan, in the case of intra-Union supplies of goods the reverse charge procedure should apply where the person acquiring the goods is a certified taxable person. 

The Commission proposes that the definitive regime should be implemented in 2022, with a number of “quick fixes” being introduced with effect from 2019.

The new concept of the ‘Certified Taxable Person’ is thus particularly important during the transition period until the definitive system in 2022.

It will allow CTP customers to continue purchasing goods free of VAT in other Member States and applying the reverse charge on these supplies. For the Member States, the introduction of the CTP status will reduce the amounts of VAT channelling through the OSS (since liability will take place through reverse charge), while at the same time ensuring that the application of the reverse charge does not give rise to fraud, given that only reliable traders are allowed to apply the reverse charge.

Starting 2019 according to this proposal taypayers that have such status will therefore have a more beneficial position resulting in administrative and cash flow. 

The Commission is also proposing today a number of short-term measures to improve the functioning of the VAT system until the definitive regime has been fully agreed and implemented. These quick fixes address issues explicitly requested by both businesses and Member States, and cover:

• Simplification of VAT rules for companies in one Member State storing goods in another Member State to be sold directly to customers there. This simplification is limited to Certified Taxable Persons who will no longer need to register and pay VAT in another Member State when they store goods there

• Simplification for those elements of a chain transaction which do not involve the physical movement of goods, for example when goods are sold via several traders, but physically the goods move directly from the original seller to the final buyer. This simplification is limited to Certified Taxable Persons

• New harmonised and uniform rules so that traders can more easily provide proof that goods have been transported from one EU country to another. This simplification is limited to Certified Taxable Persons

• Clarification that, in addition to proof of transport, the VAT number of the commercial partners recorded in the electronic EU VAT-number verification system (VIES) is required for the cross-border VAT exemption to be applied under the current rules.

Implementing Regulation (EU) No 282/2011 as regards certain exemptions for intra-Community transactions

 

Proposal for Council Directive

 

How to become a certified person

Issues related to the storage of, and the provision of access to, information regarding the certified taxable person status of businesses can, by their nature, not be decided by individual Member States since businesses and tax administrations in all Member States should, in a standardised way, be able to check the certified taxable person status of businesses established in other Member States.

This requires a common framework and an initiative in this respect requires a proposal by the Commission to amend the VAT Administrative Cooperation Regulation.

The proposal simply defines a framework regarding the certified taxable person status, while operational control and application measures remain the responsibility of the Member States. In particular, the granting or repealing of the certified taxable person status of individual taxable persons, based upon commonly agreed conditions, remains the sole competence of the Member States.

Taxable persons would be certified at their request by the Member State where they are established and this status would be recognised by all other Member States. In order to obtain the status of CTP, a taxable person would need to meet a set of common, objective, harmonised at EU level, criteria.

Not all the categories of businesses would become eligible to apply for this status, but only those which meet certain criteria since the objective is to ensure that only reliable taxpayers are certified.

Further the certification would not be granted to non-taxable persons, flat-rate farmers, exempt SMEs, other exempt taxable persons without the right to deduct and occasional taxable persons since they do not have the obligation to declare VAT (or that obligation is purely occasional).

The criteria to grant the status would be similar to those used to certify traders for customs purposes (Authorized Economic Operator or AEO), i.e.:

• the absence of any infringement or repeated infringements of taxation rules and customs legislation, as well as of any record of serious criminal offences relating to the economic activity of the applicant;
• the demonstration by the applicant of a high level of control of his operations and of the flow of goods, either by means of a system managing commercial and, where appropriate, transport records, which allows appropriate tax controls, or by means of a reliable or certified internal audit trail;
• evidence of financial solvency of the applicant, which shall be deemed to be proven either where the applicant has good financial standing, which enables him to fulfil his commitments, with due regard to the characteristics of the type of business activity concerned, or through the production of guarantees provided by insurance or other financial institutions or by other economically reliable third parties.

Except for the categories specifically excluded, the certification would thus be open to all businesses.

The implementation of the criteria by the Member States would need to be proportionate so as to be capable of encompassing smaller businesses. Therefore, compliant businesses could apply for such certification and obtain it after due control by the national tax authorities.

See for a codification example of VAT Control Framework: Elements of GST Control Framework - Singapore - detailed overview.

