EN    EN EN 
 
EN    EN  EUROPEAN COMMISSION 
Brussels, 1.12.2010 
SEC(2010) 1455 final 
 
COMMISSION STAFF WORKING DOCUMENT 
Accompanying document to the 
  
GREEN PAPER 
 
on the future of VAT 
 
Towards a simpler, more robust and efficient VAT system 
    
{COM(2010) 695 final}  
 
EN 2   EN COMMISSION STAFF WORKING DOCUMENT 
Accompanying document to the 
  
GREEN PAPER 
 
on the future of VAT 
 
Towards a simpler, more robust and efficient VAT system 
I
NTRODUCTION  
This Staff Working Document, which supplem ents the Green Paper on the future of 
VAT, consists of a series of individual to pic papers which can be read separately, 
allowing stakeholders to go directly to those topics they have a particular interest in without having to read the whole document . The order of the topics follows the 
structure of the Green Paper. 
The aim is to supply additional background in formation on a number of issues raised 
in the Green Paper, in order to provide food for thought. The aim is not to provide 
comprehensive guidance on all issues relevant  to the topic or an exhaustive list of 
options; solutions other than those me ntioned here are equally welcome. 
Furthermore, the solutions given here s hould not be seen as Commission policy. 
They are merely illustrative of potential so lutions that could be considered in a 
specific area of VAT. 
 
EN 3   EN CONTENTS 
1. VAT treatment of cross-border trans actions within the single market ........................ 4 
2. Scope of VAT: The VAT treatment of the public sector........................................... 24 3. Exemptions from VAT and the specif ic problem of passenger transport.................. 27 
4. Deductions.................................................................................................................. 38 
5. International services ................................................................................................. 49 6. The legal process........................................................................................................ 52 7. Derogations and the abil ity to react quickly .............................................................. 59 
8. VAT rates................................................................................................................... 64 
9. The Commission action programme for reducing administrative burdens and 
streamlining VAT obligations.................................................................................... 69 
10. Small businesses......................................................................................................... 80  
11. A one stop shop system.............................................................................................. 87 12. Adapting the VAT system to larg e and Pan-European businesses ............................ 92 
13. Synergies with other legislation - Customs legislation............................................ 100 14. Reviewing the way VAT is collected....................................................................... 101 15. Protecting bona fide traders against potential involvement in VAT fraud .............. 105 
16. Efficient and modern admini stration of the VAT system ........................................ 113 
 
EN 4   EN Topic 1. 
1. VAT  TREATMENT OF CROSS -BORDER TRANSACTIONS WITHIN THE SINGLE MARKET  
1.1. History and references 
When the First and Second VAT Di rectives were adopted in 19671, the Council 
made a legal and political commitment as part of the Treaty’s objective to create the most efficient possible common market, within which there would be healthy 
competition, similar to a domestic market. It decided to establish a common system of value added tax which would not distor t conditions of competition or hinder the 
free movement of goods or services with in the common market. Accordingly, the 
taxation of imports and the non-taxation of exports in trade within what was then the European Economic Community were to be abolished. The Council reaffirmed its commitment when, in 1977, the Second VAT Directive was replaced by the Sixth VAT Directive
2. 
The ‘origin’ system of VAT (first attempt) 
That Council commitment underpinned the obj ective of designing a VAT system that 
was tailored to the internal market and ope rated within the EU, as it is now, in the 
same way as it would within a single country. The Commission made proposals for 
such a system in 19873 to complete the internal mark et by 1 January 1993 in keeping 
with the removal of formalities and fiscal c ontrols at borders for intra-EU trade, but 
with goods circulating within the EU still being subject to VAT. 
The proposals were based on the principle of ‘t axation in the country of origin’, i.e. 
at the place where the goods are when transport to anothe r Member State begins or 
the sale is made. Their key features were a harmonised tax structur e with two rates of 
VAT; harmonisation, within two defined ba nds, of the rates applied by Member 
States; and a clearing mechanism for redi stributing VAT receipts to the Member 
State where consumption takes place on the basis of declarations made by taxable 
persons.  
The transitional system 
By 1989, despite the new approach propos ed by the Commission, which included a 
transitional phase until the end of 1992, a mi nimum standard rate and a new clearing 
                                                 
1 First Council Directive 67/227/EEC of 11 April 1967 on the harmonisation of legislation of Member 
States concerning turnover taxes, Second Council Directive 67/228/EEC of 11 April 1967 on the 
harmonisation of legislation of Member States concerning turnover taxes — Structure and procedures 
for application of the common system of value added tax. 
2 Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member 
States relating to turnover taxes — Common system of value added tax: uniform basis of assessment. 
Fifth recital. 
3 COM(87) 321, COM(87) 322 and COM(87) 324, 21.8.1987. 
 
EN 5   EN mechanism based on macroeconomic data4, it had become clear that it would be 
impossible to adopt the Commi ssion’s proposals by 1 January 19935.  
Beside the resistance to the close harmonisation of rates that they required and the 
potential national budgetary implications of the rates chosen by other Member States, 
certain Member States considered that the remaining rates differences would be 
excessive and could lead to distortions of  competition and budgetary risks as regards 
sales to final consumers (in particular sales of cars and mail-orders) including 
institutional non-taxable persons and exem pt taxable persons and also to the 
relocation of the sellers. 
Some Member States also felt that  the clearing-house mechanism would over-
centralise administration of the system and that the redistribution system would not 
offer all the necessary guarant ees as to fiscal controls a nd might therefore be a source 
of dispute and budgetary conflicts between Member States. 
The Council therefore decide d to adopt transitional ar rangements proposed by the 
Commission6 which would enable fiscal frontiers to be abolished whilst allowing tax 
to continue to be collected in the Member State of destin ation of the goods at the rate 
and under the conditions of that  country. This involved a sy stem of exemption for the 
supplier and taxation by the acquirer, taxabl e persons and non-ta xable legal persons, 
with additional reportin g obligations for both7. 
For sales to private individuals, the princi ple of taxation in th e Member State of 
origin was accepted other than for distan ce sales exceeding a significant threshold 
and the sales of new means of  transport. As a general ru le, the place of taxation of 
services remained the place where the supp lier was established or, for intangible 
services provided to a taxable pers on, where the latter was established. 
At the same time, however, in Directiv e 91/680/EEC the Council reaffirmed the 
commitment made in 1967 and confirmed in 1977 of abolishing the imposition of tax on importation and the remission of tax on exportation in trade between Member States and acknowledged that such an objec tive required a definitive system for the 
taxation of that trade based on the principle of taxation in the Member State of origin 
of the goods or services, supplied with the tax revenue at the final consumption stage 
accruing to the Member State where that fi nal consumption takes place. The Council 
set a new target date of 31 December 1996.  
The origin system of VAT (second  attempt) 
Before making new proposals, the Commi ssion carried out a t horough evaluation of 
the operation of the transitional arrangements
8 and polled the Member States on their 
                                                 
4 Completion of the internal market and approximation of indirect taxes, Communication from the 
Commission to the Council and the European Parliament, COM(89) 260, 14.6.1989. 
5 Council Conclusion (Economic and Financial Affairs) of 9 October 1989. 
6 COM(90) 182, as amended by COM(91) 157. 
7 Council Directive 91/680/EEC of 16 December 1991 supplementing the common system of value 
added tax and amending Directive 77/388/EEC with  a view to the abolition of fiscal frontiers. 
8 Report by the Commission to the Council and the European Parliament on the operation of the 
transitional arrangements for ch arging VAT in intra-Community trade (COM(94) 515 final of 
23 November 1994, unpublished). 
 
EN 6   EN views. It concluded that a different appr oach to that proposed in 1987 would be 
needed to achieve a VAT system tailor ed to the internal  market. In 1996, the 
Commission put forward a gradual programme9 which differed in two main respects 
from the 1987 proposals. 
It proposed that taxation should be based on a trader’s ‘tax domicile’, with his entire 
economic activity being taxed in one single  Member State and redistribution based 
on official macroeconomic statistics to en sure that VAT receipts accrued to the 
Member State of consumption. It also envisaged a gradual changeover to the 
definitive system, the first stage being to  modernise and more uniformly apply the 
existing system whilst introducing changes which would shape it into a definitive 
system.  
However, it very soon became clear, as it had in 1987, that the degree of 
harmonisation required by this system, notably for the level and structure of rates, 
could not be achieved because of differing domestic arrangements in the Member 
States. Consequently, very little pr ogress was made in the Council on the 
Commission’s proposed 1996 programme even though it was accepted that the transitional arrangements had a number of  shortcomings. They were complicated, 
susceptible to fraud and did not help achie ve the objectives of an internal market. 
The VAT Strategy (2000) 
Therefore, in 2000, the Comm ission presented a commun ication setting out its 
strategic programme for improving the ope ration of the VAT system within the 
context of the single market
10. The strategy set four main objectives — simplifying 
and modernising existing rules, applyi ng them more uniformly and enhancing 
administrative cooperation — and a pragma tic programme of action for achieving 
them.  
Its main objective was to give new mo mentum in the Council to concrete and 
essential improvements in the existing ta x system in the short term, without, 
however, questioning the ultimate shift to th e origin principle as a long-term EU 
goal. At the end of three years, the Co mmission reviewed progress, presenting new 
initiatives and highlighting a number of emerging guidelines for future action11. It 
also raised some questions about what kind of common VAT system was best suited 
to an internal market of, at that stage, 25 Member States. 
Several of the Commission proposals made in that framework and related to intra-EU 
trade were adopted by the Council. These in cluded abolishing the requirement that 
taxable persons established in  the EU appoint a tax repres entative, if they are not 
established in the Member State where the tax is due; taxing el ectronically supplied 
services provided from non-EU countries to EU private individuals  at their place of 
residence, linked to an online one stop shop for the non-established supplier’s 
compliance obligations, and taxing supplies of electricity and natural gas to a taxable 
                                                 
9 A common system of VAT — a programme for the single market (COM(96) 328 final of 22 July 1996, 
unpublished). 
10 COM(2000) 348. 
11 COM(2003) 614. 
 
EN 7   EN dealer where he is established and the sa me supply to other customers where they 
actually use and consume the goods. 
In the mean time, a new regulation12 boosted administrative cooperation on cross-
border transactions. Regrettably, no agr eement was reached on other proposals to 
reduce the administrative burdens on intra-EU supplies, such as a single threshold for 
distance sales and the introduction of a ge neralised one stop shop for non-established 
taxable persons,13 extending to B2C transactions, in particular distance sales, and to 
B2B supplies not subject to ‘reverse charge’. 
The VAT Package 
These moves away from the principle of ta xation at origin towards taxation in the 
Member State of destination ( i.e. of establishment of the customer or of 
consumption, with either the administrative  obligations fulfilled at a distance or 
increased use of reverse charge and more cooperation between tax authorities) were 
confirmed with the adoption in  2008 of the ‘VAT package’. 
From 1 January 2010, supplies of services to taxable persons and non-taxable legal 
persons identified for VAT purposes are in  principle taxed in the Member State 
where the customer is established, with the reverse charge applying if the supplier is 
not established in the same State. 
From 2015, the current rules for taxation in the Member State of residence of private 
individuals receiving electronic services  supplied by non-EU-established businesses, 
and the corresponding online one stop shop, wi ll be extended to telecommunications 
and radio and television broadcasting services  and to the same se rvices provided by 
EU businesses. Strengthened means of a ssistance between the Member States of 
consumption and of establishment are also provided for with the possibility for the 
former to require from the latter to hold an administrative enquiry or to obtain in any event minimum information. 
VAT fraud 
In the mean time, VAT fraud had grown as a result of the systemic weaknesses in the 
transitional system which allows cross- border VAT-free purchases of goods and 
services. This greatly preoccupied Memb er States and the Commission. In 2006, the 
Commission presented a Co mmunication on the need to develop a coordinated 
strategy to improve the fi ght against fiscal fraud
14. 
The debate which followed focused on the re inforcement of the existing VAT system 
but also on the possibility for introducing a general reverse charge system or for the 
taxation of intra-EU supplies. In 2008, the Commission presented a 
Communication15 analysing these latter, more far-reaching options. 
                                                 
12 Directives 2006/65/EC, 2002/38/EC, 2003/92/EC and Regulation (EC) No 1798/2003. 
13 COM(2004) 728. 
14 COM(2006) 254. 
15 COM(2008) 109. 
 
EN 8   EN It looked in particular at th e possibility to replace the ex emption of intra-EU supplies 
of goods by a system of taxa tion at a single rate of 15  %. Here, the Member State of 
arrival would either collect the additiona l VAT from the customer to reach the 
applicable rate or refund the VAT paid in  excess. This would be combined with a 
redistribution mechanism between Member States based on monthly recapitulative 
statements.  The Council did not however invite the Commission to proceed further 
with these concepts. 
In absence of political agreement on the more  ‘far reaching measures’, efforts were 
concentrated on the so-called conventiona l measures to enhance the traditional 
methods in the fight against VAT fraud. The Commission therefore presented a short term action plan
16 containing a range of measures.  
All the legislative pr oposals announced therei n have in the meanti me been presented 
and all of them except for one have b een adopted by the Council, notably the 
Commission’s proposal for reducing the timeframes for submitting and transmitting recapitulative statements of supplies of  goods and tightening the conditions for 
exemption on importation followed by an intra-EU supply
17. The adoption of the 
recast of new Council Regulation on admini strative cooperation and combating fraud 
in the field of VAT18, providing notably the legal base  for the setting up of Eurofisc, 
has completed this short term action plan. 
1.2. Evaluation of the current VAT sy stem for intra-EU transactions 
1.2.1.  Overview of the current rules on cros s-border supplies of goods and services 
The place of supply of goods is  situated, and the transact ion taxed at the rate and 
conditions of the relevant Member Stat e, where the goods ar e located when the 
supply takes place and, in the case of tran sport, where the goods are located when 
transport to the customer begins. 
However, firstly, the cross-border supply of goods to a taxable person or a non-
taxable legal person is exempt whilst th e acquisition of the goods is subject to 
taxation in the Member State where the tr ansport ends, the VAT being paid by the 
customer19. The same rule applies to the supply of new means of transport, including 
those carried out by private individuals as sellers or purchasers and the transfer by a 
taxable person of goods forming part of his business assets to another Member State. 
Secondly, the place of supply of goods to non-taxable persons20 above a certain 
threshold or subject to ex cise duty or on option and transported by the supplier 
(distance sales) is situated where the transport ends, the VAT being paid by the 
                                                 
16 COM(2008) 807 
17 Council Directive 2008/117/EC of 16 December 2008 amending Directive 2006/112/EC on the 
common system of value added tax to combat tax ev asion connected with intr a-Community transactions 
and Council Directive 2009/69/EC of 25 June 2009 amending Directive 2006/112/EC on the common 
system of value added tax as regards tax evasion linked to imports. 
18 Council Regulation (EU) N° 904/2010 of 7 October 2010 on administrative cooperation and combating 
fraud in the field of VAT (recast). 
19 Special and simplified rules apply to so-called ‘triangular supplies’. 
20 Or to taxable persons or non-taxable legal persons whose intra-EU acquisitions of goods are not subject 
to VAT. 
 
EN 9   EN supplier in the Member State concerned. The supply of electricity and natural gas to 
a taxable dealer is situated where he is  established and the same supply to other 
persons where the customer actually uses and consumes the goods21. If the supplier is 
not established in the Member State in which the VAT is due, the customer identified for VAT purposes there is liable for payment of the tax (reverse charge). 
The place of supply of services to a taxa ble person or a non-taxable legal person 
identified for VAT purposes is situated as a general rule in the Member State where 
the customer is established, whereas th e same supply to a non-taxable person is 
situated where the supplier is established. In  the former case, if the supplier is not 
established in the Member State where the VAT is due, the customer is liable for payment of the tax (reverse charge). 
Specific rules apply to supplies connected  to immovable and movable property, 
transport, vehicle hire or restaurants and catering
22. Electronic services supplied by 
non-EU-established businesses to private i ndividuals are situated in the Member 
State of their residence. The VAT declara tion and payment are made in one Member 
State through an online one stop shop. 
These rules and practical arrangements w ill be extended as from 2015 to electronic, 
telecommunications and radio and televisi on broadcasting services provided by EU 
businesses to private individuals. Certain intangible services, such as those of 
consultants or banking, financial and insura nce transactions provided to non-taxable 
persons established in non-EU count ries, are situated outside the EU. 
1.2.2.  Positive aspects 
The transitional arrangements, whatever thei r shortcomings, allowed the abolition of 
fiscal borders and the ending of checks at  the EU’s internal borders. These were 
clearly incompatible with th e principle of free moveme nt of goods and persons and 
the smooth functioning of the single market. That is obviously a major achievement. 
Nevertheless, without any redistribution m echanism, VAT revenue  directly accrues 
to the Member State of consumption accord ing to its own rates and exemption rules 
in almost all cases. That avoids one ma jor distortion of competition which could 
occur between businesses opera ting in the same local mark et based on their place of 
establishment or the origin of the goods or services. 
Such rules allow Member States to enjoy a high degree of flexibility when setting the 
rates of VAT and the scope of exempt transactions. They can decide the fiscal pressure on households that they deem  appropriate and sustainable, and the 
corresponding revenue needed, without unde rmining the competitiveness of their 
businesses. 
                                                
 
21 Special rules also apply to supplies of goods on board ships, aircraft and trains and supplies of goods 
installed and assembled by the supplier. 
22 And to the supply of services by intermediaries, cultural, artistic, sporting, scientific, educational, 
entertainment and similar services, ancillary transpor t services, and restaurant and catering services for 
consumption on board ships, aircraft or trains. 
 
EN 10   EN With the reverse charge mechanism and th e taxation of intra-EU acquisitions of 
goods, persons liable for the payment of VAT  on cross-border transactions to the 
Member States are mainly established on their own territory and thus under their 
direct supervision and primary responsib ility in case of fraud, avoidance or 
insolvency. They therefore have a strong incentive to  encourage compliance and 
perform fiscal controls. 
This system of exemption or reverse char ge applicable to intra-EU supplies also 
releases non-established supp liers from having to be registered and pay VAT in each 
Member State of taxation and thus fro m various administrative obligations.  
The abolition of fiscal borders and th e circulation of VAT-free goods led the 
Member States to strengthen the system of  cooperation between tax authorities, first 
with the adoption in 1992 of a new Re gulation supplementing Directive 77/799/EEC, 
then with the single new Regulation in 200323 which combined and improved the 
previous texts, and recently w ith the recast adopted in 2010.  
1.2.3.  Shortcomings of the current VAT system 
1.2.3.1.  Differences in treatment between domestic  and intra-EU trans actions may hamper 
the proper functioning of the single market 
Under the principles of the free movement  of persons, goods, se rvices and capital, 
coupled with harmonised rules and de-regulati on in key sectors, widespread progress 
has been made, notably in services, to make it easier for enterprises to do business within the European Union. In a VAT system  perfectly adapted to the single market, 
there should be no distinction between supp lies or purchases made by a business with 
a customer or supplier established in its Me mber State or in another Member State. 
Every difference in treatment is therefore to be considered a potential obstacle to the 
single market and implies that traders and c onsumers are not benefitting from the full 
advantages of a real single market. 
Despite the adjustments made over the year s to the VAT system, in particular the 
abolition of fiscal borders, a business will ing to take full advantage of the single 
market has still to apply diverse VAT rules which often are not easy to handle. This 
may involve additional VAT obligations mere ly because a customer or a supplier is 
not established in his Member State. Add itional obligations may also arise when, in 
establishing a branch, it cr osses one of the European Union’s internal borders. The 
transitional arrangements applicable to s upplies of goods, and subs equent changes to 
improve taxation in the Member State of c onsumption of intra-EU  transactions in 
services or to tackle fraud resultin g from weaknesses in the transitional 
arrangements, have led to a complicated and heterogeneous system which puts high 
administrative burdens on businesses.  
Equality between domestic and intra-EU transactions has almost been achieved for 
supplies made to private individuals where the supply of goods or services is taxed 
where the sale takes place or where the supplier is established. However, equality is 
                                                
 
23 Council Regulation (EEC) No 218/92 of 27 January 1992 on administrative cooperation in the field of 
indirect taxation (VAT). Council Regulation (EC) No 1798/2003 of 7 October 2003 on administrative 
cooperation in the field of value added tax and repealing Regulation (EEC) No 218/92. 
 
