EU Faces Showdown Over VAT, E-Publications, Reverse-Charging

By Joe Kirwin

European Union finance ministers June 16 will try to reach agreement on legislation that would allow EU countries to lower value-added taxes on digital publications and a separate measure that would implement a controversial reverse-charging mechanism to fight VAT fraud.

Malta, which holds the rotating EU presidency, is hoping that nearly six months of closed-door negotiations and various compromise texts on both issues will result in separate agreements at the EU Council of Economic and Financial Affairs meeting. However, Maltese officials and EU member-nation diplomats acknowledged to Bloomberg BNA on the eve of the meeting that the two legislative proposals have become linked, and the disputes could scuttle a June 16 agreement.

“Some member states have made approval of the VAT and digital publication proposal conditional on the VAT and reverse-charging proposal getting approved,” a Maltese diplomat told Bloomberg BNA on the condition of anonymity. “Others have made approval of the reverse-charging mechanism conditional on the approval of VAT and digital publications. It it is very difficult to predict what will happen.”

“We have made it clear that we will not be offering any new compromises, so it will be up to member states to decide what they want to do,” the Maltese official told Bloomberg BNA.

Unanimous Consent Required

As is the case with all EU tax legislation, unanimous consent of all 28 members will be required to approve both legislative proposals.

Based on negotiations to date, the proposal calling for VAT reverse-charging faces the biggest hurdles. Some EU countries led by the Czech Republic, Austria, and Slovakia are the driving force behind having the right to use VAT reverse-charging. They insist it will make it possible for their national tax authorities to reduce cross-border VAT fraud, especially the notorious “carousel” schemes estimated to cost the EU as much as 50 billion euros ($56 billion) annually.

However, other countries, as well as the European Commission, see VAT reverse-charging on cross-border sales to be a major shift away from the fundamentals that underpin a VAT system. Moreover, they believe transferring—or reversing—the responsibility for collecting VAT to the retailer disrupts the multiple-transaction chain of VAT payments that extends from the original supplier to the consumer.

VAT Overhaul Due Later in 2017

The European Commission is due to propose an overhaul to the EU VAT system, which it says would be more effective at reducing VAT fraud, later in 2017. Some EU countries led by France, Italy, and Spain, with tentative support from Germany, insist that allowing reverse-charging will compromise efforts to overhaul the EU VAT system.

Lobbying groups representing retail businesses led by the European Association of Craft, Small and Medium-Sized Enterprises (UEAPME) insisted in a position paper issued in April that reverse-charging will lead to “uncertainty as well as to additional risks and costs” for small and medium-sized companies.

Meanwhile, negotiations over the pending plan to allow an option to reduce VAT on digital publications has hit a snag, as some countries led by the Czech Republic, Slovakia, Austria, and Denmark have raised liability concerns over claims they are violating EU fundamental rights guaranteeing “equal treatment” if they choose not to exercise the option.

EU Legal Service

However, the EU Council of Ministers’ legal service issued an opinion April 28 insisting the liability concerns on equal treatment aren’t warranted.

Maltese presidency officials told Bloomberg BNA they believe the liability concerns about equal treatment is a negotiating tactic to get their way with the VAT reverse-charging proposal.

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

To contact the editor responsible for this story: Penny Sukhraj at psukhraj @bna.com

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