The European Union may end up doing more work on matters of indirect taxation - with the European Commission’s presentation of a major reform of the value-added tax (VAT) system - than on questions relating to corporate taxation in the second half of 2017.
The reasons for this are quite simple. Firstly, the OECD action plan to tackle tax optimisation has been transposed into EU law (through the anti-tax avoidance directive) and there are now only two outstanding legislative proposals: - country-by-country reporting, which is not listed among the priorities of the Estonian Presidency of the Council of the EU, and the transparency of tax advisers. The taxation of the digital sector will, unsurprisingly, be a priority, but a legislative proposal is not expected before 2018 (see EUROPE 11845).
Then, the early autumn will be marked by the Commission’s presentation of the major reform of the VAT system for cross-border activities. The system in force at the moment was initially designed to be temporary, but will have been in place for more than 20 years.
The current system also leaves the door wide open to fraud: goods and services may be bought freely within the single market. Tax Commissioner Pierre Moscovici is increasingly highlighting the link between VAT fraud and the financing of terrorism.
In 2016, a Dutch television documentary explained how, in a village near to the one in which Osama bin Laden was shot to death, American troops found documents relating to a VAT fraud network, with ramifications in other EU countries. It is believed that the tax authorities lost out on €1 billion.
In July, Moscovici announced that he was to present a far-reaching VAT reform after the summer break with the aim of preventing cross-border ‘carousel’ fraud, which is also used to fund criminal activities, undoubtedly including terrorist activities. He added that cross-border VAT fraud has been estimated at €50 billion a year.
The proposal is expected by the end of September or early October. In practice, it will require increased trust between member states, as they will be required, in certain cases, to collect VAT for each other.
Subsequently, however, the Commission is also planning to revisit the provisions on reduced and super-reduced VAT rates. It has two options in mind, but is aware that the debate will be first and foremost a political one (see EUROPE 11506).
One of the options is to keep in place a minimum standard rate of 15% and to extend the list of reduced rates (including transitional proposals). Another option is to give the member states greater leeway, by handing back the powers to define reduced rates, subject to certain conditions, such as the requirement to comply with competition or non-discrimination rules. Under this second scenario, other safeguards would be set in place, such as setting a limited number of products eligible for reduced rates and establishing a list of products that do not qualify (luxury goods, for instance).
Texts already on the table
To avoid having to wait for the general reform, the Commission has already proposed allowing electronic publications to benefit from reduced VAT rates, to bring their treatment into line with paper publications (see EUROPE 11680).
The Czech Republic, however, is resisting the move, due to the fact that the French are likewise resisting a proposal aiming to allow Prague to carry out a pilot project for a reverse-charge VAT mechanism (see EUROPE 11692). Prague considers that despite the implementation of so-called conventional measures, VAT fraud is not being contained quickly enough. However, countries such as France feel that reversing the charge runs counter to the Treaty on the Functioning of the EU (see EUROPE 11742). The legal services at the Council returned an opinion along the same lines, and the amendments made to the text by the previous Maltese Presidency of the Council of the EU were not enough to put the concerns to bed (see EUROPE 11811). The two countries are now trying to find common ground bilaterally (see EUROPE 11830).
Then, the proposal to modernise VAT on e-commerce is still on the table.
During the negotiations, the UK raised the specific issue of the rapid increase in the number of fulfilment houses. Basically, these storage warehouses allow goods to be imported into the EU before they have been purchased, thereby allowing them to be dispatched rapidly when a consumer orders a product on the Internet, as the items are already in the EU. This means that the final supply of these products comes from inside the EU.
The Belgian delegation put forward an idea to resolve the problem in the short term (i.e. before 2021, as the text provides for two phases). The work carried out a technical level has allowed the Estonian Presidency to put together a new proposed compromise, which it will present to the member states on 6 September.
In this draft compromise, of which EUROPE has had sight, the Estonian Presidency provides that a taxable person “who provides warehousing, other than customs warehousing, and delivery arrangements for the supply of goods within the Community by another taxable person not established within the Community to a non-taxable person is to be held jointly and severally liable for payment of VAT. Supplies”, unless the person responsible for the fulfilment house is able to provide sufficient evidence of good faith and no fault or negligence can be imputed to that person. The Estonian Presidency is hopeful that an agreement can be reached on this text in November.
Finally, it is worth noting that on 28 July, the European Commission proposed authorising Poland to apply a reverse-charge mechanism to hard disks such as solid-state discs and hard disk readers.
The fraudsters operate by registering businesses at a given address and filing tax returns for a certain period of time. These businesses wait for a convenient moment to carry out a number of large-scale sales on the national market, collecting VAT from their customers before ceasing trading without paying the VAT owed. In most cases, it is impossible to check up on these businesses, due to difficulties in pinpointing their real headquarters and identifying the individuals involved in these activities, due to the phenomenon of virtual offices, frequent changes of headquarters, the absence of a paper trail relating to operations carried out, etc.
Poland has taken so-called conventional measures to tackle this phenomenon, but until it starts to get results, it takes the view that additional support is needed, in the form of temporary measures, such as bringing in a reverse-charge mechanism.
Other imminent initiatives
Later this year, moreover, there will be a proposal to update the rules governing administrative cooperation and the fight against cross-border VAT fraud (see EUROPE 11738). This cooperation is governed by a regulation dating from 2010. The Commission is considering bringing in possible joint audits and is looking at ways of improving Eurofisc, the network that aims to identify new versions of fraud.
A raft of measures specifically dealing with VAT rules applicable to SMEs is also expected by the end of the year.
The Commission stresses that the costs of complying with VAT obligations are proportionately higher for SMEs than for larger companies, due to the complexity and fragmentation of the EU’s VAT system. (Original version in French by Élodie Lamer)