EU Commission Updates VAT Strategy

by Ulrika Lomas, Tax-News.com, Brussels

29 October 2003

The European Commission has presented a follow-up report which reviews progress on proposals already made, lists forthcoming VAT proposals and sets out its ideas for a VAT system that would be suitable for an Internal Market consisting of 25 Member States.

"I am pleased to present the Commission's ideas for a VAT system that would meet the requirements of an Internal Market of twenty five Member States" said Frits Bolkestein, European Commissioner responsible for Taxation and the Internal Market. "The Commission wishes to co-operate fully with Member States both to ensure that legitimate businesses are not hampered from doing business across borders by complicated VAT rules and compliance requirements and to prevent fraudsters from exploiting loopholes in the present VAT rules."

“The Communication reaffirms guiding principles for the type of common VAT system that is best adapted to an Internal Market consisting of 25 Member States,” The Commission said in a statement.

It continues: “First, traders' tax compliance obligations have to be simplified in order to allow them to take advantage of the opportunities offered by the Single Market.”

“In order to achieve this, the Commission intends in particular to promote the idea of a one-stop shop system along the lines of the system introduced for electronically supplied services, whereby a trader could fulfill all his obligations for his EU-wide activities in the Member State in which he is established. The Directive on electronically-supplied services has already introduced a system whereby tax obligations could be discharged electronically, which would be an essential pre-requisite for any move to a one-stop shop system.

“Second, VAT is a consumption tax and therefore the system should be structured so that VAT revenue accrues to the Member State where consumption takes place.

“As far as the provision of services is concerned, the current rule that the provision of services is taxed at the place where the provider is established broadly achieved in the past the aim of assigning revenue correctly but this is rapidly changing. Firms providing remote services (e.g. telecommunications services) increasingly choose their place of establishment mainly for tax-planning reasons. As long as there is no political will to switch to an origin-based VAT system (whereby VAT on goods and services traded between Member States would be paid in the Member State of origin with a compensation mechanism to offset trade imbalances), the existing system must be adapted so as to ensure that revenues continue to accrue to the Member State of consumption.

“Finally, the Communication emphasises the need for continuing work on ways of eliminating carousel fraud, in particular by improved administrative co-operation between tax authorities and sharing of best practice in methods of preventing, detecting and tackling this fraud. The Commission believes that, in the medium term, there is no other solution. However, if, despite these efforts, carousel fraud takes on such proportions that it starts to affect the workings of the economy by distorting competition for honest traders then a debate must be launched at Community level on the future of the common system of VAT.”

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