On 4 October, the European Commission (EC) announced a fundamental reform of the EU VAT regime to help combat an estimated €50billion of annual VAT fraud.
3 major changes to the B2B EU VAT regime
1. 2019 Introducing four ‘Quick Fixes’ to ameliorate the existing VAT regime on international B2B transactions, including:
~ Harmonisation across the states of the treatment of call off stock.
~ Evidence required to prove the transport of goods across borders.
~ Clarifications on rules for determining treatment of transport in chain supplies with an intermediary supplier (Triangulation).
~ Requirement to verify VIES-status of VAT numbers of foreign customers
2. 2019 Introduction of Certified Tax Person (CTP) certification for tax payers which have a long-term clean VAT record with their national authorities. The first three of four above reforms will be limited to CTPs.
3. 2022 Switching from the origin-based VAT regime to destination-based. This includes charging VAT in the country of the customer. CTPs will be exempted from taxing in their home countries – instead using the existing reverse charge system.
Challenges to reforms
However, these far-reaching reforms are highly ambitious, and face several challenges.
Timetable – space to debate?
The details of the reforms are still thin, and proposed amendments to the VAT Directive will not be produced until 2018. This allows very limited time to debate what are highly contentious changes – including states surrendering tax collections to other countries.
EU member states’ political objections
The 28 countries of the EU have so far had very limited time to review and comment on the proposals. It is possible that they will be reluctant to accept the CTP scheme without further consideration. They may therefore push to separate the CTP from the 4 Quick Fixes to make progress on the latter. States may also want more debate on the destination-based VAT system as it involves them surrendering VAT collection rights.
VAT reform overload
In addition to these substantial B2B changes, the EC is also planning a large simplification of the B2C cross-border VAT reporting regime. This includes moving to a single VAT return report for sellers of goods to consumers across Europe. Attempting two massive VAT reforms is ambitious based on past performance, and could cause delays to one or both revamps.
Resistance from business community
The EC has made good progress on the underlying technology required for a destination-based regime – it’s similar 2015 B2C MOSS for electronic services has been a relative success. However, for this round of reforms, tax payers will have to plan for huge reconfigurations of their accounting, ERP and stock control IT systems. Changes of this level of complexity typically take international companies up to 5 years to implement. Small enterprises are unlikely to have low-cost accounting packages immediately available for them to benefit from the changes. The complexity of tracking which customers or suppliers are CTPs will also require major changes and additional bureaucracy for all businesses.