Roadmap for getting certified and realize effectiveness of the VAT function

 

Questions and Answers

Why does the EU's VAT system need reform?

The current VAT rules for cross-border trade between businesses in EU Member States date back to 1993, just after the creation of the Single Market. At the time, they were meant to be transitional.

The rules do not take into account technological developments, changes in business models or the globalisation of the economy, making them outdated. Crucially, the current VAT regime exposes EU countries to an unacceptable and damaging level of VAT fraud.

Revenue losses from this type of fraud are estimated at around €50 billion annually in the EU.Money which could have been used to build schools, roads and hospitals is instead spirited away by criminals to finance organised crime, and possibly terrorist organisations.

Member States recently identified VAT fraud as one of their top ten priorities when it comes to the fight against organised and serious international crime (see separate section on fraud).

The VAT reform proposed today would make the system more robust, simpler and fraud resilient, a system based on increased trust and cooperation between tax administrations. The Commission wants a VAT system that helps European companies to compete in global markets. Compliance costs for all businesses should also be reduced by simplifying and modernising the VAT obligations and VAT collection process.

A definitive VAT system for the EU has been a long-standing commitment of the European Commission. Recently, the Commission's VAT Action Plan explained in detail the need to come to a EU single European VAT area that is simpler and fraud-proof. The rules also need to be rebooted so that businesses can reap all the benefits of the Single Market.

What is the Commission proposing today?

The Commission is today proposing a series of fundamental principles and key reforms for the EU's VAT area which will improve and modernise the system for governments and businesses alike. Once agreed, these principles or 'cornerstones' will form the backbone of a robust EU-wide system which can keep pace with today's digital and mobile economy. The new system would also be much more fraud-proof.

The cornerstones which will be sent to Member States for agreement include:

• Tackling fraud: VAT should be charged on cross-border trade between businesses inside the EU. Currently, this type of trade is exempt from VAT, providing an easy loophole for unscrupulous companies to collect VAT and then vanish without remitting the money to the government.
• One Stop Shop: It will be simpler for companies that sell cross-border to deal with their VAT obligations thanks to a 'One Stop Shop'. Traders will be able to make declarations and payments using a single online portal in their own language and according to the same rules and administrative templates as in their home country. Member States will then pay the VAT to each other directly, as is already the case for all sales of e-services.
• Greater consistency: A move to the principle of 'destination' whereby the final amount of VAT is always paid to the Member State of the final consumer and charged at the rate of that Member State. This has been a long-standing commitment of the European Commission, supported by Member States and the European Parliament. It is already in place for sales of e-services.
• Less red tape: Simplification of invoicing rules, allowing sellers to prepare invoices according to the rules of their own country even when trading across borders. Companies will no longer have to prepare a list of cross-border transactions for their tax authority (the so-called "recapitulative statement").

Today's proposal also introduces the notion of a Certified Taxable Person – a category of trusted business who will benefit from much simpler and time-saving rules.

THE DEFINITIVE VAT REGIME
What is the biggest change?

VAT is a tax levied on most goods, products and services available for purchase in the EU. In principle, everything we buy includes VAT in the price. When selling domestically (i.e. not across borders) companies also pay VAT on the goods that they buy and which they plan to sell on to another business or to consumers. VAT is not currently charged on sales between businesses in different EU Member States.

Today's proposal envisages a future VAT system where VAT will be charged on sales that are made across borders to another country in the EU. The rate applicable in the country of destination will be charged.

The VAT on cross-border sales would be collected by the tax authority of the originating country and transferred to the country where the goods or services are ultimately consumed. In order to allow a soft transition for tax administrations and businesses, the first step of the definitive VAT system will focus only on transactions in goods.

How does the 'One Stop Shop' portal work?

Businesses that trade within the EU will be able to sort out their VAT far more simply and easily, via an online web portal (or 'One Stop Shop') in their home country. Otherwise, traders would have to register for VAT, file returns and make payments in every EU country where they operate.

The online portal would also allow VAT to be collected by the country where the sale is made and transferred to the country where the goods are consumed. A similar system is already in place and working well for sales of cross-border e-services. The Commission proposal to extend this system to online sales of tangible goods is currently being discussed by Member States in the Council.

In order to allow for a gradual transition, trustworthy businesses ('certified taxable persons') that are certified by their tax administrations, including SMEs, could continue to purchase goods free of VAT in another Member State and pay VAT in their own country.

