Parliament Resolution: directions for development of EU VAT system
Directions for development of EU VAT system
Read full text of the resolution
The resolution of the European Parliament does not have a force of a legally binding document, but it expresses the position of the European Union on issues important to their members as well as to the entire EU organization, and as such, sets a path for changes in the EU VAT system.
The Parliament Members pointed out that despite the fact that the overall trend in fighting with VAT gap in EU countries was initially positive, with the VAT gap falling to 10 % in 2019 from 20 % in 2009 (the preliminary estimates was indicating that the gap could fall below EUR 130 billion); this trend was reversed in 2020 when estimated losses of EUR 164 billion have been incurred, which could represent a VAT gap of approx. 13,7 %.
It was also noticed by the Parliament Members that the EU VAT system becomes increasingly complicated because of the different VAT rates as well as numerous exemptions and derogations existing in particular EU countries, which makes it not only open to frauds, but also creates administrative burdens and additional costs for businesses operating in European Union.
Bearing in mind a need to facilitate business operations in the EU region and a necessity to fight with the VAT gap, the EU Parliament called EU commission to explore and propose VAT reforms, inter alia, in the following areas:
1. VAT rates
The Sixth VAT Directive sets the framework for the VAT rates in the European Union, but it also gives national governments some freedom to set the number and level of VAT rates they choose. The minimum standard VAT rate in EU cannot be lower than 15 %, but basic VAT rates vary a lot depending on particular Member States (in CEE region standard VAT rates vary from 19% - Romania to 27% - Hungary, which is quite a significant difference and may have impact on conditions on doing business in particular CEE countries).
EU countries are also permitted to apply reduced VAT rates. Despite the fact that reduced VAT rates can be beneficial for customers, they prove to increase the costs of VAT compliance and lead to numerous disputes with tax authorities, generating additional burdens for businesses.
Having below in mind the above, EU Parliament drew attention to the necessity of simplifying and modernizing current VAT system by introducing limits on exemptions and non-standard rates.
There is no doubt that limiting number of exemptions and standardizing VAT rates within EU should contribute to facilitating VAT settlements for businesses operating in EU, however reaching a compromise between Member States on reduced VAT rates may turn to be quite difficult.
2. Digitalization / E-invoicing
In the Member States which implemented e-invoicing for B2B transactions, it has proven to be an effective tool for fighting fraud and evasion. However, still not many countries in EU has decided to implement such a solution. So far in the CEE region only Poland has adopted e-invoicing for B2B transactions (at this stage it is voluntarily and Poland awaits the permission of EU Commission to introduce mandatory e-invoicing in 2023). It should also be underlined that few other countries in the CEE region are working on launching a similar system (e.g. Slovakia, Germany and Latvia).
Seeing a digitalization as a method of combating VAT frauds, the EU Parliament called the EU Commission to explore how to harmonize EU e-invoicing, beyond its current mandatory use in public procurement across the EU (so-called B2G e-invoicing). This shows that it is quite likely that e-invoicing may become eventually mandatory for B2B transactions in the whole EU.
3. Settling VAT on cross-border transactions
The cross-borders transactions are often used in carousels to fraud VAT. The Member State take steps to counteract this tendency (e.g., by cross-checking information reported in EC Sales Lists and Intrastat and performing controls of IC transactions), however these measures seem to be not sufficient.
In this regard, EU Parliament requested EU commission to pass a Proposal for a COUNCIL DIRECTIVE amending Directive 2006/112/EC as regards the introduction of the detailed technical measures for the operation of the definitive VAT system for the taxation of trade between Member States. The aim of this Directive is to:
- change the taxation place for IC supplies (from a country of goods dispatch to a country of goods destination) and
- introduce a rule that the VAT on IC supplies is paid by a supplier (with the exception of a situation where a supplier doesn’t conduct business activity in the country of goods destination, in such case VAT will be settled by an acquirer based on a reverse charge rule).
Moreover EU Parliament underlined a necessity to find concrete solutions on the verification of cross-border transaction and suggested EU Commission to explore how to extend a use of One-Stop-Shop (currently used only for selected B2C transactions).
We will keep you informed on the further VAT developments related to EU VAT system.