Brussels, 07/04/2016 (Agence Europe) - The European Commission is to show understanding towards the United Kingdom's decision to include in its next draft budget a reduced rate of VAT on sanitary products, de facto putting itself in breach of the VAT directive.
The British government made this announcement on 18 March, having obtained conclusions from its European opposite numbers on this dossier at the end of the last European Summit (see EUROPE 11514 and 11515). In these conclusions, the European Council said that it “welcomes the intention of the Commission to include proposals (in its VAT action plan, presented on Thursday 7 April: Ed) for increased flexibility for member states with respect to reduced rates of VAT, which would provide the option for member states of VAT zero rating for sanitary products”. The proposal to reform VAT rates is not, however, expected until 2017. The action plan presented by the Commission this Thursday 7 April contains two options. The first would see all existing reduced rates, including derogations, kept in place; these can be included on the list of optional reduced rates available to the member states, in order to ensure equal treatment. The second option would consist of simply getting rid of the list of reduced rates and giving the states greater flexibility regarding the number and levels of reduced rates. The member states would still be obliged to respect the rules of the single market and competition as well as those in the framework of economic governance. A number of reduced rates would be limited and certain specific rules set in place.
When presenting these two alternatives, the Commissioner for Taxation, Pierre Moscovici, expressed his personal preference for the second option. When asked whether the Commission would agree not to open infringement proceedings against the United Kingdom if it decided to breach the current VAT directive by putting VAT on sanitary products (such as tampons) at 0%, the Commissioner replied that the Commission would “act in the spirit of our own reform”, adding that it was “able to understand the decisions made” by individual states.
A Commission source explained that another option to satisfy the United Kingdom, where the debate rages on, would be to take advantage of the forthcoming proposal at the end of the year in the framework of the digital strategy, to harmonise rates for electronic publications and rates of paper publications. The publishing sector has called for this on more than one occasion. The pressure has increased on the Commission to change the legislation and make it more consistent since the judgement returned by the Court of Justice of the EU in March 2015, concluding that France and Luxembourg could no longer continue to apply reduced VAT rates on electronic books (see EUROPE 11268). The Court upheld the Commission which, in 2012, had argued that by applying reduced rates on 'e-books', the two countries were in breach of the VAT directive (2006/112/EC) and creating competition distortions within the EU to the detriment of operators in other member states. The Commission promised to review the rules in 2016. All decisions in this area require the unanimity of the member states.
Although the Commission would prefer to be able to give the member states the option to set reduced rates themselves, it is aware that traditionally, certain states are against the principle of reduced rates and that unanimity will be hard to come by. “We are going to discuss this with the member states, we're not going to waste our time on a proposal which will not have unanimous support”, a Commission source said, adding that this could also depend on political games at the Council.
First step towards the definitive VAT regime in 2017. In 2017, the European Commission will present a proposal for a first stage to define a definitive VAT system based on the principle of destination. As part of this initial stage, the principal of taxation of cross-border supplies will be brought back and the one-stop shop extended to cover the provision of cross-border goods on a business-to-consumer basis. Companies would still be obliged to pay VAT on goods bought from other EU countries. Then, in the second stage, the taxation would be extended to all services within the single market. This would mean that the provision of goods or services, either cross-border or purely national, would be dealt with in the same way. This would call for a “qualitative leap forward in cooperation” between the member states, according to the Commission, which also considers that it will not be until the member states feel that this qualitative leap forward has been taken that the definitive VAT regime can be fully implemented.
No response to Czech republic's request in immediate future. For several months, the Czech Republic has been asking for authorisation to carry out a pilot project for the application of a generalised reverse-charge mechanism. The VAT directive allows the member states to apply a reverse-charge system, temporarily and by way of derogation, in certain pre-determined sectors. Under this system, the liability for the payment of VAT lies not with the supplier (as EU rules theoretically require), but with the client. The Czech Republic argues that this is the best way to fight carousel-type fraud. This mechanism was one of the options looked into for a definitive VAT regime, but the Commission decided to disregard it. The Czech Republic hopes to be allowed to apply this reverse-charge mechanism to goods and services above a value of €10,000. The Commission has no reply to give it at this stage. According to a Commission source, the current directive does not permit such broad derogations. It would therefore be necessary to modify the directive. The Commission is to launch an impact assessment and will take stock with the Council in June.
Finally, the Commission is considering launching an initiative on the tax treatment of the activities of the public authorities. As part of a thorough overhaul of all questions related to financial services, the Commission also intends to relaunch a proposal for VAT on financial services. This year, it will withdraw its 2008 proposal on this subject, after “60 meetings at the Council which failed to reach an agreement”, according to another source. (Original version in French by Élodie Lamer)