What will this mean for companies?
The rules will become more simple and harmonised across the EU, which in turn, will make it easier for companies to do business. For example, businesses will be able to make their declarations and payments for cross-border VAT via one online portal and in their own language ('One Stop Shop').

This will lighten the administrative burden and save time and money. Those companies that fulfil certain criteria will be considered eligible to become a Certified Taxable Person, which will bring further benefits (see below).

What will this mean for national tax authorities?
Member States' governments will be able to collect billions in VAT revenues which would otherwise be lost. In addition, the rules will be made simpler for everyone, which means there will be easier and more harmonised procedures and less administrative burden for the authorities.

The definitive regime will put in place the self-policing function of the VAT system at EU level, making VAT auditing and collection easier for tax administrations.

What will this mean for consumers?

The new proposal only applies to transactions between businesses (B2B), so EU consumers will not be directly affected. However, solving the problem of tax fraud is beneficial for society as a whole.

The vast sums of money which are lost now because of fraud could be better invested in public projects and services such as schools, hospitals and roads.

In addition, cutting back on tax fraud will close down a cash cow for criminal organisations and possibly even terrorist groups.

Finally, by removing obstacles to selling goods and services across borders, the definitive regime can boost competition between firms from different countries, resulting in lower prices for the consumers.

What is a 'Certified Taxable Person'?

The concept of a Certified Taxable Person is a new initiative being proposed today to facilitate trade and make life easier for companies operating cross-border in the EU.

Provided that companies, small or big, meet a set of criteria, they can get a certificate allowing them to be considered throughout the EU to be a reliable VAT taxpayer.

A business can become a Certified Taxable Person by applying to their national tax authorities and proving compliance with a set of sufficiently harmonised and standardised pre-defined criteria including:

1. regular payment of taxes,
2. reliable internal control systems and
3. proof of solvency

Once certified, both they and the companies that do business with them will enjoy a number of simplified procedures for the declaration and payment of cross-border VAT.

The status of Certified Taxable Person will be mutually recognised by all EU Member States.

VAT FRAUD
Who commits VAT fraud?

VAT fraud is a major EU-wide problem. It is carried out by criminals and organised crime networks. VAT fraud can occur in many sectors including electronics, cars and carbon permits.

While VAT carousel fraud is set up by individuals sometimes involved in other criminal activities, fraudulent VAT schemes generate financial profits which are then subject to money laundering in the same way as profits from other criminal activities.

Which products or sectors are most prone to VAT fraud?

The most attractive goods for fraudsters have been those of high value and low volume such as mobile phones or computer chips, which generate huge amounts of VAT in the lowest number of transactions and in the shortest possible time.

In recent years, by taking advantage of the shortcomings inherent in the current VAT regime, VAT carousel fraud has rapidly moved from one product or economic sector to another with criminals quickly adapting to any counter actions taken by enforcement bodies.

VAT fraud also tends to move from traditional to new sectors where buying and selling can happen extremely quickly due to the intangible nature of the products. For example, pollution rights exchanged on the carbon-trading market have given rise to huge fraudulent schemes in the past years. One of these networks was dismantled in France between 2008 and 2009 and amounted to a loss of more than €1.6 billion for the French budget.

It is also now possible for VAT fraud to take place without any tangible goods being moved at all: carousel fraud circuits have recently moved from real economic flows to entirely virtual operations supported by fake invoices.

What are the links between VAT fraud and organised crime, including terrorism?

Several cases of VAT fraud investigated in recent years have repeatedly highlighted the link between VAT carousel fraud and money laundering:

• In 2016, an EU-wide VAT fraud and money laundering network operating in Spain and Portugal was dismantled. It had been committing VAT fraud with fuel oil and precious metals and laundering the proceeds.
• A 2015 case involved the dismantling of an organised crime network operating in Czech Republic, Netherlands, Germany and Poland.

In addition, investigations are ongoing at Member States level which could potentially reveal links to the financing of terrorist activities.

A recent study by the European Parliament's PANA Committee revealed that, according to EUROPOL, 388 out of the 3,469 entries appearing in the so-called Panama papers were connected to VAT fraud operations. Fighting large-scale VAT fraud implies tackling the money laundering processes of fraudsters as well.

