Auteur: Eric Maurice
The European Commission on Thursday (7 April) set out an action plan on VAT that goes towards more harmonisation and control of cross-border trade and more autonomy for member states to fix taxation rates.
The aim of the first part of the plan, amid recent revelations of tax avoidance practices, is to make the VAT system "simpler, more fraud-proof and business-friendly".
"While we are investigating agressive tax planning by multinational companies and unacceptable tax evasion of some millionaires, a very simple but very effective fraud happens every day in cross-border transactions by some companies," EU tax commissioner Pierre Moscovici told journalists.
In the long term, the EU executive wants to create a single VAT system for cross-border transactions in order to avoid fraud.
Under the current system, provisionaly set up in 1993, goods traded in the EU are exempted from tax when they are supplied from one country to another but taxed when they are bought by customers.
In effect, many companies buy goods without paying VAT and sell them with VAT but the difference is not collected by tax authorities.
While EU countries get about €1,000 billion each year from VAT - an amount which Moscovici said is equivalent to 7 percent of the EU’s wealth - they lose an estimated €50 billion because of this cross-border fraud.
In total, according to the commission, the VAT gap, the difference between expected and actual revenues, was €170 billion in 2013.
Under a new law to be proposed by the commission next year, supply and acquisition would be submitted to VAT, so that companies would have to pay the VAT at all stages of the cross-border supply chain.
"Much of this fraud is organised by criminal organisations and only part of it ends up in tax havens," an EU source said.
"We need to tackle fraud and have a definitive system once and for all," the source added.
In the short term, the commission wants to step up the fight against fraud and presented 20 measures to improve cooperation between the 28 tax authorities in the EU.
"The EU Court of Auditors has been very critical about cooperation between tax administration. We need to step up cooperation through Eurofisc, sharing information and allow direct access to certain databases," the EU official said, referring to an EU tax cooperation mechanism launched in 2010.
The commission will later this year present measures on cooperation between tax authorities, including from non-EU countries. In 2017 it will present a proposal to strenghten the Eurofisc network.
The second part of the action plan is to allow more flexibility to EU countries in setting VAT rates.
So far, some member states must apply an minium 15 percent rate on all taxable supplies of goods and services. A limited list of products can be taxed at a minimum 5 percent rate, and an under-5 percent rate and zero rate are granted to some member states under derogations.
The commission is now proposing either to regularly revise the list of products benefiting from reduced rates or to abolish the list and let member states fix the rates under the condition that it does not distort competition.
"We want to reform rules to do away with uncecessary restrictions and give back a degree of freedom," Moscovici said.
"We will replace an outdated list by a series of general criterias ti give more autonomy. This is more fexible and more in line with a modern economy", he said.
This is also more in line with the political concerns of the moment. Flexibility on VAT rates has been a British demand ahead of the June EU membership referendum.
At the last EU summit prime minister David Cameron got a commitment to loosen the rules, espcially on women’s sanitary products - the so-called tampon tax.
The commission's two options, one of which will be put into a legislative proposal next year after consulting member states, give Cameron a guarantee for the future.
"We intend to give to all member states the same possibilities open to few of them" under the derogations, many of them granted when the beneficiaries joined the EU, the EU source said.
"If one member state is applying a zero rate it will be automaticaly possibe for other member states to apply it," the source said.
But that will not guarantee cheaper prices for the consumer, as experience shows that lower VAT rates are not always transformed into lower prices, another EU source noted.
In another move, the commission will propose before the end of the year to align VAT rates on e-books and online media with paper books and newspapers. It will also propose a legisation to simplify cross-border online shopping.