EN 11   EN valid only in so far as these supplies do not fall under one of the numerous specific 
rules (e.g.  distance sales, new means of transport,  certain services etc). Furthermore, 
suppliers need, in any event, to know th e status of their customers beforehand. 
Sometimes, for services to taxable persons, even the purpose of a service is relevant. 
Complexity of the rules  
On the whole, the VAT system is now built on taxation at the presumed place of 
consumption instead of the place of establis hment of the supplier or origin of the 
goods as initially foreseen. Therefore, fo r each transaction w ith a cross-border 
element (a non-established customer or suppl ier, the dispatch or location of goods or 
services elsewhere etc.), businesses are f aced with complex rules for determining the 
place of supply and the person liable for VAT and identifying the reporting obligations and checks that follow from th ese decisions. This complexity leaves 
businesses unsure of their legal position. 
The place of supply depends on many factors.  These include the kind of transactions 
(services or goods) and their nature. For goods , their location at different points of 
the transaction, their dispatch, the person carry ing out that dispatch, the status of the 
customer and the relevance for both parties of  different thresholds or options may all 
be determining factors. Fo r services, the status of  the customer, their VAT 
identification number and their place of establishment (place of business, fixed 
establishment, domicile or residence) ma y play a role. In addition, businesses can 
face different national interpretati ons of ‘place of supply’ rules. 
In principle, once the place of supply is  determined, the supplier has then to 
calculate, declare and pay the tax. This may even be in a Member State where he is not established. However, in some cases, t hose obligations can be transferred to the 
customer either directly under the ‘reverse charge’ ru les or, in two steps, by 
exempting the supply of goods and taxing intra-EU acquisition by the customer. Again, the transfer of liability and the exem ption of the supply have to be assessed 
by the supplier and depend on many factors: in  particular, for goods, the status of his 
customer and dispatch or transport; for services, their nature, the customer's tax 
status and VAT number and any interventi on in the supply by a fixed establishment 
in the Member State where the tax is due. 
Moreover, the Member State where the tax is due may have made use of the option 
referred to in Article 194 of the VAT Direct ive to apply the reverse charge to some 
supplies of goods or services carried out by non-established businesses, which are in 
principle not covered. 
However complex, in many cases the rules allow businesses operating in the Member 
States where they are not established (or deemed so) to be released from any VAT obligations there. That might be thought to encourage such trans actions compared to 
domestic ones in certain situations. Such an  assumption is nevertheless questionable. 
Aside from the complexity of the rules and the specific obligations attached to them 
(see below), there are cash flow consequences for suppliers, who are paid immediately, and for purchasers with a right  of deduction, who pay later. Moreover, 
the supplier cannot immediately subtract th e VAT incurred in the Member State of 
taxation but has to submit a refund claim. 
 
EN 12   EN In any event, transferring liability for the VAT is not always possible, in particular 
where the customer is not a taxable person (or cannot be deemed a taxable person).  
Special and additional obligations and risks 
The general rules applicable to intra-EU tr ansactions exempt or  subject to reverse 
charge imply additional obligations for both the supplier and the customer. Those 
particular burdens on cross- border activities and sometimes the enforcement of those 
obligations by national tax authorities hi nder businesses, es pecially SMEs, in 
developing trade within the European Un ion and can even dete r a purchaser from 
buying goods or services from a selle r in another Member State.  
For each intra-EU supply, the supplier has to keep additional and specific records, 
e.g. of the validation of the customer’s VAT identification number, evidence of his 
tax status and compliance, his address, a nd evidence of transport even where it has 
been arranged by the customer. Such detail s are needed not only to justify the VAT 
treatment of the transaction but also to avoid the supplie r being subsequently held 
jointly and severally liable if the custom er liable for the payment of VAT does not 
pay it. To hold the supplier jointly and seve rally liable, the tax administration must 
prove that he knew or should have known that the customer would not pay the 
VAT24. The question has even been put to the European Court of Justice whether that 
exemption can be denied for a supply has actually been made, if it can be determined that the vendor knew that he was participating in a transaction aimed at evading VAT
25 . 
The inherent weakness of the transitiona l arrangements and the need for Member 
States to tackle the consequential risk of fraud has added new burdens to operators in 
a chain of transactions where an intra-EU supply is exempt or subject to reverse 
charge. The ECJ introduced a first link between the cust omer’s right to deduct and 
the payment of VAT by the supplier, putting new responsib ilities on customers26. If 
the tax administration can prove that the customer knew or should have known that 
he was participating in a transaction linked to VAT ev asion, the tax administration 
can refuse the right to deduc t to that taxable person. 
With the ‘knowledge test’ and the conseque ntial risk for a time (which could be 
several years) of being held indirec tly liable for a fraud committed by somebody 
else, compliant businesses have to take ‘every precaution which could reasonably be 
required of them to ensure that their tran sactions are not connected with fraud, be it 
the fraudulent evasion of VAT or other fraud’27. The constant need to meet this 
requirement for each transaction could be very burdensome and carries no guarantee 
that it will satisfy the tax admi nistrations or national courts. 
The supplier must also complete a mont hly (quarterly for small businesses and 
services) recapitulative stat ement of all intra-EU customers for exempt goods and 
                                                 
24 On the so-called ‘knowledge test’, see case C-384/03, Federation of Technological Industries and 
Others. 
25 See the pending case C-285/09. 
26 See case C-439/04, Axel Kittel. 
27 See case C-439/04, Axel Kittel, para. 51. 
 
EN 13   EN services subject to the general intra-EU reverse charge. This must show their VAT 
identification numbers and the value of sales. 
The customer has to calculate, declar e and pay the VAT on the supply or the 
corresponding intra-EU acquisition of goods. He also needs to have obtained a VAT 
identification number, which may involve burdensome formalities. 
Where, in the Member State where the tax is due, the supplier only makes supplies 
subject to reverse charge, he cannot subt ract from the output VAT due the VAT he 
has incurred on this territory notably in or der to carry out thos e transactions. He 
cannot simply put the corresponding amount on a VAT return. He has to submit a 
special claim and provide further inform ation and evidence not  usually required 
where the input VAT is directly subtracted.  
According to a study made for DG Enterprise and Industry28, the administrative costs 
of submitting intra-EU sales listings or re fund claims in another Member State are 
high. For sales listing, these co sts have been estimated at €  706 million per year, 
increasing by €  204 million with the introduction of a m onthly listing. The 
administrative costs for 800  000 businesses submitting VAT refund claims in another 
Member State each year have been estimated at €  705 million (€  881 per business). 
This is, however, expected to be reduced by €  447 million with the new refund 
Directive29.  
Distortions in the conditions of competition 
In the First Council Directive, the Counc il indicated that es tablishing a common 
market within which there is no distortion of competition and where goods and services move freely as within a domestic market requires that Member States adopt 
in their legislation a model of turnover taxes such as will ensure that outcome and which is ‘bound to re sult in neutrality’
30. 
The system which has evolved aims at ta xing supplies of services and goods in the 
Member State of consumption, extending to  the more economically important cross-
border purchases by private consumers (dista nce sales, cars etc.); one could thus 
suppose that the risk of distor tion of competition is low. Ho wever, certain features of 
the VAT system put at risk just such  an outcome within the single market. 
• Threshold and options 
The simplification measures for distance-selling arrangements could cause the same 
product purchased cross-border to be taxed unde r the rate of either  the Member State 
of the seller or of the Memb er State of the customer. Wh ilst for e-services there will 
be no threshold or option, fo r e-commerce in goods, the rule s applicable can depend 
                                                 
28 Communication from the Commission to the Council and the European Parliament, Action Programme 
for Reducing Administrative Burdens in the EU — Sectoral Reductions Plans and 2009 Actions 
(COM(2009) 544). 
29 Council Directive 2008/9/EC of 12 February 2008 laying down detailed rules for the refund of value 
added tax, provided for in Directive 2006/112/EC, to taxable persons not established in the Member 
State of refund but established in another Member State. 
30 Eighth recital in the preamble to the First Directive. 
 
EN 14   EN on the seller’s turnover in the Member State of destination or a decision to make use 
of the option to tax his supplies there.  
The VAT obligations (identification, return s, payment, additional checks) for intra-
EU acquisitions above the minimum threshold of €  10 000 made by fully exempted 
taxable persons (such as small businesses) , and non-taxable legal persons (such as 
public bodies) could deter them from pur chasing goods in other Member States, 
impeding full market access in particular for public procurement. This could be even 
worse for intra-EU acquisitions of services  where no such threshold has been set for 
taxable persons. 
• Right to deduct 
When assessing whether businesses operate  on a level playing field, one cannot 
ignore the costs that they incur. With the principle of neutrality, VAT should have no 
influence on business costs. However, in some Member States certain business expenses are excluded from the right to de duct, or pro rata or  capital goods scheme 
calculations are applied differently. The system of taxation is now based on the 
application of the rules of the Member Stat e of taxation whilst the deduction system 
depends on the Member State where the expense occurs. The supply will be taxed at the same rate whether the supplier is es tablished in the Member State or not. 
It can, however, happen that, because of th e particular rules in the Member State 
where the trader is established, certain bus iness expenses are ex cluded from the right 
to deduct. A trader in this position will be  forced to reflect this non-deductible VAT 
in selling prices. He therefore suffers an  appreciable competitive disadvantage when 
selling in other Member States which do not apply such a restriction or when selling 
in his own Member State in competition with suppliers established in Member States not applying that restriction. 
1.2.3.2.  Derogations and options have led to a complicated system and added unnecessary 
administrative burdens on businesses 
The VAT system was designed to sustain th e single market. Simplifying obligations 
on businesses, notably those operating in several Member States, has been a focus in so far as this is possible. However, in the interest of preserving Member States’ fiscal 
sovereignty and to allow them appropriate flexibility, businesses, whether established 
there or not, have to comply with dive rse legislation on VAT due to the numerous 
options and derogations available. Differe nces in interpretati on, transposition and 
enforcement of the VAT Dir ective add to the diversity. 
Traders therefore require know ledge of the differences in  application in different 
Member States, particularly when operati ng through a branch or a subsidiary. This 
makes the VAT-related costs of doing busines s in the single market higher than in 
the domestic market. Businesses do not find this encourages them to expand their activities in other Member States or establish branches there.  
1.2.3.3.  Non-taxation of intra-EU transa ctions is a source of fraud  
Since the transitional arrangements began, the Commission and Member States have 
become aware of fraud opport unities in the curr ent system. Put simply, if a person 
 
EN 15   EN gives a VAT number to his supplier establis hed in another Member State, and, for 
supplies of goods, provides proof that they  have left the Me mber State of the 
supplier, he acquires the goods or services without paying the VAT to his supplier. An operator who acquires goods or services in this way and then does not pay VAT 
on their subsequent resale circumvents the self-policing feature of the VAT system, 
in which the right of deduction provides an effective incentive to declare the 
corresponding output sale. Any resulting fra ud is rendered more lucrative because no 
input tax has been incurred on the cross border purchase. The current system is thus 
amenable to fraud and has a systemic weakness.  
In 2009, the Commission published a study
31 which set out to quantify and analyse 
the VAT gap for each Member State, based on a comparison of national VAT receipts with a theoretical net VAT liability  for the national economy as a whole. The 
VAT gap includes factors othe r than fraud such as legal avoidance and unpaid VAT 
from insolvencies. This means that the enti re VAT gap is not due to fraud. The study 
estimates the gap at €
 106.7 billion in 2006 within th e EU-25 (excluding Cyprus). 
This represents an average of 12  % of the net theoretical liability, although several 
Member States are above 20  %. 
The systems put in place in  1993 to manage such risk s (EC listings initially for 
goods, then for services) are not very efficien t in tackling certain types of fraud such 
as where the intra-EU acquirer promptly disappears. Some Member State therefore 
implemented a domestic reverse charge for certain high-value goods (cell-phones, 
computer chips) and certain services (CO2 emission allowances). The latest attempts 
to combat fraud, arising from the Co mmission’s 2006 Communication on fraud 
strategy (reducing timeframes for submitting EC listings and boosting administrative 
cooperation) have yet to prove their effici ency and the systemic weaknesses of the 
transitional system persist. 
With several Member States implementing derogations and imposing new reporting 
obligations on businesses, the underlying weaknesses have certainly led to less 
harmonisation, a greater administrative burde n on businesses and additional costs for 
tax administrations, particular in control and administrative assistance. It could be 
argued that the costs (VAT losses plus a dditional burdens for both Member States 
and businesses) are too high compared to  the actual benefits of applying an 
exemption or the reverse charge to intra-EU transactions. 
Moreover, Member States and the Commissi on are regularly alerte d to possible fresh 
fraud patterns in other services and goods . Fraudsters repeatedly use the same 
loopholes and the same schemes. Once tax administrations have plugged the gap by 
amending the rules, the fraudsters switch to other sectors or Member States. The 
continual refinement of the VAT system by means of further reverse charge schemes 
being introduced by Member States is not su stainable with the cu rrent adoption rules, 
and fire-fighting requests will be endless. Moreover, the re verse charge may result in 
further losses in particular fo r goods likely to be sold to final consumers and thus it 
requires additional reporting obligations and controls. 
                                                 
31 Reckon LLP (London), ‘Study to quantify and an alyse the VAT gap in the EU-25 Member States’, 
21 September 2009. 
 
EN 16   EN 1.2.3.4.  Changes in technology and the economic envi ronment have not all been taken into 
account 
Since 1993 and even more since 1977, the wa y in which business is conducted on a 
daily basis has changed. Increasing use of new technologies, where costs have 
tumbled and speed exploded, is illustrate d by the increase of  e-commerce and by 
administrative practices such as com puterised accounting. However, the VAT 
system, and particularly the reporting oblig ations of taxable persons operating in 
several Member States and the way in wh ich the VAT is collected, has remained 
largely unchanged. The significant and appeal ing exception of the special scheme for 
e-services is rather limited in practice and is accessible only to a handful of non-EU-
established businesses until 2015. One signifi cant development is the new refund 
procedure allowing an online claim to be submitted through the web portal of the 
Member State of establishm ent, although this is expe riencing teething problems.  
The nature of business a nd the way it is organised have changed too. Whilst 
manufacturing remains important to trade in the EU, by 2007 se rvices represented 
just over 70  % of gross value added in the Eu ropean Union. Some consideration 
therefore needs to be given to how the VAT system adjusts to a service-driven 
economy. The special scheme for e-services could, again, be seen as a precursor.  
The VAT treatment of services has, however,32 recently been completely overhauled. 
The new system uses concepts and criter ia different from those for goods, thus 
worsening the heterogeneity of VAT treatment of intra-EU supplies. For instance, small or completely exempt businesses are liable for VAT if they purchase services from a non-established provider, whatever their value, whereas they are accountable 
for acquisitions of goods only if they opt or reach a particular threshold. 
Many businesses now operate in more than one Member State as a result of the 
deepening of the single market. The EU has also experienced a wave of international 
mergers and acquisitions. Large European companies now view the whole European 
Union as their ‘home market’ and accord ingly seek, like non-EU international 
companies, to establish effective Pan-Europ ean business structures. This has resulted 
in an increase in the proportion of cross-bo rder transactions car ried out within the 
same group of companies and centralisation of business functions such as finance 
and accounting. 
However, these groups have to deal with up to 27 different sets of rules notably 
regarding invoicing or repor ting obligations, without the option of using any 
simplified rules for their intra-group cross-border transactions. These large European businesses have to compete with major inte rnational companies. In order to improve 
their competitiveness at international leve l, the cost of doing business in their own 
‘domestic’ market needs to improve. 
1.3. Possible alternatives to the current system 
The purpose here is to address options fo r removing the differences in treatment 
between domestic and intra-EU transacti ons and to design a simpler and business-
                                                
 
32 Directive 2008/8/EC. 
 
EN 17   EN friendly VAT system while allocating revenue  to the Member State of consumption, 
reducing administrative burdens for busine sses and limiting collection costs and the 
scope for fraud. 
Several possible solutions ar e available both for goods and services. Academics have 
also proposed various alternatives: Viable  Integrated VAT (VIVAT), Compensating 
VAT (C-VAT), Dual EU and local VAT  (Dual VAT), a prepaid VAT system 
(PVAT), etc.  
Some solutions have already been thoroughl y discussed with the Council, mainly 
those based on the principle of origin. Othe rs, less analysed, take account of the 
progressive shift toward a system base d on taxation in the Member State of 
destination. The question remains, however, who should be liable for payment of the 
VAT where the supplier is not established in  the Member State where the tax is due 
and, if the supplier is  liable, how this Member State should collect that revenue.  
Of course, all these options must not impe de the free movement of goods in the sense 
that they do not give rise to c ontrols or formalities at frontiers. 
Some of those options are addressed here . They are as far as possible simply 
described. All have both advantages a nd disadvantages which will deserve an 
exhaustive and thorough examination. The pur pose of this part is not to conclude 
such an assessment but to try already to point out their major advantages and disadvantages. 
The options can be divided in two major groups according to the choice made on the 
place of taxation of the intra-EU supplies. This can be either the Member State of 
destination or the Member State of orig in. Both concepts can however again be 
defined in different ways. 
Within each group, different alternatives  are available depending on the way VAT 
would be charged on the intra-EU transactions. 
1.3.1.  Place of taxation in the Me mber State of destination 
In such a system, the rules applicable to  B2C cross-border transactions would be 
maintained, although simplified obligations such as a wider one stop shop could be 
provided for. The amendment would essentia lly concern the place of taxation of B2B 
supplies of goods.  
1.3.1.1.  Place of taxation where the customer is established, both for goods and services 
This would mean harmonising the rules appl icable to goods and to services provided 
to businesses. In B2B transactions, the supplier often does not know the specific 
destination of the goods that he has sold  because transport is organised by the 
customer and also because of commercial  reasons. However, he always knows the 
identity, the location and the VAT identifica tion number of the customer to whom he 
has transferred ownership of the goods. 
As is the case for supplies of services, it could be stipulated, as  a general rule, that 
the place of supply of goods to taxable pers ons is where the customer has established 
his business or has his fixe d establishment to which th e goods have been provided.  
 
