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By Joe Kirwin
European Union legal advisers to the Council of Ministers issued an opinion warning of potential market disruption that could follow if current plans to introduce reverse charging of value-added tax, to help counter fraud, proceed.
The EU Council of Ministers’ legal service concluded that the VAT reverse-charging proposal doesn’t “contain sufficient conditions” to ensure the plan will cause only minimal disturbance to the EU single market, according to a confidential document seen May 25 by Bloomberg BNA.
It added that the proposal doesn’t “ensure its compatibility with the principle of proportionality and the requirement to cause the least possible disturbance to the internal market.”
The advisers also said the plan deviates from the EU’s general VAT principles. According to the European Commission reverse-charging proposal put forward in December 2016, it would apply only to cross-border sales of goods and services worth more than 10,000 euros ($11,000).
The legal opinion, the first and only opinion from the Council of Ministers’ legal advisers on the proposal, threatens to lengthen the odds on agreement for introducing VAT reverse-charging into the bloc.
The legal analysis comes at a critical juncture as Malta, which holds the rotating EU presidency, is under pressure from some EU members led by the Czech Republic, Slovakia, and Austria to get an agreement on the plan in June.
The proponents say VAT reverse-charging is crucial for combating the hundreds of billions of dollars lost via schemes known as carousel or “missing trader” fraud, where suppliers of goods collect VAT and then disappear or collect refunds on VAT they collected or paid out. However, many other EU nations have been reluctant to embrace the plan because it will be a dramatic shift away from the “fractionated” VAT payment principle.
Besides warning about the potential single market disruptions, the Council of Ministers’ legal opinion noted the lack of a “detailed examination of possible alternative means to achieve, with equal effectiveness,” reduced VAT fraud. “It is limited to considerations of convenience, without, however, providing any in-depth comparative study of the measure envisaged and other means to combat VAT fraud,” the confidential document said.
Further complicating the chances of swift approval of the legislation in the Council of Economic and Financial Affairs, the legal service emphasized that the reverse-charging proposal must be temporary. The commission proposal calls for the reverse charging exemption to end in 2022.
However, the Czech Republic and other proponents insist that 10 years is a more suitable period to use reverse charging to effectively fight fraud.
The European Commission reluctantly proposed the temporary use of VAT reverse charging after the Czech Republic made it a condition of its approval of the EU Anti-Tax Avoidance Directive, which is designed to clamp down on multinational company tax avoidance estimated to cost EU countries more than $60 billion a year. The Czech Republic noted that VAT fraud costs governments more than double the amount lost from corporate tax avoidance and evasion, and therefore the use of reverse charging should be just as much if not more of a political priority.
Besides being skeptical about the merits of VAT reverse charging, the European Commission has insisted a more effective way to fight fraud is to overhaul the VAT regime. It will present a new EU VAT proposal later in 2017 that will be geared around an EU-wide web portal designed to ensure the chain of VAT payments for cross-border sales of goods and services are paid, and can be easily traced when they aren’t.
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