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Following the VAT Action Plan published last April 2017, the European Commission proposed the fundamental principles of what is aimed to become the biggest reform of European VAT rules in recent years.
Intra-Community VAT will follow the destination principle. This means that sales to another EU country will charge VAT at the country of destination´s VAT rate.
Currently, intra-Community supplies are zero-rated provided that certain conditions are met. On the other side of the transaction, intra-Community acquisitions are subject to reverse charge by the client. With the proposed changes, intra-Community supplies will charge VAT at the applicable VAT rate in the country of destination, however, a VAT registration will not be required in that country. Instead, this VAT amount will be paid to the country of establishment of the supplier. The tax authorities in this country will then transfer the VAT amount to the authorities in the country of destination.
For example, under the current regime, where you sell your products from France into Germany, you will make a zero-rated intra-Community supply in France. You customer will then reverse charge the purchase on its German VAT return. Under the proposed changes, you would charge German VAT on this supply. This German VAT collected from your customer would be paid to the French tax authorities, who subsequently transfer that amount to the German tax authorities. The French VAT return will indicate the sale in a section for German intra-Community supplies. On the other side of the transaction , the German client will deduct VAT as part of its German VAT return.
The system is based on the already applicable VAT rules on electronically supplied services. All EU countries would introduce a one stop shop mechanism well all intra-Community supplies across Europe are reported by each taxable person.
The current EU VAT regime is used by fraudsters to collect VAT on domestic supplies and then disappear. This fraud costs European taxpayers € 50 billion every year. This amount is equivalent to €100 per EU citizen each year. The money lost often goes to violent and terrorist organizations.
Another reason for changing the EU VAT system are compliance costs. Businesses operating on an intra-Community basis spend an average of 11% additional compliance cost compared to those operating locally. The new system will simplify compliance and enhance the single European market by reducing administrative burdens from European business operators.
If agreed, these changes would enter into force in 2022. However, there are several steps and approvals required before this date is confirmed.
The proposals published by the Commission this week will be forwarded to the European Parliament and European Economic Social Committee (EESC) for consultation. The next step will require the Council to approve the initiative.
According to the Commission, during Spring 2018 they will publish more details about the technical and IT requirements of this initiative.
We expect further proposals to be published in order to enhance the cooperation and information exchange between Member States, as the new EU VAT regime will require daily cooperation between all EU tax authorities.
More detailed information is available in the website of the European Commission.