EN 18   EN A follow-on supply with no additional dispatch  would be either a domestic supply, if 
the goods have arrived in the Member State where the customer is established, or another intra-EU supply, if the goods were pr eviously transported to another Member 
State or subject to a distance sale in the case of supply to a non-taxable person. 
If the customer is established outside the EU, the place of suppl y would be where the 
goods are located when the supply takes pl aces or transport or dispatch begins. 
However, the transaction would be exem pt from VAT as exportation if the goods 
were dispatched to or transported outside the EU.  
In the same way, if the customer is esta blished in the EU but the goods are located 
outside the EU when the supply takes place or  dispatch or transport begins, the place 
of supply would be outside the EU or wh ere the goods enter the EU. The usual rules 
on importing goods would apply. If the goods we re located in the EU and were then 
transported out of the EU, the transaction,  although taking place in the Member State 
of establishment of the customer, woul d of course be exempt from VAT as 
exportation. 
The place of supply would be no longer linke d to the actual flow of the goods within 
the EU and would remain situated in the EU  as long as the goods circulate within the 
EU’s borders.  
Such a system would build on  existing concepts of establishment and identification 
and could thus be introduced without ot her major structural changes to the VAT 
system. Based on the identification number of  the customer, it would be easier to 
manage, both for the tax administration and businesses. The concept of ‘intra-
Community acquisition of goods’ or transfer  of goods would no longer be needed.  
This system would not require any approxi mation of tax rates, and so would give 
Member States a large leeway to set VAT ra tes as they see fit. The business locations 
of suppliers would not be influenced and exempt or instituti onal purchasers would 
pay the same amount of VAT whether or not  their supplier was established in their 
Member State. 
1.3.1.2.  Place of taxation where the goods arrive 
The flow of the goods would still be take n into account and the place of supply for 
intra-EU B2B supplies of goods would be th e place where the transport or dispatch 
of the goods ends. Unlike the current sy stem with the combination of two 
transactions, the supply of goods and intr a-EU acquisition by the customer, such a 
rule could only be applied where the s upplier knows the destination of the goods. 
This creates no particular di fficulty where transport is organised by the supplier: the 
supplier would apply the rules currently appl icable to distance sales, but without a 
threshold. 
Where transport is organised by the customer, the supplier would have to rely on the 
information provided to him. One has to  distinguish between two situations:  
(1) the customer provides the relevant info rmation, with an incentive to do so 
correctly, as this determines the pla ce of taxation and the place where the 
 
EN 19   EN customer can claim the right of deductio n; to ensure legal certainty for the 
supplier the information has to be reco rded and confirmed by the customer; 
(2) where the customer wants to keep th e destination of the goods hidden from 
the supplier, e.g. for commercial reas ons, it would be presumed that the 
transport has ended at the place of esta blishment of the purchaser (see above). 
If that place differs from the place of arrival of the goods, the customer would 
be required to declare a transfer of goods in the Member State of arrival. 
Such a system would build on the existing concepts of current intra-EU distance 
sales (to private individuals) combined with  the ‘place of supply of services’ rules, 
and could thus be introduced without ot her major structural changes to the VAT 
system. The Member States would remain free to set the level of taxation they deem appropriate. 
However, the combination of both rules,  depending on the pers on organising the 
transport and/or the willingness of the custom er to indicate the place of destination, 
could complicate their applic ation. Such a system would require another transaction 
for VAT purposes if the place of arriva l was unknown to the supplier and differs 
from the place of establishment of the customer. 
1.3.1.3.  The taxation of intra-EU tr ansactions in such systems 
The taxation of intra-EU tr ansaction would considerably reduce the potential impact 
of fraud linked to intra-EU supplies on Me mber States’ treasuries by removing the 
profit for fraudsters and their accomplices in obtaining refunds of VAT on supplies on which VAT has been charged but not remitted to the Treasury or in charging a customer VAT on goods or services acquire d free of VAT and then going missing 
without accounting for this VAT. It mainta ins the integrity of the VAT system, 
together with the fractionated payment m echanism and the existing flow of revenue. 
Generally, B2B intra-EU supplies of serv ices are already taxed under the reverse 
charge procedure with the customer, not the supplier, being responsible for the 
payment of the VAT. It could also be envisa ged to extend that sy stem, to all supplies 
of goods cross border. This creates consis tency between all intra-EU B2B supplies. 
With such a system, consistency between domestic and intra-EU transactions could 
be achieved by applying a reverse charge mechanism on domestic B2B transactions. 
A wider one stop shop  
Taxation of intra-EU transactions woul d mean, however, that  the supplier would 
have to have a relationship with the Memb er State of arrival of the goods or of 
establishment of the customer for servic es or/and goods, in  order to fulfil 
administrative obligations there. This w ould involve registration in that Member 
State. A simpler solution would be a one stop shop scheme where the Member State of establishment of the supplier acted as a proxy in relations with the Member State of taxation. 
The taxable person making the intra-EU supply would fulfil identification and 
declaration obligations in the Member St ate of taxation through a one stop shop in 
his own Member State. The taxable pers on making the supply would charge VAT at 
 
EN 20   EN the appropriate rate of the Member State of  taxation and make payments directly to 
that Member State through the one stop shop.  
A supplier would have therefore to know th e VAT rates and their coverage in the 
Member State of arrival, in particular the products and services covered by any 
reduced rate. This could be handled by appr opriate computer software and a binding 
list of rates for all products and services w ould be made available by Member States 
(see topic 8). This could be facilitated by setti ng up a Pan-European database with all 
CN (customs nomenclature) codes and the corresponding VAT rates. It might also be 
advisable to provide rules by which Member  States would link the use of reduced 
rates to specific CN codes.  
Use of the one stop shop concept would mi nimise the burden on traders, who would 
only need to allocate the appr opriate rate of tax to th eir supply. It would enable 
revenue on intra-EU sales to accrue direct ly to the Member State of consumption 
without using a clea ring mechanism.  
The EC-sales listing requirement could be  abolished. The taxable purchaser would 
deduct input VAT in the normal way. However, for control purposes, because the person liable for VAT would be in anothe r Member State, the taxable purchaser 
might have to include the intra-EU supplie s in his VAT declarations with the VAT 
identification of the supplier, in order to allow the Member State of taxation to cross-
check the input credit wi th the payment made through the one stop shop. 
The right to deduct could perhaps be li mited to purchases in the acquirer’s 
declaration, which would include that information. This would make the link 
between the right to deduct and actual payment of the VAT by the supplier much 
stronger. The so-called ‘knowledge test’ coul d also be strengthened by reversing the 
burden of proof while giving the customer the option to pay the VAT charged by his supplier directly to the Treas ury (‘reverse payment’ see topic 15) if there was any 
doubt about the supplier’s compliance and he did not want to check up on it. In any event, Member States would use the options  offered by mutual assistance (including 
recovery), particularly the new ones, for control and collection in the Member State 
of establishment of the supplier. 
Enhanced administrative cooperation, e.g. the obligation to inform the Member State 
of consumption of control visits, that Member State’s right to attend multilateral controls, financial incentives for control visits (e.g. reta ining a percentage of any 
undeclared tax revenue) or compensation for the Member State of establishment, might also be considered. 
Gradual changes towards a wide r OSS and possible exclusions  
In case a 'one-step' move to such a system  would be considered too drastic, a gradual 
introduction could also be examined. It c ould be envisaged to extend the current 
reverse charge system applicable to intr a-EU services, initially, to all intra-EU 
supplies between taxable persons (par ticularly supplies of goods) and to 
progressively include transactions in th e one stop shop (on which VAT would have 
been charged by the supplier). One could star t with specific goods and services that 
are susceptible to fraud (obviously not covered by domestic reverse charge 
derogations) or easy to follow (new mean s of transport traded between taxable 
 
EN 21   EN persons, for instance). In the mean time, B2C transactions such as distance sales 
could be rapidly included in the scope of the one stop shop already used for 
electronic, telecommunications and radio and television broadcasting services.  
Another idea would be to make transa ctions between members of a group of 
businesses (parent/subsidiary) which acc ount for a high proportion of intra-EU 
supplies subject to reverse charge or cons ider them non-taxable transactions (like 
transactions between branches ), possibly subject to a syst em of authorisation. This 
would mean in practice th at the territorial scope of the VAT group would be 
extended to branches and companies established in other Member States but within the EU. The ongoing work on the Common Consolidated Corporate Tax Base (CCCTB),
33 in particular the scope of consolida tion, might be of particular relevance 
and should be taken into account (see topic 12). 
The last step in such a development would be to merge the one st op shop firstly with 
the web portal for refund claims and secondl y with national VAT declarations. That 
would allow businesses directly  to subtract the VAT incurr ed in each Member State 
of taxation from the VAT due in that Memb er State, in the same way as in their 
Member State of establishment. For reason s of fiscal soverei gnty, offsetting the net 
amounts due or to be refunded for each Memb er State could not be considered. Then 
a single, standard and EU-wide declarat ion through the one st op shop would cover 
all transactions and would be submitte d with the corresponding payment in the 
Member State of the place of business, or main establishment if the taxable person did not have a place of busines s in the EU (see topic 11). Such a scheme could also 
be envisaged for businesses not established in the EU. 
The application of the reverse charge  to all B2B cross borders supplies  
The current reverse charge system, applicab le generally to B2B supplies of services 
would apply to all intra-EU supplies of goods  between taxable persons. As at present, 
businesses selling goods in Member States wh ere they are not established (or deemed 
so) would be released from any VAT ob ligations necessary under a OSS and they 
could preserve the advantag es of the current system. Moreover, goods and services 
sold cross border could be treated equally. 
However, current specific obligations and shortcomings (see above) would remain in 
particular for the supplier such as the recapitulative statements, the need to keep additional and specific records and the impo ssibility to subtract from the output VAT 
due the VAT incurred in the Member State where the tax is due. It would not resolve the endemic weakness in the current system  (MTIC fraud) and the independence of 
two transactions, a supply followed by an  intra-Community acquisition, would be 
lost requiring as for services a consistent application by all Member States of the place of supply rules. 
The extension of the reverse charge to domestic B2B supplies  
Consistency between domestic and intra-EU  transactions could be achieved by also 
applying a reverse charge mechanis m on domestic B2B transactions. 
                                                
 
33 See communications COM(2001) 582, COM(2003) 726 and COM(2007) 223. 
 
EN 22   EN This would deal with the endemic vulnerabi lity to fraud of the current VAT system 
in B2B transactions following a cross bor der purchase exempt or subject to the 
reverse charge. 
On the other hand, that would mean discarding the principl e of ‘fractioned payment’, 
which is a major benefit of VAT: in such a system, the Treasury would collect all the VAT at the last stage. In particular a ll the tax due on the total final consumption 
would be paid by retailers which woul d be allowed to buy VAT free all their 
products. That risk could therefore require additional checks and reporting 
obligations for all domestic B2B transactions. 
The Commission assessed such a system in 2008 and highlighted the potential shift 
in fraud to the retail sector
34.  
The Commission concluded that the reverse charge concept should not be ruled out 
but that it could never be  introduced on an optional basis wit hout affecting the 
workings of the single market. The Comm ission was willing to consider a pilot 
project to test the introduc tion of a compulsory generalis ed reverse charge system. 
1.3.2.  Place of taxation in the Me mber State of ‘origin’  
1.3.2.1.  Place of taxation in the Member State of origin of the goods and services 
First proposed in 1987 to abolish fiscal bor ders in 1993, raised again in 2008 as a far-
reaching measure to tackle intra-EU fraud, and ruled out twice by the Council, such a 
system provided that the place of supply of  goods was deemed to be where the goods 
were located at the time when the supply t ook place or the dispat ch or transport of 
the goods to the customer began, whereas the place of services remained situated where the supplier was established, with certain limited exceptions. 
No exemption was applicable to supplies of goods transported in another Member 
State. All supplies were taxed according to th e rules and in particular the rate of the 
Member State of origin with a reallocation of the revenues to the Member State of 
consumption (see below). In 2008, however, the Commission examined the possibility of a two-step a pproach with the taxation of  intra-EU supplies of goods 
between taxable persons in the Member St ate of origin at a single rate of 15
 %, the 
Member State of arrival either collecting from the customer the additional VAT in 
order to reach the rate ap plicable there or refunding the VAT paid in excess. 
1.3.2.2.  Place of establishment of the supplier of goods and services — single place of 
taxation 
This system was proposed in the Commission’s 1996 work programme. In such a 
system, all of a given supplier’s transactions would be taxed in one place for the entire EU, with no distinct ion any longer according to th e Member State in which 
they were carried out or to the flow of goods. 
In 1996, it was proposed that that single pl ace would be the ‘t ax domicile’ of the 
taxable persons but that concept was open to discussion. It could be the firms’ 
                                                
 
34 COM(2008) 109, 22.2.2008 and SEC(2008) 249, 22.2.2008. 
 
EN 23   EN registered office, or the place where it was actually managed, or other criteria could 
be used. One could also consider the place of establishment (place of business or/and 
fixed establishment) an appropriate place. 
1.3.2.3.  The requirements and the possible outcomes of the two systems 
Both systems would require a high degree of  harmonisation of the level and structure 
of rates and of exemption rules in order to avoid damaging the conditions of competition and causing businesses to relocate and because the revenue of each Member State of consumption would dire ctly depend on rates and exemption rules 
set in the Member States of establishmen t of the suppliers or  origin of the goods. 
It would also require close cooperation and a high degree of mutual confidence 
between Member States because the effectiveness with which each Member State administers and controls the tax would dir ectly affect the budget of other Member 
States. However, the taxation of intra-EU transactions would c onsiderably reduce the 
potential impact of ‘MTIC’ and ca rousel frauds on Member States. 
Such systems would also either end or  significantly reduce the difference in 
treatment between domestic and intra-EU transactions and the additional obligations or complexity of the latter. They woul d greatly simplify and reduce administrative 
burdens for businesses, whether as buyers  and sellers. The obligation to submit a 
recapitulative statement might, however, be kept to serve as a basis for the reallocation system (see below). The si ngle place of taxation would, in addition, 
allow businesses to meet their obligations to declare and pay VAT and exercise the 
right to deduct in one place. 
The direct allocation of VAT revenues to  the Member State where consumption 
takes place and where the VAT  is deducted when the customer is a taxable person 
would no longer be possible. Such syst ems would therefore need a clearing 
mechanism for the redistribution of VAT  receipts to that Member State. 
Clearing could be done on the basis of declar ations made by taxable persons either in 
their VAT returns (as proposed in 1987) or in monthly sale s listings similar to the 
current recapitulative statements (as envisaged in 2008). As proposed in 1989
35 and 
in 1996, one might also consider macro-ec onomic reallocation of Member States’ 
VAT revenue on the basis of either trade statistics or the consumption side of 
National Accounts. 
                                                 
35 Completion of the internal market and approximation of indirect taxes — Communication from the 
Commission to the Council and to the European Parliament, COM(89) 260. 
 
EN 24   EN Topic 2. 
2. SCOPE OF VAT:  THE VAT  TREATMENT OF THE PUBLIC SECTOR  
2.1. Introduction 
This topic only deals with the VAT treat ment of public bodies, which is a long-
standing issue within the EU. 
The Commission is aware that determini ng the scope of VAT raises a number of 
other concerns, in particular how to treat the activities of holding companies and of 
charities. The fact that these issues ar e not dealt with here  should not prevent 
stakeholders from contributing on them in th e public debate (see questions 3 and 4 in 
the Green Paper). 
2.2. The legal framework 
For the purposes of the VAT Directive, a taxable person is any person who carries 
out economic activities, whatever the person’s status — private or public. 
However, Article 13 of the VAT Directive contains special rules for public legal 
entities where they engage in transactions  as a public authority. Where this occurs, 
the public body will not be considered to be a taxable person for VAT purposes and 
the activities or transactions  performed as a public author ity are outside the scope of 
VAT law. 
Nevertheless, where these out-of-scope activities could lead to ‘significant 
distortions of competition’ they are treated as taxable activities.  
Additionally, there are two lists: a list of activities for which public bodies will be 
regarded as taxable persons  (Annex I of the VAT Direct ive) and a list of public-
interest exemptions (Articles 132 to 134). 
Member States are also authorised to cons ider certain exempt activities engaged in 
by bodies governed by public law as activities in which those bodies engage as public authorities, thereby treating them  as being outside the scope of VAT. 
There is a large body of case law in this  area, which is an indication of the 
complexity of the current rules. 
2.3. Shortcomings 
2.3.1.  Neutrality 
Problems of distortion of competition may occur because the same activity may be 
taxed if carried out by a private body but not taxed if carried out by a public body. As 
the status of the supplier determines whet her the activity is ta xable or non-taxable, 
this could give rise to distorti ons in a liberalised environment. 
The exempt and non-taxable status of pub lic bodies creates an  incentive to self-
supply inputs since in that way non-deductible  VAT can be avoided. This results in a 
 
EN 25   EN bias towards in-house supplies of goods a nd services and the use of own employee 
labour. This bias can create inefficiencies in public sect or production and delivery of 
services. Spending decisions are often base d on VAT rather than on real economic 
factors. 
As exempt or non-taxable status makes it impossible for operators to deduct the input 
VAT charged on their acquisitions of goods a nd services used for subsequent exempt 
or non-taxable transactions, it also crea tes a ‘hidden VAT’ which will be passed 
forward and will result in a higher cost if the public authority supplies goods and 
services to a taxable person who has a right to deduct input VAT. 
Because VAT on investment by public bodies cannot be recovered, it is often argued 
that the present VAT regime works against the need to develop investment in public 
goods. 
2.3.2.  Lack of harmonisation 
The Directive leaves wide discretion to Me mber States to define notions such as 
‘public body’. As a result, there is no EU a pproach to the activiti es that public bodies 
engage in as ‘public authorities’. 
2.3.3.  Complexity  
The current VAT regime for public bodies r ecognises three categor ies of activities. 
They can be taxed, they can be within the scope of VAT but exempt or they can be 
outside the scope of VAT. The problem is  not restricted to determining the VAT 
status of the supply; it also makes determ ining the right of deduction of public bodies 
more complicated. 
Exemptions in the public interest are also not very precisely defined. The extent to 
which an activity can be considered as ‘clo sely linked’ is, for example, difficult to 
determine. As a result, it is often difficult to determine the legal nature and the conditions under which an entity’s ac tivities might benefit from exemption.  
Additional complexities are created by the di fferent options availa ble to the Member 
States: the option in Article 13(2) of the VAT  Directive to regard exempt activities as 
out of scope, and the options in Article 133 to make the granting of certain 
exemptions listed in Article 132(1) to bodies other than those governed by public law dependent on additional conditions.  
2.4. The way forward 
A first initiative was launche d by the Commission in 2003 with its proposal to 
remove the VAT exemption applicable to pos tal services. This proposal is still on the 
table at the Council. 
Beyond that proposal, the Commission has recen tly initiated an in -depth study of the 
current provisions on public bodies and exemptions in the public interest.  
This study will look at the problems created by the present EU and national rules on 
the application of VAT to the public sector. 
 
EN 26   EN The study will go beyond a description of  the problems and will also look how 
economically important the differential VAT treatment is. Based on an assessment of 
the economic importance of the differences, the study will look at what options exist 
to reduce VAT distortions and present the pr os and cons with a view to achieving a 
level playing field for VAT. 
Wide-ranging options like extending the regular VAT system to all the activities of 
public institutions will not be  disregarded in the study. A ‘f ull taxation’ model of this 
type, along the lines of what is currently in force in countries such as New Zealand or Australia, has major advantages in terms of  tax neutrality. However,  it also raises a 
number of issues, such as how to arrive at a definition of many public services. If 
such a model were chosen, the question w ould also arise as to which VAT rate 
(reduced or even super reduced rate) should be applied to these supplies in order to 
mitigate the impact of VAT on the final consumer. 
More limited reforms could also be envisaged such as an option to tax for public 
bodies, along the lines of what has been  proposed by the Comm ission for financial 
services. Modernisation of the current exemp tions and clarification of the rules laid 
down in Article 13 could also be envisaged. 
A third avenue could also be to rely  on Member States’ present capacity to 
implement national refund schemes outside the VAT system. This solution, which is 
also used elsewhere in the world (Canada fo r example) gives a lot of flexibility to 
Member States. 
The study is being carried out by Copenhage n Economics and is due to be finalised 
by early 2011. Once it is finalised, the Commission will launch a public consultation and call on all stakeholders to contribute. 
 
