European Commission Taxation and Customs Union The future of VAT EU perspective Donato Raponi 26 October 2011 Copenhagen

2 European Commission Taxation and Customs Union GREEN PAPER After more than 40 years, the European Commission has considered it was time for a critical look to the EU VAT system, therefore a broad based consultation with all stakeholders  Presentation of the Green Paper in December 2010  Consultation has been open until 31st May 2011  33 questions in total. Questions both for evaluating the current system and for potential solutions  Conference in Milano with tax administrations and stakeholders on 6 May

3 European Commission Taxation and Customs Union GREEN PAPER contributions received ( pages) : will be published on the web of DG TAXUD Study launched on the evaluation of the present system: to be published soon on the Web of DG TAXUD Discussion with Member States : Taxation Policy Group, Deputy Directors for VAT and the Future of VAT Working Group. Opinions of the European Parliament, the European Economic and Social Committee

4 European Commission Taxation and Customs Union GREEN PAPER General reflections Value added tax (VAT) constitutes a major source of revenue for national budgets (in 2009: 784 billion in tax revenue, 21 % of national tax revenues)  Indirect taxes are more growth-friendly than direct taxes  broadening the tax base is a must to allow tax shifts Enhancing the single market of vital importance (Europe 2020 strategy)  Business: current VAT system too complex and burdensome  Business: easier to import/export than intra-EU trade The current arrangements expose the VAT system to fraud (about 12% of VAT remains uncollected)

5 European Commission Taxation and Customs Union THE FUTURE OF EU VAT A VAT SYSTEM ADAPTED TO THE SINGLE MARKET Some figures:  Intra-EU trade represents about 2500 billion €, in 1993 about 700 billion.  40 % of sales of manufactured goods leave the MS, 70 % of those going to other MS. Which system ?  1967: commitment: taxation in the country of origin Is it achievable ? Unanimity ( EP, ECOSOC, BUSINESS) : not realistic in the foreseeable future Need a pragmatic solution

6 European Commission Taxation and Customs Union THE FUTURE OF EU VAT A VAT SYSTEM ADAPTED TO THE SINGLE MARKET  System based on taxation at destination(rate and rules of MS of destination)  Several ways of achieving this objective: Current transitional arrangements for intra-EU B2B transactions but too complex, burdensome and do not cope well with normal commercial practices. Taxation at the place of establishment of the customer –Similar treatment of supplies of goods and services –Decoupling taxation rules from the physical flow of the goods but connecting to the contractual flow Taxation at the place of arrival of goods –Flow of goods taken into account, similar to the current concept of distance sales

7 European Commission Taxation and Customs Union THE FUTURE OF EU VAT A VAT SYSTEM ADAPTED TO THE SINGLE MARKET The supplier charges VAT on cross-border B2B supplies:  Equal treatment for domestic and cross-border transactions  The intregrity of the VAT system with the fractional collection mechanism reinstituted  Economic evaluation shows significant advantages but impact for businesses and tax authorities significant too This would require the implementation of a comprehensive One- Stop-Shop. Conclusion: EU VAT SYSTEM should be based on the principle of taxation at destination. Technical work on the different possible ways to implement the destination principle

8 European Commission Taxation and Customs Union THE FUTURE OF EU VAT A SIMPLE SYSTEM Compliance cost: 2 to 8 % of VAT collections Businesses engaged in intra-EU trade: additional burden : national obligations, different options left to MS  Harmonisation of VAT procedures: substantial gains in trade, GDP and consumption Possible initiatives:  Provide the business with better and more reliable information at EU level: rules and obligations relating to registration,invoicing, VAT returns,VAT rates, speicial obligations,limitation to the right of deduction…etc  Improvement of the EU legal process: larger involvement of stakeholders, more transparency in the process of establishing and interpretating EU vat law, publication of VAT Committee guidelines approved and explanatory notes for the implementation of new legislation…etc

9 European Commission Taxation and Customs Union THE FUTURE OF EU VAT A SIMPLE SYSTEM  Improvement of the governance of the VAT at EU level: Setting up of a communication channel at EU-level where Tax Authorities, the Commission and business representatives exchange views on practical matters of VAT administration.  Standardisation of VAT obligations: Divergent obligations oblige businesses to tailor IT specifications and procedures for each MS where they operate Is seen as a key to easing administrative burdens Possible solutions: standardisation of obligations: declaration, registration … available in all languages

10 European Commission Taxation and Customs Union THE FUTURE OF EU VAT A SIMPLE SYSTEM  The One-Stop-Shop « mini » OSS for Eu providers of telecommunications, boroadcasting and electronic services supplied to final consumers within the EU: enter into force by 2015 = major milestone More general use of this concept Crucial instrument to reduce compliance costs and easing trade ( SMEs), especially in a VAT system based on taxation at destination

11 European Commission Taxation and Customs Union THE FUTURE OF EU VAT MORE EFFICIENT SYSTEM A broader tax base + a larger application of standard rate Better efficiency of the tax More revenue

12 European Commission Taxation and Customs Union c Broadening the tax base  Public bodies and exemptions for certains activities in the public interest Study highlighted shortcomings of present rules: –Lack of neutrality –Distorsions of competition –Complexity Possible solutions: –Full taxation (GDP: + 0,19, VAT revenue=+195 billion, public employment: )  Concerns: cost of public goods, social security if education or health activites taxes –Targeted and progressive approach: starting with activities with a larger degree of private sector involvement: waste collection, water treatment …etc

13 European Commission Taxation and Customs Union THE FUTURE OF EU VAT MORE EFFICIENT SYSTEM  Passenger transport services Present rules = different treatments (exemption, reduced rates, standard rates) depending of the means of transports and Member States distortions of competition Possible approaches: – suppression of the exemption applied to international air and sea transport ? –Extension of the exemption to the other means of transport ?

14 European Commission Taxation and Customs Union THE FUTURE OF EU VAT MORE EFFICIENT SYSTEM Structure of rates  Approximation of rates : condition for the functioning of the origin based system  VAT system based on taxation at destination : no more a condition  Business concerns: divergences in VAT rates = additional compliance costs (reduction by 50 % the dissimilarity between MSin terms of the special VAT rates = + 9,8 % of intra-EU trade gains, + 1,1 of GDP)  Study: VAT rate is not the most suitable instrument for pursuing policy objectives  Equal treatment between products ( online formats and traditional formats)

15 European Commission Taxation and Customs Union THE FUTURE OF EU VAT A MORE ROBUST SYSTEM  Fraud and avoidance: correlated to the compliance burden Appropriate system for the taxation of intra-EU transactions Simpler VAT system Contribute to the robustness of the VAT system  VAT Collection new ways: –Split payment –Wharehouse model  Quick reaction mechanism Provide MS with a legal base in order to take immediate national measures to stop massive fraudulent practices

16 European Commission Taxation and Customs Union THE FUTURE OF EU VAT Thank you