ECOFIN Speaks on EU VAT Reforms

Working towards a ‘Definitive VAT System’

The EU’s Economic and Financial Affairs Council (“ECOFIN”) issued a report last month.  This followed its review of EU tax policies and developments since Finland took over the Presidency of the Council of the EU in July 2019. 

The report is broad.  It covers digital taxation, contributions to the ongoing OECD strategy discussions on global company taxation, as well as an overhaul of the excise duty regime.  Much of the report noted the attention the Finnish Presidency has devoted to strategies concerning the legal framework and management of VAT within the EU.  These are summarised below.

Continuing the progress of previous Presidencies, the Finnish Presidency perseveres with the Commission’s two-step approach in developing VAT legislation for the creation of a Single EU VAT Area, the primary tenet of the VAT Action Plan, resulting in implementation of the “Quick Fixes”  from the start of 2020. However, various questions remain around the essential components upon which a Definitive VAT System should be based, how intra-EU transactions (especially the movement of goods) should be reported.   

 The six primary principles

The Commission’s original proposal for a Definitive VAT System was dependent on six primary principles: 

1. Taxation in the Member State of delivery or consumption;
2. Intra-EU B2B supplies of goods to be recorded as a single transaction in the destination country, in substitution of the present rules requiring the reporting of two transactions (i.e. a zero-rated intra-Community supply of goods in the country of dispatch, followed by an Intra-Community acquisition in the receiving country);
3. The idea of a Certified Taxable Person (“CTP”) and their certification
4. Guidelines applicable to those liable to account for VAT on supplies of goods to CTPs;
5. Guidelines applicable to those liable to account for VAT on supplies of goods to non-CTPs
6. Extending the scope of the One-Stop-Shop permitting VAT registration, reporting and collection for all EU transactions in only one EU country.

Dialogue continued to progress throughout 2019 between the Commission and individual EU Member States to gather input on the details of the six principles.  This is expected to continue through most of this year.

CTP status may not come to fruition

An ongoing sticking point in these deliberations so far is that the concept of a CTP, along with the application of different VAT rules for CTPs and non-CTPs, is unpopular.  Failure to arrive at a consensus here is why CTP provisions weren’t initiated from 1 January 2020 as originally intended, due to worries about their complexity and impact upon the ease of doing business and tax neutrality.  Accordingly, it now seems likely the CTP concept won’t survive to final implementation, and that an alternative measure of ensuring the integrity of transactions will need to be considered.  Certainly, there are avenues to be explored that are already being trialed.  These include “real-time” invoice clearance like the Sistema di Interscambio (SDI) model effective in Italy since 1 January 2019, and has since been proposed in France for 2023; and harnessing blockchain, which was extensively discussed at last month’s European Commission conference “VAT In The Digital Age” and announced that a test programme is being developed in the Netherlands.  The consequence of these conversations could prove to create a step change in how the taxation of transactions is managed not just within the EU but throughout Europe and beyond.

Recapitulative Statements remain valued

Another significant issue highlighted by ECOFIN’s report concerns whether to end the reporting requirement of periodic Recapitulative Statements, following suggestions these filings may now be unnecessary as B2B intra-community transactions within the EU are recorded in the purchaser’s country.  However, many EU Member States are against this unless a compelling alternative for collecting data on intra-EU data becomes available.  One suggestion highlighted in the report is an automated transaction-based reporting system that harvests data from other VAT submissions from both the seller and purchaser.  Nonetheless, such a scheme would need to take into account additional administrative burdens for sellers and tax authorities, loss of revenue to tax authorities due to business insolvencies, reporting anomalies, potential VAT fraud, and the impact on existing country-level derogations to the EU VAT Directive.  In any event, if serious consideration is being given to a transfer of VAT liability from customer (“reverse charge”) to supplier, there is broad consensus that this change must be supplemented with “solid and proportionate safeguards”, and that further investigation is needed in this area.  Such safeguards could include introducing blanket joint and several liability to both parties in a transaction (i.e. curbing a buyer’s VAT claim when the supplier doesn’t declare the output VAT to the tax authority), but, ECOFIN acknowledges that such a provision would need to be supplemented either by some form of split payment regime (as already adopted in a targeted manner in Poland and Italy) or a different system in order to preserve the buyer’s enshrined entitlement within EU VAT rules to deduct input VAT.

Overall, the Council concluded that ongoing development of the Definitive VAT System shouldn’t impede incremental activity to improve the present system.  It will be interesting to observe how these parallel efforts will collide and intertwine over the coming year.