EU Consults On Reform Of VAT Rates

by Ulrika Lomas, Tax-News.com, Brussels

21 December 2016

The European Commission has launched a consultation on reforming the rules governing value-added tax (VAT) rates.

The Commission intends to present a formal proposal for reform of the VAT Directive in autumn 2017. The Directive sets out general rules limiting EU member states' freedom to set VAT rates, and is intended to guarantee the neutrality, simplicity, and workability of the VAT system.

The framework was established more than two decades ago with the aim of arriving at a definitive VAT system based on the "origin principle" – namely, a system in which the location of the seller determines the tax treatment, including the rate. As a result, member states would be required to tax the same goods at very similar rates, and the directive set minimum taxation levels in the hope that over time VAT rates would converge.

However, in 2011, the Commission decided to abandon the objective of introducing an origin-based VAT system in favor of a destination-based regime. Under a destination-based system, the VAT applicable is the one where the buyer is located.

The Commission said that, by nature, the destination system allows greater rate differentiation between member states with a lower risk of distorting competition. "The introduction of the destination system has opened up the possibility to reform rules on rates and make them less constraining for member states," it explained.

The consultation seeks feedback on the need for EU action in the field of VAT rates, and on the proper balance between harmonization and member states' autonomy in the setting of VAT rates. It also asks for comments on the problems and risks linked to the differentiation of VAT rates within the Single Market.

The consultation will close on March 20, 2017.

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