EN 27   EN Topic 3. 
3. EXEMPTIONS FROM VAT  AND THE SPECIFIC PROBLEM OF PASSENGER TRANSPORT  
This topic covers two issues. The first is exemptions from VAT in general.  
The second is the specific problem of VA T on passenger transport. VAT exemption 
is, however, only part of the issues to be examined; the place of taxation is another 
factor to be looked at when deal ing with VAT on passenger transport. 
EXEMPTIONS FROM VAT 
3.1. History and references 
If VAT were indeed the neutral tax on c onsumption that it is supposed to be, 
exemptions would not exist. They run counter  to the logic of VAT  but their existence 
is nevertheless of great practical importance 
The rationale for the application of exemptions has traditionally been twofold. One is 
that they sustain distributional and soci al objectives and compensate for the 
perceived regressive nature of VAT. Linke d to that may have been some desire 
expressed in these ‘ Exemptions for certain activit ies in the public interest’  to 
promote the consumption of certain goods or  services which we re considered as 
having beneficial qualities and where VAT exemption was seen as having a 
beneficial effect on prices for the final c onsumer. To a great extent, these exemptions 
reflect the established practices in Member  States before the Sixth Directive came 
into existence. Probably there was also a perception that many of  these exemptions 
related to ‘public goods’ which could not be exchanged in a market or consumed 
individually and consequently should be  left outside the scope of VAT. It is 
noteworthy, even if it does not make any c ontribution to the over all coherence of the 
list, that these exemptions extend to ‘cer tain’ but not all activities in the public 
interest. 
The other rationale is the ‘difficult to tax’  argument which sustains the exemptions 
for gambling, financial and insurance serv ices and many transactions involving 
immovable property. 
In addition, Article 371 of the VAT Directive allows some Member States to 
continue to exempt certain tr ansactions (listed in Annex X, Part B). Articles 375 to 
390b extend this facility to other Member States. The reason here is that complete 
agreement on a common list of exemptions c ould not be reached at  the time the Sixth 
Directive was adopted and it was therefore limited to measures already in force. 
Seemingly this arrangement was envisaged as transitional but now seems to have 
acquired an indefinite life. 
Taken together, these exempt goods and services  constitute a considerable part of the 
potential tax base. Even disregarding th e numerous technical difficulties which 
exemption gives rise to, the degradation of the tax base alone raises serious 
questions, not only in the light of the supposed ly neutral nature of the tax, but also in 
 
EN 28   EN the context of the current economic downt urn. The OECD has dr awn attention to 
methodologies for comparing the efficiency of VAT systems36  
The ECJ has on many occasions pointed to the need for strict interpretation of 
exemptions since they are exceptions to the general rule that all supplies of goods or 
services are subject to VAT. Strict is , however, not a synonym of narrow and the 
Court has increasingly taken the position th at the requirement to interpret them 
strictly must not have the effect of c onstruing the terms used to specify VAT 
exceptions in such a manner as to deprive the exemptions of their intended effect. 
This brings a certain tension to understandi ng the scope of the exemptions set out in 
the Directive. In so far as it produces un certainty, would it not be preferable to 
resolve this by reforming the legislation on cl ear policy grounds rather than leaving it 
in the hands of the Court? 
Maurice Lauré is usually seen  as the father of VAT. Wr iting long before the current 
crises, he suggested that in considering the negative impact of exemptions in the 
VAT system, the European VAT system shoul d be interpreted in the light of the 
coherent economic principles on wh ich a VAT system should be based37. The first 
step in this process would be  to develop a clear idea of th e financial consequences of 
the VAT exemptions, something which has never really been undertaken since the 
first steps were taken to set up the common VAT system. A critical re-examination along these lines seems long overdue. 
3.2. Evaluation of the current legislation 
3.2.1.  Exemptions and tax revenue 
Even if exemptions remove a considerable pa rt of the tax base, Member States are to 
some extent compensated by the associated restriction on deduction. It is not easy to 
observe and measure this but the figures ar e probably significant even if they fall 
short of what would be expected under taxation
38. The effect on revenue probably 
also depends on where in the chain of supply the break in taxation occurs.  
In any critical review of exemptions gene rally, this revenue would probably act as a 
force for inertia. It is neve rtheless a factor in any debate but without  reliable data on 
this and the corresponding figures for reve nue foregone because of the exemption, it 
will not be easy to arrive at an objective assessment.  
The non-recoverable VAT accrues to the Memb er State of the place where services 
or goods are supplied. For most exempt activ ities this will probably be the Member 
State of the exempt activity itself.  
Where, however, the exempt service is supplied to a re cipient in another Member 
State, the place of supply will generally be where the recipient is established. This 
                                                 
36 Consumption Tax Trends OECD Paris, annual publication. 
37 Les Impôts Gaspilleurs , Lauré, Babeau et Louit, Presses Univ ersitaires de France — PUF (17 octobre 
2001). More colourfully, he also described exemptions as ‘the cancer of the VAT system’. 
38 Member States do not generally release this info rmation but Jon Cannon, head of the UK Revenue and 
Customs partial exemption said last year at a seminar in Oxford University that exemptions contribute 
about 15  % of VAT yield. 
 
EN 29   EN will be the case whether this recipient is a taxable person or not. As a result, the link 
between the place where the i nputs are taxed and the place where the resu lting output 
is supplied (and consumed) is broken. 
For many of the exempt services, this will not be a source of concern as they are 
unlikely to be supplied across borders or  traded between Member States. Some 
financial and insurance services are, however, widely traded internationally and this pattern can be expected to grow with th e deepening of Pan-Eu ropean markets for 
these services. The outcome here is that those Member States who are net exporters 
of financial and insurance services ar e disproportionate be neficiaries of non-
recoverable tax revenue whilst other Member States who ar e net recipients of these 
services contend with what is in effect a drain on their receipts. Deepening the Pan-
European market will accentuate this uneve nness in the accrual of tax receipts.  
The question arises whether the wide de facto freedom given to Member States to 
manage and set recovery levels (in effect, th e level of taxation) and at the same time 
to retain this tax even when all the consum ers of the exempt services are established 
in other Member States is not a potential source of mischief.  
3.3. Shortcomings of the current system 
3.3.1.  Distortions of ec onomic decisions 
VAT exemptions encourage internalisatio n (the performance of services by the 
taxable person’s own personnel), even if exte rnal suppliers could offer higher quality 
at lower VAT-exclusive prices. Thus, ex emptions and out of  scope activities 
discourage outsourcing of activ ities which could more efficiently be performed by 
specialised providers. This bias creates in efficiencies in the production and delivery 
of goods and services. Entities carrying out exempt activities therefore often base 
spending decisions on the VAT effect rather  than on real business or other economic 
factors.  
Exempt status makes it impossible for the operators concerned to deduct the input 
VAT charged on their acquisitions of goods a nd services used for subsequent exempt 
supplies. It thereby creates a ‘hidden VAT’ which will be passed on and will result in a higher cost when these exempt supplies are made to a taxable person with a right to deduct input VAT. 
Because VAT on investment by entities that  perform exempt activities cannot be 
recovered, it is often argued that the pr esent VAT regime is a disincentive to 
investment.  
The result is that organisational forms are at least to some extent driven by other than 
purely economic considerations and to th at extent the outcome is sometimes 
undesirable and distorted. For the most pa rt, the activities exempted in the 1970s 
were not capital intensive and were limite d in their distribut ion to the national 
territories of Member States — this is far from being the case today.  
 
EN 30   EN 3.3.2.  Time to re-assess the exemptions and out–of-s cope status of supplies made by public 
bodies and others 
It would not be unreasonabl e therefore to cast a criti cal eye on the existing 
exemptions and ask whether they are still justified. 
As long ago as 2003 the Commission put forw ard a proposal to remove the current 
exemption for the public postal services. Howe ver, the Council has still not been able 
to reach a consensus.  
As far as ‘difficult to tax’ services ar e concerned, their continued exemption should 
depend on the answer to two in terconnected questions. Firstl y, what were the original 
technical, legal and economic justifications for them? This need to be investigated. 
Secondly, depending on the answer to that  question, can an a lternative and more 
efficient VAT treatment for these services be found? 
For immovable property, the existing le gislation has produced a complex mix of 
taxation, exemption and optional taxation. It c ould be argued that as there are internal 
market considerations at stake here, a pragmatic approach would leave things 
unchanged. This ignores the reality that ex empting supplies to taxable persons is 
inefficient and jeopardises the functioni ng of the VAT system. Whereas certain 
aspects of this exemption can be justifie d on economic and social grounds, it is not 
so easy to find similar justification for the inclusion of transactions involving hotel premises or premises for industrial or commercial purposes. One approach to rationalising the existing exemption might be to limit its scope to three restricted categories: 
(a) the letting of houses to private individuals; 
(b) supplies of buildings that are not new and where the supplier has not 
recovered input VAT on the building’s acquisition; and 
(c) supplies of land other than building land. 
This indeed was what the Commission originally envisaged in its preparatory work 
on the Sixth VAT Directive. Perhaps it is now time to reconsider this more streamlined approach in the interests of  the efficiency of the VAT system?  
Looking beyond the outcome of the current debate in the Council on the exemption 
for financial services and insurance, the question of full taxation cannot be avoided. 
The well-known technical issues here are beyond the scope of th is note and, although 
complexity has to be acknowledged, it is increasingly accepted that they can be 
overcome. The non-recoverable VAT has beco me a significant source of revenue, 
particularly for those Member States with  established financia l service centres who 
have become significant exporters of these services, but this revenue does not always 
accrue where the services are consumed. Ap art from correcting this misallocation of 
tax, it is clear that many of the current te chnical and legal VAT difficulties around 
exemption would simply disappear. The potential for tax competition and other drawbacks associated with input tax recove ry would be resolved. New developments 
such as Sharia banking, which do not sit eas ily within the curre nt exemption, would 
not be a VAT problem if all financial transactions were taxed. The technical 
 
EN 31   EN difficulties here cannot be minimised but in any discussions on VAT strategy for the 
next 10 years, it is impossible not to ra ise the point of ending these particular 
exemptions.  
As far as gambling is concerned, the Direct ive provides that it is exempt, subject to 
the conditions and limitations laid dow n by each Member State. A margin of 
discretion is thus conferred in regard to the exempti on and it can in some cases 
extend only to a limited number of forms of gambling (typically lotteries and betting), even if they account  for only a minor part of a ll gambling carried on in the 
territory of a Member States. 
The evidence, based on the actual practice in several Member States, would seem to 
point to a conclusion that  the ‘difficult to tax’ ar gument holds no water and the 
retention of a general exem ption must now be called into question. A critical 
examination should look at any residual r easons for keeping it. This should obviously 
address the issues raised by the increasing market for online services, which is often supplied by service providers established in locations other than the Member State where the customer is established.  
3.4. The way forward 
The primary aim of the Sixth Directive was to establish a uniform basis for collection 
of the EU’s own resources. This implied uniform rules on exemp tions and deduction. 
The optimal solution from a VAT perspe ctive would be to end most of the 
exemptions but, if this is not immediatel y achievable, a starting point would be to 
look at a more harmonised approach. 
The study that is currently being carried out by Copenhagen Economics (see topic 2) 
also covers exemptions in the public intere st. It will provide a useful input for the 
review of these exemptions. 
The review should also include the der ogations covered by Annex X which were 
never really to be seen as permanent fixt ures in the Directive.  Consideration should 
therefore be given to whethe r they are still justified. 
VAT ON PASSENGER TRANSPORT 
3.5. The current legal framework 
Transport services, like any other service supplied by a taxable person within the EU, 
are subject to VAT. Transport may be domes tic (departing from and arriving in the 
same country) or internationa l (departing from and arriving  in different countries). 
International transpor t covers transport going from one  Member State to another as 
well as transport going to (outward) or coming from (inward) outside the EU. 
Where VAT is applied, the supply of passenge r transport is taxed pursuant to where 
the transport effectively takes place, proportionate to the distances covered 
(Article 48 of the VAT Directive) and ma y be subject to a reduced rate of a 
minimum of 5
 % by the Member States as provided for in point (5) of Annex III. 
The VAT Directive nevertheless leaves scope  for passenger transp ort to continue to 
be exempted through derogations accorded to Member States. It reflects the 
 
EN 32   EN exemptions already in place in Member States before 1 January 1978 or accepted 
upon the accession of new Member States. Those exemptions are to be found in 
Articles 371 to 390 and, from 1 January 2011, Articles 390a and 390b.  
In addition, exemptions related to intern ational transport, al lowing certain passenger 
transport providers to purchase some goods and services free of VAT, have been in 
force since the introduction of VAT for in ternational sea and air transport.  
This means that the VAT treatment of passenger transport combines different 
exemptions, depending on the kind of mean s of transport used  to provide the 
transport and the place where the tr ansport is deemed to take place: 
– Exemption of passenger transport provi ded by transport providers to their 
customers, subject to certain conditions (output exemption); 
– Exemption of some supplies to transport providers, subject to  certain conditions 
(input exemption). 
3.6. Historical overview 
Under the definitive arrangements, according to Article 393(2) of the VAT Directive, 
passenger transport is supposed to be taxed in  the Member State of departure for that 
part of the journey taki ng place within the EU. In  1992, the Commission therefore 
proposed to tax passenger trans port at the place of departure39, but the Council could 
not reach an agreement on the proposed amendment. One of the main issues standing in the way of an agreement was the patchwor k of exemptions in force in the different 
Member States. 
A study
40 was carried out for the Commission in 1997 and confirmed the differences 
in treatment between Member States a nd also between the different means of 
transport. Given the absence of political will among Member States  to change that 
situation, the Commission took no ne w initiative in this field. 
In July 2000, the Commission stated its in tention to put forward a number of new 
proposals and to review existing proposals in the VAT area41. The rules on the place 
of supply of services were identified as one of the potential future priorities.  
In its consultation paper42 the Commission again suggested taxing the supply of 
passenger transport services taking place in  the EU, irrespective of the means of 
transport used, at the place of departure. Fo r domestic transport, this rule would not 
change the situation while, for international transport, it would ensure that to a large 
extent passenger transport services could be  taxed where they are actually consumed, 
without the complication of having to spli t up the price accordi ng to the distances 
covered in each Member State.  
                                                 
39 COM(92) 416-rev2 as amended by COM(94) 378. 
40 KPMG. 1997. A study of the VAT Regime and Competition in the Field of Passenger Transport, 
http://ec.europa.eu/taxation_customs/resour ces/documents/pass_tran_kpmg_final.pdf. 
41 COM(2000) 348 Final, 7 July 2000 ‘A strategy to improve the operation of the VAT system within the 
context of the internal market’. 
42 Commission Consultation Paper: VA T — The Place of Supply of Serv ices to Non-Taxable Persons 
http://ec.europa.eu/ta xation_customs/resources/documen ts/vat_place_of_supply_en.pdf. 
 
EN 33   EN Summarising the results of this public consultation43, the Commission noted, 
however, that although ‘ some businesses supported this idea, there was also serious 
opposition mainly from airline companies fearing that the new rules could encourage 
Member State to abolish the current exemption’ , and that most businesses found that 
‘the real issue is that  of the different rates and exemp tions applied by Member States 
and the inequity in VAT treatment betw een air, sea and road/train transport’ . 
Against this background, it was decided not to propose to change the rules 
concerning the place of taxa tion of passenger transport44 The Council agreed with 
this approach when adopting the new rules concerning the place of supply of services. 
Recently, the issue of the VAT taxation of passenger transport has again come into 
the picture, given the broad reflection launc hed in the context of the fight against 
climate change. 
3.7. Evaluation of the current legislation or policy 
The VAT treatment of passenger transpor t differs from one Member State to 
another
45. 
Domestic passenger transport is taxed in almost all Member States, whatever means 
of transport are used. Denmark, Ireland and Malta, however, exempt domestic 
passenger transport, except some transport by road. International passenger transport, 
on the other hand, is in most cases exempted by Member States. Whilst international sea and air transport services are exempt of VAT in the whole of the EU-27, VAT is 
paid, subject to varying c onditions, on international pass enger transport within the 
EU on inland waterways, rail and road  transport in nine Member States.  
Where international passenger transport is  taxed, it is often difficult for Member 
States to effectively ensure the actual taxation when transpor t starting and ending 
outside their territory is supplied by a tran sport provider not established in that 
Member State.  
Specific exemptions for international tran sport are provided for in Articles 148 to 
150 of the VAT Directive. These exempti ons, which are applic able throughout the 
EU, apply to the input of certain busine sses which provide inte rnational passenger 
transport by air or by sea, allowing them  to purchase, free of VAT, vessels and 
aircraft as well as goods for fuelling and provisioning these means of transport and 
services to meet their direct need or th at of their cargo. The application of these 
exemptions varies across the EU, given that  Member States may limit their scope and 
adopt the detailed rules for their implementation.  
These input exemptions are intrinsically reserved for international air and sea 
transport at the exclusion of other means of  transport, like trains or busses. They 
                                                
 
43 http://ec.europa.eu/taxation_customs/resources/documents/common/consultations/tax/rep_vat_ 
place_of_supply_en.pdf. 
44 See the explanatory memorandum for the proposal COM(2005) 334 final (point 2.2.). 
45 A description of the current situation can be found at: http://ec.europa.eu/taxation_customs/ 
resources/documents/taxation/vat/how_vat_works/rates/vat_rates_en.pdf. 
 
EN 34   EN provide a cash-flow advantag e for certain parts of th e transport sector, with 
businesses benefiting from exemption not having to pre-finance the VAT before being able to exercise their right of deduction. Given the importance of the amount 
involved, this advantage is far from negligible. 
It means that the current situation with a number of exemptions applied quite broadly 
in the sector of passenger transport raises the question of the neutrality of the applicable VAT treatment and its sustainability in the long term. 
3.7.1.  Positive aspects 
3.7.1.1.  Promoting certain sectors of passenger transport 
The VAT exemption applied to international air and sea transport gives providers of 
this kind of transport within the EU a competitive advantage over other transport providers who have to charge VAT. Firs tly, the exemption of passenger transport 
leads to lower operating cost s for providers of interna tional air and sea transport 
within the EU. Secondly, it facilitates such transport operations and reduces the 
administrative burden of alternative proce dures for the VAT refund in situations 
where VAT is charged. Thirdly, numerous exemptions for the supply of goods and services for such operators lead to si gnificant cash-flow advantages, which permit 
the operators to invest, for instance, in new means of transport. 
3.7.1.2.  Competitive prices for passenger transport for final consumers  
The VAT exemption applied to certain sect ors of passenger transport allows certain 
operators to lower their costs, which can lead to lower prices for passenger transport and a more competitive pricing policy.  
3.7.2.  Shortcomings 
3.7.2.1.  Economic distortions 
The difference in treatment between different means of transport may influence the 
traveller's decision on the journey to be taken. The exemption for international air 
and sea transport gives providers of this kind of transport a competitive advantage over other transport providers who have to charge VAT. With the development of international bus and train transport, in particular high speed trains, similar rules 
should be applied to transport within the EU irrespective of the means of transport 
involved. 
3.7.2.2.  Lack of harmonisation  
While taxation of passenger transport is e nvisaged, Member States may continue to 
exempt such services by means of derogati ons. The potential combination of taxation 
and exemption increases the administrative burden on businesses, which first have to assess whether they need to charge VAT on  the services supplied and, if so, must 
meet their obligations in each of the Memb er States on the territory of which they 
provide passenger transport services. 
 
