July 31, 2018

EU VAT: the Czechs are Playing Chess

It is no coincidence that the EU most important decision-making body conducts the overwhelming majority of its business behind closed doors. Because the process can often be unconventional.

These days, the Council of Ministers does occasionally hold public debates in the name of transparency. Take, for example, the fate of the EU proposal to allow EU member states to reduce VAT on digital publications. The idea is to throw a potential financial lifeline to newspapers, magazines and book publishers that are struggling to find a profitable business model in a digital world. A very worthy, honorable cause.

For those of you that read this blog regularly will know that somehow the fate of this reduced VAT rates for digital publication plan has become tethered to a totally unrelated, highly controversial scheme to allow temporary VAT reverse charging. The latter is supposed to help crack down on the more than 50 billion euros in revenue EU member states lose annually due to VAT fraud.

The temporary VAT reverse charging plan is the pet project of the Czech Republic and its billionaire Prime Minister Andrej Babis who believes it will cut out the current flaws in EU cross-border sales that lead to missing trader or carousel scams.

Babis did not his political zenith without bold moves – bluffing or not. To appreciate this, you have to go back to June of 2016, when EU finance ministers were zeroing on the most ambitious corporate tax reform in the bloc’s history. The EU Anti-Tax Avoidance Directive was on the verge of approval in record time. The rotating Dutch presidency was about to meet the often insurmountable unanimity requirement needed to close any EU tax legislation after less than five months of negotiation.

Having just launched his political career as the Czech finance minister, Babis insisted on what he believed at the time – and still does – a reality check. The EU is losing 50 billion euro a year in VAT fraud, he argued, while the pending ATAD is only projected to retrieve 5 billion euros in corporate tax avoidance and evasion.Citing the disparate numbers Babis laid down his ultimatum: no deal on ATAD unless there is an agreement to back temporary VAT reverse charging.

Voilà. A deal was done: the European Commission, which had always dismissed VAT reverse charging as flawed, held its nose and promised a proposal by the end of the year. And on the last day before the 2016 Christmas break when the European Commission cleans out his filing cabinets of pending odds and ends it announced in small print a temporary VAT reverse charging proposal.

Unfortunately, for those in the newspaper, magazine and book publishing industry it just so happened that the Commission also made good on the same day a commitment to propose reduced VAT on digital publications.

As the saying goes, timing is often everything in life. And so is bad luck. Having lost leverage with the approval of ATAD, Czech Republic latched onto the reduced VAT digital proposal and has not let go. Not only did the Czech Republic block a deal in May of 2017 when the VAT digital publication proposal was expected to fly through the Economic Council of Economic and Financial Affairs (Ecofin) but it did so again in May of 2018.

 Recognizing that patience was wearing thin among other EU member states – Sweden went as far as insisting the Czech Republic was holding democracy at ransom– Babis went straight to the EU member state standing front and center in opposition to the VAT reverse charging plan: France. Convinced that the temporary reverse charging plan will scupper pending plans for a root-and-branch overhaul of the EU VAT system, the French government – before the election of Emmanuel Macron and after – has refused to budge.  

Twice in recent months, Babis pin-holed Macron at EU summits. He followed up with a flattering letter and invited the French leader to Prague. Babis then expanded his persistent and – to most EU member states – annoying lobbying with other EU leaders at recent summits. The most recent being June 28-29.

 Thus, the bête noire VAT reverse charging proposal was back on the EU finance minister agenda again when they met July 13 in Brussels. And while the mood music was better and Babis’s hand-picked successor as the nation’s finance minister Alena Schillerova welcomed the “constructive” attitude, she made it clear: no VAT reverse charging deal, no deal on optional reduced VAT for digital publications.

EU rotating presidency holder Austria holder, which steers all issues in the Council of Ministers until the end of 2018, say it has since now received various technical solutions that could break the logjam. It believes a deal in October, when the next formal ECOFIN takes place, is likely. As Swedish Finance Magdalena Andersson will tell you: a cornerstone to democracy – the fourth estate – depends on it.