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EU Commission's action plan to reboot VAT system

07/04/2016

On April 7, as the part of the Better Regulation agenda, the EU Commission presented the Action Plan for modernising the EU VAT system and elimination of the VAT gap caused mainly by cross-border frauds. At the same time, the envisaged changes should make the VAT system more business - friendly, especially towards SMEs and online companies.

The key elements of the Action Plan are:

1) Building a fraud-proof VAT system

The Commission's plan is to devise a set of definitive rules for a single European VAT area. Under the new rules, while cross-border transactions would remain to be taxed at the rates of the Member State of destination (the reverse-charge mechanism), the manner of tax collection will be revised in a way to enable a more fraud-proof system. In parallel, an EU-wide web portal would be implemented to provide for a simpler VAT collection system for businesses and a more robust system for Member States to gather revenue.

2) Measures to tackle VAT fraud under the current rules

As the VAT gap amounted to EUR 170 billion in 2013, the Commission acknowledged the need to combat the possibilities of cross-border fraud immediately and within the current rules. The Commission should propose measures to boost the current means used by national tax administrations to exchange information, fraud schemes and best practices by the end of 2016, if not sooner.

3) Higher autonomy in setting the VAT rates

The Commission intends to award the Member States more flexibility in setting their own rates policy in the future. Currently, two alternatives are being discussed. The first option is to maintain the minimum standard rate of 15% and to review the list of goods and services which can benefit from reduced rates regularly. The alternative is to fully abolish the list of goods and services for which a reduced rate is applicable. The latter would require to introduce new rules to avoid unfair tax competition between the Member States.

4) Building a business- friendly VAT system

The complexity of the current VAT system makes it difficult for Member States to ensure compliance of the e-commerce. The Commission should, by the end of 2016, propose measures to modernise and simplify VAT for cross-border e-commerce, including the application of reduced rates for e-publications.

As the next step, the Commission will ask the EU Parliament and the EU Council to confirm their support for the reforms set out and will prepare the proposals on all key elements of the Action Plan in 2016 and 2017.

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Authors

Picture of Sasa Sodja
Saša Sodja
Attorney-at-Law
Ljubljana