According to another EU study, 21 cases of EU VAT fraud between 2004 and 2010 involved organised crime, with the proceeds potentially being used to finance other types of crime, such as drug trafficking, trafficking in human beings, identity fraud, alcohol smuggling and counterfeiting.

What is missing trader fraud (MTIC) and VAT carousel fraud?

VAT fraud can occur when a company that has collected VAT from its buyer and should pay this amount to the tax authority does not pay but instead disappears. The business owner simply vanishes with the money. Most fraud takes place when the company buys goods from another Member State, because purchasing the goods is VAT-free. When selling the goods on domestically, the company receives the entire amount of VAT, which it pockets. Because the company disappears, this type of fraud is called missing trader fraud.

Carousel fraud goes even further. In this case the same goods are bought and resold by the fraudster several times via middlemen. Each time the amount of collected VAT increases and the company either disappears or becomes insolvent before the tax authority can collect the accumulated VAT. With carousel fraud, the same product goes around several times before the fraudsters disappear.

Why are the current rules prone to fraud?

The nature of VAT collection, whereby the money is collected step-by-step all along the production chain, helps incentivise companies to follow closely their VAT obligations. In this way, they can claim back the VAT they pay when buying and the full amount of VAT is finally paid only by the final consumer.

But goods sold across borders in the EU are today exempt from VAT. At the same time, the company buying the goods must charge VAT when selling on to another business or to a final consumer in the same Member State. This gives unscrupulous businesses the opportunity to simply pocket the full amount of VAT and disappear.

There are no adequate cross-border control systems that can operate quickly enough and this problem forms the root of a significant amount of fraud.

For example, significant MTIC fraud or carousel fraud can occur within a single month, which is too short for the tax authority to detect the fraud and to react.

How will the switch to a definitive VAT regime help to fight VAT fraud in the EU? 

The proposed cornerstones of a definitive regime scrap the exemption of VAT that is currently in place for cross-border trade within the EU, which is the main case of large-scale, cross-border VAT fraud today.

In future, VAT should be collected and paid in the same way as for domestic transactions. This would dramatically decrease the risk of non-payment of VAT to governments and eliminate the main weakness of today's cross-border VAT calculation (see diagram).

In short, the proposed rules would simplify the EU VAT area and make it more difficult to commit fraud. A robust single European VAT area would treat cross-border transactions in the same way as domestic transactions (i.e. cross-border trade will no longer be exempt from VAT), putting an end to the inbuilt weaknesses of the system.

How does this proposal fit into the EU's fight against organised crime?

Member States have identified missing trader intra-community fraud (MTIC fraud or "carousel fraud" if it is repeated over and over again with the participation of the same companies) as one of ten EU priorities in the fight against organised and serious international crime for the period 2018-2021.

VAT fraud needs to be tackled with the same vigour as other international crimes such as cybercrime, drugs and money laundering.

Member States can only fight VAT carousel fraud efficiently through close cooperation at both national and EU level. At national level, competent actors including tax authorities, financial intelligence units, law enforcement bodies and judicial authorities need to work together.

At EU level, we believe that close cooperation and action between Member States and all competent EU bodies including the EUROFISC network, EUROPOL, EUROJUST, OLAF and the upcoming European Public Prosecutor Office is needed.

SHORT-TERM 'QUICK FIXES'

Why is the Commission proposing 'Quick Fixes' to improve the VAT system? 

The Commission is also proposing today a number of short-term measures to improve the functioning of the VAT system until the definitive regime has been fully agreed and implemented.

These quick fixes address issues explicitly requested by both businesses and Member States, and cover:

• Simplification of VAT rules for companies in one Member State storing goods in another Member State to be sold directly to customers there. This simplification is limited to Certified Taxable Persons who will no longer need to register and pay VAT in another Member State when they store goods there.
• Simplification for those elements of a chain transaction which do not involve the physical movement of goods, for example when goods are sold via several traders, but physically the goods move directly from the original seller to the final buyer. This simplification is limited to Certified Taxable Persons.
• New harmonised and uniform rules so that traders can more easily provide proof that goods have been transported from one EU country to another. This simplification is limited to Certified Taxable Persons.
• Clarification that, in addition to proof of transport, the VAT number of the commercial partners recorded in the electronic EU VAT-number verification system (VIES) is required for the cross-border VAT exemption to be applied under the current rules.

NEXT STEPS

What are the next steps for this proposal?

