EC provides insight on important reforms of European Union VAT
The European Commission (EC) has circulated information on a new set of reforms to the current EU VAT framework, with the aim of tackling tax evasion and decreasing friction for businesses that trade cross-border.
Currently, the VAT system was designed and instigated alongside the creation of the EU Single Market, with the view of presenting a harmonised VAT framework, that was supposed to address the free movement of goods and services by:
- Guaranteeing that double taxation of the same goods and services did not occur, but also that the goods did not go about untaxed either; and also
- Guaranteeing that VAT fraud did not increase once border controls no longer existed.
The EC specified at the time, that rules were intermediate and would therefore go through changes in the future. The new proposals would represent the changes envisaged almost 25 years ago.
New rule for taxation of intra-community B2B ‘supply of goods’
At present, a company shipping goods from one EU Member State to another typically zero rates the supply in the ‘country of shipment’, whilst the customer is required to account for VAT by means of ‘acquisition tax’. Under a new rule, the business dispatching the goods will now charge VAT at the rate applicable in the ‘country of destination’. This means the resulting VAT will now be paid directly to the tax authorities in the originating country, which will then be required to pay to the country of destination.
In order to simplify this change to the regime, the EC intends to set-up a ‘one-stop-shop’ to streamline the registration and compliance procedures. The proposal draws heavily on the ‘Mini-One-Stop-Shop’ (MOSS) system, which applies to companies selling electronic services to individuals. This ‘one-stop-shop’ method principally means businesses would use a portal in their country of establishment to file and pay liabilities related to all EU Member States, instead of having to register with tax authorities in each individual country.
The EC foresees that input tax incurred in the local country would be recoverable in the ‘one-stop-shop’. Nevertheless, it is not yet clear how this system would manage with all the supplementary reporting requirements enforced by some EU Member States (e.g. SAF-T in Poland, 394 in Romania, SII in Spain etc.) or how the system would handle all the exceptions and special rules that apply to B2B transactions (e.g. domestic reverse charge, domestic exemptions). This is one of the reasons that the new rules will not apply until 2022 at the earliest.
Certified taxable persons and quick fixes
Ahead of these new rules, a transitional arrangement by the EC intends on granting certain businesses the possibility to use several simplification measures to ease VAT compliance. This new concept set out by these EU proposals, will only be available to taxpayers who obtain ‘Certified Taxable Person’ (CTP) status for simplification.
These ‘quick fixes’ for business obtaining CTP status will be able to benefit from the following:
- Co-ordinated and constant rules on providing ‘proof of transport’ for goods shipped between the EU Member States;
- Evading VAT registration and payment in cases where businesses hold stocks in other EU VAT authorities to be sold straight to customers there (call-off stock scenarios); and
- Simplification measures in cases where a business is part of a cross-border chain transaction supply with several sales, but just one transportation of the goods.
The only ‘quick fix’ that is not precisely aimed at CTP’s mentions to clarify the need for the partners’ EU VAT ID being verified in the VIES system, as an extra condition for zero rating goods shipped between EU Member States (currently, as a principle matter, only evidence that goods have moved out of the Member State is required).
When are these changes envisaged?
This CTP and quick fixes are envisaged to be effective from 1st January, 2019. The new rules, whereby, VAT will become due at the ‘place of destination’ are hoped to have effect from 1st January, 2022. Nevertheless, all changes are subject to agreement by the EU Member States and hence these time scales may change, with a prospect that like the once proposed single VAT return, it doesn’t actually get agreement from all the appropriate EU Member States.
Tax recommendations from the EU from the ‘Panama Papers’ probe
Certain EU Member States are obstructing the fight against money laundering, tax avoidance, and evasion, the European Parliament committee of inquiry into the ‘Panama Papers’ leaks has said.
The Committee also called for a mutual international definition of what constitutes an Offshore Financial Centre (OFC), tax haven, secrecy haven, non-cooperative tax jurisdiction, and high-risk country, and suggested that an entity with an offshore structure should have to validate to authorities their need for such an arrangement.
The Committee re-iterated the requirement for “regularly updated, standardised, interconnected, and publicly accessible beneficial ownership (BO) registers.” It also called for plans to close loopholes that it said allow for aggressive tax planning as well as more dissuasive sanctions at both EU and national level against banks and intermediaries ‘that are knowingly, wilfully and systematically involved in illegal tax or money laundering schemes.'”
