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EU States' VAT Decisions Under The Microscope

by Ulrika Lomas,, Brussels

11 October 2013

The European Commission has released its annual "Tax Reforms in EU Member States" report, containing in-depth analysis of Member States' tax policy decisions during the past twelve months, and recommendations to address the specific tax policy challenges they face. The report contains a lengthy section on policy in the VAT sphere.

Following closely on the heels of new research on the EU VAT gap and policy gap, the report begins by reiterating that VAT revenues collected by states are often far below what could theoretically be collected were all concessionary rates of VAT revoked.

The report applauds some member states (Belgium, Estonia, Latvia, Luxembourg, Portugal and Poland) for recent efforts to broaden their VAT bases by extending the application of their standard VAT rate. Spain, for instance, now applies the standard rate of 21 percent to sectors or categories of services that were previously subject to reduced rates (e.g. artistic performances, cinemas, and theaters). However, in contrast, the study points out that other states have expanded the use of reduced rates, such as Sweden with its cut-rate for restaurants and catering services, introduced in 2012.

Reviewing VAT policy changes that have taken place over the past twelve months since the last review, the study carries forward recommendations from 2012 that seven countries broaden their VAT bases and make their VAT regimes more efficient (Germany, Estonia, France, Italy, Hungary, Slovakia and Sweden) and newly recommends similar reforms for Belgium, the UK and Luxembourg.

The report points out that Greece, Spain, Italy, Latvia, Portugal and the UK exhibit a VAT revenue ratio significantly below the EU-28 average. "This indicates that these countries in particular could improve either the structure of VAT or tax compliance in order to increase its efficiency," the report says, adding that: "The ratio is [also] below the EU average in Slovakia, France, Belgium, Ireland, Poland and Lithuania, signaling scope for increasing VAT efficiency."

Aside from its criticism of EU states' "excessive" tax expenditures, the report praises authorities' efforts to tackle non-compliance. It acknowledges that:

  • Austria has taken measures to increase tax compliance in VAT and group tax regimes;
  • The Czech Republic continued work on reviewing the organization of its tax authority, moving towards an integrated revenue agency, and enhanced its risk management capacity by introducing the concept of an 'unreliable VAT taxpayer';
  • Croatia introduced fiscal cash registries from January 2013;
  • Estonia took measures to gain better control of low enforcement areas by amending its VAT law;
  • Finland continued implementation of its multi-annual action plan against the shadow economy;
  • Hungary improved monitoring of the use of cash, increased penalties and increased controls, especially against VAT fraud;
  • Italy reinforced the traceability of transactions and expanded the use of third-party information and reporting;
  • Portugal reformed its VAT invoicing system by implementing mandatory invoicing and electronic transfers of invoice data for all business sectors and transactions. This reform was complemented by a tax incentive for final consumers to request invoices for services delivered by restaurants, hairdressers and vehicle repair shops;
  • Slovakia focused its risk management process on VAT fraud and took measures to fight evasion by requiring electronic payment above a certain threshold;
  • Spain set up a dedicated structure for tackling international tax fraud (the Office of International Taxation); and,
  • The UK took steps to counter offshore tax evasion, tax avoidance and aggressive tax planning, including VAT avoidance.

Concluding, the report also touches on the role that VAT rates can play in achieving the EU's environmental goals by deterring polluting activities, and fostering innovation. It encourages states to dismantle VAT concessions in place for fossil fuels and discusses the tax treatment of the automobile and car rental sector.

TAGS: environment | compliance | VAT rates | tax | business | European Commission | tax compliance | Belgium | Hungary | Ireland | Malta | Portugal | tax avoidance | energy | law | Estonia | Latvia | Luxembourg | Slovakia | environmental tax | enforcement | food | tax authority | offshore | tax planning | Austria | Czech Republic | Finland | France | Germany | Greece | Italy | Poland | Spain | Sweden | penalties | inflation | Croatia | Lithuania | services | Europe | Tax

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