The proposal will be forwarded to the European Parliament for consultation and to the Council of Ministers for their agreement. It will require unanimous agreement from all Member States in the Council before it can enter into force.

A second directive overhauling the whole VAT Directive will be proposed in which the cornerstones will be implemented and the current transitional articles will be replaced or deleted.

Further changes regarding the administrative cooperation rules and substantial IT developments will be needed in order to ensure the proper operation of the system.

The adoption of this second proposal is currently scheduled for 2018 and the definitive regime should enter into application in 2022.

Will these new rules affect trade with suppliers outside of the EU? 

No, the new proposal only applies to commercial transactions within the EU.

Who have you consulted ahead of this proposal and what was the outcome?

Throughout the process of drafting the proposals, interest groups and stakeholders were consulted regularly through conferences, working groups with representatives of Member States (Group on the Future of VAT) and business (VAT Expert Group).

A public consultation also ran for three months until March 2017, resulting in 121 contributions.

What other VAT reforms are planned?

This proposal is part of the Commission's VAT action plan and there are several other initiatives to change the EU's VAT area planned before the end of the year.

 Press release

The European Commission has today launched plans for the biggest reform of EU VAT rules in a quarter of a century. The reboot would improve and modernise the system for governments and businesses alike. Overall, over €150 billion of VAT is lost every year, meaning that Member States miss out on revenue that could be used for schools, roads and healthcare. Of this, around €50 billion - or €100 per EU citizen each year - is estimated to be due to cross-border VAT fraud. This money can be used to finance criminal organisations, including terrorism. It is estimated that this sum would be reduced by 80% thanks to the proposed reform.

The proposed VAT reform would also make the system more robust and simpler to use for companies. The Commission wants a VAT system that helps European companies to reap all the benefits of the Single Market and to compete in global markets. Businesses trading cross-border currently suffer from 11% higher compliance costs compared to those trading only domestically. Simplifying and modernising VAT should reduce these costs by an estimated €1 billion.

A definitive VAT system that works for the Single Market has been a long-standing commitment of the European Commission. The 2016 VAT Action Plan explained in detail the need to come to a single European VAT area that is simpler and fraud-proof.

With today's package, the Commission proposes to fundamentally change the current VAT system by taxing sales of goods from one EU country to another in the same way as goods are sold within individual Member States. This will create a new and definitive VAT system for the EU.

We will seek agreement on four fundamental principles, or 'cornerstones' of a new definitive single EU VAT area:

• Tackling fraud: VAT will now be charged on cross-border trade between businesses. Currently, this type of trade is exempt from VAT, providing an easy loophole for unscrupulous companies to collect VAT and then vanish without remitting the money to the government.
• One Stop Shop: It will be simpler for companies that sell cross-border to deal with their VAT obligations thanks to a 'One Stop Shop'. Traders will be able to make declarations and payments using a single online portal in their own language and according to the same rules and administrative templates as in their home country. Member States will then pay the VAT to each other directly, as is already the case for all sales of e-services.
• Greater consistency: A move to the principle of 'destination' whereby the final amount of VAT is always paid to the Member State of the final consumer and charged at the rate of that Member State. This has been a long-standing commitment of the European Commission, supported by Member States. It is already in place for sales of e-services.
• Less red tape: Simplification of invoicing rules, allowing sellers to prepare invoices according to the rules of their own country even when trading across borders. Companies will no longer have to prepare a list of cross-border transactions for their tax authority (the so-called 'recapitulative statement').

Today's proposal also introduces the notion of a Certified Taxable Person – a category of trusted business that will benefit from much simpler and time-saving rules. Four 'quick fixes' have also been proposed, to come into force by 2019.

These short-term measures were explicitly requested by Member States to improve the day-to-day functioning of the current VAT system until the definitive regime has been fully agreed and implemented.

SAP add-on for e-invoicing via clearance model

KGT SAP add-ons for SAF-T, e-invoicing and MTD UK for VAT work as a standalone application within the SAP system and does not change existing customer SAP functionality or processes. It is fully configurable with custom namespace /KGT.

KGT partnered up with SAP regarding 'SAP Advanced Compliance Reporting for SAP HANA'. The 'Advanced Compliance Reporting' (ACR) service enables you to configure, generate, analyze, and electronically submit statutory reports that contain indirect taxes, such as value-added tax.

KGT provides also S/4 HANA transformation support.

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