In May, a group of more than 60 investigative journalists from 30 countries collaborated on a report titled Grand Theft Europe(https://correctiv.org/en/top-stories-en/2019/05/07/grand-theft-europe/) that detailed how fraudsters manipulate European Union VAT rules. It documented the all-too-familiar carousel and missing trader scams that exploit a system where a cross-border sales are split into two transactions with the first half exempted from VAT.

Of course, the conclusions drawn from the report – titled CORRECTIVE – did not comes as a surprise as it is by now well documented that VAT fraud costs EU member state governments approximately 50 billion euros a year. The overall EU VAT gap, which includes not only fraud but administrative flaws that prevent governments from receiving the amount due based on overall sales, is 150 billion euros.

In May of 2018, the European Commission proposed to overhaul the VAT system to shut down the fraud and close the gap by moving to a destination-based approach. It would establish that a cross-border transaction is a “single taxable supply”and ensure goods are taxed where the transport to the consumer ends.

However 14 months after the proposal was made, EU finance ministers have all but ignored it. So when the CORRECTIVE report came out, European Taxation Commissioner Pierre Moscovici was hoping it would trigger the kind of public pressure that resulted in 2016 with the release of the Panama Papers. The massive leak of Mossack Fonseca law firm documents exposed how politicians, private citizens and some companies stash their cash in tax havens around the world. The scandal over the Panama Papers led to EU finance ministers approving in record time the Anti-Tax Avoidance Directive, which put into EU law key OECD anti-base erosion and profit shifting provisions.

Moscovici tried to make his case in a letter to all 28 EU finance ministers calling for immediate action to approve the definitive VAT proposal. But that plea fell on deaf ears. Romania, which held the presidency at the time, ignored Moscovici. As a result the proposal is still in the deep freezer.

Of course one of the main impediments to the VAT overhaul regime is oppositionto an extension of the one-stop-shop VAT portal currently used for business-to-business for cross-border sales of electronic services as well as for electronic commerce sales in 2021. Bottom line on why expanding the one-stop-shop is blocked: member states do not trust each other when it comes to collecting and distributing VAT for one another.

As Finland prepares its autumn push for legislative achievements for its rotating EU presidencythat will conclude at the end of 2019, it is struggling to determine how to proceed with the VAT definitive regime.

The Finnish presidency dilemma is all the more complicated by moves by some EU member states have made recently by adopting domestic real-time VAT transaction requirements such as those underway inItaly, Spain and Hungary. Most important, the initial results of real-time VAT reporting is positive, especially in Italy.

Italian authorities reported in July that after six months the new e-invoicing system has increased VAT receipts by 4 billion euros from a year ago. The total is twice as much as was expected. Considering this success in Italy, which has one of the highest VAT gaps in the EU at 35 billion euro annually, other EU countries rushing to adopt a similar system. France is No. 1 on that list.

Another new, innovative VAT collection regime is due to be launched in November in Poland in order to reduce domestic VAT fraud. The Polish system involves a split-payment systemthat will require all Polish merchants selling certain categories of goods to set up a special Polish bank account, into which VAT must be deposited. Goods that will be covered by the new system include steel, coal and other fuels, electronic goods such asmobile phones, tablets and cameras as well as car parts.

As the real-time invoicing and split-payment schemes hold out hope for waging the battle against VAT fraud they do not enhance immediate prospects for the EU definitive VAT proposal. That’s because neither real-time reporting nor the Polish split-payment system, which required a special European Commission exemption, were in the May 2018 proposal.

And that is a conundrum Finland is wrestling with as it considers a way forward on the pending VAT reform proposal. Moreover it must decide whether it is worth the effort to draw up a presidency proposal that adds real-time invoicing and split payment systems. “If adding real-time reporting and split payment provisions would mean the difference between getting an agreement or not we would certainly consider it,” a Finnish presidency official recently told a group of VAT experts in July . “But at this point it is not clear that would be the case.”

Such a major addition toa VAT legislative initiative has precedent. It was only two years ago that EU presidency holder Estonia adapted the pending VAT electronic commerce proposal by imposing collection requirements on online platforms. Despite complaints from the electronic commerce industry that such a major change was not acceptable without an economic impact assessment, the Estonian presidency move was approved.

Will a similar turn of events occur with the definitive VAT proposal? As this point the European Commission will only say it is “monitoring”events such those in Italy when it comes to real-time VAT reporting. But it adds that it has no plans to withdraw the proposal and over revise it.

Of course as of Nov. 1 Moscovici will be no longer in office and a new tax commissioner will be in place as part of a new European Commission headed by president-elect Ursula van der Leyen. If the Italian VAT collection success story continues and spreads inevitably and the Polish plan achieves positive results the pending VAT proposal will need revision. That could be done by the new European Commission. Or it could be done by the EU presidency holder.