EN 35   EN 3.7.2.3.  Complexity  
Taxing international passenger transport services in pr oportion to the distances 
covered makes collection of the ta x both difficult and impractical.  
In an internal market without fiscal fron tiers it implies that, for example, a coach 
company transporting tourists from Pari s to Amsterdam need s to apply French, 
Belgian and Dutch VAT to each relevant part of the journey and pay the corresponding amount of VAT to the tax aut hority of each Member State concerned. 
For operators, this may be difficult to apply and is quite burdensome. The consideration paid by the customer needs to be split between the Member States 
crossed during the transport to allow for VAT to be paid in each Member State, 
unless some of them have deci ded to exempt the service.  
There is a genuine risk that VAT is not accounted for, in pa rticular where the 
transport is only crossing a Member State in which the operator is not established, 
not departing from or arriving there. 
3.8. A possible way forward  
Experience has shown that unless the place of taxation, the rates and the exemptions 
are addressed as a whole, little progress is likely. A piecemeal approach that would 
not ensure equal treatment of the different  types of passenger transport, or of the 
operators providing it, offers  no satisfactory solution.  
3.8.1.  Full taxation of passenger transport 
Transport that takes place on the territory of  a Member State, is consumed in the EU. 
This applies to both domestic and inte rnational passenger transport. It would 
therefore be consistent with VAT being a broadly based tax on consumption to move 
to full taxation. Where services are not pr ovided in the public in terest, there are no 
economic, social or other reason s to justify an exemption.  
Putting an end to exemptions that are appli cable to international passenger transport 
by air or sea only would ensure a level play ing field. There would also be a synergy 
with other EU policies, notably the fight against climate change, where the transport 
sector is identified as an im portant source of CO2 emissions. 
It is difficult to imagine a review of the exemptions wit hout also looking at the rules 
governing the place of taxation of transpor t services and the rates that may be 
applied. To identify solutions that are not only workable but also acceptable may be a 
challenge. 
In taxing passenger transport, only trans port linked to the EU territory should be 
targeted. Other than taxing passenger transport according to the distances covered, as envisaged under the current rules, alternat ives such as the place of departure, the 
place of arrival, the place of the supplier or the place of the customer, separately or in 
combination, could be considered. It may al so be that other alternatives could be 
identified.  
 
EN 36   EN The method chosen to tax passenger transp ort should in any event ensure that 
transport consumed within the EU is taxed whilst not influencing the proper 
functioning of the internal market. 
Taxation could result in an increase in administrative burdens for those sectors which 
currently benefit from exemption, in partic ular where transport is carried out by non-
EU operators. That may be overcome if tr ansport operators are allowed to use the 
mechanism put in place for non-establis hed suppliers of electronic services, 
telecommunications and broadcasting services46. 
3.8.2.  Full output exemption of passenger transport 
Taxing passenger transport is not without co mplication. That is particularly so with 
international passenger trans port and may in part explai n the exemption currently 
enjoyed by operators providi ng international passenger tr ansport by air or by sea. 
This is less so with domestic transport which is therefore in many cases taxed. 
If full taxation proves not to be an option, thought could perhaps be given to moving 
towards exempting international passenger transport regardless of the means of 
transport used. Whilst it is not in the nature of VAT, an output exemption may 
nevertheless be justified by the complex ity of the tax. This would leave some 
consumption untaxed but at least it woul d ensure equal treatment between the 
different modes of transport. 
An exemption would not necessa rily conflict with other po licies but its consequences 
should be carefully assessed. 
Normally, businesses can only deduct VAT  charged on input used for taxed 
activities. An output exemption for transpor t would therefore impa ct on the right of 
transport operators to deduct VAT paid on th eir purchases. This could lead to serious 
financial difficulties for businesses, such  as considerable amounts of non-deductible 
VAT or cash-flow problems related to pre- financing substantial amounts of VAT, 
which would probably create great resi stance from the businesses concerned. 
3.8.3.  Taxation, or output exemption, of passenger tr ansport combined with partial input 
exemption 
Given the level of investment needed in the transport sector, there may be valid 
reasons for exempting inputs. If found appropriate, the exem ption would still need to 
be partial and target certain purchases only. 
Should passenger transport be taxed, opera tors would be able to deduct input VAT. 
Paying VAT on the purchase of durable goods of significant value which are 
essential for carrying out transport, in par ticular means of tran sport, could, however, 
still have a non-negligible e ffect on the cash-f low of transport providers, who would 
need to pre-finance the tax.  
                                                 
46 This mechanism, which is already in place for non-EU suppliers of electr onic services, will from 
1 January 2015 be extended to EU suppliers of electronic services, telecommunications and 
broadcasting services who are no t established (see Articles 357 et  seq. of the VAT Directive). 
 
EN 37   EN Should an output exemption be  chosen, the lack of a ri ght of deduction would mean 
that the VAT paid by transport operators b ecomes a real cost. This would increase 
the justification for an exemption for purchases made by transport operators. 
In both situations — taxation or exemp tion — equal treatment should be ensured. 
Should such an input exemption be put in place, it  would therefore n eed to be applied 
to all transport sectors (air, sea, land). 
 
EN 38   EN Topic 4. 
4. DEDUCTIONS  
4.1. The current legal framework 
The right of deduction is a key factor in ensuring that the VAT system is neutral, 
relieving taxable persons of the VAT paid  on their input so that the tax, after 
collection in stages, is ultimat ely borne by final consumers.  
The main rules on deductions are set out in  Articles 167 to 192 of the VAT Directive. 
These cover the time when VAT becomes deductible, the scope of the right of deduction, restrictions, and how the right of deduction is exercised. 
Regarding restrictions on the right of deduction, Article 176 of  the VAT Directive 
(previously Article 17(6) of the Sixth VAT Directive) stip ulates that ‘the Council, 
acting unanimously on the basis of a Co mmission proposal, shall determine the 
expenditure in respect of which VAT shall not be deductible’. Mo reover, it contains 
a provision allowing Member States to reta in all the exclusions provided for under 
their national laws at 1 Janua ry 1979 or on the da te of their accession for the Member 
States which acceded to the EU after that date.  
Besides these main provisions, there are tw o Directives on the refund of VAT to 
taxable persons who are not established in  the Member State in which they incur 
VAT on goods and services or on their import of goods: 
– Council Directive 2008/9/EC, la ying down rules for the re fund of VAT to taxable 
persons not established in the Member St ate of refund but established in another 
member State; 
– The Thirteenth Council Directive (86/560/ EEC), on arrangements for the refund 
of VAT to taxable persons not es tablished in the European Union. 
4.2. Historical overview 
Several legislative initiatives have been taken in the past to review the rules on 
deduction. 
A first attempt to harmonise the restricti ons on the right of deduction was made in 
1982 with the so-called Twelfth Directive
47 proposal. However, this proposal was 
never adopted. 
Under the SLIM (Simplifying Legislation fo r the Internal Market ) initiative in 1997, 
the working party set up to examine VAT obligations recommended examining ways 
and means of radically reforming the re fund procedures laid  down in the then 
applicable Eighth VAT Direct ive for non-established EU traders. At that time, the 
Commission took the view that significan t simplification could only be reached by 
replacing the refund system by a ‘cross-borde r deduction’, i.e. a system that allows 
                                                 
47 COM(82) 870. 
 
EN 39   EN EU taxable persons to deduc t VAT incurred in another Member State where they are 
not established by setting it off, in his own VAT return in the Member State of 
establishment, against th e amount of VAT due for which they are liable. The 
Commission’s proposal for such a reform, presented in 1998,48 again included a 
section on expenditure not eligible for a full VAT deduction with a view to 
approximating national rules. This proposal was, again, never adopted. 
Under its VAT strategy launched in 2000 and updated in 2003, the Commission 
proposed broad simplification comprising si x concrete measures which included two 
items on deduction/refund: the replacement of the refund system for non-established 
EU taxable persons and harmonisation of th e scope of goods and services for which 
Member States may apply restri ctions on the right to deduct49. The new refund 
system, entirely electronic but  still based on a system of actual refund by the Member 
State where the VAT was incurred, entere d into force on 1 January 2010. The part 
related to restrictions  on the right of deduction is s till on the table at the Council. 
In 2007, the Commission proposed, amongst othe r items, a Directive which included 
rules to refine the right of deduction's ba sic rule that a taxable person may deduct 
VAT on input only in so far as the goods and services are used for transactions that 
give rise to deduction. Under ECJ case la w, there was no way of preventing taxable 
persons from allocating mixed-use goods (used for both business and non-business 
purposes) wholly to business assets and deducting the whole amount of VAT 
immediately and in full, insofar as privat e use was subsequently taxed as a service 
over time. This created considerable unjustif ied cash-flow advantages for the taxable 
persons concerned, es pecially in relation to immovabl e property. The purpose of the 
new Directive50, which was adopted in 2009 and w ill take effect from 1 January 
2011, is to restrict upfront deduction to e ffective business use. At the same time, a 
correction mechanism should take fluctuat ions between busine ss and private (non-
business) use into account. 
4.3. Evaluation of the current legislation or  policy: positive aspects and specific 
shortcomings 
The principle of neutrality requires fu ll deductibility of the VAT on goods and 
services which are used for taxed econo mic activities. VAT on goods and services 
obtained for non-business use (private or out-o f-scope activities) or exempt activities 
(with the exception of exempt activities givi ng rise to a right of  deduction like intra-
EU supplies of goods or exports) is not de ductible. Respecting this requirement is 
sometimes problematic in those cases where goods and services are used for multiple 
purposes (taxed activities, exempt activ ities and non-business purposes) and changes 
in this use occur during the economic  lifetime of the good or service. 
Restrictions on deduction should in princi ple apply in situa tions where goods and 
services are used for business/non-business purposes and determining the effective proportion between the two could create majo r difficulties for the trader (sometimes 
                                                
 
48 COM(1998) 377. 
49 COM(2004) 728. 
50 Council Directive 2009/162/EU of 22 December 2009 amending various provisions of Directive 
2006/112/EC on the common system of value added tax (OJ L 10, 15.1.2010, p. 14). 
 
EN 40   EN impossible to make in practice) and c ould be impossible to verify by the tax 
authorities. 
4.3.1.  Use of goods and services both for exempt ac tivities and activities giving rise to a 
right of deduction 
Recital 39 of the VAT Directive states that  ‘the rules governing deductions should be 
harmonised to the extent that they affect  the actual amounts collected. The deductible 
proportion should be calculated in a simila r manner in all the Member States’.  
The rules which the Member States must follow in achieving that objective are set 
out in Articles 173 to 175 of the Directive.  Unfortunately they provide only limited 
guidance and consequently Member States have gone their own way in implementing them. Although it is notable that the VAT Di rective only requires that the calculation 
should be established in ‘a similar manne r’ (which does not mean the same manner), 
there is clearly an expectat ion that the actual  amount collected should be harmonised 
for similar operations in different Member  States and that differences in the 
computation of deductible VAT should not lead to competitive imbalances.  
The ECJ has provided some limited guidance which, if followed, might be expected 
to deliver a more harmonised approach. 
Beyond that, however, the evidence points to  considerable variations in the 
methodologies imposed or accepted by Member  States and, more worryingly, the 
actual rates of input VAT recovery. A study carried out for the Commission
51 
confirmed this, attributing the variations in recovery rates to the availability of an 
option to tax, differing business mixes, differe nces in the scope of the exemptions in 
national law and finally concessional arrang ements or interpretations which are not 
always documented in national legislation. In the latter instance, it is not easy to 
verify that such arrangements ar e in conformity with EU law52. In addition, 
differences in the computational rules adopt ed largely on their in itiative by different 
Member States, notwithstanding the First National Bank of Chicago  judgment, will 
always give different  recovery rates (e.g.  using gross margin or gross interest will 
result in a wide variation in outcomes). 
The consequences of non-harmonisation ar e particularly troub lesome when an 
exemption involves commercial activities. Th e recovery rate determines the tax 
actually borne by, for instance a banki ng or an insurance institution. Non-
harmonisation therefore creates competitive imbalances between operators and may possibly become a vehicle for tax competition between Member States. It is probable that for many institutions non-recovera ble VAT may currently be the most 
significant tax they pay, even if the lack of  transparency makes it difficult to say this 
with any certainty.  
                                                
 
51 Survey on the recovery of input VAT in the financial sector , IBFD December 2006. 
52 Where the arrangements with the tax authority are mo re favourable than might be expected under the 
VAT Directive, the beneficiary will never complain of  course and the authorities will not be inclined to 
disclose the details to the Commission, perhaps on the grounds of commercial confidentiality. 
 
EN 41   EN 4.3.2.  Provisions dealing with the non-busines s (private use) of business assets; 
adjustments and corrections 
The Directive adopted on 22 December 2009 provides specific rules on exercising 
the right of deduction in the light of the prin ciple that deduction arises only in so far 
as goods and services are used for a business activity.  
Problems had at first arisen in relation to the initial exercise of the right of deduction 
for immovable property not exclusively used  for business purposes. Once allocated 
to business assets, even where business use was minimal the total amount of VAT 
could be deducted upfront and private use would be output taxed via the ‘full cost’ 
valuation rules over a period of  (in some cases) up to 20 years, creating (unjustified) 
cash-flow advantages. 
The 2009 Directive, firstly, rest ricts the initial exercise of  the right of deduction for 
immovable property to effec tive business use; immediate and full deduction in the 
case of mixed use is therefore no longer possible. 
Secondly, it introduces a ‘corre ction’ mechanism’ in add ition to the existing system 
of adjustment for capital goods.  
In order for the adjustment system to be applicable, a person must first acquire 
capital goods as a taxable person and allocate  them to business assets. Fluctuations 
during the adjustment period between taxed business use (giving rise to a right of 
deduction) and exempt business use (not givi ng rise to a right of deduction) are taken 
into account via the adjustment system. 
However, no specific comparable parallel  rules catering for a similar division 
between business and non-business use of  assets were available. Although non-
business (private) use of a business asset was to be taxed as a deemed service (under 
Article 26 of the VAT Directive), there wa s no adjustment mechanism in favour of 
the taxable person if business use incr eased beyond the initi al business use. 
If, under the new rules on forced apportionmen t, an asset were se en as being partly 
allocated to non-business use (where the taxable person was previously free to 
allocate mixed-use goods entirely to bus iness assets) no adjustment of the tax 
relating to the non-business part in favour of the taxable person was allowed. 
Therefore, the new rules are intended to de al with this problem via a ‘correction’ 
system (in relation to increase/decrease of business and non-business use) by analogy with the adjustment system and by exclud ing the otherwise a pplicable output tax 
rules in the case of a subsequent decreas e in business use (Ar ticle 26 of the VAT 
Directive). 
Thirdly, particularly in comparison with the original Commission proposal, the scope 
of the Directive was extended, via an option for the Member States, to all goods forming part of business assets. 
As this legislation will come  into effect from 1 January 2011, it is too ea rly to assess 
its effects, but some observations may be made.  
 
EN 42   EN The option of extending the scope of thes e provisions will lead to further de-
harmonisation. As the text refers to ‘busine ss assets as they (i.e . the Member States) 
specify’, this new rule will have a differe nt scope of application in each Member 
State and might create further distortions of competition within the Internal Market. It remains to be seen whether Member Stat es will extend the rules to e.g. non-capital 
goods. 
For the new correction mechanism, reference is made to the principles of the 
adjustment system via a general refere nce to Articles 184 to 192 of the VAT 
Directive and ‘as applied in the respectiv e Member State’. Any differences in the 
current adjustment systems between the Memb er States will therefore extend to the 
new correction system. Because of the general reference to all articles on adjustment, 
Member States have some discretion in appl ying the new rules, e .g. the possibility to 
permit administrative simplifications (see Article 189 of the VAT Directive). 
4.3.3.  Restrictions on the right of deduction 
Article 176 of the VAT Directive as set out above is the legal base for most of the 
restrictions curren tly applied in the Member St ates. Besides that provision, 
restrictions can be also  based on the following: 
• Each Member State may, for cyclical or  economic reasons, to tally or partly 
exclude all or some capita l goods or other goods from the system of deduction 
after consulting the VAT Committee (A rticle 177 of the VAT Directive). 
• The Council may grant individual deroga tions on the right of deduction to any 
Member State insofar as these measures are intended to simplify the procedure for 
collecting VAT or to prevent certain forms of tax evasion or avoidance 
(Article 395 of th e VAT Directive). 
4.3.3.1.  Positive aspects 
Flat-rate restrictions on the deduction of  input VAT for expenses covering mixed 
private and business use (cars, restaurant s and mobile phones) simplify matters both 
for the taxpayer and the tax administration. 
Flat-rate restrictions are a simple way of apportioning business and non-business use, 
in that the flat rate deduction allowed should generally reflect the effective proportion of business use. It has to be accepted that a flat-rate proportion can never 
correspond to each individual case, and that there will be winners and losers when applying such a mechanism.  
Flat-rate restrictions go beyond their objectiv e of simplification when the proportion 
no longer corresponds to the economic reality (for instance, if VAT related to car 
expenses is fully excluded from the right of deduction).  
Positive effects of, probably, most rules that derogate from the general principle are 
that individual Member States can mainta in existing national situations which are 
economically or even culturally accepted or desired (standstill), can react quickly to 
fluctuations or crisis situ ations in the national economy (exclusions for cyclical or 
economic reasons), can simplify VAT collec tion for taxable pers ons and/or the tax 
 
EN 43   EN administration in difficult situations and ca n apply measures to combat tax evasion 
and avoidance at short notice (t hrough individual derogations). 
4.3.3.2.  Shortcomings  
• Any restriction of the right of deduction in relation to strictly business expenditure 
affects the neutrality of the VAT system and should therefore be avoided. At the 
same time, it affects the principle th at VAT should be a consumption tax. 
• As exceptions exist on a national basis,  taxable persons ope rating in different 
Member States have to deal with differe nt sets of rules. For example, it makes 
cross-border refunds (see further) more complicated within the EU as different 
(sub)-codes have to be used to cover a ll existing different situations in the 
respective Member States. 
• The standstill provision in Article 176 imp lies that new or previously abolished 
restrictions cannot be (re )introduced. This results in Member States having 
unequal rights in this respect. 
4.3.4.  The time when the right to deduct arises 
The right of deduction arises at the time th e deductible tax becomes chargeable. That 
means that a customer is, in principle, entitled to deduct the VAT as soon as the 
supply is made on his next VAT return, whet her or not he has paid for the supply.  
This rule creates a cash flow advantage for late payers, the burden of which is in fact 
borne by the suppliers, for instance SMEs that may be unable to impose reasonable 
terms of payment on their customers but who have to pay the VAT immediately to 
the Treasury. While this rule is neutral for the State, it is doubtful whether its effects 
on the supplier and the customer are consis tent with the principle of neutrality. 
Allowing businesses, particularly small ones, to pay the VAT only when they have 
received payment would c onstitute a solution already permitted under the VAT 
Directive (see Article 66(b)). Several Member States allow this option with in addition a derogation to postpone  the right of deduction of  businesses opting for such 
a scheme (the so-called cash accounting scheme). 
This scheme enables such taxable persons to apply a simple rule based on the date of 
payment for their input and output transactions , to determine at what point they must 
exercise their right to deduct VAT and pay the tax to the revenue authorities. For such taxpayers, the scheme simplifies th e formalities and may, furthermore, give 
them a cash-flow advantage, particularly if most of their expenditure is not liable to 
VAT (e.g. salaries) or they have to accept lengthy payment terms from their 
customers but cannot impose similar payment terms on their suppliers.  
However, this scheme could lead to unwanted effects: discrimination against 
suppliers who have opted for the scheme, because it indirectly deprives their 
customers to the right to deduct the VAT immediately as they can under the common 
rules. 
 
