A new VAT action plan by the European Commission

The current intra-Community VAT rules were introduced in 1992 as a provisional regime. However, these rules remained unchanged due to, among other reasons, different VAT rates in each Member State. The Commission has now published and ambitious VAT Action plan to introduce a final EU VAT regime.

What exactly are the proposed changes?

At the moment, where a business invoices a client in another EU country, the supply is zero rated and the acquisition is taxed in the country of the recipient, who deducts and pays VAT in the same VAT return with the corresponding nil effect (provided the client has full right to deduct VAT). Under the proposed changes, the supplier would charge VAT of the customer’s country from his own jurisdiction. This VAT would then be reported and collected by the tax authorities in the supplier’s country. This authorities would transfer the VAT collected to the customer’s member state. For example, in the proposed scheme, if a French supplier sells goods to a German customer, the French company would charge German VAT on the invoice. This VAT would then be reported in the French VAT return and collected by the French authorities. Then they would subsequently transfer the amount to the German tax authorities.

When will the proposal be in effect?

This proposal is still under discussion and it will take years and several approvals before it comes into effect. The proposed scheme follows the MOSS rules for digital services supplied to non-registered customers.

In addition to the VAT treatment of intra-Community transactions, the Commission took the opportunity to suggest changes on the current reduced VAT rates regulation. These rules only allow reduced VAT rates on items or services listed in the Appendix III of the VAT Directive. Following recurrent debates in different member states like the tampon tax in the UK or the e-book standard rate in France and Italy (as opposed to reduced rates on paper books), the Commission is now proposing two options: a) a periodic review of the Appendix III to make sure is always up to date or b) cancelling the Appendix III and give members states freedom on the scope of reduced rates.