EU Plans VAT System Revamp With ‘Reliable Taxpayer’ Designations

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By Joe Kirwin

The European Commission Oct. 3 will propose plans to overhaul the EU’s value-added tax system with the use of reverse-charging to counter fraud, alongside certifying a business as a “reliable taxpayer” on a global basis.

Based on the multi-step, multi-year proposal seen by Bloomberg BNA, the cornerstone of the first phase will be a new “certified taxable person” certificate available to businesses that meet certain conditions. With the CTP certificate, a business will then be able to use a range of simplified rules, including the controversial “reverse charge” scheme to help counter fraud.

“The concept of CTP allows for an attestation that a particular business can globally be considered to be a reliable taxpayer,” the draft proposal said. “The CTP concept will allow for a gradual implementation of the definitive VAT system because, in the first step of that system, reverse charge will apply where the acquirer, in the case of intra-EU supplies, is a CTP.”

The new plan aims to reduce cross-border fraud that EU officials estimate is costing the trading bloc’s 28 member states more than $180 billion a year—primarily due to traders manipulating current rules that apply to sales across EU country borders.

Destination Principle

The overall concept behind the proposal is to implement the “destination principle” for cross-border sales that will shift the applicable VAT rate to where goods and services are consumed. The new system will also include a “one-stop-shop” system for businesses when it comes to processing and paying VAT—a process already in use for the cross-border sales of electronic services.

Recognizing that reverse charging is controversial, as some member states are in favor and others are opposed, the proposal states that “the justification is that, the CTP being by definition a reliable taxpayer, no fraud should occur as a result of no VAT being charged on intra-EU supplies made for a CTP.”

The proposal’s various quick fixes, which would only be available to CTP-certified businesses, call for:

  •  simplification and harmonization of rules regarding call-off stock arrangements, where a merchant sells goods in bulk to a warehouse in another member state;
  •  recognition of the VAT identification number of the customer as a substantive condition to exempt from VAT an intra-EU supply of goods;
  •  simplification of rules to ensure legal certainty regarding chain transactions.

Gerhard Huemer, the economic policy director of the European Association of Craft, Small and Medium-Sized Enterprises (UEAPME) , told Bloomberg BNA that for small companies, a temporary reverse-charging scheme isn’t practical. He said UEAPME would prefer the commission stick to a plan for extending the one-stop-shop VAT scheme, as it has recently done with a pending EU VAT electronic commerce proposal.

“We see some advantages—especially for large companies—of a specific treatment of certified tax persons, but this does not help the majority of SMEs at all,” Huemer told Bloomberg BNA in an Oct. 2 email.

VAT Rates

The Oct. 3 legislative proposal will be followed up by another one in November on VAT rates designed to remove much of the current EU single-market fragmentation, caused by a wide variety of rates and exemptions including reduced or zero-rates. Currently, VAT rates in the EU range from 15 percent to more than 25 percent.

“In fact, with goods and services being taxed in the member state of destination, suppliers derive no significant benefit from being established in lower-rate member states,” according to the proposal. “Greater diversity in VAT rates would therefore no longer disrupt the functioning of the single market.”

The commission will also announce that in November, a special VAT for small and medium-sized enterprises will be designed to help them reduce costs in a “destination-based” VAT system.

In 2018, the commission will propose legislation to apply the destination-based VAT system to cross-border sales of services.

Pending VAT Proposals

The new EU plan on VAT also raises questions about two pending VAT proposals. One includes a temporary reverse-charging scheme that member states could adopt under certain conditions. Countries led by the Czech Republic insist reverse-charging is the most efficient way to reduce carousel or “missing trader” fraud involving cross-border sales of goods.

EU finance ministers were close to reaching an agreement in June on the temporary reverse-charging proposal.. However, France led opposition to the proposal, insisting it would be better to wait for the commission overhaul proposal Oct. 3.

As a result of the failure to approve in June the temporary reverse charging proposal, the Czech Republic and several other countries refused to support a pending proposal to give EU member states the option to reduce VAT on digital publications.

Officials for Estonia, which holds the rotating EU presidency, told Bloomberg BNA in an email in September that it has not scheduled any political discussions at the ministerial level on either the pending reverse-charging proposal or the reduced VAT rate for digital publications. Estonian leaders are waiting to see if bilateral negotiations between France and the Czech Republic can resolve differences on reverse-charging.

A Czech Republic official, who spoke to Bloomberg BNA on the condition of anonymity, said upcoming parliamentary elections in the country have put on hold the Czech government position on both the temporary reverse charging proposal and the optional reduced-VAT on digital publications.

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 in London at psukhraj@bna.com

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