VAT in business: challenges and modern reforms

New data in recent EU-VAT report shows that the ‘VAT Gap’ (the difference between expected VAT revenues and those actually collected) stood at €93 billion in the EU-27. On some estimates, about one quarter of that is directly attributed to VAT fraud, which remains a major problem in the states and European continent. At a time when governments need sustainable revenues to assist recovery and resilience programs, all states need urgently accelerate efforts to mitigate these losses.  

Changes needed…
Rapid digitalisation of the EU-wide economies poses serious challenges to existing tax systems; e.g. in issues of new business models such in platform economy, as well as in new digital-type transactions appeared in the crypto-asset market. Secondly, there is an urgent need to reduce tax fraud and tax evasion: recent figures revealed by new “VAT Gap” data show that the EU states in 2020 lost €93 billion in VAT revenues, and about one quarter is presumably attributed to fraud. Thirdly, modern technological innovations can help to adopt changing solutions on tax issues and redirect “lost amounts” to funding public services and mountain needed investments.
Finally, it remains vital to continue working to make the national tax systems fairer and more equitable, while making it easier for all companies, including SMEs, to take advantage of the EU’s single market opportunities.
Actually, the EU has made recently active measures to achieve fair, efficient and sustainable taxation; e.g. in mid-July 2020, the European Commission adopted a new “tax package” aimed at reinforcing efforts to combat tax abuse, assist national tax authorities in keeping pace with constantly evolving economy and easing administrative burdens for citizens and companies. The package also ensures improved cooperation with non-EU countries, and strengthens the Commission’s support to developing countries. The so-called “tax action plan” is composed of 25 initiatives to be implemented in the member states by 2024 to make taxation fairer, simpler and more adapted to modern technologies.
For example, taxation rules on digital platforms: the EU states will automatically exchange information on income generated by sellers on digital platforms, which will both allow national authorities to identify situations where tax should be paid and will also reduce the administrative burden placed on platforms, who have to deal with several, different national reporting requirements.
Reference to: https://taxation-customs.ec.europa.eu/package-fair-and-simple-taxation_en

In December 2022, the European Commission proposed a series of measures to modernise and make the EU’s Value-Added Tax (VAT) system work better for businesses and more resilient to fraud by embracing and promoting digitalisation. These proposals will help the member states to collect up to €18 billion more in VAT revenues annually (€11 billion only as a result of anti-fraud measures and reduce compliance costs for traders by over €4.1 billion per year over the next ten years) while helping to grow all sorts of businesses, including SMEs.
The new system introduces real-time digital reporting for VAT purposes based on e-invoicing that will give the states valuable information they need to accelerate efforts to combat VAT fraud, especially so-called carousel fraud.
The move to e-invoicing will help reduce VAT fraud, make sure that existing national systems converge across the EU and pave the way for states to set up national digital reporting systems for domestic trade in the coming years.

Source: https://taxation-customs.ec.europa.eu/taxation-1/value-added-tax-vat/vat-digital-age_en

General remarks: modern VAT in Europe
The EU’s VAT “golden rule” is that it has to be ‘neutral’: e.g. in the sense that local products and those from other EU states are subject the same VAT. Besides, businesses are being able to reclaim any VAT that they pay on goods or services: thus, ultimately, the final consumer should be the only one who is actually taxed. Businesses are given a VAT identification number and they have to show the VAT amounts charged to customers on their invoices.
The VAT system in the EU is governed by a common legal framework, i.e. several VAT Directives and the Commission is responsible for ensuring the correct application of the VAT Directives. However, each EU state is responsible for the transposition of these provisions into national legislation and their correct application within its territory. Furthermore, VAT is a traditional own resource of the EU budget and in this way contributes to the EU-wide sources of revenue. It is therefore fundamental to work towards improving VAT collection and reducing the VAT Gap.

More on the evolution of VAT Gap in: https://ec.europa.eu/commission/presscorner/detail/en/qanda_20_1580

VAT fraud, generally, results from weaknesses in the current VAT system and the way in which tax administrations manage VAT collection. As soon as VAT is a major revenue source for the EU member states, VAT losses, including those due to VAT fraud, have a big impact on any state’s budget.
See: https://www.integrin.dk/2020/09/22/vat-in-europe-vital-component-in-econometric-integrations-analysis/

Value Added Tax (VAT) is a consumption tax charged on most goods and services consumed in the EU; VAT is levied on the ‘value added’ to the product at each stage of production and distribution, which means that VAT is charged when VAT-registered businesses sell to other businesses (B2B) or to the final consumer (B2C).
The VAT system in the EU is governed by a common legal framework: the VAT Directives, one of the latest is a revised Directive on Administrative Cooperation (Council Directive, 2011/16/EU). However, each EU state is responsible for the transposition of these provisions into national legislation and their correct application within its territory; the Commission is only responsible for ensuring the correct application of VAT legislation.
Furthermore, VAT contributes significantly to national budgets that pay for schools, hospitals and other public services in EU Member States. It is also a source of revenue for the EU budget. It is therefore fundamental to work towards improving VAT collection and reducing the VAT Gap.