EN 44   EN This problem could be tackled by granting all customers of a ‘cash accounter’ the 
right to deduct the VAT as soon as the s upply has been made or the invoice issued 
and therefore by separating the chargeabili ty of the VAT from the time of its 
deduction. The cost in term s of cash flow would then be incurred by the State. 
However, allowing a ‘cash accounter’ to issue, for instance, an invoice for an account, without having to pa y the VAT stated, while auth orising the customer to 
deduct it immediately, could le ad to abuse or avoidance between persons that have 
close ties, for example. 
The solution might therefore be to make  it a general rule that the VAT becomes 
chargeable when payment for the supply is  received by the supplier with the 
customer having the right to deduct at the same time.  
Such a rule would be perfectly neutral for most stakeholders: the supplier, the 
customer and the State. The only losers w ould generally be customers who are able 
to impose lengthy credit terms on their suppl iers. They would no longer benefit from 
the cash-flow advantage resulting from the period between the time when they can deduct VAT and the later time when they have to pay the VAT to the supplier. However, if a customer has no right to deduct VAT, the State would have to wait 
until the customer pays the invoice before it collects the VAT. Nevertheless, in both 
cases, the supplier would no longer suffer the cost of late payment to the benefit of 
the State and/or his customer. 
More broadly, basing the VAT system on payment and therefore reducing the time 
between payment of the VAT and remittance to the Treasury may limit losses from 
supplier insolvencies. It would also allow more modern means of collecting VAT to 
be put in place with the obj ective of preventing fraud due to the concealment of sales 
and reducing the administrative cost to both businesses and the tax administration. 
For instance, a VAT system based on paym ent would facilitate the setting up of a 
scheme where the customer would pay the VAT  directly to the Treasury while at the 
same time paying for his purchase by credit  card or credit tran sfer (see point 5.4.1 of 
the green paper). By adapting banking pa yments through SEPA, it might be possible 
to pay the net amount to the supplier and th e VAT to the tax authority, at the same 
time and in a single payment transaction. 
However, the cash accounting system in itself cannot be seen as an effective solution 
to major abuses such as carousel fraud. In general, the fraudster demanding a VAT refund complies and is able to prove that the goods acquired were actually paid for. 
Thus, cash accounting could represent a more neutral system providing some assistance to SMEs in terms of cash flow a dvantages and, to some  extent, could limit 
VAT losses due to insolvencies. But to counter fraud, an additional and more far-reaching measure would be needed such as imposing conditions on the right of deduction itself. 
 
EN 45   EN 4.3.5.  Refunds to non-established EU operators (Directive 2008/9/EC) 
On 1 January 2010, the refund system of the Eighth VAT Directive53 was replaced 
by a new and entirely electronic refund system for non-established EU taxable 
persons. The previous pape r-based system was considered burdensome to both 
businesses and tax administrations, was char acterised by increasing failure to comply 
with time limits and had become out of date. For tax administrations, each refund 
required physical proce ssing — stamping and return ing invoices and import 
documents — but lacked effective means of  verification. In re ality, the available 
information often allowed only the applican t’s status as a taxable person and the 
conformity of the invo ice or document to be checked. Member St ates of refund could 
not verify the division between taxed, exempt  or out-of-scope supplies or the way the 
deduction was made (pro rata  or by actual attribution). 
The new system sought to deal with a num ber of administrative problems, both for 
businesses and tax administrations, and to  enhance the position of claimants. In 
practice, a claim is introduced via th e web portal of the Member State of 
establishment of the taxable person and sent over, after certain checks have been 
made, to the Member State where the VAT  was incurred (the Member State of 
refund), which then has to decide whet her the claim is eligible and, where 
appropriate, to refund the VAT to the claimant. 
4.3.5.1.  Positive effects 
Because of the implementation problems, any positive effects have been 
overshadowed by the rather serious techni cal problems in certain Member States. 
Further analysis would be required to determine whether and to what extent 
expectations in terms of speed (because of the electronic procedure), efficiency 
(introduction of the claim via the web por tal of the claimant’s Member State, 
reduction of language problems via maximum use of codes), and improvement of the taxpayers’ status (granting in terest in cases of late payment) have been met. 
4.3.5.2.  Shortcomings 
Although the EU components of the IT system  were set up satisfactorily, a number of 
problems occurred in the Member States:  
• The late, incorrect or non-tr ansposition of EU legislation resulted in the late 
opening of national web portals  (sometimes up to five  months after 1 January 
2010); discrimination against non-establis hed agents; limits on the number of 
invoices; incorrect treatm ent of VAT groups (multiple VAT numbers), and other 
problems. 
• There were problems with and unnecessary  restrictions on the proper functioning 
of the national web portals in relation to e.g. opening times, accepted formats and absence of batch uploads. 
                                                
 
53 Eighth Council Directive 79/1072/EEC of 6 Decembe r 1979 on the harmonisation of the laws of the 
Member States relating to turnover taxes — Arrangements for the refund of value added tax to taxable 
persons not established in the territory of the country (OJ L 331 of 27.12.1979, p. 11). 
 
EN 46   EN • The text of the Directive contained a numb er of options (e.g. use of language, use 
of codes for business activ ity, use of codes for sectors of activity), a few 
shortcomings (the principle of using dire ct contacts between the Member State of 
refund and the non-establishe d applicant for several ro utine messages which could 
easily have been routed through the comm on IT system) and very few provisions 
enabling the Commission to adopt  common implementing provisions. 
To avoid such situations in future, le ssons should be drawn from the problems 
experienced in setting up the system. However, a proper assessment of the 
shortcomings of the system can only be made once it is running properly. 
Some of these shortcomings are ad dressed in the recent Commission proposal54 on 
extending the deadline for cros s-border refunds, as it also contains new rules aimed 
at granting the Commission the necessary pow ers to standardise the technical details 
needed for such a Pan-European scheme to work properly. 
4.3.6.  Refunds to non-EU operators (T hirteenth Directive 86/560/EEC) 
The Thirteenth Directive, on refunding VAT to taxable persons that are not 
established in the Union55, has never been amended since its adoption. The system is 
still entirely paper-b ased. Unlike the refund system fo r EU taxable persons that are 
established in another Member State, this  Directive leaves a lot of discretion to 
Member States. In particular, Member St ates may make the VAT refunds conditional 
upon the granting by non-EU states of comp arable advantages regarding turnover 
taxes (the so-called reciprocity clause). Member States also decide the practical 
arrangements for claiming these refunds , e.g. time limits or minimum amounts. 
Eligibility for refunds is determined accord ing to the Member States’ domestic rules 
on VAT deductions, although certain expend iture may be excluded or certain 
conditions imposed. 
4.3.6.1.  Positive effects 
With the refund system for taxable persons  not established in the Union, the EU 
seeks to guarantee the principle of neutra lity of VAT as a consumption tax in 
international trade, destined to accrue to the state or jurisdiction where consumption 
takes place. 
4.3.6.2.  Shortcomings 
Reciprocity can generally be arranged in  different ways: via formal bilateral 
agreements between states or via a unila teral decision by a st ate to recognise a 
number of countries as having a comparable  VAT or indirect tax system under which 
comparable advantages are granted to an EU  Member State. The result is that the 
reciprocity conditions are not  applied uniformly across the EU, which results in the 
same non-EU country being treated differently  according to the conditions agreed by 
individual Member States. 
                                                 
54 COM (2010) 381. 
55 Thirteenth Council Directive 86/560/EEC of 17 November 1986 on the harmonisation of the laws of the 
Member States relating to turnover taxes — Arrangements for the refund of value added tax to taxable 
persons not established in the Community (OJ L 326 of 21.11  1986, p. 40). 
 
EN 47   EN 4.4. Possible ways forward 
4.4.1.  Mixed use of goods and services 
This is an important area of concern. Th e amending Directive adopted in December 
2009 brings a partial soluti on to a specific problem wh ich the Commission indeed 
considered it necessary to address in the short term. 
A more fundamental review of the provisi ons governing the scope of the right of 
deduction, proportional deduction and ad justments would seem necessary. 
The difficulties encountered in Council when discussing the 2009 Directive already 
gives an indication of the complexity of such a task.  
A less far-reaching approach would be to further harmonise the scope and details of 
the new rules laid down by the new Directive,  thereby reducing the optional aspect of 
the Directive. 
Another more targeted option would be to  launch a more general review of the 
adjustment rules (Articles 184–192 of the VAT Directive). 
4.4.2.  Restrictions on the right of deduction 
A first option would be to define in a harmonised way those goods and services for 
which Member States may impose restric tions. The proportion of the restriction 
could be decided by the Member States ta king into account their national situation. 
This would be in line with the existing pr oposal which is still on the table at the 
Council. 
A more ambitious option would be fully ha rmonise the restricti ons, leaving Member 
States no discretion in this area. 
4.4.3.  The time when the right to deduct arises 
The advantages and disadvantages of changing the time when the right of deduction 
arises in terms of cash flow for businesses and tax authorities, fraud prevention, and 
the impact on accounting obligations  could be further examined.  
4.4.4.  Refunds to non-established EU operators (Directive 2008/9/EC) 
The benefits of the newly introduced sy stem can only be measured once it is 
functioning smoothly. The Comm ission still believes in its merits and is convinced 
that the current difficulties can be resolved. 
Nevertheless, the ultimate simplification would still be a cross-border deduction 
mechanism via the VAT declaration of the taxable person in his Member State of 
establishment, as proposed in 1997.  
Additionally, a fully worked out one st op shop mechanism (see point 5.3.4.1 of the 
Green Paper), allowing taxpayers to declare output VAT but also to exercise the right 
of deduction on the VAT return coul d replace the refund procedure.  
 
EN 48   EN 4.4.5.  Refunds to non-EU operators (T hirteenth Directive 86/560/EEC) 
In order to enhance neutra lity in international trade between the EU and non-EU 
countries, one option could be to de fine reciprocity at EU level. 
Another could be to examine whether ad ditional conditionality clauses (e.g. on 
exchange of information as regards VAT/GST) should be used. 
A more ambitious approach would be to intr oduce an electronic procedure, similar to 
that recently implemented for non-establi shed EU operators, with a single portal 
managed by the Commission. 
 
EN 49   EN Topic 5.  
5. INTERNATIONAL SERVICES  
5.1. Current position 
The need to address issues relating to the supply of services across the EU’s external 
border is a relatively recent development in  the history of the common system of 
VAT. In all probability, those who framed th e original legislation did not consider 
cross-border services to be  of any great economic intere st, especially where non-EU 
countries were involved. For a long time,  the rules on the place of supply of B2B 
services were seen as sufficient to deal with all likely eventualities.  
The arrival of online electronic commerce ch anged this, confirming that few things 
in life are really written in  stone. The development of an online B2C market brought 
new problems for VAT and, in particular, left a fledglin g European industry at a 
serious competitive disadvantage. The so-called e-servi ces VAT Directive56 rectified 
this and, in so doing, broke new ground by setting up simplified, streamlined 
compliance procedures for service suppliers  established in non-EU countries that 
made taxable supplies to EU consumers. 
These e-commerce services are, however, only one part of a larger phenomenon. 
Changes in technology, greater deregula tion, innovative business models and the 
general impact of globalisation have result ed in enormous changes in the economic 
significance of internationally traded serv ices and intangibles, putting pressure in 
turn on international aspects of the VAT system. 
In order to address such issues, the Co mmission has engaged with the OECD in a 
process to develop international norm s for VAT-type taxes based on taxation 
according to the rules applicable in the ju risdiction of consumption. These will have 
no impact on the rules for intra-EU transacti ons. In this context, therefore, the term 
‘international’ refers to tr ansactions which involve both the EU and one or more non-
EU counties.  
Since VAT is an EU competence, the need for a coordinated EU approach is clear. 
Member States that participate in the OE CD cannot enter into agreements with non-
member countries on arrangements which might  interfere with the rules laid down in 
the VAT Directive, even if such arra ngements are limited to interpretative 
commentaries or guidelines. Coordination mu st also involve those Member States 
that are not members of the OECD.  
The expectation of the OECD is that, ove r time, this process will yield a body of 
work broadly similar in status to  the transfer pr icing guidelines. 
                                                 
56 Council Directive 2002/38/EC of 7 May 2002 amending and amending temporarily Directive 
77/388/EEC as regards the value added tax arrangements applicable to radio and television broadcasting 
services and certain electr onically supplied services (OJ 2002 L 128, p. 41). 
 
EN 50   EN 5.2. Evaluation of issues being addressed and future progress 
The work being pursued at the OECD fa lls under the heading of ‘International 
VAT/GST Guidelines’ and has to be seen as a long-term project. Th e intention is that 
once finalised, it will provide governments and taxpayers with recommendations on 
how cross-border supplies of services should be taxed. 
In international trade in services, whic h can involve several jurisdictions, all 
potentially claiming the right to tax, taxa tion according to the destination principle 
should ensure tax neutrality and prevent distortion of competition.  
The OECD has just completed a general public consultation on a draft second 
chapter of the Guidelines, dealing with  customer location in the context of 
identifying the jurisdiction which has taxing ri ghts. It is expected that this chapter 
will be finalised in the near future thr ough a process of endorsement by the OECD’s 
Committee on Fiscal Affairs. 
Progress to date has, howev er, been largely achieved  by avoiding more difficult 
issues such as tax avoidance and artif icial arrangements. Currently, questions 
involving complex corporate structures, in particular branches, and more complex 
supplies are coming to the fore. 
The need for a coordinated EU position in  these negotiations is  now becoming more 
important. It is the Commission’s intention to deal with this via the VAT Committee, 
as and when the need arises. 
As pointed out above the e-se rvices VAT Directive has ensu red from a legal point of 
view taxation of these servic es within the Member State of consumption. From the 
outset, it was acknowledge d that this legislation relies heavily on voluntary 
compliance from the suppliers.  
Bilateral agreements with non-EU countri es or multilateral agreements covering 
VAT could provide a legal base for an exch ange of information and, as far as the 
joint OECD/Council of Europe multilateral convention is concerned, even a legal 
base for the assistance in  recovery of debts. 
Because initially the e-services provisions  were agreed for a limited period in time, 
little attention was given to this aspect . The adoption of the VAT package has now 
given these provisions a permanent charact er without addressing the outstanding 
issue of the control of  these transactions.  
It can be questioned whether such situation is acceptabl e in the long term. From 2015 
similar provisions for ensuring taxati on at destination will be extended to 
telecommunications and broadcasting services, and to similar intra-EU services. The EU legislation adopted for that purpose at  EU level strengthene d the administrative 
cooperation between Member Stat es for these intra-EU transa ctions to ensure that the 
Member State of consumption has the capacity to audit these transactions. 
This will stress the inequality in terms of control between EU and non EU traders in 
the same sector and subject to similar VAT rules.  
 
EN 51   EN Developing VAT administrative  cooperation at international level is one potential 
way forward. The alternative, explored in certain non-EU jurisdictions, is to seek 
ways of collecting the VAT from the persons established within the EU, in this case the private person. 
 
EN 52   EN Topic 6.  
6. THE LEGAL PROCESS  
6.1. Current legal framework 
The Council adopts provisions harmonising tu rnover taxes such as VAT to the extent 
necessary to ensure the establishment and the functioning of the internal market and 
to avoid distortion of competition57. Such provisions must be adopted by unanimity 
and after consulting the European Parliament and the Economic and Social Committee. Adoption of any provision re quires a proposal fr om the Commission, 
which has the right of initiative
58. 
Amendments to a Commission proposal can  be made by Council. Where these 
changes do not achieve the aims of th e proposal or go beyond those aims, the 
Commission’s only option is to  withdraw its proposal. 
While the Treaty prescribes no particular legal instrument, VAT has mainly been 
regulated by means of directives. A dire ctive is binding upon each Member State to 
which it is addressed, but leaves the choi ce of form and methods to the national 
authorities, who transpose it into national legislation59. 
In the VAT Directive, which establishes the common system of VAT, the Council 
has reserved for itself the power to a dopt implementing measures (Implementing 
Regulations). By its very nature, this pro cedure is limited in scope and may not be 
used to amend the VAT Directive. Since no power has been delegated to the Commission
60, all substantive changes therefor e need to go through the normal 
legislative procedure, involving una nimous adoption by the Council.  
6.2. Historical overview 
The legislative procedure has remained th e same over the years and, with the most 
recent accession, amendments to VAT legisl ation now need the unanimous support 
of 27 Member States. Although the voting regime was discussed, and indeed 
suggestions were made that  certain administrative rule s on VAT should not require 
unanimity, for instance invoicing rules, th e Lisbon Treaty has br ought no change in 
this respect.  
However, areas of qualified majority vot ing have existed in VAT legislation. 
Derogations allowed under Article 13 of  the Second VAT Directive could be 
approved by qualified voting if the measur e simplified the procedure for charging 
                                                 
57 This follows from Article 113 of the Treaty on  the Functioning of the European Union (TFEU). 
58 The legislative procedure is laid down in Article 289 TFEU. 
59 An outline of the legal acts that may be adopted by the EU can be found in Article 288 TFEU. 
60 Under Article 290 TFEU, a legislative act may delegate to the Commission the powers to adopt non-
legislative acts of general application to supplement or amend certain elements of the legislative act. The exercise of these powers is dealt with in a Communication from the Commission to the European 
Parliament and the Council: Implementation of Article 290 of the Treaty on the Functioning of the 
European Union (COM(2009) 673). 
 
EN 53   EN VAT or aimed to prevent fraud, provided the effect on competition between Member 
States was neutral. 
The procedure for implementing measures for VAT was introduced as recently as 
200461, with implementing powers being conferred on the Council62. An earlier 
proposal to confer such powers on th e Commission, assisted by the VAT 
Committee63, was not accepted by the Council give n the use of qualified majority 
this would have involved64.  
For the first time, in 2005, the Council th en agreed implementing measures as 
provided for in the VAT Directive which ar e binding and directly applicable in all 
Member States65 These measures were derived from work undertaken by the VAT 
Committee, a consultative body made up of re presentatives of Member States with 
no legislative powers of its own. 
6.3. Evaluation of current legislation or policy 
6.3.1.  Positive aspects 
VAT is an important source of income fo r Member States and this explains the 
importance attached to the use of unanimity  in this field. Unanimity serves to 
preserve the fiscal sovereignty of each Memb er State, which is a prerequisite for any 
sovereign State.  
Subsidiarity dictates that le gislation on VAT is only propos ed if action at EU level is 
more effective than action taken at national,  regional or local level. Such action must 
not go beyond what is necessa ry to achieve the objective set. Those are principles 
safeguarded through the use of directives , which not only leave much for Member 
States to decide but also provide for opti ons and derogations.  
Being a transaction-based tax, VAT is infl uenced by elements of  civil legislation, 
property law and commercial law. The flexib ility offered by the current framework is 
essential to accommodate differences in legal traditions across Member States. 
                                                 
61 This change was introduced by Council Directive 2004/7/EC of 20 January 2004 amending Directive 
77/388/EEC concerning the common system of value added tax, as regards conferment of implementing 
powers and the procedure for adopting derogations (OJ L 27, 30.1.2004, p. 44). 
62 Where uniform conditions for implementing legally binding EU acts are needed, those acts, under 
Article 291(2) TFEU, confer implementing powers on the Commission or, in duly justified specific 
cases, on the Council. 
63 Proposal for a Council Directive amending Directive 77/388/EEC on the common system of Value 
Added Tax (the Value Added Tax Committee) (COM(97) 325). 
64 According to the rules on comitology governed by Council Decision 1999/468/EC of 28 June 1999 
laying down the procedures for the exercise of implementing powers conferred on the Commission 
(OJ L 184, 17.7.1999, p. 23), the committee assisting the Commission always needs to act by qualified majority. 
65 Regulation (EC) No 1777/2005 laying down implementing measures for Directive 77/388/EEC on the 
common system of value added tax (OJ L 288, 29.10.2005, p. 1). 
 
