Algirdas Šemeta EU Commissioner for Taxation and Customs Union, Audit and Anti-Fraud Our ambitions for the VAT system of the next 10 years Conference on the Green Paper on the Future of VAT Milan, 6 May 2011
European Commission - SPEECH/11/314 06/05/2011
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EU Commissioner for Taxation and Customs Union, Audit and Anti-Fraud
Our ambitions for the VAT system of the next 10 years
Conference on the Green Paper on the Future of VAT
Milan, 6 May 2011
Ladies and Gentlemen,
Let me start by saying how pleased and impressed I am by the number of people who managed to come to Milano today from all over Europe and beyond in order to take a more active role in the public consultation on the future of VAT. For us, this conference is an important step in the public consultation that we launched last December with the adoption of the Green Paper on the future of VAT.
The objectives of the Green Paper
I announced this initiative in 2010 when I began my mandate as Commissioner for Taxation, Customs Union, audit and anti-fraud. I felt that the time had come to have a fresh look at the European VAT system. There were indeed a number of reasons which in my view justified taking this step.
Firstly, VAT is a major source of revenue for national budgets, on average one fifth of the Member States tax revenue.
The importance of VAT in these terms has been increasing over the last fifteen years. This trend has notably been reinforced in the context of the financial and economic crisis.
Moreover, the general tendency to shift the tax burden from direct to indirect taxation is likely to continue. This is because income taxes have a more negative effect on competitiveness and growth and because of the demographic situation in most of our countries.
This means that we have to work towards a higher potential of revenues from consumption taxes and first of all VAT. The tax base needs to be broadened.
Actual VAT revenues of the EU Member States that are also members of the OECD represent only 55% of the revenues that could, in theory, be collected if all final consumption was taxed at the standard rate.
The EU average of 55%, as compared with the figures of other countries, namely 74% in Canada, 77% in Switzerland and close to 100% in New Zealand, demonstrates a clear room for improvement in the EU.
We all know that broadening the tax base is by far preferable to increasing tax rates in order to collect revenues in an efficient way and minimise the negative impacts on economic growth.
We also have to realise that the average standard rate in the EU already exceeds 20%. This means that we are getting nearer to the levels which a VAT system might be unlikely to digest without favouring a drift into the black economy or harming consumption growth.
These topics are all related to the vital need for the Member States to balance their national budgets and undertake a real fiscal consolidation. We are going to discuss in depth these topics during the 3rd session of the conference this afternoon.
Secondly, but in the same line, we need to better tackle VAT fraud. This has already been a major issue on the political agenda in the recent years. The situation is still not satisfactory.
Promising progress was made in the field of cooperation between tax authorities to combat VAT fraud more efficiently. However, it does not solve the inherent weaknesses in the VAT system itself, which provide the opportunities for setting up the fraud.
This is why we need to use the opportunity of taking a fresh look at VAT to make it more fraud-proof. We need to invest our efforts into new tools and to touch upon issues like the collection methods that have remained unchanged since the introduction of VAT.
Reducing the complexity of the current VAT system would already help to minimise fraud opportunities. Instead of looking at the principle questions we have a tendency to add new elements to existing rules, thus adding complications.
Finally, the current VAT system is not only too complex but also too burdensome and costly. This is true both for tax administrations and businesses especially in terms of doing business in the single market.
Since the abolition of fiscal borders, the business models have changed substantially over the years. VAT therefore needs to be adapted. The increased use of new technologies by businesses represents not only a challenge but also an opportunity for VAT to modernise and utilise these new technologies.
This is necessary to reduce burdens put on businesses and to improve the collection of VAT for the national tax administrations. All the above is particularly relevant in those times of scarce resources and spending restrictions for the European governments.
In summary: We must develop a new and modern VAT system, fully compatible with the single market. It should also continue ensuring and even improve its role as a revenue raiser in the long term.
How to achieve such ambitious objectives
Therefore, the Green Paper and the public consultation constitute the first step in this process. I would like to stress that the Green Paper does not define any policy lines at this stage. The Commission has entered this debate with an open mind.
Only once the debate is closed and all the contributions properly evaluated the Commission will draw conclusions on the future priority areas.
