Definitive VAT system for cross-border trade

(update following the European Commission proposal on the detailed technical amendments for the operation of the definitive VAT system)

Key messages

• We welcome the European Commission’s commitment to the creation of a single VAT-area based on maximum simplicity, clarity and robustness against fraud. We support in particular the Commission’s efforts to further improve and broaden the One-Stop-Shop. However, the Definitive VAT-system, as outlined in the Commission’s ‘cornerstone’ and ‘technical’ proposals, whereby VAT will be charged on cross-border trade between businesses, will significantly increase compliance costs as businesses will have to be continuously informed about the wide range of different VAT-rates in the different Member States. We are also concerned that the proposed model will significantly impact cash-flow and may not reduce overall VAT-fraud.
• We are concerned that the Commission’s proposed application of the destination principle, whereby suppliers will have to deal with the tax administration of the country where the goods are transported to, rather than the administration where the customers are established, will bring an unnecessary increase in the overall administrative burden.
• We are concerned, that by not having the same VAT-rules for goods and services at the initial stage, this will increase the administrative burden of businesses who will have to deal with two different systems. Additionally, as the digitalised economy blurs the line between goods and services, having a VAT-system without the same rules between goods and services, would make the system more complicated and less robust against fraud. We would encourage the Commission to undertake an initiative which covers the same place of taxation rules for goods as currently already apply for services.

What does BusinessEurope aim for?

• We support the European Commission’s efforts to modernise the EU’s VAT- system, reduce administrative burden and to close the VAT-gap. The current VAT-system is highly fragmented, complex and subsequently reduces and distorts trade and investment by creating unnecessary extensive administrative burden and trade barriers to businesses. However, the Definitive VAT-system, as outlined in the Commission’s proposals, risks creating more administrative burden, with significant impacts for cash-flow.
• Further VAT-reforms should also take into account the fast-changing (digitalised) economy, which blurs the line between goods and services and upcoming technologies which may be helpful in closing the VAT-gap and simplifying VAT-reporting.
• We call on Member States to improve current cooperation between the different national tax administrations to establish greater levels of trust and efficiency. We cannot improve the VAT-system without trust between Member States and cooperation between tax administrations and businesses.