The European Commission on Wednesday launched plans for the biggest reform of EU VAT rules in a quarter of a century.
According to the Commission, the reboot would improve and modernize the system for governments and businesses alike. Overall, over€150 billion of VAT is lost every year, meaning that Member States miss out on revenue that could be used for schools, roads and healthcare.
Of this, around €50 billion – or €100 per EU citizen each year – is estimated to be due to cross-border VAT fraud. This money can be used to finance criminal organizations, including terrorism. It is estimated that this sum would be reduced by 80% thanks to the proposed reform.
The proposed VAT reform would also make the system more robust and simpler to use for companies, the Commission said.
The Commission wants a VAT system that helps European companies to reap all the benefits of the Single Market and to compete in global markets. Businesses trading cross-border currently suffer from 11% higher compliance costs compared to those trading only domestically. Simplifying and modernizing VAT should reduce these costs by an estimated €1 billion.
A definitive VAT system that works for the Single Market has been a long-standing commitment of the European Commission. The 2016 VAT Action Plan explained in detail the need to come to a single European VAT area that is simpler and fraud-proof.
Vice-President Valdis Dombrovskis, responsible for the Euro and Social Dialogue said: “Today, we are proposing to renew the current VAT system, which was set up a quarter century ago on a temporary basis. We need a definitive system that allows us to deal more efficiently with cross‑border VAT fraud. At the European Union level, this fraud causes an annual tax revenue loss of around €50 billion.”
According to Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, “Twenty-five years after the creation of the Single Market, companies and consumers still face 28 different VAT regimes when operating cross-border. Criminals and possibly terrorists have been exploiting these loopholes for too long, organising a €50bn fraud per year. This anachronistic system based on national borders must end! Member States should consider cross-border VAT transactions as domestic operations in our internal market by 2022. Today’s proposal is expected to reduce cross-border VAT fraud by around 80%. At the same time, it will make life easier for EU companies trading across borders, slashing red tape and simplifying VAT-related procedures. In short: good news for business, consumers and national budgets, bad news for fraudsters.”
With the package, the Commission proposes to fundamentally change the current VAT system by taxing sales of goods from one EU country to another in the same way as goods are sold within individual Member States. This will create a new and definitive VAT system for the EU.