EN 54   EN 6.3.2.  Shortcomings 
6.3.2.1.  The need for unanimity 
The use of unanimity voting is still seen as an obstacle to real progress in improving 
the VAT system. The issues caused by the voting regime are only exacerbated with the accession of new Member States. 
This obstacle may be overcome, although ofte n at the price of the time it takes to 
reach a result, such as with the changes made to the place of supply of services
66 
where it took almost five years to reach agreement. In some cas es an agreement can 
only be reached at the price of including many options, as  illustrated by the invoicing 
rules67, which reduces the simplification benef its. In other cases the obstacle may, 
however, be so great that it stands in the way of progress,  as with the proposal for a 
one stop shop to make it easier to comply with tax obligations EU-wide, which is 
still pending in the Council68. 
The need for unanimity, not only in those areas  directly affecting the right of taxation 
of Member States but also beyond, increasi ngly stands in the way of reforming the 
tax system in depth and bringing it up-to- date. This is especially the case with 
implementing measures. 
6.3.2.2.  Flexibility causing complexity 
Member States have great discretion becau se of the legal instrument chosen (a 
directive) combined with the fact that any legislation in the field of taxation needs to 
be adopted by unanimity (stipulated by the Treaty). This may also explain why the 
rules adopted at EU level are not always  fully harmonised but leave a degree of 
flexibility. 
Flexibility, however, comes at  the expense of more uniform application of the 
common rules across the EU. This is exacerbated by the fact that each Member State is responsible for applying t hose rules within its territory. 
However, businesses with EU-wide activitie s are repeatedly calling for more uniform 
application with a view to lowering their costs and remaining competitive, and SMEs 
may even refrain from cross-border transa ctions because of the complexities. This 
problem can be overcome through common im plementing measures; the extent to 
which that particular procedure is used has been limited until now, but it is being used to facilitate the implementation of  the new rules on the place of supply of 
services.  
Given that unanimity by the Council is st ill required, even for the adoption of 
implementing measures, this remains a le ngthy procedure. Moreover, there is a 
considerable risk that only the most basi c measures may be agreed, leaving unsolved 
                                                
 
66 To be found in Directive 2008/8/EC. 
67 Council Directive 2010/45/EU  of 13 July 2010 amending Directive 2006/112/EC on the common 
system of value added tax as regards the rules on invoicing (OJ L 189, 22.7.2010, p. 1). 
68 Proposal for a Council Directive amending Directive 77/388/EEC with a view to simplifying value 
added tax obligations ( COM(2004) 728 ). 
 
EN 55   EN the most sensitive issues on which there is disagreement, which are often the most 
important. 
6.3.2.3.  Differences in implementation and application 
As Member States are res ponsible for the implementatio n and application of the 
common VAT rules, they are given much disc retion in this respect. When these rules 
change, Member States are, however, of ten left without much guidance on the 
implications of the legislation adopted. 
This leaves the potential for differences in application of th e rules across the EU 
resulting in increased costs for businesse s wanting to operate outside their own 
Member State and an obstacle to the singl e market. In certain situations, such 
differences also carry the risk of double taxation or non-taxation.  
Any difference there may be between Memb er States can be caused not only by the 
way in which EU VAT legislation is transposed into national law but also by differences of interpretation of  the factual situation. In th e absence of a mechanism to 
deal with such matters, th e only recourse for businesses is to go to court. 
6.4. Possible ways forward 
When attempting to identify possible solutions, it is necessary to keep in mind 
existing constraints. To imagine that cha nges to the main EU VAT legislation could 
be adopted by qualified majority must for ex ample be ruled out given that unanimity 
is prescribed by the Lisbon Treaty. Such a constraint does not, however, extend to 
implementing measures, where ther e could be scope for change. 
6.4.1.  What type of legislation: le gal instrument to consider 
VAT is far from harmonised and the use of di rectives is a contributing factor. To the 
extent that this affects the intern al market, it does present a problem. 
To better ensure that the rules govern ing VAT are harmonise d, thought could be 
given to using regulations instead. These offer the adva ntage of being binding in 
their entirety and directly app licable in all Member States. 
A regulation would not allow for options or de rogations as is currently the case and if 
the VAT Directive were to be transforme d into a regulation it would therefore 
require much effort and good will.  
If such a shift is to be justified, it may be that the use of regulations would have to be 
limited to those areas of VAT where the need for harmonised rules is evident, such as the place of taxation. Another example could be the refund procedure for EU non-
established businesses, where a Pan-European  IT system requires fully standardised 
rules to function properly. 
6.4.2.  Preparing legislation: th e role of stakeholders 
When drawing up a proposal, the Commissi on generally discusses it with Member 
States through a working group. The Commi ssion also engages in consultation with 
 
EN 56   EN the stakeholders69 and the public consultation makes up part of the impact 
assessment. 
To strengthen the dialogue, it could perhaps be  useful to put in place a permanent EU 
business group. Such a group could serve as a forum where, in discussions with 
stakeholders, problems with EU legislati on may be identified and draft proposals 
examined. The group could also be used to follow up on legislation once adopted.  
6.4.3.  Legislation to be adopted: ensuring the best outcome 
Before the Commission proposes any substan tive initiatives, an impact assessment is 
drafted70. In consultation with businesses, it looks at the advantages and 
disadvantages of the different policy opti ons and assesses thei r potential impact.  
Although, with a view to improving the quality  of EU legislation, each institution is 
committed to assessing the impact of its proposals or amendments71, the Council has 
yet to rise to the challenge. This may in pa rt be due to the conf identiality inherent in 
any negotiation.  
There is a need to strike a balance between safeguarding confidentiality and 
involving stakeholders so as to ensure that, prior to adoption, the C ouncil assesses 
the impact of any substantial changes it intends to make to proposals presented by 
the Commission. 
If no separate impact assessment is initia ted by the Council, it could instead be 
argued that the impact assessment presented by the Commission should be extended to cover the changes contemplated by th e Council. Time would obviously be needed 
if the Commission were to update its impact  assessment. To be able to do so, it 
would also need to consult business about  those changes. This would render the 
process more transparent. 
6.4.4.  Legislative powers: how to exercise them 
There are situations where rapid action to amend legislation is crucial. This is 
perhaps best illustrated by recent events wher e, in certain sectors, widespread fraud 
was detected for which quick solutions were needed. To cater for this in future, there may be a need to look for a way in which action could be taken rapidly (this topic is further dealt with in topic 7).  
On the other hand, to keep up with changes in the way business is conducted or in 
response to developments in technology, it is also important to update legislation without too much delay. It may for exampl e be that, in response to new products 
appearing, the list of electroni cally supplied services woul d need to be adapted at 
regular intervals. 
                                                
 
69 This is guided by the Commission communication Towards a reinforced culture of consultation and 
dialogue — General principles and minimum standards for consultation of interested parties by the 
Commission  (COM(2002) 704 ). 
70 http://ec.europa.eu/governa nce/impact/index_en.htm . 
71 In the context of the Inter-Institutional Agreemen t on Better Lawmaking (IIA), the three institutions — 
the European Parliament, the Council and the Commission — have agreed on an inter-institutional 
‘Common Approach to Impact Assessment (IA) ’. 
 
EN 57   EN Where quick solutions are needed, one res ponse could be to delegate powers to 
enable the Commission, as a general measure, to supplem ent or amend certain points 
of law, as provided for under the Lisbon Treaty72. The Council, as the legislator, 
must decide to give the Co mmission this responsibility.  
Any delegation, which must be for an ag reed term, must be clear, precise and 
detailed. It grants the Commission quasi-legislative powers to be exercised autonomously, although consultation of re presentatives of Member States is 
envisaged. These powers may be revoked if th e legislator so wishes. The legislator 
may also reserve the right of opposition, in which case the act is suspended to allow 
for objections. 
Since such delegation may only cover non-esse ntial elements, this  would only offer a 
partial solution. More profound changes would in any event need to be dealt with 
directly by the Council. 
6.4.5.  Common rules: ensuring uniform application 
To more efficiently overcome differences in application, thought  could perhaps be 
given to introducing a procedure by which some or all implementing measures would 
be taken by the Commission. When such  powers are conferred, the Commission is 
assisted in the exercise of its executiv e powers by a Committee (in this case, the 
VAT Committee) acting by qualified majority . This procedure would provide more 
safeguards not only to businesses but also to  Member States, as in the absence of 
implementing measures there is a legal v acuum which only the European Court of 
Justice can fill.  
In the area of excise, the Excise Committee, with a similar role to that of the VAT 
Committee, nevertheless has the ability to agree implementing measures in certain defined areas
73. This approach could also be followed for VAT. 
Consideration could also be given to  the Commission producing guidance after 
legislation is adopted in Council and before implementation. The absence of any legal standing for such explanations has been the main reason for not taking such 
action until now but there are nevertheless other arguments in favour of taking a 
more proactive approach. Guidance availa ble shortly after the adoption of new EU 
legal texts might be invaluable to taxabl e persons in understanding the changes. It 
would of course need to be made cl ear that such guidance was produced for 
information purposes only.  
6.4.6.  Changes in legislation: allowing for the necessary amendments 
Ensuring that the relevant legislation is put in place well in advance of the entry into 
force of any changes is the key to a smoot h transition. When it comes to directives 
which have to be implemented into national legislation by a certain date, this is the responsibility of each individual Member Stat e. Often, if not always, the changes will 
enter into force on that same date. 
                                                
 
72 Article 290 TFEU. 
73 See Directive 2008/118 (previousl y Directive 92/12), in Articles 13(2), 29 and 34, all referring to 
Article 43 where the link is to comitology. 
 
EN 58   EN If instead, Member States were obliged to take steps to implement new rules well in 
advance of their entry into force, this w ould leave more time for affected businesses 
to prepare for the changes. It should make it easier for traders to apply the new rules. Another option could be to link the entry in to force of new rule s to the adoption of 
common implementing measures, with a deadline laid down. 
 
EN 59   EN Topic 7.  
7. DEROGATIONS AND THE ABILITY TO REACT QUICKLY  
7.1. History and references 
The VAT Directive contains specific rules allowing for specific national measures to 
be taken in specific circumstances. Thes e measures are genera lly referred to as 
‘derogations’ and are based on Articles 395 and 396 of the VAT Directive.  
In addition, reference should also be made  to the so-called ‘notified’ derogation 
measures which, under Article 394 of the VAT Directive, Member States may retain 
if they were applicable at 1 January 1977, were notified to the Commission before 
1 January 1978 and fulfil certain criteria. 
Article 13 of the Second VAT Directive74 allowed Member States, in ‘exceptional 
circumstances’, to adopt measures to simp lify the charging of VAT or to prevent 
fraud. The Member State applying such a de rogating measure had to inform all the 
other Member States and the Commission. 
If there was an objection from the Commission or the other Member States within 
one month of notification, the Commissi on would, within three months, come 
forward with a suitable proposal. 
If the measure was purely national, to simp lify the charging of VAT or to prevent 
fraud, then the Council could agree the der ogation by qualified majority voting. If the 
measure affected the principles of VAT, and particularly the neutrality of the system 
in relation to other Member States, then unanimity was required. 
Conversely, Article 19 of the Second VAT  Directive required the Commission to 
‘restrict progressively or to abolish measures adopted by Member States in 
derogation from this [common VAT] syst em’. The aim was to align national VAT 
systems in the interests of the common, now single, market. 
Article 27 of the Sixth VAT Directive am ended the derogation procedure. Member 
States were no longer allowed to notify derogating meas ures and await any objection 
but instead had to notify the Commission, which would then come forward with a 
proposal. The procedure for adopting deroga tions was ‘tacit’ insofar as a Member 
State or the Commission explicitly had to ask that the matter be raised at the Council 
within a period of two months after the Commission circulated the request and the 
accompanying documentation to the other Member States. After that period, the derogation was deemed to have been adopted. 
                                                
 
74 Second Council Directive of 11 April 1967 on the harmonisation of legislation of Member States 
concerning turnover taxes. Structure and procedures for application of the common system of value 
added tax (OJ 71, 14.4.1967, p. 1303–1312 (DE, FR, IT, NL); English special edition: Series I 
Chapter 1967, p. 16). 
 
EN 60   EN Currently, the procedure requires the Commission to propose an implementing 
Decision and unanimous adoption by the C ouncil. This ‘explicit’ procedure has, 
however, only existed since 200475. 
With the VAT Directive, the relevant legi slation is now Article  395. This article 
stipulates that the Council, acting unanim ously on a proposal fr om the Commission, 
may authorise a Member State to introduce sp ecial measures in order to simplify the 
procedure for collecting VAT or to prevent certain forms of tax evasion or avoidance. To that end, a specific pr ocedure is set out in that Article. 
Article 396 of the VAT Directive, by anal ogy and according to the same procedure, 
allows a Member State to conclude an agreement with a non-EU country or an 
international body which contains der ogations from the VAT Directive. 
As certain derogations covering similar prob lems were granted to different Member 
States under different terms, the C ouncil adopted a Commission proposal to 
incorporate certain measures into the VAT Directive via the so-called 
‘Rationalisation’ Directive
76. As some of the special m easures had proved successful, 
particularly in the fight against tax avoi dance and evasion, the Commission wished to 
allow all Member States to apply them  without having to seek individual 
authorisations. At the same time, a number  of individual deroga tions were repealed. 
Under this Directive, a derogating measure does not need to be granted individually; 
only the VAT Committee has to be informed  of the national legislative measures. 
7.2. The purpose of the derogation procedure 
The purpose of the derogation procedure is to  adopt (more) quickly  certain specific 
measures that are needed in a specific nati onal context in order to fight tax evasion or 
avoidance or to simplify the procedure for collecting VAT. Generally, derogating 
measures are time-limited to allow for a re view after a period of time to evaluate 
whether the measure is still appropriate and needed. 
The Commission’s derogating proposals must  not be far-reaching measures that 
provide for a substantial change to the VAT  system and they must comply with the 
general principles of the EU  law such as proportionality, equal treatment and legal 
certainty. In particular, any measure requested by a Member State must be justified, 
targeted at the specific objective and proportio nate to the aims. It  must therefore be 
‘necessary for the specific objective whic h it pursues and have the least possible 
effect on the objectives and principles of the [VAT] Directive’77. Where the 
Commission is not satisfied that a reque st meets these criteria, it issues a 
Communication informing the Member States that it considers an implementing 
Decision inappropriate. 
                                                 
75 Council Directive 2004/7/EC of 20 January 2004 amending Directive 77/388/EEC concerning the 
common system of value added tax, as regards conferment of implementing powers and the procedure 
for adopting derogations (OJ L 27 of 30.1.2004, p. 44). 
76 Council Directive 2006/69/EC of 24 July 2006 amending Directive 77/388/EEC as regards certain 
measures to simplify the procedure for charging value added tax and to assist in countering tax evasion 
or avoidance, and repealing certain Decisions granting derogations (OJ L 221 of 12.8.2006, p. 9). 
77 Case C-177/99, Ampafrance SA, case C-324/82, Commission v Belgium. 
 
EN 61   EN Derogation measures have been applied in very different fields of the VAT system 
such as territoriality, deemed supplies, us e of the open market value, exemptions, 
cash accounting, recovery or refund of VAT, limitations to the right of deduction, 
persons liable for payment of the VAT  (reverse charge) and special schemes78. 
7.3. Evaluation of the current legislation 
7.3.1.  Positive aspects 
The main positive aspect is the flexibility  the derogation procedure offers to the 
Member States to deal with specific situ ations of tax evasion or avoidance and 
difficult VAT collection issues within a reasonably short pe riod through being 
authorised to implement a measure that is not covered by the VAT Directive. On an 
international level, it provides the same fl exibility for a Member State to conclude 
agreements with non-EU countries and to  fulfil its internat ional obligations. 
Businesses might benefit from simplific ation measures, such as cash accounting, 
which reduce burdens. They can also benef it from the removal of distortions of 
competition when fraudsters are prevented from gaining a market advantage through 
not paying the right amount of tax. 
7.3.2.  Shortcomings 
Many of the derogations e ither have a legal base under Article 394 of the VAT 
Directive (by virtue of Member States having such a measure in place on 1 January 
1977 and having notified the Commission of such measures before 1 January 1978) 
or were tacitly approved under the previo us derogation procedure, which raises 
questions of transparency a nd equal treatment of Member States. Similar derogations 
would not necessarily be granted nowaday s to other Member States, creating an 
unfair system relating in part to the time of accession of Member States. As it is not 
possible to revert back after a ‘standstill’  derogation is repealed, Member States 
might be tempted to ‘freeze’ the current le gal situation even where they now make 
little or no use of the derogating measure. 
Any derogating measure, by its very natu re, affects the common VAT system and, 
subsequently, to varying degrees, the single market. 
As these derogating measures are genera lly applied on a national basis, taxable 
persons operating in different Me mber States have to deal with different sets of rules. 
Even similar derogations in different Me mber States may differ as regards their 
scope or conditions or the obligations  of the taxable persons concerned.  
The temporary nature of the derogating measur e affects the overall stability of the tax 
system and could create a feeling of lack of legal certainty for taxable persons who 
                                                 
78 As the number of derogations changes constantly, see the following webpage for an overview of 
existing derogations: http://ec.europa.eu/taxation_customs/taxation/vat/key_documents/ 
table_derogations/index_en.htm. As this list is generally updated once a year (and currently reflects the situation on 31 December 2009), reference is, in a ddition, made to the following webpage where this 
year’s derogations (amongs t other legislation) are published:  http://ec.europa.eu/taxation_customs 
/common/legislation/legislation/taxation/index_en.htm. 
 
