EU destination-based VAT to combat €50bn fraud

Today, the European Commission (EC) published details of a 2022 proposal to shift the EU VAT regime from an origin-based system to a destination based one. This means taxing cross-border B2B sales at the rate of the country of the customer rather than that of the seller. The seller would then report and pay the foreign VAT through their home VAT return in single 'one stop shop' tax portal managed by their tax authority.  This mirrors the e-services B2C MOSS VAT reforms of 2015.

The aim is to cut missing-trader EU VAT fraud, estimated at €50bn pa, by up to €40bn. The change will end the VAT nil-rating on B2B sales between member states, but may result in companies having to pay and recoup up to €342bn per annum in new, cross border VAT cash flows for goods.  This could extend to €517bn when commercial services are included later in stage two.

A destination-based VAT proposal will likely face stiff opposition from a number of member states who will be weary of passing control of their tax collections to fellow member states.

Currently, B2B sales of most good and services across any EU member state border are subject to VAT of the Seller’s country – Origin-based VAT. To alleviate buyers from having to reclaim billions of foreign VAT in the country of their foreign sellers, the 'reverse charge' simplification shifts the VAT to the buyer. This is done by the buyer entering both the purchase and the sale twice in their own, domestic VAT return. There is therefore no requirement to pay VAT – hence the sale is zero-rated for VAT purposes.

The system has functioned since the introduction of the EU’s Single Market in November 1993 with the intention of it being a temporary, 4-year measure. It was planned that all countries would harmonise their VAT regimes. However, this agreement has never been achieved – largely because EU countries have diverging VAT rates.

The EC has long abandoned the plan to make the origin basis the permanent solution for the EU VAT regime. Instead, it is now proposing that VAT on cross-border B2B sales will be due in the country of the buyer - as for domestic sales.  Initially for goods; but also for services at some later date.  For example, if a German seller has a Polish business customer, they would charge 23% Polish VAT instead of nil-rating the sale.  The German company would collect and pay the Polish VAT due to the German tax authorities. The German tax office would next repatriate the VAT to the Polish tax authorities. The mechanism has already been adopted for the Mini One-Stop-Shop (MOSS) system, introduced on B2C cross-border sales of electronic services.  NOTE: a new category of accredited VAT payers, Certified Taxable Person, will be exempted from having to charge VAT - see below.

The EC is proposing a two-stage implementations, with goods first from 2022, followed by services.  Detailed legislation will be produced in 2018 to update the EU VAT Directive.  There will also be simplified VAT invoices requirements, with Sellers no only having to comply with their own local laws.

A first step towards the new system will be a series of immediate reforms for January 2019. These will include:

1. Harmonisation of the VAT rules on consignment stocks being held in other member states
2. Simplifications of triangulation VAT rules to associate transport on cross-border trades where the transport is carried out by an intermediate supplier
3. Harmonising requirements for the proof of cross-border transport of goods
4. Requirement to verify foreign customers' VAT number on VIES to apply zero-rating VAT

The first three reforms will only be made available to Certified Taxable Persons, see below.

The concept of a 'Certified Taxable Person' will also be introduced.  This is modelled on the customs equivalent of an Authorised Economic Operator). These certified tax payers, with a clean tax history, will be entitled to continue to use the reverse charge and not charge or collect the VAT of their customers' countries. This may present some challenges in agreeing the qualification for this status, and tracking it.

The zero-rating simplification has opened up the EU to extensive VAT fraud by criminal gangs over the past 10 years. They set-up companies simulating nil VAT cross-border sales, but actually sell the goods in their own country with VAT which they then keep. Complex variations include scores of companies in multiple countries purporting to sell and resell the same fictitious goods – a scheme known as carousel fraud.

The EC estimates this type of fraud costs member states €50bn per annum. It has affected a number of sectors in particular, including: computer chips; mobile phones; computer tablets; carbon trading; precious metals and stones; and wholesale electricity.  The EU does provide for a limited use of the domestic reverse charge to combat this to an extent.

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