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The end of the present EU VAT system approaching?

Late in May this year, the European Commission submitted a proposal to amend the VAT Directive, outlining the definitive (final) VAT system. The new system should unify the principles applicable in the VAT area across the European Union, simplify cross-border trading, and help tackle tax evasion.

The present system of VAT has been implemented as just temporary, and for 25 years, Europe has been waiting for a definitive system. Last month, the Commission took another major step towards this goal and submitted a proposal amending the VAT Directive (‘the Directive’).

Proposed definitive VAT system 
The significance of the changes to VAT that the new system will bring is best illustrated by the fact that the proposed amendment affects nearly a half of the Directive’s articles.  

An important change is the simplification and, we may say, an entirely new understanding of the taxation of cross-border sales of goods. Presently, intra-community supplies have to be viewed from two perspectives: the supplier’s, and the supply recipient’s. The exemption of supplies of goods to another member state is always reviewed on the supplier’s part; on the recipient’s part, it is reviewed as to whether it involves an intra-community acquisition. This artificial splitting, i.e. viewing a single transaction from two perspectives, should now be eliminated: under the proposed amendment, an intra-community supply would be viewed as a single taxable supply to be taxed by the supplier, in the country where the dispatch/transport of the goods ends.

A fundamental principle of the definitive VAT system should thus be that the seller shall be liable for the collection of tax even for intra-community supplies. The seller will therefore have to charge the tax at the tax rate applicable in the state where the transport of goods is to be completed already when setting the price. This approach will not apply if the recipient is a certified taxable person (CTP), in which case the present concept, i.e. the possibility of exempt supplies and intra-community acquisitions, shall be preserved.

Connected with the proposed mechanism is a one-stop shop – a single on-line portal that could be used by taxpayers for the taxation of intra-community supplies. The portal should be available to suppliers from the EU and to those from outside the EU, provided that they have an EU-established intermediary that would be liable for their European VAT-related liabilities.
The new rules are proposed to enter into force on 1 July 2022.

Because of the long-term time horizon for the approval and implementation of the definitive VAT system, the Commission has also proposed a package of measures to remedy the most pressing issues in the VAT area by way of quick fixes. 

Four quick fixes
Although the quick fixes have not been approved by the finance ministers at the June ECOFIN session, we expect them to be passed at some point in the future. The measures should concern: 
  • call-off (consignment) stock arrangements
  • linking transport to a specific supply in a chain transaction
  • proving transport of goods between member states
  • verifying the recipient’s VAT status in VIES for the purposes of VAT exemption of intra-EU supplies.

A definitive VAT system that would be more resilient to tax fraud and at the same time more simple for all parties involved is thus taking on a more exact shape. While it may seem that there remains plenty of time, the new system will bring substantial changes, and the taxpayers have to get ready for them.