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IP/03/1447

Brussels 24th October 2003

VAT: Commission reviews and updates strategy for improving the operation of the EU VAT system

The European Commission has presented a follow-up report on its strategic programme that it adopted in 2000 (see IP/00/615) for the improvement of the VAT system. The Commission reviews progress with proposals already made, lists forthcoming VAT proposals and presents its ideas for a VAT system that would be suitable for an Internal Market consisting of 25 Member States. In particular, the Commission announces its intention of promoting the idea of a one-stop shop system, whereby a trader could fulfil all his obligations for his EU-wide activities solely in the Member State in which he is established. The Commission suggests that taxation at the place of destination may become increasingly necessary, particularly for services, in order to prevent distortions of competition and in order to ensure that VAT continues to accrue to the Member State where consumption takes place. Finally, the Communication emphasises the need for continuing work on ways of eliminating the growing problem of carousel fraud.

"I am pleased to present the Commission's ideas for a VAT system that would meet the requirements of an Internal Market of twenty five Member States" said Frits Bolkestein, European Commissioner responsible for Taxation and the Internal Market. "The Commission wishes to co-operate fully with Member States both to ensure that legitimate businesses are not hampered from doing business across borders by complicated VAT rules and compliance requirements and to prevent fraudsters from exploiting loopholes in the present VAT rules."

The Commission reviews progress that has been made since 2000 and lists new initiatives that it intends to take over the next few years.

  • Nine proposals have been adopted in the VAT area since 2000. However, it will be difficult to repeat this success after enlargement of the EU if the unanimity voting rule continues to apply to tax proposals.

  • The proposed forthcoming initiatives are listed in the Annex. The overall aim is to continue efforts towards the simplification and modernisation of the existing common VAT system, more uniform application of current rules and improvements in administrative co-operation between tax authorities.

One-stop shop

The Communication reaffirms guiding principles for the type of common VAT system that is best adapted to an Internal Market consisting of 25 Member States. First, traders' tax compliance obligations have to be simplified in order to allow them to take advantage of the opportunities offered by the Single Market.

In order to achieve this, the Commission intends in particular to promote the idea of a one-stop shop system along the lines of the system introduced for electronically supplied services (see IP/02/673 and MEMO/03/142), whereby a trader could fulfil all his obligations for his EU-wide activities in the Member State in which he is established. The Directive on electronically-supplied services has already introduced a system whereby tax obligations could be discharged electronically, which would be an essential pre-requisite for any move to a one-stop shop system.

VAT revenue for country of consumption

Second, VAT is a consumption tax and therefore the system should be structured so that VAT revenue accrues to the Member State where consumption takes place. With increasing cross-border and distance sales of services, as well as goods, this implies the need for changes in the place of taxation. As far as the provision of services is concerned, the current rule that the provision of services is taxed at the place where the provider is established broadly achieved in the past the aim of assigning revenue correctly but this is rapidly changing. Firms providing remote services (e.g. telecommunications services) increasingly choose their place of establishment mainly for tax-planning reasons. As long as there is no political will to switch to an origin-based VAT system (whereby VAT on goods and services traded between Member States would be paid in the Member State of origin with a compensation mechanism to offset trade imbalances), the existing system must be adapted so as to ensure that revenues continue to accrue to the Member State of consumption.

Eliminating carousel fraud

Finally, the Communication emphasises the need for continuing work on ways of eliminating carousel fraud, in particular by improved administrative co-operation between tax authorities and sharing of best practice in methods of preventing, detecting and tackling this fraud. The Commission believes that, in the medium term, there is no other solution. However, if, despite these efforts, carousel fraud takes on such proportions that it starts to affect the workings of the economy by distorting competition for honest traders then a debate must be launched at Community level on the future of the common system of VAT. Essentially carousel fraud involves abuse of the exemption mechanism for VAT intra-community transactions. There are no reliable statistics for its incidence at EU level but the amount of VAT evaded is undoubtedly considerable.

Background

In June 2000, the Commission proposed a new strategy to bring about a pragmatic improvement in the current VAT system. The strategy provided for an action programme, geared to four main objectives: the simplification and modernisation of existing rules, more uniform application of current rules and ensure closer administrative co-operation between Member States to combat fraud. The Commission considered that the Internal Market could and would function better with a VAT system based on taxation in the Member State of origin as this would be easier to administer and consequently less costly for business and less susceptible to fraud, providing a better a guarantee of stable tax revenues. However, since Member States are not prepared to move towards closer harmonisation of VAT rates, it is unlikely that progress will be made in the immediate future towards this long-term goal. Therefore, the Commission strategy was designed to create fresh impetus within the Council to adopt improvements to the current destination-based arrangements as quickly as possible.

The Commission Communication "Review and Update of VAT strategy priorities" can be found on the Europa site at:

http://ec.europa.eu/taxation_customs/whatsnew.htm

ANNEX

VAT legislative proposals in the pipeline

Proposal

Scheduled date of presentation by the Commission
Place of taxation of services (B2B)4th quarter 2003
Recast of Sixth Directive4th quarter 2003
Rationalisation of derogations2nd quarter 2004
Promotions and payment cards2nd quarter 2004
Simplification of obligations (including review of place of taxation for goods and small business scheme)3rd quarter 2004
Elimination of double taxation in individual cases3rd quarter 2004
VAT regime for public authorities4th quarter 2004
Place of taxation of services (B2C)2005
Survey of various options, facilities and transitional provisions2005
Taxation of financial services2005
Revision of VIESp.m.

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