January 9, 2019

EU VAT: work in progress

While much of the media spotlight was on the attempt by the Austrian leadership to broker a deal on a temporary digital tax on large internet company revenues, intensive work also took place in order to reach an agreement on key VAT issues

These included not only establishing a single transaction chain on cross-border sales but also on the terms that would allow law-abiding businesses to gain a “Certified Tax Person” or CTP certification that would allow them to benefit from simplified, less expensive VAT processing procedures. The CTP certificate is inspired by the authorized economic operator concept used for customs duties on foreign country imports.

Other key VAT issues negotiated in recent months include rules for companies without the CTP status and, most important, the extension of the current One-Stop-Shop (OSS) system for the definitive VAT rebuild. According to a state-of-play report drawn up in recent weeks by Austria, member states agree on the concept of a one-transaction system instead of the current two-part system on cross-border sales. However, when it comes to the CTP and the OSS divisions among member states thrive.

While a number of member states seemed to support the idea to introduce the new notion of a CTP many member states have expressed concerns about its possible complexity and negative effects on businesses and tax authorities as well as potential neutrality issues if a system were introduced where different rules apply dependent on whether the customer is a CTP or not” according to the Austrian report.

When it comes to the OSS, the Austrian report stated that “essentially” EU member states support its extension, but it must include a change that adopts supplier liability for cross-border sales. However, a key issue still to be resolved concerns differences between the proposed possibility to deduct input VAT through the OSS in certain cases and refund timing issues related to the EU Refund Directive

A number of member states argue that applying the current VAT Refund Directive under the definitive system would not be proportionate and may negatively influence the customer’s cash flow (especially in case of transfers of goods between member states or where the taxable person is the recipient of a supply subject to VAT reverse charge),” the report says.

   Another key part of the pending EU VAT overhaul concerns rates. Businesses consistently complain about having to deal with a patchwork that includes not only a wide range of base rates but also hundreds of reduced or zero rate exemptions.

After trying for more than two decade sto get EU member states to dramatically shrink their list of exemptions, the European Commission reversed course. The pending proposal would give EU member states even more freedom in their setting of rates. But they would have to ensure that the weighted average of their VAT rate patchwork exceeds 12 percent. The plan also calls for an EU-wide “negative list” of goods and services that would be ineligible for reduced rates. This would contrast to the current “positive list” patchwork. 

However, whether this plan will make it easier for businesses to navigate the current VAT rate maze remains questionable to say the least. 

A third part of the pending EU VAT overhaul, which, like rate reform, is a stand-alone legislative proposal, concerns revamping VAT rules for small and medium-sized enterprises in order to reduce costs and competitive distortions. According to the Austrian presidency, based on technical talks among EU member state tax experts, any future agreement must not “lead to weakened tax control and increase the risks of VAT fraud evasion.”

Of course while the EU continues the work to build a new VAT system,  it will be up to incoming EU presidency holder Romania to push for an agreement. Will it happen in the first half of 2019? Doubtful. If a deal is to be struck in 2019 it will likely be with Finland at the helm of the rotating EU presidency in the second half of the year. That said, some EU diplomats working the tax field say it will be years before a deal is reached

The 2018 slow going on the VAT rebuild did not mean the EU VAT patch job did not continue. Far from it. A wide range of changes were adopted, including a series of short-term “quick fixes” designed to the plug cross-border VAT fraud gap. These include measures to simplify and harmonize rules for call-off stock arrangements, chain transactions and cross-border transport rules.

Other VAT related legislation approved in 2018 allows EU member states the right to reduce VAT rates for digital publications so that they are on even terms with printed publications. In addition, an agreement was reached that allows EU member to use temporarily a reverse charging scheme for cross-border sales on certain high-value goods.  

There is much work ahead.