European Parliament Backs VAT Reverse Charging

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By Joe Kirwin

Nov. 25 — The European Parliament gave overwhelming support to the use of value-added tax reverse charging by European Union member states in order to clamp down on fraud for cross-border sales that annually costs governments close to $200 billion.

EU lawmakers on Nov. 24 backed the provisions and other measures for VAT overhaul by a vote of 459-87, with 74 abstentions. The support for reverse charging, which leaves the collection of the levy to the final retail sale in an often-lengthy transaction chain, comes despite opposition from the European Commission and European businesses.

“We need reforms quickly in order to reduce the massive VAT gap in the EU,’' said Werner Langen, a German member of the European Parliament who steered the resolution. “We need VAT reforms quickly to tackle fraud and make the collection of VAT more transparent and less bureaucratic.”

Reverse-charging is seen by some EU member countries such as Austria, Germany, the Czech Republic and others as a panacea against VAT scams such carousel and missing trader fraud—often run by organized crime groups that either collect VAT and disappear without paying it to governments or apply for reimbursements for VAT they never paid.

In the case of the Czech Republic, the government threatened to block the EU Anti-Tax Avoidance Directive, approved in July, designed to clamp down on multinational tax evasion and avoidance unless the government was given assurances it could adopt a reverse charging mechanism. The Czech government insisted that VAT fraud was a far more serious problem than corporate tax evasion.

Sales Tax

Speaking at a Nov. 23 debate in the European Parliament, European Commission Vice President Jyrki Katainen insisted that the reverse charging approach doesn’t offer the same potential to reduce fraud as other revamps to the “fractionated’’ system that has been at the core of the EU VAT system since it was initiated with the launch of the EU single market.

“Actually, replacing the VAT by a sort of sales tax could significantly increase fraud and administrative burdens for business. This is not the right approach,’' Katainen said.

Huge Risks

The European Association for Craft, Small-and Medium Sized Enterprises—known by its French acronym EUAPME and which represents more than 12 million companies throughout the EU—told Bloomberg BNA there are huge risks with putting the collection of VAT at the retail stage.

“This would distort the current VAT system based on taxation of value added throughout the whole production chain,” Gerhard Huemer, a tax expert with EUAPME, told Bloomberg BNA in a telephone interview.

“There is also a high risk to replace existing cases of fraud by new ones, whose full extent can not be estimated yet.”

Pilot Programs

As a result of the Czech Republic’s demands in July, the European Commission is expected to reluctantly approve temporary pilot programs for reverse charging by the end of 2016. They must be approved unanimously in the Council of Ministers before they can be put in place.

“If the reverse charge systems are only implemented temporarily and only by certain member states, they create additional costs and uncertainty for SMEs, who have to deal with different clients in different ways and have adaptation costs at the beginning and the end of such temporary measures,” Huemer said.

He added that reverse charging also poses risks for SMEs because they would be liable for VAT if it turned out that a transaction understood to be a business-to-business transaction was subsequently classified by tax authorities as a business-to-consumer sale.

Complicates Plans

The support for provisional, pilot reverse charging schemes are expected to complicate the commission’s plans to propose a legislative overhaul of the VAT system for cross-border sales in 2017.

The European Commission believes that the best way to tackle missing trader and carousel fraud would be through a system in which VAT is collected through the transaction chain in the original member state, where cross-border sales and services take place.

The commission insists that with increased cooperation among EU tax authorities and the use of special computerized data systems, some of which are currently being put in place, this preferred approach could be implemented by 2021.

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

For More Information

The European Parliament resolution on VAT overhaul and reverse charging is at http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//NONSGML+TA+P8-TA-2016-0453+0+DOC+PDF+V0//EN.

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