This Inception Impact Assessment aims to inform stakeholders about the Commission's work in order to allow them to provide feedback on the intended initiative and to participate effectively in future consultation activities.
Stakeholders are in particular invited to provide views on the Commission's understanding of the problem and possible solutions and to make available any relevant information that they may have, including on possible impacts of the different options. The Inception Impact Assessment is provided for information purposes only and its content may change.
This Inception Impact Assessment does not prejudge the final decision of the Commission on whether this initiative will be pursued or on its final content.
Proposal for a more efficient VAT treatment of cross-border business-to-business (B2B) supplies of goods and a simpler, fraud-proof definitive VAT system
In the 2016 VAT Action Plan and in the 2017 Work Programme the Commission outlined its plans towards a single EU VAT area. Following this, four VAT-related proposals are to be adopted in 2017: the definitive VAT system, the reform of VAT rate-setting, the SME VAT package and an initiative on improved administrative cooperation.
The proposal for a simpler and fraud-proof definitive VAT system is closely connected with the three other initiatives. When the common system of VAT was established in 1967, Member States made the commitment to establish a definitive VAT system operating within the European Union (EU) in the same way as it would within a single Member State.
Since the political and technical conditions were not ripe for such a system when the physical borders between Member States were abolished by the end of 1992, transitional VAT arrangements were adopted.
The existing VAT legislation provides that these temporary rules which are still in force have to be replaced by definitive arrangements. As agreed by the European Parliament and the Council, the definitive VAT system should be based on the principle of taxation at destination. This initiative will also take into account recent Council conclusions and the European Parliament resolution on the way to improve the VAT treatment of cross-border transactions.
VAT rate reform
In the 2016 VAT Action Plan, and the 2017 Work Programme the Commission outlined its plans towards a single EU VAT area.
Following this, four VAT-related proposals will be adopted in 2017: definitive VAT system, the reform of VAT rate-setting, a simplification package for small and medium sized companies (SME package) and an initiative on improved administrative cooperation.
The reform of VAT rates is particularly linked with the initiative on the definitive VAT regime because the existing extensive system of derogations to the VAT rates is largely set to expire when the definitive regime is adopted. Thus, this proposal will also have to determine the regime that will apply following the expiration of the derogations to the VAT rates.
The VAT Action Plan highlighted that the rules on VAT rates should be updated to give more flexibility to Member States in setting VAT rates, also taking into account the subsidiarity principle set out in Article 113 TFEU.
The existing regime for VAT rates was devised with the objective to put in place a VAT system based on the origin principle, under which the VAT rate applicable to a transaction is determined by the Member State where the seller is located.
To avoid competitive distortions by different VAT rates for the same product pending the origin of the seller, this system would require a very high degree of rate alignment among Member States.
Given that, already upon the entry into force of the VAT Directive, there were stark differences in the level of VAT rates, the legislator, encouraging rate convergence amongst Member States, set floors on the level of VAT rates, or limited the application of reduced rates.
In 2011, however, given the lack of progress on rate convergence, the Commission with agreement of the Council and the European Parliament decided to abandon the objective of a VAT system based on the origin principle in favour of one based on the destination system, according to which the VAT rate applicable is the one where the consumption normally takes place.
In this system, goods sold in a Member State are subject to the VAT rate set by that Member State.
Suppliers derive no significant benefit from being established in a lower-rate Member State, so VAT rate differences have less potential to disrupt the functioning of the single market. This opened up the possibility to reform rules on rates to make them less constraining for Member States.
Finally, it should be noted that a specific proposal on rates for e-publications was adopted by the Commission on 30 November 2016 - following a particularly urgent need to adapt VAT to digital technologies. Under the general proposal on VAT rates, such targeted proposals would not be necessary anymore.
Review of the special scheme for small enterprises
In the 2016 VAT Action Plan and the 2017 Work Programme the Commission outlined its plans towards a single EU VAT area.
Following this, four VAT-related proposals will be adopted in 2017: definitive VAT system, the reform of VAT rate-setting, a simplification package for small and medium sized companies (SME VAT package), and an initiative on improved administrative cooperation.
The review of the SME scheme, that is also part of the Single Market Strategy, is particularly linked with the initiative on the definitive VAT regime because the current provisions of the SME scheme are temporary in character and apply only until the definitive arrangements for cross-border trade enter into force.
Similarly to the e-commerce proposal6, the review aims at simplifying VAT rules for small businesses, including startups, but its scope is much larger. It covers exemption, simplification and burden reduction measures and is not limited to businesses selling online, but covers broadly all the sectors of economic activity.