Feasibility and economic evaluation study Final Report - 30 June 2015
The European Commission published a study prepared by EY that is titled “Implementing the destination principle to intra-EU B2B supplies of goods”.
The feasibility study examines issues of the current VAT model in force and the level of EU VAT fraud. It as well also takes into consideration the compliance costs by taxable persons, especially those who conduct cross-border transactions versus domestic.
In this report, administrative costs for a Member State Tax Authority will include costs relating to the following activities: processing VAT registrations, undertaking VAT audits, reviewing VAT returns, reviewing EC Sales Lists (recapitulative statements), helpline and written query handling, and the implementation of new legislation.
The European Commission has identified two fundamental issues with the current model of taxation: namely the additional compliance costs borne by businesses that conduct cross-border trade when compared to those businesses that only trade domestically and the occurrence of VAT fraud.
The European Commission has commissioned EY to conduct a study of five policy options designed to enable the implementation of a destination based VAT system across the EU that to some extent addresses these issues.
Option 1: ‘Limited improvement of current rules’
This involves improving the current rules without modifying them fundamentally. This option seeks to reduce the compliance obligations and costs for businesses engaged in particular cross-border transaction types, namely call-off and consignment stock transactions and chain transactions, as well as extending the use of a range of simplifications already contained within the legislation.
It seeks to address VAT fraud by clarifying the documentary evidence required to support the exemption of an intra-community supply. In addition, it also considers implementing a requirement for the customer to sign a document declaring receipt of the goods in the Member State of delivery.
Option 2: ‘Taxation following the flow of the goods’
This involves adapting current rules whilst still following the flow of the goods with the supplier charging the VAT of the Member State of destination.
This option aims to reduce compliance obligations and costs for businesses engaged in cross-border trade by utilising a single One-Stop Shop (OSS) return through which the supplier can not only account for VAT due on sale, but also offset against this VAT incurred on purchases in other Member States.
It also seeks to address levels of VAT fraud by making VAT accountable on the dispatch of the goods, rather than the self-accounting that currently occurs on the receipt.
Option 3: ‘Reverse charge following the flow of goods’
This involves adapting current rules whilst still following the flow of goods with the customer applying the reverse charge mechanism in the Member State of destination.
This option aims to reduce compliance obligations and costs for businesses engaged in cross-border trade by harmonising the terminology associated with transactions and the method through which VAT is accounted for. No additional measures against VAT fraud are considered under this option.
Option 4: ‘Alignment with the place of supply of services’
This option aims to reduce compliance obligations and costs for businesses engaged in cross-border trade by harmonising the place of supply for services and goods.The customer will apply the reverse charge in its Member State of establishment.
Various anti-fraud measures may be implemented under this option. For example, there may need to be specific mention on the invoices and/or on the recapitulative statement about the location of the goods.
Furthermore, the treatment of the sale as B2B may become exclusively dependent on the provision of a valid VAT number by the customer to the supplier.
Option 5: ‘Taxation following the contractual flow’
This involves alignment with the contractual flow, with the supplier charging VAT of the Member State where the customer is established.
This option aims to reduce compliance obligations and costs for businesses engaged in cross-border trade by utilising a single One-Stop Shop (OSS) return through which the supplier can not only account for VAT due on sale, but also offset against this VAT incurred on purchases in other Member States.
It also seeks to address levels of VAT fraud by making VAT accountable on the dispatch of the goods, rather than the selfaccounting that currently occurs on the receipt.
As part of the study, EY has gathered information from businesses, tax experts, Member States’ Tax Authorities and additional sources in order to make a comparison against the current “As Is” taxation model and also determine the impact of the implementation of each of the five proposed policy options.
This information aims to assess the impact of the five policy options from both a qualitative and quantitative perspective.
To this end, information has been obtained on business compliance costs, tax administration costs, cash flow costs, VAT fraud implications, legislative implications and aspects of practical implementation for each of the five proposed policies.
In addition to the collection and analysis of this information, EY has provided a conclusion as to whether the policy options have a potential to address the two fundamental issues and what (if any) impact there will be on the European economy as a whole.
