ECOFIN Speaks on EU VAT Reforms

Pivotal projects in the development of EU VAT

The EU’s Economic and Financial Affairs Council (“ECOFIN”) issued a report in December. This followed its review of EU tax policies and developments since Finland took over Presidency of the Council of the European Union in July 2019.  In a previous article we summarised their status review of the EU working towards a ‘Definitive VAT System’.  Here, we examine their comments on the progress of other pivotal EU VAT projects.

Action on VAT rates

The European Commission has, for some time, intended to revise regulations around the fixing of reduced VAT rates. This includes a provision to give EU Member States more flexibility in rate setting along with providing a list of goods and services that can’t deviate from a country’s standard VAT rate. Of course, any revised regulations would need to comply with the requirements of the Definitive VAT System. Additionally, to help trade and ease of access by businesses it’s been suggested that an online database be created to record all of the EU reduced rates (although consultation as to how this measure might be implemented has yet to begin).  In terms of the design of such a database, a logical start would be by looking at the EU’s VAT Information Exchange System (VIES) and Market Access databases.

VAT on e-commerce transactions

To provide further details and procedures to expedite the ‘VAT e-commerce Directive’ due to come into force on 1 January 2021, ECOFIN adopted two proposals revising legislation relating to B2C ‘distance sales’ of goods between EU Member States, and B2C sales via digital marketplaces and other electronic platforms by both EU and non-EU based sellers. Then, in December the Council endorsed the outcomes of a European Court of Auditors report concerning the difficulties in VAT and customs duty collection on e-commerce transactions. The Council stated that despite procedural improvements in this area, most EU Member States agreed more work is needed to strengthen the system whilst reducing its complexity and compliance costs.

VAT rules and procedures for small businesses

The report acknowledged that the VAT rules impacting Small and Medium Enterprises (“SMEs”) need improvement, on the following grounds:

• Although Member States permit (to varying degrees) SMEs the option to avoid VAT registration by means of turnover thresholds, this does result in excessive administration costs;
• There remains significant distortion in competition between the VAT registered and the non-VAT registered;
• SMEs should be given greater opportunity for voluntary compliance, which should, in turn, positively affect the VAT Gap.

We can therefore expect continued transformation in this critical area.

Government collection from payment service providers of VAT related transaction information

In December 2018 the Commission proposed legislation applying certain rules to payment service providers with the aim of making it easier for tax authorities and EUROFISC officials to detect and close down VAT fraud. The aim is to facilitate the setup of a centralised information storage system, and to enable a harmonised mechanism by which EU Member States can harvest VAT and other transaction information from electronic payment records.  Should either of these developments occur, our prediction is they could prove revolutionary for the accurate collection of VAT and other transaction taxes, since they could even herald a shift in how (and from whom) VAT is collected. 

Evolution, not revolution

Overall, ECOFIN’s report conclusions provide confidence that the EU continues to recognise – notwithstanding the various attempts to harmonise tax reporting and collection throughout the bloc – that there isn’t a ‘one size fits all’ solution to the needs of all business and industry sectors, and that application of targeted measures can bring quick wins.