Co-rapporteur Jeppe Kofod (S&D, DK) said:
Europe needs to get its own house in order before it can end the scourge of systematic money laundering, tax avoidance, and evasion. It is clear that urgent reform is needed, not least within the Council Code of Conduct Group on business taxation. The citizens of Europe have a right to know what their national governments are doing - and not doing - in the Council to help end harmful cross-border tax practices.
Co-rapporteur Petr Jezek (ALDE, CZ) recommended that the practices revealed by the Panama Papers were not inevitable. “Our conclusions are clear: had the EU and its Member States played a more pro-active role in the past, the problems revealed by the Panama Papers could have been avoided. They arose because EU legislation against money laundering and exchange of tax information was not properly implemented,” he said.
The Inquiry Committee was set-up from the leak of this personal financial information, collectively known as the ‘Panama Papers’. This information revealed that some offshore business entities had been used for illegal purposes, including fraud and tax evasion. Sometime in December, the Inquiry Committee’s report will be put into a final vote by the full European Parliament.
OECD releases guidelines to mirror EU’s digital tax reforms
At the end of October, the OECD released new implementation procedures to support the collection of consumption taxes on cross-border sales.
The regulation – ‘Mechanisms for the Effective Collection of VAT/GST Where the Supplier Is Not Located in the Jurisdiction of Taxation’ – is anticipated to support the reliable implementation of internationally agreed standards on the VAT treatment of cross-border trade, as set out in the OECD’s updated VAT/GST Guidelines. The OECD said the guidance’s release is predominantly pertinent given the ongoing digitalisation of the economy and that taxing the digital economy was a key tax challenge tackled in the OECD’s ‘Base Erosion and Profit Shifting’ (BEPS) project, covered under Action 1.
The proposals from the OECD’s Action 1 report were that countries remove VAT exemptions for low-value consignments and also to introduce taxation on business-to-consumer supplies of certain electronic services in the location of the consumer. The proposals were principally based on those already proceeding in the European Union (EU), which from 1st January, 2015, introduced new place of supply rules for providers of broadcasting, telecommunications, and electronic services, providing that these should be taxable in the location of the consumer. It has been agreed recently at EU level that low-value consignments should lose their exemptions.
The implementation guidance builds on good practice approaches deployed by jurisdictions when they require foreign suppliers to register and collect VAT on cross-border B2C sales in application of the solutions recommended in the BEPS Action 1 report. The implementation guidance was developed by the OECD with the active involvement of a wide range of jurisdictions beyond the OECD and with representatives of the global business community.
, said the OECD.
“The early data on the impact of the recommended solutions is very promising. The European Union, which was the first adopter of these collection mechanisms, has identified the total VAT revenue declared via its compliance regime (the Mini-One-Stop-Shop or MOSS) as in excess of €3 billion in its first year of operation. The MOSS has also played an important role in reducing the compliance burden of businesses that use the regime. Approximately 70% of the total cross-border B2C supplies of services and intangibles that are in scope of this regime are captured by this compliance regime.”
“The new implementation guidance will support enhanced compliance levels while limiting compliance costs for digital suppliers by promoting the consistent and coherent implementation of these collection mechanisms across jurisdictions,” the OECD said.
Foreign Investors may get double tax relief improvements from the EU
The European Commission (EC) on the 11th December, 2017 set out new proposals on the introduction by Member States of quick, simplified, and standardised measures for refunding withholding taxes overpaid by cross-border investors.
The EC has suggested a new ‘Code of Conduct’, which is anticipated to offer solutions for investors who, as a result of how withholding taxes are applied, end up paying taxes twice on the income they receive from cross-border investments.
A withholding tax is a tax withheld at source in the EU country where investments income such as dividends, interests, and royalties are made. These levies offer a way for Member States to make sure that taxes are being applied properly on cross-border transactions. Since the income is often taxed again in the Member State where the investor is resident, problems of double taxation can result. Investors have a right to claim a refund when double taxation occurs, but the EC recognises that refund processes are currently problematic, costly, and timewasting.
The adoption of the ‘Code of Conduct’ will be voluntary for Member States. To develop tax rules for investors, the Code offers for:
- Methods to help smaller investors for whom the rules on the refund of withholding tax are excessively difficult;
- User-friendly digital forms to apply for withholding tax relief in the case of overpayment with be created;
- A dependable and effective timeframe for tax authorities for the granting of withholding tax relief; and
- A solitary point of contact in Member State tax administrations to deal with queries from investors on withholding tax.
