Does the common system of VAT need a total overhaul?
Over the last few years, the amount of value added tax (VAT) as a part of national taxation revenue generated by EU Member States has steadily grown. And it is not just an important source of income for national treasuries only. The EU’s own resources, linked to VAT, amount to approximately 14 billion euros.
On a number of occasions, during talks on ways of giving a new direction to the Single Market, the issue of the common system of VAT has been raised. Take the Report by former EU Competition Commissioner Professor Mario Monti, ‘A New Strategy for the Single Market’, which advocates the “reform [of] VAT rules in a single market-friendly way”. The Commission, for its part, used its Communication “Towards a single market act’ to announce the presentation of a new VAT strategy in 2011. This strategy is apparently to be based on the public debate prompted by the Green Paper on the future of VAT, published on 1 December 2010.
The first two VAT directives were issued as early as 1967. However, the directives only regulated the general structure of the VAT system. It was still the job of the Member States to define the scope of VAT, including the setting of rates. It was not until 1977 that this scope was set down in writing in the 6th VAT Directive (77/388/EEC), which was replaced on 1 January 2007 by the directive on the common system of value-added tax, which became known as the VAT directive (2006/112/EC). The latter brought together all the individual provisions into a single legal act, and continues to apply today, albeit in modified form. The directive lays down, amongst other things, a minimum rate of VAT, i.e. a standard rate of at least 15% and a reduced rate of at least 5%. Here, however, one can point out the huge discrepancies which prevail in the Member States even today.
In order to arrive at a sound, simple and more straightforward VAT system for the Single Market, the Commission has set its sights on subjecting the system to a complete overhaul. The survey on what form the VAT system should take is divided into two sections. In the first, the basic principles of taxation levied on internal EU (i.e. intra- community) sales will be discussed. In so doing, the Commission, making a distinction between country of origin and country of destination, is presenting two different set-ups. It is possible that the Commission, marked by its repeated failure to introduce the ‘country of origin’ principle (whereby goods and services would be taxed in their country of origin and not in the destination country), is putting the emphasis on changing to the ‘country of destination’ principle. In this connection, it is calling for thoroughgoing checks and improvements to VAT provisions with regard to legal certainty and administrative costs.
In the second section, the European Commission addresses further key issues, such as how to guarantee the impartiality of the VAT system. The Commission views the tax exemptions laid down in current law as incompatible with the principle of VAT as a broad-based form of taxation, and demands that they be verified in the light of economic and technological changes. It is also putting the current systems of VAT deduction up for discussion, and is looking into any international services whose significance has grown as a result of globalisation, deregulation and developments in the field of communications technology. One issue very close to the Commission’s heart – as recently alluded to yet again by Commissioner Algirdas Semeta – is the simplification of the administrative costs, as well as making it harder for people to cheat the system.
In a further section, the Commission turns its attention to VAT rates, although it does leave a question mark hanging over the issue of reduced rates. The latter have often served as instruments for health and environmental protection or even for political ends. However, when applied to cross-border rates on goods and services, their effect on the economy has been high compliance costs and legal uncertainty. In this context the Commission is posing the question whether, if a lower standard rate were applied, reduced rates ought to be abolished. At this juncture, it is important to remember that VAT is a tax which in economic terms is borne by the end user, i.e. the consumer. Yet, should reduced rates be wholly phased out, it would undoubtedly be the consumer who would be saddled with higher product prices. This move would strike a particularly heavy blow on people living on low incomes. As an alternative to abolishing reduced rates, the Commission is putting forward a list of binding, uniformly adopted reduced VAT rates, which would be used to pursue specific political goals such as those outlined in the Europe 2020 Strategy.
Contributions to the consultation may be sent to DG Taxation and Customs Union until 31 May 2011.
translated from the original German