EU 2022 definitive VAT system

The EU definitive VAT system is the ambitious and controversial plan to overhaul the existing origin-based EU VAT regime for B2B cross-border sales. The aim is to combat an estimated €50bn p.a. in VAT fraud committed by criminal gangs in missing trader and carousel fraud schemes. It is part of the EU Action Plan for VAT and other reforms.

At present, it has not gained unanimous agreement by the member states. The scheduled January 2022 launch has already been delayed until July 2022. Further deferment is almost certain as fundamental disagreements remain between member states on the potential disproportionate effects and unproven benefits of the plan.

The proposal involves a switch to a destination-based VAT regime for B2B goods cross-border transactions. This would replace the existing ‘temporary’ origin basis. This was introduced in 1993 as a short-term fix until a destination system could be agreed upon. A number of attempts over nearly 30 years have failed to achieve this.

The latest plan would require vendors on cross-border transactions to charge and collect the VAT of their customer’s country of residence in the case of cross-border B2B sales. The collected VAT would then be remitted by the vendor to its national tax authority. It in turn would distribute the VAT to the appropriate member states of the vendor’s customers. 

However, most states appear sceptical of the proposed system. Concerns were highlighted at the most recent meeting group of EU member state finance ministers, ECOFIN, in December 2019. In particular, member states agreed that the reform should proceed only if it can be demonstrated that the significant upheaval, and burden on businesses and tax authorities, can be justified in terms of reduced VAT fraud. 

Most member states are opposed to the certified taxable person simplification. This would have seen trusted and certified taxpayers being exempted from charging VAT to reduce their compliance and payments processing burden. States feel this would have problems of complexity and neutrality. 

Some member states are also opposed to the withdrawal of the recapitulative statements (e.g. intrastat and EC sales listings) in the event of an implementation. Most member states believe the significant burden on the vendor charging and collecting taxes under the system would be unacceptable, as it would create a major risk to the VAT gap from new types of fraud and insolvencies.