EU marches towards greater co-ordination

On April 7th 2016, the European Commission adopted a Key Action Plan on VAT intended to move towards a more co-ordinated single EU VAT area.

The Action Plan sets out a plan covering:

• Key principles for a future Single European VAT system;
• Short term measures to tackle VAT fraud;
• Options to modernise the EU framework for member states; and
• Plans to simplify VAT rules for e-commerce.

The commission will present legislative proposals for the above by the end of 2016, and in 2017 and 2018.

The definitive VAT system for cross border trade will be based on the principle of taxation in the country of destination of the goods. The destination principle mandates that VAT on goods will be paid in the country where the purchaser is resident (i.e. the country of consumption) at the rate that would have been applied had the goods been purchased from a domestic supplier.

The current system effectively taxes the supplies in the Member State of destination but is not a destination system. Such intra-EU supplies are exempted with credit in the member state of origin and therefore the place of supply of the goods is the member state of origin. There is a separate requirement for acquisition tax to be declared by the customer in the Member State of destination.

The current system is often abused by fraudulent traders and is estimated to cost the Eurozone around EUR 170 billion in lost VAT every year.