EU Definitive VAT System reform stalled?

Is the proposal to reform the existing origin-based EU VAT regime for B2B cross-border sales now stalled? No; but a lot more work will be required to convince a majority of doubting states - who see risks of further fraud and complexity - to back it.

The aim of the reform is to tackle the stubborn, multi-billion euro VAT fraud problem, particularly associated with ‘carousel’ and ‘missing trader’ fraud. However, much opposition from EU member states has emerged to the proposed destination-based ‘Definitive VAT System’ plan.  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.

Definitive VAT System

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, Definitive VAT System plan would require vendors 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. They in turn would distribute the VAT to the appropriate member states of the vendor’s customers. 

The aim is to tackle the multi-billion euro VAT fraud problem by closing the nil-rated intra-community supply loophole. This has been exploited by criminal gangs in large scale frauds were an exempt cross-border sale is reported when in fact a domestic sale with VAT has occurred. In this case, the fraudster pockets the fraudulently collected VAT.

Majority of states sceptical of new VAT system

The most recent EU meeting group of member state Finance Ministers, ECOFIN, has summarised for the European Council progress to date on the Definitive VAT System. This highlighted many fundamental blockers:

• Member states are 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 VAT fraud eliminated. 
• A majority of states are opposed to the Certified Taxable Person simplification. This would have seen reliable taxpayers being exempted from charging VAT to reduce their compliance and payments processing burden. States feel this would have problems of complexity and neutrality. 
• States are also against the withdrawal of the recapitulative statements (e.g. Intrastat and EC Sales Listings) in the event of an implementation.
• Most states believe the significant burden on the vendor charging and collecting taxes would be unacceptable. It would leave a major risk of VAT gap from fraud and insolvencies.

Member states have now agreed to undertake further examination of the measure via the EU Commission. In particular, an investigation into alternative technologies to solve the unresolved questions.