The main change is that in the case of cross-border transactions within the EU, the supplier must charge the VAT to his customer at the rate of the Member State of destination of the goods. The VAT must then be declared and paid in the Member State where the supplier is established via a one-stop-shop mechanism. Another important change is the introduction of the Certified Taxable Person (CTP), for which simplified procedures will apply.
The aim is to introduce the new system in 2022, but first the Member States of the European Union must actually agree on it. In the short term, the European Commission has also proposed a number of “quick fixes” to improve the VAT system.
Current EU VAT Rules
The current VAT rules for transactions within the Member States of the European Union were introduced in 1993 as “transitional arrangements”.
The initial intention was that cross-border transactions within the EU would be taxed with VAT in the country from which the supply is made (country-of-origin principle). A business established in the Netherlands would then have had to charge Dutch VAT when supplying goods to a German customer. The Member States would compensate the VAT payments with each other via a clearing system. However, insufficient trust between the Member States meant that this proposal was never achieved.
Instead of this, domestic transactions and cross-border transactions have for many years been subject to two completely different VAT systems: domestic supplies are usually taxed with VAT; in the case of cross-border transactions between businesses (B2B), the supply by the seller is exempt and the buyer pays VAT on the acquisition.
Despite various attempts, the transitional arrangements have still today not been converted into definitive arrangements. Rather, changes have regularly been made to the transitional arrangements, so that over the years a fairly complex system has developed, leading to a high administrative burden for businesses and considerable loss of revenue for Member States.
European Commission's reform plans
The European Commission’s reform plans announced in October 2017 were prompted by the wish to modernise the VAT system and make it simpler and more business-friendly, for the benefit of both Member States and businesses. The most important motive, however, appears to be the wish to reduce the annual loss of VAT revenue, estimated to be more than EUR 150 billion. A large proportion of this loss is said to be due to cross-border VAT fraud.
The plans, intended for introduction in 2022, can be summarised as follows:
- For cross-border supplies of goods within the European Union, the supplier will have to charge VAT, and this must be VAT at the rate of the Member State of destination of the goods. In an example: a Dutch business that supplies goods to a customer in Germany will have to charge German VAT on the invoice.
- A one-stop-shop (OSS) mechanism will be introduced, so that the VAT payable on supplies of goods to other Member States can be declared by suppliers in the Member State where they are established. This mechanism also makes it possible to offset the VAT payable on supplies against the input VAT on acquisitions made in the EU.
- The concept of the Certified Taxable Person (CTP) is introduced. This concept allows for an attestation that a particular business can globally be considered to be a reliable taxpayer, and is modelled on the existing concept of authorised economic operator (AEO) in the field of customs.
- For Certified Taxable Persons, the current rules will remain in force. This means that supplies to a CTP will result in VAT being levied (via reverse charge) in the country of the customer.
The European Commission also introduces a number of “quick fixes”, which are intended to enter into effect as early as 2019. These “quick fixes” are the following:
- Simplification and harmonisation of rules regarding “call-off stock”, i.e. stock that a supplier holds in a Member State where it is not established, so that it can be quickly sold to local customers on a call-off basis. Some countries have a simplification arrangement for this, which avoids compulsory registration in the country where the stock is held; other countries do not have an arrangement of this kind. A simplification arrangement to avoid registration is now proposed for all countries, but only for Certified Taxable Persons (see above).
- In order for intra-Community supplies of goods to be exempted from VAT, it will be compulsory to have the customer’s VAT identification number. On the basis of case law, this number is currently not a substantive condition, but this will consequently be changed.
- There will be simplification of determining which transaction in a chain transaction or triangular transaction is defined as the cross-border supply. This simplification will only apply for CTPs.
- Rules will be introduced making it easier for businesses to prove that goods have been transported from one Member State to another, which is a condition for exemption from VAT. These rules will also only apply for CTPs.