Ecofin Reaches Landmark VAT Agreement

by Ulrika Lomas, Tax-News.com, Brussels

05 December 2007

The European Council of Finance Ministers (Ecofin) has reached a landmark political agreement on two draft directives and a draft regulation aimed at changing the rules on value-added taxation intended to ensure that VAT on services accrues to the country where consumption occurs, and to prevent distortions of competition between member states operating different VAT rates.

The agreement ends a five-year deadlock on the sweeping changes to the community's VAT laws, but the reverse charging of VAT on the purchases of goods and services electronically will not begin until 2015, with a revenue sharing agreement phased in over the subsequent three years. This has appeased Luxembourg, which had used its veto to block the proposed reforms.

Any changes to EU tax laws require the unanimous consent of the member states, but Luxembourg, with its 15% VAT rate - the lowest that a member state can levy under EU law - has become a popular location for internationally known e-commerce businesses such as eBay, Skype and iTunes, and the Grand Duchy's government and was determined to negotiate a better deal for itself in order to protect its revenue base. Luxembourg Prime Minister, Jean-Claude Juncker claimed that the government stood to lose an estimated EUR220 million annually in tax revenues under the original VAT reform proposals.

Ecofin announced Tuesday that the so-called VAT package will be adopted without further discussion at a forthcoming Council meeting, after finalisation of the texts. The new rules will require taxation for VAT on business-to-business supplies of services at the place where the customer is situated, and no longer at the location of the supplier, as is currently the case.

For business-to-consumer supplies of services, the place of taxation will continue to be that where the supplier is established. However, in certain circumstances, the general rules for both businesses and consumers will not be applicable, and specified rules will apply to reflect the principle of taxation at the place of consumption. These exemptions concern in particular: restaurant services, the hiring of means of transport, cultural, sporting, scientific and educational services, and business to consumer supplies of telecommunications, broadcasting and electronic services.

To simplify VAT arrangements made necessary by the new rules for telecoms, broadcasting and electronic services, a "one-stop" system will be introduced, to enable service providers to fulfil in their home member state a single set of obligations for registrations, declarations and payments, including for services provided in other member states where they are not established. VAT revenue will then be transferred from the country in which the supplier is located to that where the customer is situated, whose VAT rates and controls will be applicable.

The measures will as a general rule enter into force on 1 January 2010.

The Council's political agreement was made possible by a compromise regarding the change of rule on the place of taxation for business-to-consumer supplies of telecoms, broadcasting and electronic services.

For this sector: application of the new rules and the one-stop scheme will be deferred to 1 January 2015; the member state of establishment will, until 1 January 2019, retain a proportion of VAT receipts collected through the one-stop scheme. This proportion will amount to 30% from 1 January 2015 until 31 December 2016, 15% from 1 January 2017 until 31 December 2018, and 0% from 1 January 2019 onwards; the Commission will be asked to report on the feasibility of the new rules before their entry into force.

Although the long-awaited agreement perhaps exposed the flaws in how decisions between 25, often competing, member states are made, EU Tax Commissioner Laszlo Kovacs was pleased that a consensus eventually emerged.

"Finally agreement was reached and it certainly shows that even in very difficult circumstances when we need consensus, it can be achieved if serious community interests are at stake," he told a news conference.

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