We just finished our College meeting. There were a number of important items on our agenda.
We discussed the outcome of last week's European Council and held an orientation debate on the European Semester, including on our country reports and the macroeconomic imbalances procedure.
The country reports are the European Commission's analysis of the economic and social challenges that Member States are facing. They monitor policy reforms in Member States and point to challenges that need to be addressed.
The country reports include the results of the in-depth reviews recently carried out on macroeconomic imbalances in 18 Member States.
The findings of the reports will eventually feed into the National Reform Programmes and Stability or Convergence Programmes that Member States submit to the Commission in April. They will also contribute to the country specific recommendations to Member States in spring.
This year, we decided to streamline the macroeconomic imbalances procedure, moving from 6 to 4 different categories of macroeconomic imbalances, namely: no imbalances, imbalances, excessive imbalances, and excessive imbalances within the corrective arm of the macroeconomic imbalances procedure.
We will publish the country reports this Friday, and decisions in the context of the macroeconomic imbalances procedure are to be taken within the next few weeks.
Let me briefly put these reports in the broader economic context. The EU is still going through a moderate recovery. According to our recent Winter Economic Forecast, we expect 1.9% growth for the EU and 1.7% for the Euro area for this year.
There are risks to this forecast, however, primarily due to the deteriorating external environment. Moreover, we have seen a marked increase in financial market volatility and risk aversion.
At the same time, while progress has been made on a number of fronts, structural weaknesses exposed by the crisis still need to be fully addressed by some Member States and this is recognised in the reports.
It is therefore important that Member States implement policies that support macroeconomic stability and confidence. It includes continuing to tackle persistent vulnerabilities in some countries, such as high public and private debt.
- Implementing reforms to stimulate investment and reinforce productivity;
- Labour market and social protection institutions supporting adjustment while guaranteeing social cohesion;
- Powering convergence towards the best performers in areas that are key for growth, such as education and skills, business environment, public finance management and public administration.
This is what the European Semester is about and where the European Commission has been entrusted with a very serious responsibility.
Now, to turn to another orientation debate which we held today – on value added tax.
Over the past year, the Commission has made several ambitious proposals to make corporate tax systems fairer and more efficient.
We also presented the Anti-Tax Avoidance Package, which is currently being discussed in the Council. I welcome that the Dutch Presidency intends to make rapid progress on it, with agreement on country-by-country reporting expected for March.
The discussion on VAT is important because VAT is one of the main sources of government revenue. In 2014, VAT amounted to almost one trillion euros,which is equivalent to some 7% of EU GDP.
Unfortunately, the VAT gap, or in other words, the amount of VAT revenue which is lost, is very high, around €170 billion every year. Out of this, around €50 billion is lost because of fraud in cross-border business transactions, such as carrousel fraud or missing trader fraud. This is unacceptable. There is an urgent need to act.
At the same time, VAT rules account for a significant administrative burden, especially for SMEs and digital businesses. The administrative burden for cross-border transactions is still higher than for domestic transactions. It is estimated to be around 11% higher.
Because of new technological developments, it is necessary to adjust the EU rules which have been developed over the past decades on how VAT is charged when goods and services flow freely across borders, also taking into account development such as digital developments, internet trade and so on.
The EU can address these challenges by modernising the way VAT is collected and we are focussing on cross-border transactions.
All the EU institutions have recognised that VAT will flow to the Member State of destination, as is the situation today.
We also intend to confirm that this will be a definitive VAT regime using the principle of country of destination; unlike it is currently being assumed that we are in a transitional period moving towards applying the principle of country of origin. One intention is to clearly state that the definite regime would be a regime of country of destination.
We also need to improve the way these taxes are collected and to reduce VAT fraud and make life simpler for businesses.
There is a serious challenge, in this context, how to address this. In todays' orientation debate we discussed two main options:
- We discussed the option based on taxation of intra-EU supply, where the tax administration of the country where the goods originate also collect taxes in behalf of country of destination and then share this revenue with the country of destination.
- And we discussed the option of a generalised reverse charge mechanism.
What emerged from the discussions is that the preferred option seemed to be the option based on the taxation of intra-EU supply. Of course, it would imply a high degree of trust and cooperation among tax administrations in the EU.
To reach agreement on VAT, as in other fields of tax policy, we need to build consensus because the principle of unanimity applies when Member States discuss tax policy.
Following up on the conclusions of last week's European Council on trade, Commissioner Malmström informed the College on the state-of-play of several ongoing trade negotiations.
The 28 Heads of State or Government asked for work to be advanced in several negotiating fronts, namely with the US, Canada, Japan, Latin America, notably Mercosur, and in the Asia-Pacific region.
As you may be aware, the 12th round of the negotiations for a trade agreement with the United States is taking place currently in Brussels, as we speak.