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Major changes of EU VAT rules take shape of detailed technical measures

On 25 May 2018, the European Commission released a proposal of detailed technical amendments to EU rules on VAT. The proposed measures are aimed to introduce a future fraud-proof EU VAT system. To launch these changes, around 200 of the 408 articles in the EU VAT Directive would need to be adapted.

May's package of measures is a follow-up to the proposal of the main principles or 'cornerstones' of a definitive EU VAT system for the B2B trade in goods within the EU (read more in the article „The European Commission proposes a significant reform of the VAT system in the EU“).

Putting the principles of the definitive EU VAT area into operation would require significant changes to the EU VAT Directive. These should bring about:

  • Simplifying taxation of cross-border transactions involving goods

In the current VAT system, trade in goods between businesses is split into two transactions:

  1. a VAT exempt supply of goods in the EU member state where the dispatch or transport to the customer begins, followed by

  2. a taxed acquisition of goods in the EU member state where the goods are finally located after transportation from another EU member state.

Once agreement on the amendments to the VAT rules is met, the cross-border trade of goods in the EU should be defined as a 'single taxable supply' which will ensure that goods are taxed in the EU member state where the transport of the goods ends. The objective of this measure is to significantly reduce VAT fraud.

  • One Stop Shop

It is proposed to introduce the necessary provisions to put in place the 'One Stop Shop' for all B2B EU traders. It should be created in form of an online portal to be used by businesses to fulfill their VAT obligations. The related details were announced by the European Commission in the October 2017 VAT reform proposal.

This system should also be available to companies outside the EU who want to sell to other businesses within the EU and who would otherwise have to register for VAT in the respective EU member states. Once the system enters into force, these businesses will have to appoint one “intermediary” established in the EU to take care of VAT for them.

  • Less administrative burdens

Measures aimed at combating VAT fraud should result in reducing the administrative burden businesses in the EU currently face when they sell to other companies in other EU member states. Filing of EU Sales Lists required by the current VAT system will no longer be needed for cross-border supplies of goods in the EU.

Invoicing regarding EU trade should continue to be governed by the rules of the EU member state of the seller.

  • Seller should usually be responsible for settling the VAT liability

May 2018 draft proposal clarifies that it is the seller that should charge the VAT due on a supply of goods to his customer in another EU member state, at the rate of the EU member state of destination.

Only where the customer is a Certified Taxable Person (i.e. a reliable taxpayer, recognized as such by the tax administration) and the supplier is not established in the EU member state of taxation, the acquirer of the goods will be liable for VAT. The concept of Certified Taxable Person was introduced by the European Commission in the VAT reform proposal published in October 2017.

The new rules are proposed to take effect from 1 July 2022.

The European Commission reconfirmed that the proposed changes for the so-called „quick fixes” remain entirely valid since they should enter into force well ahead of the adoption of the proposed technical changes of the EU VAT rules (by 2019). Their brief summary is included in the November 2017 issue of Tax and legal news.

As the proposed measures contain significant changes of the EU VAT rules, businesses should already consider assessing impact on their business activities and monitor development in the implementation process.

Prolongation of the optional reverse charge mechanism and of the Quick Reaction Mechanism against VAT fraud

As part of the package introduced in May 2018, the European Commission published a proposal of amendments to the EU VAT Directive, the purpose of which is to prolong the possibility of EU member states to:

  • apply the reverse charge mechanism to combat existing fraud in supplies of goods and services included in Article 199a(1) of the VAT Directive,

  • use the Quick Reaction Mechanism (QRM) to combat VAT fraud more quickly and efficiently.

According to the current wording of the EU VAT Directive, these temporary and targeted measures should expire on 31 December 2018. As the EU member states would subsequently be deprived of an efficient tool to fight fraud, the European Commission considers appropriate to prolong these measures until 30 June 2022, the date on which the definitive VAT regime should enter into force.

                                        

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