This is yet another important building block on the road towards a true single market for capital. Today's ‘Code of Conduct’ should help investors to avoid long delays and high costs when claiming withholding tax refunds. We will now work closely with Member States to make sure that the new Code of Conduct delivers tangible results.
, Valdis Dombrovskis, Vice-President in charge of Financial Stability, Financial Services, and Capital Markets, commenting on the ‘Code of Conduct’s’ launch.
Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation, and Customs, said: “While a very important tool for protecting public finances, withholding taxes can lead to a disproportionate burden on individuals and companies when it comes to seeking tax relief. My hope is that today’s Code of Conduct will help EU countries to navigate the fine balance between ensuring a consistent tax collection on income and offering tax certainty to businesses that lose out on an estimated €8.4 billion ($9.9 billion) in compliance costs each year.”
Trade talks to progress between EU and UK
On the 15th December the European Council will decide on whether talks on the UK’s exit from the EU can proceed to a second stage, to trade and tax issues.
The European Commission on the 8th December recommended to the European Council to conclude that satisfactory progress has been made in the first phase of the Article 50 negotiations with the United Kingdom, following an agreement recently reached on three priority areas: citizens’ rights; the dialogue on Ireland and Northern Ireland and the border; and the financial settlement.
The Commission said EU citizens living in the United Kingdom will be secure under the agreement, affirming that the rights of EU citizens living in the United Kingdom and United Kingdom citizens in the EU27 will continue to be the same after the United Kingdom has left the EU. The Commission has also made sure that any administrative measures will be inexpensive and simple for EU citizens in the United Kingdom, it said.
With regards to the financial settlement, the United Kingdom has agreed that obligations taken by the EU28 will be honoured by the EU28, including the United Kingdom.
According to the Commission, with regard to the border between Ireland and Northern Ireland, the United Kingdom acknowledges the exceptional situation on the island of Ireland and has made substantial commitments to avoid a hard border.
Full details of the Commission’s assessment are obtainable in the Commission’s announcement on the state of progress of the negotiations with the United Kingdom.
Jean-Claude Juncker, the President of the European Commission, said: “This is a difficult negotiation but we have now made a first breakthrough. I am satisfied with the fair deal we have reached with the United Kingdom. If the 27 Member States agree with our assessment, the European Commission and our Chief Negotiator Michel Barnier stand ready to begin work on the second phase of the negotiations immediately. I will continue to keep the European Parliament very closely involved throughout the process, as the European Parliament will have to ratify the final Withdrawal Agreement.”
Michel Barnier, the European Commission’s Chief Negotiator, said: “The Commission’s assessment is based on the real, genuine progress made in each of our three priority areas. By agreeing on these issues, and settling the past, we can now move forward and discuss our future relationship on the basis of trust and confidence.”
According to the conclusions of a survey released on 11th December, the slow movement in Brexit talks is hitting business confidence, with activity and optimism in the services sector being predominantly depressed.
Remarking on the outcomes, Peter Hemington, Partner, BDO LLP, said: “The unprecedented political and economic climate is stunting the growth of UK business. The continued absence of clarity about our potential Brexit trade deal leaves businesses lacking confidence to make important decisions regarding future investment and direction. The Government needs to be clear with all UK businesses about its Brexit plan and what the most likely outcome will be. Only then will UK businesses be able to make informed decisions and the necessary preparations to protect and encourage future growth.”
The UK Government has briefly defined what it proposes its tax and customs regimes to look like after Brexit. On the 9th October, 2017, the UK Government released a number of white papers, setting out how it will manage its trade and customs policies, as well as its customs, value-added tax, and excise regimes, when the UK leaves the European Union. Its ‘Customs Bill White Paper’, which precisely looks at cross-border tax preparations, says the UK’s new legislation will, as far as possible, replicate the effect of existing EU customs laws.
The ‘Customs Bill’ will give the UK the authority to charge customs duty on goods; state how goods will be classified, set and vary the rates of customs duty and any quotas; alter the VAT and excise regimes so that they can function efficiently post-exit; set out the rules governing how HMRC will gather and enforce the taxes and duties owed; and implement tax-related elements of the UK’s future trade policy, the Government said.
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