Fair taxation: Commission proposes final measures for fraud-proof VAT system

By Dental Tribune International
October 30, 2018

BRUSSELS, Belgium: The EU member states are losing billions of euros in value added tax (VAT) revenues each year. The resulting VAT gap, the difference between the expected VAT revenues and those that are eventually collected, provides an estimate of the revenue lost owing to tax evasion and avoidance on the one hand and bankruptcies, financial insolvencies and miscalculations on the other. On 25 May 2018, the European Commission proposed final technical measures to create a fraud-proof EU VAT system.

VAT and the VAT gap

VAT is a consumption tax in the European Union assessed on the value added to goods and services. VAT is collected fractionally, via a system of partial payments whereby VAT-registered businesses deduct from the VAT they have collected the amount of tax they have paid to other taxable persons on purchases for their business activities. This way, double taxation is avoided and the tax is neutral regardless of the number of transactions involved.

VAT plays an important role in the European Single Market. It replaced the turnover taxes that distorted competition and hindered the free movement of goods, and was then amended to allow for the removal of checks and formalities on goods moving between the various member states. It is a major and growing source of revenue for EU member states, raising over €1 trillion in 2015, corresponding to 7 per cent of EU GDP.

However, according to the 2017 Study and Reports on the VAT Gap in the EU-28 Member States, the estimated VAT gap in the EU 28 in 2015 was estimated at €151.5 billion, or 12 per cent of the total expected VAT revenue. It should be noted though that this VAT gap is not purely equivalent to VAT fraud. Apart from VAT fraud through tax evasion or avoidance, the VAT gap is influenced by bankruptcies and tax arrears, as well as reporting problems in national accounts.

Towards a fraud-proof VAT system

The Commission has consistently pressed for the reform of the VAT system. The Commission’s 2016 Action Plan on VAT announced its intention to propose a definitive VAT system for the EU. Since then, progress has been made, resulting in agreement on new VAT rules for online sales, and the Commission has already put forward its proposals on the main principles behind the future definitive EU VAT area and a major reform of how VAT rates are set in EU member states. The current proposal follows up on these preceding steps. The Commission said that it had listened to the European Parliament and the Council, which both suggested that any future VAT system should be based on the principle of taxation at destination, that is where the goods or services are consumed.

The proposed package of measures substantially modifies the rules relating to VAT and should make it easier for companies across the EU, putting an end to 25 years of a transitional VAT regime in the European Single Market. Last October, the Commission proposed the main principles for the creation of a single EU VAT area, which would help to shut down the estimated €50 billion in fraud currently affecting national budgets annually in EU member states. With these technical measures, the Commission hopes that member states will kick-start discussions on the broader principles or cornerstones of a simpler and resilient definitive EU VAT system for the trade in goods within the EU.

According to Pierre Moscovici, European Commissioner for Economic and Financial Affairs, Taxation and Customs, “The proposals we are presenting today [25 May 2018] represent the final building blocks in the overhaul of the EU’s VAT system. They will open the way to simpler rules, less red tape and a more user-friendly system, thanks to the online one-stop shop for traders. It is time for our member states to trust each other when it comes to VAT collection on intra-EU transactions. We estimate that our proposed reform could reduce by 80 per cent the €50 billion lost each year in cross-border VAT fraud. I hope that member states will now seize this opportunity to put in place a quality VAT system for the EU.”

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