The proposed shake-up follows pressure from member states to scrap a system that hampers their ability to decide which products should benefit from reduced levies and to counter cross-border VAT fraud, which auditors estimate costs the bloc at least €60bn every year.
Pierre Moscovici, commissioner for economic and financial affairs, said the EU faces a “staggering” €170bn shortfall in VAT revenues collected by member states.
“This is a huge waste of money that could be invested on growth and jobs. It’s time to have this money back.”
In measures that would overhaul the current system, the commission would see exporting countries made responsible for collecting VAT, which would be set at the rates applied in the final destination country.
Currently, tax is collected in the state where the goods or services are sold while exporters are exempt, a system that leaves the door wide-open to fraud as the European Court of Auditors highlighted earlier this year.
The commission estimates that if exporting countries instead collect the tax and then transfer that to the treasury of destination countries, cross-border fraud could be reduced by 80%, saving €40bn a year.
While the commission will present its proposal for the changes in 2017, in the meantime it has also called for “urgent action on several fronts” to counter the VAT gap.
These include measures to strengthen the efficiency of tax administrations and enhance cooperation between them as well as with other bodies including customs and law enforcement.
Moscovici said the commission is also “keen to grant member states more autonomy on how to define their VAT reduced rates.”
Current rules stipulate that VAT must be set at a minimum rate of 15% for all products apart from those that feature on a long list of exemptions and lower rates.
Many member states have fought for greater flexibility, with some being more successful than others. The UK recently won the right to abolish VAT on women’s sanitary products, while the Netherlands secured a reduced rate for bicycles and Cyprus and Luxembourg on hairdressing.
France and Luxembourg however lost their lengthy battle for reduced rates on e-books in European court.
Two alternative proposals to the current system have been tabled by the commission. The first, less radical option, would see the current minimum rate and the list of reductions and exemptions maintained, but reviewed regularly based on member states’ input.
The second would abolish this list and allow member states the autonomy to chose which products should benefit from lower or zero levies, but this would be subject to safeguards to prevent fraud and avoid unfair tax competition. The commission also warned it could increase compliance costs for businesses.
This would contradict another element of the plan which hopes to offer support to e-commerce and small and medium sized enterprises in a system that the commission said is currently complex and costly for businesses and member states alike.
It will present a plan at the end of this year to modernise and simplify VAT for cross-border e-commerce, which will include a proposal to ensure e-books can benefit from the same reduced rates as physical publications.
“As a second step, we will present in 2017 a VAT simplification package designed to support the growth of SMEs and make it easier for them to trade across borders,” the commission added.
Petr Kriz, president of the Federation of European Accountants (FEE) welcomed the plans, but warned that compliance burdens for companies, and SMEs in particular, “should remain at the forefront” and “new measures should help and not hinder business”.
He added: “The federation is glad that the action plan aims to simplify the current VAT system and recognises the particular needs of SMEs. Tackling VAT fraud and adapting to the digital economy will prove crucial in making the VAT system fit for the 21st century.”
