EU VAT reforms: progress but doubt ahead

The EU’s ambitious ‘Action Plan on VAT’ reforms are now in full implementation phase. However, 2020 will present stiff opposition to the chief measures. Support for the big headline reform, the Definitive VAT System, is now crumbling among member states.

EU VAT creaking

The current EU VAT regime has remained largely unchanged since the inception of the EU Single Market in 1993. Since then, two major forces have exposed the need for a radical update: over €50 billion per annum in fraud and lost tax revenues, and its constraints on the explosive growth of e-commerce which has reached over €550 billion per annum in the EU.

Action plan on VAT faces challenges

To tackle these challenges the EU Commission has proposed a range of more than ten reforms to the EU VAT Directive. These reforms seek to close the VAT fraud loopholes and simplify e-commerce VAT.  The ‘Four Quick Fixes’, clarifying B2B VAT rules, came into force this month. This follows simplifications to the digital VAT compliance rules.

The big changes start next year, with the VAT e-commerce package, introducing a single pan-EU VAT return for online sellers of goods. In addition, marketplaces such as Amazon, eBay and Etsy will become responsible for the VAT on goods sold by online retailers from China, the US and other EU countries.

But the cornerstone reform, the Definitive VAT System, has yet to be confirmed for a 2022 planned launch, and faces immovable objections. Many states are unwilling to trust each other with revenue collections. It would replace the existing origin-based regime with the obligation to collect VAT in the country of the customer - a destination-based tax. One element of the reform, the ‘Certified Taxable Person’, is now effectively dead.

The Polish criticism at the Davos forum of VAT reforms highlights the member states’ frustrations with the progress on the fraud reforms. 2020 may kill off the Definitive VAT System proposal, and see states go increasingly for unilateral measures.