The creation of the single market in 1993 was a major boost for businesses trading between EU countries. The removal of internal borders meant that lorries could travel from Copenhagen to Seville without stopping at national borders to comply with customs or VAT obligations.
However, the system of VAT exemption at export, in place before the removal of borders, remained the rule. This transitory VAT system should have lasted just three years, yet is still in place 25 years later.
The transitional regime has not only become highly complicated for businesses with cross-border activities; it has also proven to be prone to fraud, with several criminal organisations trying to circumvent the payment of VAT. Revenue losses due to this fraud are estimated at €50bn each year.
This autumn, the European Commission will propose a new, ‘definitive’ VAT system. The new rules will be designed with the single market in mind. They will aim to improve the way companies do business across the EU and address the root cause of cross-border VAT fraud.
Under the current rules, goods exported to another EU member state are exempt from VAT. But the same exporter that sells goods abroad without VAT is able to reclaim VAT from his tax administration on his purchases at home. Under the new system, VAT-exempt sales for cross-border transactions in the EU will come to an end.
The new VAT system will be based on the principle of taxation in the country of destination of the goods.
The seller will collect VAT from his customer not only when he sells within his home country but also for cross-border transactions within the EU, through a ’one-stop-shop’. There will be consistent treatment of domestic and cross-border sales along the entire chain of production and distribution.
In other words, sellers of goods will collect VAT from their customers abroad just as if they are selling to customers at home. This is precisely the concept of a genuine borderless union: borders will be down for good, including for VAT.
VAT collection has become a growing source of revenue for EU member states, representing more than €1 trillion every year.
But EU VAT is more than that. In an area where there are no longer controls at internal borders, no more indirect taxes that distort competition and where goods are free to cross borders, our EU VAT system has greatly contributed to improving the functioning of our single market.
The new definitive VAT system will help to unleash its full potential by responding to three challenges. First, it should substantially reduce the very significant levels of cross-border VAT fraud.
Second, it should reduce the difficulty of calculating and paying VAT for cross-border activities and cut compliance costs for businesses.
And third, it should tax goods and services where they are consumed. The European Parliament has long been a keen supporter of our reform. It acknowledged that current rules were provisional and agreed that “a comprehensive VAT system should reduce operational costs for users and administrative charges for authorities while combating fraud, which is a considerable burden on public finances and on consumers.”
More recently, MEPs welcomed the Commission’s intention to propose a definitive VAT system by 2017 and noted that concerted efforts between member states were needed to reach agreement on a definitive VAT system.
EU finance ministers have also given their support to a future EU VAT system, stating that VAT is “a major source of revenue for the national budgets and reform of the current EU VAT system should (…) aim at making it more effective and efficient, removing unjustified exemptions and broadening the tax base, in order to contribute to fiscal consolidation and growth.”
The Commission’s goal is to create an EU-wide VAT system that supports a deeper and fairer single market. We will pursue our efforts to achieve consensus on this complex albeit crucial proposal. I count on the Parliament’s active support in the months ahead so as to achieve a definitive VAT system that will be pivotal to the expansion of intra-EU trade.