EU Deadlocked Over Company Exemption for New VAT System

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By Joe Kirwin

The push to overhaul the European Union value-added tax regime has stalled because a majority of member nations oppose an exemption for companies to transition to a destination-based scheme for cross-border sales.

The exemption would apply if companies qualify for a “certified taxable person” status. Multiple EU diplomats, speaking to Bloomberg Tax on the condition of anonymity, said they don’t expect progress on the overhaul proposal until the provision is dropped.

“There is really no justification for the certified taxable person system if we are going to move to a destination-based system,” said an EU diplomat, who has participated in the negotiations over the past three months chaired by EU presidency holder Bulgaria. “There are a large majority of countries that believe the CTP should be hived off. Once that happens talks can advance.”

The proposal would tax at destination for intra-EU cross-border supplies of goods, and the seller would be responsible for charging and collecting VAT. If the buyer is a reliable taxpayer, known in the proposal as a “certified taxable person,” then the buyer must make the VAT payment directly to the member nation’s treasury.

The new system is meant to help EU member nations reduce overall VAT fraud, which is estimated to cost about 150 billion euros ($184 billion) each year.

Some Support

The proposal calls for a range of quick fixes, including a one-stop-shop (OSS) portal processing system.

Another EU diplomat who is also part of the negotiations said those provisions have overwhelming support. Besides some concerns from Germany, “almost all other countries are in favor” and the certified taxable person provision is the element holding up progress, the diplomat said.

The system would allow companies to make declarations and payments for VAT in their home country for cross-border sales. The home-based tax authorities would then forward the VAT to the destination country tax authorities. The system is already use for cross-border sales in electronic services and is soon to be put in place for online cross-border sales.

The European Association of Craft, Small and Medium-Sized Enterprises is also lobbying against the certified taxable person provision in particular, and the destination-based system in general. The organization is known by its French acronym UEAPME and represents more than 12 million companies.

“UEAPME sees huge costs and risks for SMEs if they have to apply VAT rates of the member state of destination and if they have to differentiate between customers applying normal rules and those who are a Certified Taxable Person,” the lobby group said in a position paper released March 12.

Crucial to Fight Fraud

The European Commission insists the reforms are crucial to reduce VAT fraud, which it says is helping organized crime and terrorist groups. The Oct. 4 proposal called for the certified taxable person provision and the quick fixes to take effect by 2019.

Bulgarian officials say they hope to have an agreement by the end of June, when their term as EU rotating presidency ends.

“The definitive VAT regime is a priority for the Bulgarian presidency,” Genoveva Chervenakova, a spokeswoman for the Bulgarian presidency said in an April 10 email. “The text for the quick fixes is expected to be agreed in May.”

While the VAT overhaul negotiations continue, the European Commission is due in May to make new VAT proposals that are supposed to establish the legal cornerstone for the definitive, destination-based VAT regime.

“These upcoming proposals will provide the technical details on how to define where and how sales take place, how it is charged and collected on a practical basis and how special VAT schemes should be treated,” European Commission spokeswoman Vanessa Mock said in an April 10 email.

VAT Stalemate

Two other key EU VAT proposals are at the top of Bulgaria’s agenda. The proposals, under discussion by member nations in the Council of Economic and Financial Affairs, have been deadlocked since June of 2017. One would give EU member nations the right to allow reduced or zero VAT rates for digital publications.

The second would give member nations the right to adopt a temporary generalized VAT reverse charging system for certain high-valued goods worth more than 10,000 euros ($12,300).

All of the EU VAT proposals require the unanimous consent of the 28 EU member states in the Council of Ministers. The European Parliament only has a consultative role on EU tax legislation.

Both proposals have become politically entangled. The Czech Republic conditioned its approval of the 2016 EU Anti-Tax Avoidance Directive on the European Commission proposing the generalized, temporary VAT reverse charging legislation.

The commission proposed the idea in December 2016, but also raised concerns it would delay the implementation of the new, definitive, destination-based VAT system and hurt the EU single market.

In the subsequent Council of Minister negotiations France has taken up the commission arguments and has blocked the reverse charging proposal. In response, the Czech Republic blocked progress on the proposal to drop VAT rates for digital publications, a provision France has championed.

French, Czech Detente

In the past two months, French and Czech officials have held bilateral meetings, including one between French President Emmanuel Macron and new Czech Prime Minister Andrej Babis at an March 23 EU summit. Babis also appealed to Macron in a letter seen by Bloomberg Tax.

As a result of the bilateral meetings, Chervenakova said the Bulgarian presidency “is willing to make some efforts to improve the situation and explore the possibilities to reach a compromise decision.”

Meanwhile the European Commission has been highly critical of the way the proposal for reduced VAT rates on online publications has been held hostage for the reverse charging VAT proposal.

“The proposal to ensure equal treatment in VAT rates for e-publications and their printed equivalents is a completely separate initiative and should be treated as such in the Council discussions,” Mock said.

To contact the reporter on this story: Joe Kirwin in Brussels at correspondents@bloomberglaw.com

To contact the editor on this story: Penny Sukhraj at psukhraj@bloombergtax.com

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