Present reforms
Current EU VAT rules were last updated in 1993 – long before the digital age – and are ill-suited to the needs of businesses, consumers and administrations in an era of cross-border internet shopping. In the meantime, the online shopping boom has transformed retail across the world, and has accelerated even further during the pandemic. Accelerated online retail has underlined the need for reform to ensure that the VAT due on online sales gets paid to the country of the consumer. The new rules also respond to the need to simplify life for shoppers and traders alike.
While the new rules represent a big change in the way EU online businesses deal with their VAT needs, it will bring untold benefits when it comes to ease of doing business, cutting down on fraud and improving the consumer experience for online shoppers in the EU.
A similar ‘Mini One Stop Shop’ for VAT has already been running successfully since 2015 for cross-border sales of electronic services. Its extension to online sales of goods will offer even more advantages for online retailers and consumers in the EU. Similar reforms have been put in place and are working well in other jurisdictions such as Norway, Australia and New Zealand.
New Value-Added Tax (VAT) rules for online shopping entered into force at the end of June 2021as part of efforts to ensure a more level playing field for all businesses, to simplify cross-border e-commerce and to introduce greater transparency for EU shoppers when it comes to pricing and consumer choice.
The new rules from 2021 were also aimed to affect online sellers, in the digital platform and marketplaces both inside and outside the EU, by postal operators and couriers, customs and tax administrations, as well as consumers.
Source: https://ec.europa.eu/commission/presscorner/detail/en/ip_21_3098

Practical examples
Under the current VAT rules, a hotel in a large European city, for example, faces competition from a platform which may facilitate thousands of listings in the same city, many of which are not taxed.
Under the new rules, where the underlying supplier of passenger transport or short-term accommodation does not charge VAT, the platform will charge VAT on their behalf. The platform will collect the VAT from the customer and remit it to the tax authorities. Day-to-day operations of underlying suppliers are not affected: VAT is simply automatically added to the price shown on the platform.
As with other businesses dealing with cross-border supplies, where the supply is in a Member State in which the platform is not established, they will be able to declare the VAT via the existing simplification measures, such as the OSS and the reverse charge.
Huge progress has been made in recent years to make the EU’s VAT system as easy as possible to use for companies that sell to consumers across the EU, in particular online. Since July 2021, a new online system (the ‘One Stop Shop’ – or OSS – and ‘Import One Stop Shop’ – or IOSS – portals) allows businesses to declare and remit the VAT due on their cross-border sales of goods and services to consumers within the EU via one state administration and in one language.
But some traders who want to sell goods to consumers within a EU state other than their own still need to register in other states for VAT purposes. The same problem affects traders who simply want to move stock to another EU state for storage. Registering for VAT can be time consuming and expensive, costing a minimum of €1,200 per state – particularly costly for SMEs, start-ups and businesses looking to scale-up.
The ‘One Stop Shop’ (OSS) and ‘Import One Stop Shop’ (Import OSS) allows businesses to declare and remit the VAT due on their sales on goods and services within the EU, and on imports of low-value goods into the EU.
In that vein, the system was designed to simplify VAT compliance for cross-border online shopping sales and introduce greater transparency for EU shoppers when it comes to pricing and consumer choice. It also contributes to a fairer and simpler system of taxation in the EU, and to the modernisation of VAT in line with the realities of the e-commerce market.
Figures emerging following an ex-post evaluation of the first 6 months of application of the e-commerce package point to a successful implementation of the new system in the EU states collecting approximately €8 billion in VAT revenues via the OSS and IOSS portals, which equates to approximately €16 billion on an annual basis.
Now that the OSS and IOSS systems are fully up and running, the Commission is proposing further targeted simplifications that can offer an even better experience for e-commerce traders and customers.
More examples in: https://ec.europa.eu/commission/presscorner/detail/en/QANDA_22_7518
Additional information in the Commissioner Gentiloni’s remarks (8.xii.2022)on VAT in the digital age at: https://ec.europa.eu/commission/presscorner/detail/en/STATEMENT_22_7590

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