The European Commission has today proposed new rules to give Member States more flexibility to set Value Added Tax (VAT) rates and to create a better tax environment to help SMEs flourish.
Today’s proposals are the final steps of the Commission’s overhaul of VAT rules, with the creation of a single EU VAT area to dramatically reduce the €50 billion lost to VAT fraud each year in the EU, while supporting business and securing government revenues. The EU’s common VAT rules, agreed by all Member States in 1992, are out of date and too restrictive. They allow Member States to apply reduced VAT rates to only a handful of sectors and products. At the same time, EU countries consider VAT rates as a useful instrument to pursue some of their political objectives. The Commission is now making good on its pledge to give Member States more autonomy on rates. Countries will be on a more equal footing when it comes to some existing exceptions to the rules, known as VAT derogations. The Commission is today also addressing the problem of smaller companies suffering from disproportionate VAT compliance costs.
“Cross-border VAT fraud is a major cause of revenue loss for Member States and EU budgets. Today’s proposal will help to strengthen the cooperation between institutions working nationally and at EU level in order to effectively tackle this problem and improve tax collection.” Said Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue.
The European Commission has today unveiled new tools to make the EU’s Value Added Tax (VAT) system more fraud-proof and close loopholes which can lead to large-scale VAT fraud. The new rules aim to build trust between Member States so that they can exchange more information and boost cooperation between national tax authorities and law enforcement authorities. The most cautious estimates show that VAT fraud can lead to lost revenues of over €50 billion a year for EU Member States – money that should be going towards public investment in hospitals, schools and roads. Revelations in the ‘Paradise Papers’ have again shown how tax avoidance schemes can be used to help wealthy individuals and companies to circumvent the EU’s VAT rules to avoid paying their fair share of tax. Recent reports also suggest that VAT fraud schemes can be used to finance criminal organisations, including terrorists. Today’s proposals would enable Member States to exchange more relevant information and to cooperate more closely in the fight against these activities. Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, said: “The Paradise Papers have again shown how some are taking advantage of lax application of EU VAT rules to get away with paying less VAT than others. And we know that VAT fraud can be a source of financing for criminal acts, including terrorism. Combating this requires far more effective information-sharing than currently exists between the competent national authorities – and today’s proposals will make that happen.“
“Today, we are proposing to renew the current VAT system, which was set up a quarter century ago on a temporary basis. We need a definitive system that allows us to deal more efficiently with cross‑border VAT fraud. At the European Union level, this fraud causes an annual tax revenue loss of around €50 billion.” Said Vice-President Valdis Dombrovskis, responsible for the Euro and Social Dialogue.
The European Commission has today launched plans for the biggest reform of EU VAT rules in a quarter of a century. The reboot would improve and modernise the system for governments and businesses alike. Overall, over€150 billion of VAT is lost every year, meaning that Member States miss out on revenue that could be used for schools, roads and healthcare. Of this, around €50 billion – or €100 per EU citizen each year – is estimated to be due to cross-border VAT fraud. This money can be used to finance criminal organisations, including terrorism. It is estimated that this sum would be reduced by 80% thanks to the proposed reform.
The proposed VAT reform would also make the system more robust and simpler to use for companies. The Commission wants a VAT system that helps European companies to reap all the benefits of the Single Market and to compete in global markets. Businesses trading cross-border currently suffer from 11% higher compliance costs compared to those trading only domestically. Simplifying and modernising VAT should reduce these costs by an estimated €1 billion.
A definitive VAT system that works for the Single Market has been a long-standing commitment of the European Commission. The 2016 VAT Action Planexplained in detail the need to come to a single European VAT area that is simpler and fraud-proof.
Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, said: “Twenty-five years after the creation of the Single Market, companies and consumers still face 28 different VAT regimes when operating cross-border. Criminals and possibly terrorists have been exploiting these loopholes for too long, organising a €50bn fraud per year. This anachronistic system based on national borders must end! Member States should consider cross-border VAT transactions as domestic operations in our internal market by 2022. Today’s proposal is expected to reduce cross-border VAT fraud by around 80%. At the same time, it will make life easier for EU companies trading across borders, slashing red tape and simplifying VAT-related procedures. In short: good news for business, consumers and national budgets, bad news for fraudsters.”
With today’s package, the Commission proposes to fundamentally change the current VAT system by taxing sales of goods from one EU country to another in the same way as goods are sold within individual Member States. This will create a new and definitive VAT system for the EU.
“Member States should not accept such shocking losses of VAT revenues. While the Commission is supporting efforts to improve collection throughout the EU, current VAT rules date from 1993 and are outdated. We will soon propose to revamp the rules governing VAT on cross-border sales. Our reform will help cut cross-border VAT fraud by 80% and get badly-needed money back to Member State coffers.” Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs.
EU countries lost an estimated total of €152 billion in Value-Added Tax (VAT) revenues in 2015, according to a new study by the European Commission. The ‘VAT Gap’, which is the overall difference between the expected VAT revenue and the amount actually collected, again demonstrates the need for serious reform so that Member States can make full use of VAT revenues for their budgets. While the collection of VAT revenues shows some signs of improvement, the missing amounts remain unacceptably high. The report comes just ahead of proposals by the Commission to overhaul the VAT system. While average EU figures are improving, individual VAT collection performances vary significantly amongst Member States. The largest VAT Gaps were reported in Romania (37.2%), Slovakia (29.4%) and Greece (28.3 %). The smallest gaps were observed in Spain (3.5%) and Croatia (3.9 %). In absolute terms, the highest VAT Gap of €35 billion was in Italy. The VAT Gap decreased in most Member States, with the strongest improvements in Malta, Romania and Spain. Seven Member States saw small increases: Belgium, Denmark, Ireland, Greece, Luxembourg, Finland and the UK.