EU Launches Open Consulation On VAT Reform

by Ulrika Lomas, Tax-News.com, Brussels

17 June 2003

The European Commission has launched an open consultation for views on how the EU's Value Added Tax (VAT) rules concerning the place of taxation of the supply of services should be improved.

The consultation is based on a paper prepared by the Commission's Taxation and Customs Directorate-General. The paper considers the idea of shifting taxation from the place where the supplier is established or has a fixed place of business ('origin' basis) to the place where the customer is located, when the customer is a trader ('destination' basis).

The origin basis worked adequately when the VAT system was first introduced but, with increasing supplies of services across borders, this rule can now lead to administrative complexities, distortions of competition and double or non-taxation of international supplies of services. The Commission intends to launch a proposal in this field in the autumn this year, taking into account the opinions expressed by stakeholders during the present public consultation.

The paper considers the idea of changing the VAT rules so that the customer (if he is a trader) rather than the supplier would be responsible for paying the VAT on services supplied to him. In other words, the rules for applying VAT to services supplied to a business customer in another EU country would be modelled on the current rules for VAT on goods sold to a business in another Member State. The paper suggests that this change in the place of taxation would be appropriate given the increasingly international nature of the services industry.

It would reduce administrative burdens since it would mean that suppliers would not, as is often the case at present, have to register for VAT purposes when providing services into a Member State other than that in which they are established. Furthermore, as the changes would bring the VAT rules more into line with rules concerning the taxation of supplies of services in many non-EU jurisdictions that apply consumption taxes, there would be less risk of double or non-taxation in the case of international supplies of services.

Since such a change would mean that a service provided to a business in another country would be exempted from VAT in the Member State of the supplier, information exchange between Member States' tax administrations would be important to ensure that the VAT is actually paid by the receiving trader. Therefore, the report also considers the possibility of extending to supplies of services the system of electronic information exchange used between tax authorities, known as the "VAT Information Exchange System" or "VIES".

The consultation is open for comments until the end of June 2003.

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