The EU urgently needs a definitive VAT system | Photo credit: Press Associatio
The single market on one hand, and the VAT particularism of the member states on the other, have created a situation of enormous VAT fraud. This has become a serious economic problem for the Union.
Therefore, an ambitious VAT reform and the creation of a definitive European VAT system are urgently needed. However, the Council, which must decide unanimously on tax questions, has blocked all legislative initiatives in recent years.
The legislative proposals presented by the Commission last December are a step in the right direction. In future, more and more cross-border traded goods and services will be taxed in the country of destination.
The implementation of the country-of-origin-principle could not be executed, due to the lack of tax rate harmonisation. The Council adopted minimum tax rates, although numerous exemptions are in place.
In addition, the Commission has proposed a single contact point for businesses, the so-called ‘one-stop-shop’. This will lower the costs of bureaucracy significantly.
Other important measures - to be implemented immediately - concern the better exchange of information between member states. The EU should install an automatic exchange of VAT data as well as of national customs data.
Another important way of tackling VAT fraud is to apply the reverse-charge mechanism, where the responsibility of taxation is shifted to the buyer of a good or service. Defacto, VAT would only be collected from those consumers that effectively have to bear the burden of taxation anyway.
The bureaucracy of VAT collection for business-to-business transactions as well as the possibility of carousel fraud would cease. Pilot projects in specific business sectors with high levels of VAT fraud have already delivered good results.
At the request of the Council, the Commission wants to allow pilot projects for the general application of the reverse-charge-mechanism. The Czech Republic will probably be the first country to test this procedure when the legal basis is agreed.
All these measures can contribute to the fight against VAT fraud in the EU. However, for effective harmonisation, greater simplification of the VAT rates will be necessary.
Currently, there are separate lists for each member state, stating which goods and services are eligible for reduced VAT rates. These lists should be harmonised, while leaving the decision on the actual VAT rate to the member states. We should aim for a transparent system with only few but clear exemptions from VAT.
VAT is in the area of tension between the fiscal sovereignty of the member states and the demands of the open European single market. An extensive reform, taking into account both these needs, is urgently needed to fight fraud and make cross-border trade simpler.
The Commission has made reasonable proposals; the ball is now in the Council’s court. Let us hope that the member states will end their longlasting blockade and create a system benefitting the honest taxpayer, not opening the floodgates for fraud.
The European Parliament will continue to assist the Council and the Commission and try to positively influence the legislative process.