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Brussels, 29th October 2004

VAT simplification proposal: Frequently Asked Questions

(see also IP/04/1331)

How would the one-stop-shop scheme for non established traders operate?

The scheme would give traders who are liable to pay VAT in several Member States the option to use a single place of compliance in the Member State where they are established.

The main features of the proposed scheme are:

  • it would be optional for businesses, both EU and non EU traders;
  • VAT returns would be submitted electronically, via a website of the tax authorities of the Member State of establishment;
  • the information on the VAT returns would be transmitted automatically to the Member States of consumption (where the tax would be due);
  • payment of VAT would be made directly to the Member States of consumption;
  • the Member States of consumption would maintain the right to exercise controls and checks on traders.

How would a one-stop-shop compliance scheme improve present arrangements?

The proposed scheme would remove the current obligation on traders supplying goods or services across borders to lodge VAT returns in every Member State in which they operate. The present rules require businesses to lodge declarations (as well as paying VAT) in the Member State where consumption of the goods they supply takes place. Complex rules have been created in order to determine where such a "place of consumption" is. For intra-EU supplies of goods between traders this obligation has been removed in some instances by moving to the customer the responsibility for paying the tax. But in other cases (distance sales to individuals, for example), the supplier has to register and pay VAT in the other country, which is very difficult when the trader has no permanent establishment with local employees and is not fully acquainted with the language and legislation of the other country. Furthermore, since Member States have considerable discretion in defining the content and frequency of VAT returns, a cross-border trader may be faced with a raft of different obligations in different Member States. This is a major obstacle to the smooth functioning of the Internal Market.

Explain the proposed one-stop-shop scheme for VAT refunds

The proposal would allow a trader to present a request, via a portal website managed by the tax administration where he is established, for a VAT refund relating to goods or services supplied to other Member States. This portal would then ensure that the request would be directed to the Member State where the expenses were incurred, which would refund directly to the applicant.

Making the current refund procedure electronic should mean less work in the future for the refunding Member States and consequently the Commission also proposes that the processing time for requests be reduced from 6 to 3 months. In addition, the Commission proposes that if a Member State exceeds the deadline for making a refund, it would be required to pay interest at 1% a month calculated on the amount to be refunded.

Explain the current VAT refund procedure and why it needs to be amended.

The Sixth VAT Directive (77/388/EEC) establishes the principle by which any taxable person is entitled to the deduction or refund of VAT on the expenditure it makes for the needs of its taxable operations, in whichever Member State the expenditure subject to VAT is made. In this way neutrality is achieved: comparable goods and services bear the same tax burden, whatever the length of the production and distribution chain.

The Eighth VAT Directive (79/1072/EEC) harmonises at Community level the procedures for refunding VAT to taxable persons established in a Member State other than the State of refund. The main aim of this Directive is to put traders not established in the Member State where they discharge VAT in a position comparable to that of traders of that Member State who exert their right to deduction directly in their regular declarations.

The cross-border refund procedures are extremely cumbersome, costly and at times inconsistently applied by different Member States. This has posed considerable problems for many years for both traders and the national administrations of the Member States.

The Commission presented a proposal in 1998 with the objective of replacing the Eighth VAT Directive refund procedure by a principle of cross-border deduction (see IP/98/560). However, the Council has not agreed to this so far. The present proposal would at least simplify the procedure for claiming cross-border refunds and speed up the making of those refunds.

How would the proposal harmonise the goods and services for which Member States may apply restrictions to the right to deduct?

The proposal would mean that Member States could only deny VAT deductions to traders for:

  • motorised road vehicles, boats and aircraft;
  • travel, accommodation, food and drink;
  • luxuries, amusements and entertainment.

Member States currently apply very divergent rules in this regard, on the basis of a stand still provision in the Sixth Directive which allows them to retain all the exclusions provided for under their national laws when the Sixth VAT Directive came into force or when they became members of the EU.

The Commission's 1998 proposal (see above) also contained provisions on expenditure not eligible for a full deduction of VAT, proposing the approximation of the national rules.

The current proposal is less ambitious. It does not propose harmonisation of national rules but simply a limitation of the areas in which Member States can choose whether or not to apply exclusions to the right to deduct.

How would the use of the "reverse charge" be extended?

The Commission is proposing to broaden the scope of the obligatory reverse charge mechanism (making the business customer the person liable to pay the VAT), by imposing its application on

  • supplies of goods which are installed or assembled by or on behalf of the supplier, supplies of services connected with immovable property,
  • services of a cultural, artistic, sporting, scientific, educational or entertainment nature,
  • ancillary transport activities, and
  • services in connection with movable tangible property.

Several Member States already apply the reverse charge mechanism to these supplies and making this obligatory for all Member States would ensure more uniform application of VAT rules within the EU.

For B2B (business to business) transactions subject to VAT in the Member State where the customer is established, making the business customer the person liable to pay the tax that the supplier does not have tax obligations in that Member State.

How would the proposal amend VAT rules for SMEs?

The proposal provides for more flexibility in determining the threshold under which traders, notably Small and Medium Enterprises (SMEs), can be deemed exempt from VAT. All Member States would be allowed to set the threshold at a maximum of €100,000. At present some Member States are entitled to apply a very high threshold for VAT exemption for SMEs while others are not. This is because arrangements specific to individual Member States were granted in successive EU enlargements. In addition, Member States which already had an exemption threshold higher than that provided by the Sixth VAT Directive at the time of the adoption of that Directive were permitted to maintain these thresholds and even permitted to increase them so as to maintain their value in real terms.

What changes would the proposal make to distance selling rules?

The proposal would change the current rules that apply when a trader sells goods to customers in a different Member State to that in which he is established. It would set a global threshold of €150,000 above which the rate of VAT that the trader would have to apply to the goods sent abroad to a particular country should be that of the Member State of destination of the goods rather than the trader's own country.

The current arrangements for distance selling were put in place in 1993. They provide for a threshold of either €35,000 or €100,000, at the discretion of each Member State, above which the destination country rate of VAT must apply.

The fact that different thresholds apply in different Member States complicates matters for traders. They have to monitor their turnover in each Member State, and keep track of the different thresholds applicable.

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