Controls to close the VAT gap and combat VAT fraud
The VAT gap for Europe remains around €137 billion every year, according to the latest report from the European Commission. This represents a loss of 11.2% of the expected VAT revenue for the region. The largest gaps were in Romania at 37.89%, Greece 33.6%, and Lithuania at 25.3%.
To reduce the VAT gap and combat VAT fraud, countries around the globe including India, Thailand, Vietnam, and in Latin America are taking rapid legislative measures to implement different types of VAT controls. And this has spread to an increasing number of European countries such as Italy, France, and Greece. Such requirements are often contradictory to the EU VAT rules.
For example, an e-invoicing mandate like Italy’s contradicts the freedom established in the VAT Directive 2006/112. The Directive allows trading parties to freely exchange invoices in the form (paper or electronic) and format they have agreed. Similarly, a split payment mechanism contradicts the VAT payment rules where, in a B2B situation, the supplier charges and pays VAT periodically to the tax authority after filing its periodical VAT return.
What is VAT split payment?
A split payment system is an alternative VAT collection system where the VAT amount and the tax base are paid in two separate accounts. There are variations of the split payment system across the globe, but in general, the net amount is paid to the supplier’s business bank account, and the VAT amount is paid directly to a dedicated bank account of the supplier, called a VAT account.
In December 2017 the European Commission carried out a study to design and assess legally and technically feasible scenarios for a split payment mechanism as a VAT collection tool. According to the study, split payment “is regarded as a measure that can combat VAT fraud and non-compliance by removing the opportunity of suppliers to charge VAT and disappear without declaring or paying it to the tax authority (‘missing trader fraud’). It deviates from the current EU VAT regime, which mainly relies on vendor-based collection of VAT and on periodical reporting and payment of VAT by registered traders.”
The study found “no strong evidence that the benefits of split payment would outweigh its costs. The main identified effects were that a wider scope of split payment would potentially provide a larger decrease of the VAT gap but would also significantly increase the related administrative costs”.
EU countries that have adopted a split-payment mechanism
Despite the European Commission’s concerns as to the value and benefits of a split payment regime and its compatibility with the Treaty, this mechanism has been adopted by several countries. They are mainly outside the EU (such as LatAm countries and Turkey, where alternative terms are inconsistently used, i.e. “withholding of VAT” or “reverse charge”). In the EU, Italy applies a limited split payment regime (only to B2G transactions). Poland adopted a mandatory system and the UK is considering a possible split payment mechanism by exploring its benefits and costs during consultations with relevant stakeholders.
VAT split payment in Romania
Since 1 January 2018, Romania applied a mandatory split payment mechanism for taxpayers above a certain threshold for outstanding VAT liabilities. However, later in the same year Romania received its first letter of formal notice from the European Commission and its request to derogate from EU rules in the VAT Directive in this area was rejected. Romania was given a deadline to take remedial actions to comply with the EU rules but only a year later, December 2019, it actually passed legislative measures detailed by Emergency Ordinance No. 78/2019 replacing the VAT split payment mechanism with an effective date as early as 1 February 2020.
What this means for Romanian taxpayers:
- Taxpayers applying the VAT split payment mechanism will have the available balance of their VAT account transferred by default into their current treasury/bank account between 1 and 11 February 2020;
- Starting 23 December 2019, taxpayers will no longer be enrolled in the VAT split payment mechanism;
- By 1 February 2020 the VAT account can be subject to enforcement proceedings by any creditor.
The future of SAF-T in Romania
Despite developments on the topic of the split payment system, in the same spirit of enforcing VAT collection, Romania’s SAF-T plans are expected to continue as planned. SAF-T reporting is expected to be introduced in Romania, starting in January 2020, with a pilot for large taxpayers. The goal is full adoption of SAF-T reports by the end of 2020. This is different to the split payment mechanism, local SAF-T implementations are not within the realm of the Common Market, and therefore not something the EU can influence.