I believe that a first major issue to be handled is the VAT rules to be applied to intra-EU transactions within the Single Market.
In the past, the Council has laid down in the EU law its aim for a move towards a VAT system based on the taxation of goods and services in the Member State of origin. When this choice was confirmed again in 1992, despite the first failure to honour this commitment in 1987, the EU consisted of twelve Member States. For the majority of the current Member States this choice was simply part of the Community ‘acquis’ when they joined the EU.
After eighteen years of transitional regime, time has come to take a decision.
Whatever the final choice might be, ending the so-called ‘transitional’ character of the VAT rules for intra-EU trade would already be a first valuable result from the discussions initiated by this Green Paper.
The Commission recently emphasized this objective in the Single Market Act adopted on 13th of April, which stresses in particular the fundamental importance of establishing the definitive VAT system applicable to cross-border operations.
The second part of the Green Paper puts all the other aspects of the VAT system under review. The main topics focus on how to achieve a simpler, more robust and efficient VAT system to reduce collection and compliance costs whilst limiting fraud and providing maximum flexibility for Member States.
I will not go into detail on all these issues. A number of them have been outstanding for a long time, such as the VAT rules applicable to public authorities or to passenger transport. This is however not a reason to exclude them from this debate. The contributions the Commission hopefully will get would give a new impetus to these files.
Allow me to mention nonetheless a few important items.
Firstly, I would like to refer to the potential improvements in the process of legislative proposals, its transparency and the role of stakeholders. Here, recent experiences with the implementation of the so-called ‘VAT package’ (change of the place of supply rules for services and new refund scheme) have put businesses in difficult situations in some cases.
Secondly, let me mention the way VAT is collected. Collection is based on a periodical self assessment by the tax payer who is potentially audited at a later stage by the tax authorities.
Considering the VAT gap and the costs of collection and compliance, we need to investigate whether more efficient ways of collecting the tax are available today.
It is for that reason that a feasibility study on alternative ways of collecting the VAT has been launched. I am perfectly aware that pursuing this issue requires much more analysis and can only be realised in the medium term.
Nevertheless, it is always useful to collect some reactions at an early stage. This is why the topic is raised in the Green Paper. The second session of today will certainly also give you the opportunity to express your views on it.
Thirdly, I would like to stress the importance of the relationship between taxpayers and tax administrations. I believe that tax administrations should all converge towards an efficient and modern administering of the VAT system.
Taxable persons are their intermediaries to collect tax. We should give them the right incentives and responsibilities in that task.
A new partnership with taxable persons that will ensure a high level of efficiency is an imperative to improve the competitiveness of our businesses in the world. Such new concept of partnership should be combined with legal certainty, and should be provided not only via ex post audits but rather through cooperation in real time.
Ladies and Gentlemen,
The Green Paper is a unique opportunity for everyone to participate in the debate and to contribute to the future of VAT, for the better of the EU as a whole.
I'm aware that many of you have already put a lot of efforts in this exercise. Many events were organised in recent weeks with the Green Paper at the centre of the discussion. I was told by associations, consultants and even private companies that they had set up their own internal consultation process with a view of preparing a substantial and well reflected contribution.
I very much welcome the efforts you are putting into this, mostly adding up to your already busy agenda. Your commitment however demonstrates that you share my view on the importance of the exercise. This consultation process is a first step towards defining the framework for the EU policy in the field of VAT for, at least, the 10 years to come.
On the basis of the outcome of the public consultation and of course of our discussions today, we will issue by the end of this year a Communication setting out the new VAT priorities and the new VAT strategy.
I believe you understand that our schedule for the following months is very tight. If you have not contributed yet to the questions raised in the Green Paper, I strongly invite you to do so without delay.
Before concluding, I would like to stress again the importance of the modernisation of the VAT system and my intention to rapidly make tangible progress.
Finally, I would like to thank the Italian authorities, in particular Mrs Lapecorella and the Ministry of Finance, for their support in the organisation of this event. I hope everyone will benefit from our conference, business or Member States' representatives, tax practitioners or academics.
Thank you and I wish you a fruitful debate!