Modernisation of the VAT system: rates liberalisation and optimisation of the small-business scheme
The European Commission has published detailed drafts of its reform of the final two aspects of its VAT Action Plan.
Since the EU Commission launched its action plan to modernise and consolidate the common VAT system in April 2016, the EU Council has adopted a thorough and essential reform of e-commerce rules (Directive 2017/2455/EU of 5 December 2017, most of which will enter into effect on 1 January 2021).
The Commission has also published its draft texts designed to lay the groundwork for a definitive regime for cross-border transactions, and should soon complete them by presenting the technical terms of that regime, the details of which may condition acceptance of this draft by Member States and taxpayers.
The current drafts also contain measures to enhance cooperation between Member States to combat fraud, and, while waiting for the new definitive regime to enter into effect, a draft directive that would enable the Member States to generalise self-assessment to better combat fraud.
The documents published on 18 January 2018 set out the details of the final two aspects of the action plan.
Reform of the Rates Rules
Currently, the VAT directive authorises each Member State to apply a standard tax rate which must be equal to at least 15%, and two reduced rates, which cannot be lower than 5%. Member States are allowed to apply a reduced rate only to deliveries of goods and the performance of services that fall into one of the categories listed in annex III of the directive.
As an exception to these general rules and while waiting for adoption of a definitive regime that never happened, the Member States continue to apply special rates that do not meet the above criteria. According to the Commission, 250 special rates are currently applied in the EU Member States.
Because in future, the VAT system's operating rules should be based on a rule of taxation at the destination, the Commission, backed by several studies on this issue, believes it can give the Member States greater flexibility to set rates without running the risk of the single market being disrupted by the different rates applied in the various Member States.
Following this analysis, the draft directive would enable the Member States to apply any rate they choose to goods and services that are taxable in their territory, subject to the following rules:
- in addition to the minimum standard rate of 15% and two reduced rates of at least 5% that they currently have, the Member States could apply a rate between 0% and 5%, as well as a “zero rate” (operations taxed at 0% are not subject to VAT, but nonetheless entitle the operators that sell them to deduct the tax that applies to the cost of producing them);
- each Member State must ensure that combining the various rates results in a weighted average tax rate of more than 12%;
- no Member State could apply a reduced rate to the goods and services exhaustively listed in the directive. The goods and services currently listed in the draft include, in particular, operations related to transportation methods, bank and insurance operations, gambling and money, delivery of alcoholic beverages, furniture, electrical appliances, computer products, precious metals, the services of travel agents, used goods subject to the margin scheme, etc.
Consequently, all the special rates the various Member States have applied until now would be eliminated except Portugal’s rates specific to the autonomous regions of the Azores and Madeira.
Of course, the freedom that would be granted to member States will in all events continue to be subject to the rules of the treaty on the Union (in particular, the rules regarding State aids, protectionist taxation, and fair competition), as well as the rules that govern the VAT, especially the principle of neutrality according to which similar products cannot be treated differently.
According to the draft, this reform would enter into effect at the same time as the one proposed for the definitive regime for cross-border transactions, which the Commission proposes to set at 1 January 2022.
The Commission has not given any information on how this draft fits with the one in which it proposes to allow an immediate application of a reduced rate to the online press, which has not yet obtained the unanimous Member State approval required for the European Union to adopt tax reforms.
Consolidation of the Scheme for Small Businesses
Improving the scheme for small businesses is a key part of strengthening the single market and enhancing the conditions for a competition.
In addition to the few measures already included in the other drafts proposed by the Commission (including the exemption for start-ups included in the reform adopted for e-commerce), the Commission suggests a series of measures aimed at ensuring equal treatment for small businesses that conduct operations in Member States where an exemption is applied, regardless of whether or not they are established there.
The Member States could still choose the threshold for applying the exemption, but it could not exceed EUR 85,000. In addition, they would be required to apply the exemption to non-established EU small businesses, provided the business's total turnover realized in the EU does not exceed EUR 100,000.
The Member States would also be encouraged to offer simplified obligations for small businesses, whether or not such businesses qualify for an exemption.
This part of the reform would enter into effect on 1 July 2022.
- Proposal for a Dir. amending Directive 2006/112/EC as regards rates of value added tax (COM(2018) 20, 18 January 2018).
- Proposal for a directive amending Directive 2006/112/EC on the common system of value added tax as regards the special scheme for small enterprises (COM(2018).21, 18 January 2018).