EN 62   EN first have to adjust to a new system and th en have to revert back to the previous 
system later. Compliance costs can  subsequently be considerable. 
The number of derogation requests rema ins high (and is even increasing), and 
derogations are more and more requested in  cases where the issue at stake is not 
really specific to one or two Member St ates and may therefore be perceived as a 
means to circumvent ongoing (but bloc ked) negotiations in the Council by 
introducing a derogation request within th e field of the Commission proposal. This 
could even endanger the negotiations and, u ltimately, call into question the need to 
adopt the proposal for a Di rective which nonetheless o ffers additional guarantees 
such as common and equal rules for Member  States and businesses and the adoption 
of which gives a voice to the European Parliament and the Economic and Social 
Committee. 
Derogating measures can bring a short-term solution but could have  an effect on the 
overall VAT system in the longer run. For example the (inc reased) use of the 
domestic reverse charge mechanism could be  a short-term solution to stop carousel 
and missing trader fraud in a particular sector and in a particular  Member State but 
could also lead in the medium  term to a shift in fraud to other sectors, to the retail 
trade or to other Member States; and its  overall effectiveness could therefore be 
questioned. Such continual derogation request s may therefore be seen as unsuitable, 
endless and unsustainable short-term solu tions when more fundamental changes to 
the Directive are needed. 
The impact of the national measures is not assessed in a way which is comparable to 
other EU decisions. Derogation requests ar e not subject to an impact assessment by 
the Member States and often have no ex pos t evaluation. For instan ce, the effect of a 
reverse charge mechanism in one Member State on VAT revenues in another Member State is not subject to any impact assessment, as would be normal for other 
Commission proposals. 
Although usually short in comparison with th e adoption of a Directive, the period 
needed for the adoption of a Council Decision is typically eight months, which is still 
too long for Member States needing a measur e implemented quickly to tackle fraud. 
Recent experience with VAT fraud in the em ission trading sector, in particular, has 
drawn attention to that major constraint . The Article 395 procedure has indeed 
proven not to be sufficiently flexible and efficient in case of sudden major fraud 
attacks requiring an immediate national legislative reaction.  Because of the 
considerable impact on VAT receipts, Member  States found themselves in a position 
where they had to take unilateral measures , whilst being aware that these measures 
were not in line with  the VAT Directive. 
7.4. Possible ways forward 
A comprehensive evaluation of the curren t individual derogati ons could pave the 
way for common rules to be adopted in order to provide, first, the same options to all 
Member States and, second, comparable condi tions of application to businesses (e.g. 
similar to the aim of the Rationalisation Directive, or to the situation as regards cash accounting). 
 
EN 63   EN In case of a duly justified re quest demonstrating the existe nce of serious fraud risks 
in a specific Member State which could lead  to irreparable damage and which require 
immediate action not in line with the VAT Directive, a possible way forward would 
be to enable the Commission to authorise th at Member State, within a few days, to 
take the necessary measures.  
Such an authorisation would be limited in  time (e.g. six months) and could involve 
the Member States through the VAT Committee either immediately or at a later stage 
in order to extend the measures to, for in stance, one year. In the mean time, the 
request would follow the normal procedure referred to in Article 395 of the VAT 
Directive. 
The legal process for this urgent and prot ective authorisation clearly needs to be 
further investigated. Launching this rethin k seems, however, inevitable after the 
recent VAT fraud experiences. 
 
EN 64   EN Topic 8.  
8. VAT  RATES  
8.1. Current legal framework 
The basic rules concerning VAT rates set out in the VAT Directive are simple. 
Articles 96 and 97 require Member States to  apply a standard ra te of at least 15  %. In 
addition, Articles 98 and 99 stipulate that Me mber States may opt to apply one or 
two reduced rates of not less than 5  % to a restricted list  of goods and services 
eligible for a reduced VAT rate (Annex III to the VAT Directive). In this respect, Member States remain free to apply a reduced  rate to a whole category or to restrict 
its application to (even a very small) part of it. 
However, this simple structure, which applies to all Member States, is complicated 
by a multitude of derogations (zero rates, super-reduced rates
79, individual reduced 
rates, parking rates80, etc) laid down in Articles 102 to 129.  
Some of these derogations apply until th e entry into force of the adoption of 
definitive arrangements based on taxation in the Member State of origin. However, 
not all Member States can take advantage of them. 
Other temporary derogations provided to i ndividual Member States result from the 
accession negotiations and contain a fixed end date.  
8.2. Historical overview 
The current VAT rates structure is still based on the principles of the Directive81 
adopted by the Council in 1992, as part of  the package of m easures considered 
necessary for the abolition of controls at tax frontiers and the creation of the internal 
market. 
Since then, the standard rate and reduced rates have been dealt with separately. 
8.2.1.  STANDARD RATE 
The level of the standard rate has to be decided by the Council at  regular intervals. 
Since 1992, the minimum standard rate of 15  % has been extended four times and 
applies until 31 December 2010. Each time, the Council has renewed its political 
statement for the Council minutes menti oning Member States’ efforts to avoid 
widening the 10 percentage point  span between the lowest and highest rates applied. 
This demonstrates the continued concerns  of Member States about distortions 
between high and low rate countries and the possible budgetary effects of different 
levels of VAT rates.  
                                                 
79 The super-reduced rate is any rate less than 5  % but higher than 0  %. 
80 A parking rate is a rate applied to goods and services not included in Annex III to which certain 
Member States applied reduced, super re duced or zero rates at 1 January 1991. 
81 Directive 92/77/EEC of 19 October 1992 supplementing the common system of VAT and amending 
Directive 77/388/EEC (approximation of VAT rates) (OJ L 316 , 31.10.1992, p. 1). 
 
EN 65   EN 8.2.2.  REDUCED RATES 
8.2.2.1.  The labour-intensive services experiment 
As a follow up to the conclusions of th e European Council of 11 and 12 December 
1998 on combating unemployment, the Commission presented a proposal82 to enable 
those Member States which so desired to experiment with the operation and impact, 
in terms of job crea tion, of a reduction in  the VAT rates on labour -intensive services 
which were not exposed to  cross-border competition. 
The provisions allowing for this experi ment, adopted in 1999, were extended four 
times mainly to ensure continuity and certa inty for the sectors that benefitted from 
the reduced rate, but also to include new Me mber States wishing to participate in the 
experiment while awaiting more general pr oposals concerning reduced rates of VAT. 
8.2.2.2.  The need for an overall assessment of the scope of reduced rates 
In February 2006, the European Council aske d the Commission to present an overall 
assessment report on the impact of reduced  VAT rates in terms of job creation, 
economic growth and the proper functioning of  the internal market, on the basis of a 
study carried out by an independent economic think-tank. 
The study, awarded to Copenhagen Economics83, revealed that a single VAT rate is 
by far the best policy choice from a purely economic point of view. A move towards 
more uniform rates thus has considerable ad vantages as it would reduce distortions in 
the functioning of the inte rnal market and simplify th e rules, and thus reduce 
compliance costs for traders. 
However, there may be specific economic be nefits from operating a reduced rate in 
carefully targeted sectors using many low- skilled workers financed, for example, by 
higher VAT rates elsewhere. It can crea te permanent employment gains, but the 
overall gains are likely to be minor. Lowe r VAT rates can result in economic growth 
if they can induce consumers to spend less time on do-it-yourself activities and more time on their ordinary job or hobbies. For ( certain) locally supplie d services such a 
shift could take place.  
In addition, the study makes a strong case th at reduced VAT rate s create significant 
compliance costs for business and tax author ities, partly at least because of the 
interpretations which often have to be made in borderline cases. 
The study also stresses that, often, other al ternative policy tools, such as direct 
subsidies for particular activities, might be more efficient than reduced VAT to 
achieve environmental, social, cultural, economic, etc., policy objectives with fewer 
costs. These subsidy schemes may be bett er targeted, better designed to avoid 
                                                
 
82 COM(1999) 62 final (OJ C 102, 13.4.1999, p. 10). 
83 Study by Copenhagen Economics ApS, Nyropsgade 13/1, DK-1602 Copenhagen (2007) on the reduced 
rates of VAT applied to goods and services in the EU Member States, available on the Commission’s website at the following address:  
 http://ec.europa.eu/taxation_customs/taxation/gen_info/economic_analysis/economic_studies/index_en.
htm. 
 
EN 66   EN negative spill over effects at EU level and, generally speaking, may be more 
transparent.  
8.2.2.3.  The agreement reached on reduced rates in 2009 
The Council considered that the debate on the reduced VAT rates had already run 
since the presentation of Commission’s 2003 proposal and it was time to close it. 
After long and thorough discus sion, the debate in the C ouncil on the overall system 
of reduced VAT rates was thus concluded with the unanimous political agreement of 10 March 2009
84. 
This political agreement was formalised  in Directive 2009/47/EC of 5 May 2009, 
which considerably restrained the Commi ssion’s proposal. It mainly allows — on a 
permanent basis — the optional use of re duced rates of VAT for certain labour-
intensive local services, in cluding restaurant services. 
8.3. The way forward 
The average level of rates has tended  to increase since 2000. The increase was 
marginal in 2000-2002 but then, after a period of constancy, there was a sharp rise in 
2009-2010 as some Member States adopted dr astic revenue-raising measures during 
the crisis. The increase is visible in the st andard rate and to a lesser extent in the 
reduced rate. 
This phenomenon prompts the following observations:  
• If the upward trend in the standard rate in the Member States were to continue, the 
question arises whether the minimum level of 15  % laid down in the VAT 
Directive should not be increased  in line with that trend.  
• The ongoing increase in the standard VAT  rate is an incentive for certain 
economic sectors to push for a reduced ra te. Even now a number of sectors are 
making repeated requests for inclusion in Annex III on the grounds that they are also essential goods or services, like health  prevention, children welfare, security 
clothes and services, etc.  
• Article 99 of the VAT Directive sets out th e principle that reduced rates are fixed 
at a level which is high enough to ensure that taxable persons, in general, do not 
end up in a constant repayment situation when offsetting their deductible VAT (with expenses at the standard rate) ag ainst their VAT due (at a reduced rate). 
Increasing the minimum level of the reduced rate, set at 5
 % in the VAT Directive, 
might be a way to uphold this principle.  
The guiding principles of any potenti al review of VAT rates should be 
rationalisation, simplification and consistency. 
A list of goods and services for which a re duced rate would be compulsory in all 
Member States would be a good way of upholding these principles. 
                                                 
84 Council (Economic and Financial Affairs) political agreement of 10 March 2009 on reduced VAT rates: 
http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/106576.pdf . 
 
EN 67   EN But even a short and optional list of redu ced rates would be a major step forward 
compared with the current situation. 
Simplification and rationalisation woul d specifically require clearer EU-wide 
definitions of the categories in the list, whet her it is compulsory or optional. If it 
were optional, the option should cover th e whole category, not just parts of it. 
Consistency would mean that comparable pr oducts are subject to the same VAT rate 
and the way the product is ‘delivered’, sp ecifically the use of  modern technology, 
should not affect the VAT rate applied to it. This is in pa rticular the case for cultural 
products and services which can be distributed onlin e and offline (through physical 
support). Currently Member States may appl y a reduced VAT rate to certain cultural 
products or services but have to apply th e standard VAT rate to competing online 
services, such as books/e-books  or film downloads/cinema tickets, even if they are 
based on the same cultural content and have  the same social purposes. The ‘Digital 
Agenda for Europe’ stipulates  that the challenges of convergence between the online 
and the physical environment should be addressed in al l reviews of public policy, 
including tax matters, to stimulate the wide spread development and utilisation of the 
Internet and relate d goods and services.85 
As regards the goods and services to be re tained on the (compulso ry or alternatively 
short and optional) list of reduced rates, it should be pointed out that the use of 
reduced rates is often advo cated for health, cultural and environmental reasons. 
From a health perspective, access, availabil ity and acceptability of food stuffs largely 
determine the diets of European Citi zens. Given the impact of unhealthy 
consumption patterns on public health an d Member States' budgets , taxation could be 
used to pro-actively promote healthy diets. 
Some cultural goods and services benefit fr om a reduced VAT rate at the discretion 
of Member States. These are goods and serv ices which from a political and social 
point of view have special characteristics, notably the support of cultural diversity. It 
is in Europe's interest – and in line with Europe 2020 – to promote cultural content 
and access to cultural content which will raise the average education level. Tax 
instruments have a clear impact  on these policies' objectives. 
There are also strong arguments that integr ating environmental aspects into taxation 
can encourage consumers and producers to switch to more environmentally-
favourable products by adjusting price stru ctures. The current VAT system does not 
recognise this phenomenon. Broadening th e objectives of VAT by linking it to 
sustainable consumption would be in line  with the recent Commission initiatives 
aiming at achieving a resource efficient economy which is one of the key flagship initiatives of the EU 2020 Strategy. Cha nging price structure can help to shift 
demand towards less polluting and more res ource- and energy-efficient products. It 
will also encourage further research into  the development and innovation of more 
environmentally-favourable goods.  
                                                
 
85 The Digital Agenda for Europe is one of the Europe 2020 flagships, COM(2010)245. 
 
EN 68   EN Market based instruments (including taxes)  can be one of the most effective (and 
efficient) policy tools to change behavi our, in place of or complementing direct 
regulation and many examples  exist across the world. 
In the short term, providing traders with a ppropriate and reliable information through 
an online database on the rates applicable within the EU could be envisaged with a 
view to facilitating compliance for those bus inesses wanting to take full advantage of 
the single market. 
As the level and structure of VAT rates di ffer considerably between Member States, 
businesses which carry out supplies of goods or services taxable in Member States 
where they are not established have to look for reliable information on the rates 
applicable. The process of information-gath ering might be particularly expensive and 
burdensome, especially for SMEs.  
Setting up such a database would require a commitment from the Member States to 
provide official, accurate and detailed info rmation on the VAT rates to be applied on 
their territory at frequent intervals. Indeed, taking into account the Member States’ discretion in setting VAT rates, only they  can provide the detailed information 
required and ensure it is up to date. The Commission could, however, lend technical 
and practical support.  
 
EN 69   EN Topic 9.  
9. THE COMMISSION ACTION PROGRAMME FOR REDUCING ADMINISTRATIVE BURDENS 
AND STREAMLINING VAT  OBLIGATIONS  
9.1. Introduction 
The regulatory environment in which businesses operate influences their 
competitiveness and their ability to grow and create jobs. The Commission is committed to developing a better regulatory environment for businesses; one that is simple, understandable, effective and enforceable. 
Amongst the primary objectives of the ‘Be tter Regulation’ agenda is the aim to 
reduce administrative burdens by 25
 % by 2012. Thirteen priority areas were 
selected, including VAT legislation.  
To help in this process, on 31 Augus t 2007 the Commission se t up a ‘High Level 
Group of Independent Stakeholders’ to  advise on carrying out the Action 
Programme, with initially a three-year mandate, now extended until 31 December 2012. On 13 September 2007, Edmund Stoiber, the former Minister-President of 
Bavaria, was appointed as Chairman of the group. 
9.2. The Commission’s Communication on an  action programme for reducing 
administrative burdens 
The work followed analysis by a consor tium, a group of external contractors 
undertaking studies for the Co mmission, and was carried out in three distinct stages. 
These are detailed below along with the corresponding links. 
(1) Mapping of information obligations (IOs) stemming directly from VAT 
legislation (Directive 20 06/112/EC) — Tax Law (VAT)
86  
(2) Measuring the cost of compliance with information obligations — Tax Law 
(VAT)87  
(3) Reduction recommendations — Tax Law (VAT)88  
A Communication was i ssued on 22 October 2009 along with an Annex 
(COM(2009) 544 final Annex) detailing the results so far on the reduction of administrative burdens by sector and provi ding recommendations for future action. 
The details of the VAT recommendations  can be found on pages 81 to 91 of the 
Annex and, as mentioned in the Green Pa per, relate to measures 6 to 15. 
Recommendations 1 to 5 and 16 have either been adopted by the Council or proposed by the Commission. 
                                                
 
86 http://wcmcom-ec-europa-eu-wip.wcmvue.cec.eu.int:8080/enterprise/policies/better-
regulation/administrative-burdens/priority-areas/tax/index_en.htm 
87 http://ec.europa.eu/enterprise/policies/be tter-regulation/files/abst09_taxlaw_en.pdf 
88 http://ec.europa.eu/enterprise/policies/better-re gulation/documents/ab_studies_2009_en.htm (click on 
Tax Law in the list under ‘2. Reduction Recommendations’) 
 
EN 70   EN Recommendations 6 to 15 in the Anne x to the Communication (COM(2009) 544 
final) are reproduced below. 
Abolishing annual summary VAT returns (Recommendation 6) 
The VAT Directive allows Member States to  require that taxabl e persons submit an 
annual summary VAT return, containing the information provided in the periodic 
VAT returns and where necessary adjusting it. However, most of the information 
required on these returns is  redundant or could be be tter obtained in other ways. 
Some Member States do not require them . Abolishing annual summary VAT returns 
could be part of the options under review.  
Businesses would no longer have to subm it summary annual returns. They would 
make corrections or amendments in the periodic returns, as practiced in those 
Member States which do not re quire an annual summary return. 
Reducing the frequency of the peri odic VAT return (Recommendation 7) 
Taxable persons are required to submit a periodic VAT return (Article 250 of the 
VAT Directive) in which they set out all the information needed to calculate the 
VAT chargeable and the deductions to be made. The most common frequencies used 
by Member States are monthly and quart erly. Frequencies could be harmonised, 
revised downwards and based on turnover th resholds. The frequency could be annual 
for enterprises with a turnover of up to EUR 500  000, quarterly for those with a 
turnover of up to EUR 2.5 million and monthly for those above that threshold. Businesses would, however, be allowed to  opt for more frequent submission. 
Changing the frequency could reduce the number of VAT returns. Businesses would 
therefore spend less on consolidating VAT accounts, compiling the return and checking or correcting mistakes. 
Simplifying the proof required for the VAT export exemption 
(Recommendation 8) 
Taxable persons applying the VAT export ex emption are required to prove to their 
tax authorities that they ha ve dispatched the goods outsi de the European Union. The 
burden of providing this proof depends on the number and type of documents 
required. The export document, drawn up fo r customs purposes, could normally be 
regarded as sufficient proof of exporta tion. It could be sent by the customs 
authorities to the VAT authorities via th e electronic information exchange system. 
Paperwork related to the application for a VAT export exemption would significantly 
be reduced. 
Abolishing the intra-EU acquisitions listing (Recommendation 9) 
The VAT Directive allows Member States to require that taxable persons submit a 
list of acquisitions of goods or transactions from sellers established in other Member 
States. However, tax authorities could obtai n the information provided by this listing 
from other sources, such as the intra-EU  supplies listing or the VAT Information 
Exchange System.  
 
EN 71   EN Abolishing ‘nil’ intra-EU sales listings (Recommendation 10) 
The VAT Directive requires taxable persons to file lists of all supplies made to 
taxable persons in other Member States. Member States may require the list to be submitted even for periods in which no intra-EU supplies took place. Businesses perceive this as irritating. 
Businesses could be exempted from intra-EU  supplies listings for periods in which 
they made no intra-EU supplies. Tax authorit ies could deduce the f act that there were 
no supplies from the periodic VAT return. 
Introducing a real-time VAT coll ection system (Recommendation 11) 
The current system of VAT collection is  invoice- (not sett lement-) based and 
requires businesses to use significant resources to comply with their VAT obligations. VAT payment and refund would be changed to the point at which payment is settled in real  time through the banking system. This would automate 
most of the things that businesses curre ntly have to do to comply with VAT 
legislation. 
All taxable persons would be affected by th is measure, notably with regard to the 
submission of VAT returns and listings  and the bookkeeping and consolidation 
activities required to calcu late the VAT amount due. 
Facilitating use of the power of attorney to submit VAT returns and listings 
(Recommendation 12) 
Use of the power of attorney to submit VAT returns and listings is currently 
restricted, limiting the way businesses use extern al tax consultants. In so far as these 
limitations stem from national measures implementing EU law, the Commission 
could consider a soft-law approach to disse minate best practice in this area and have 
more Member States opting for a lighter implementation approach. 
SMEs, which are most likely to make exte nsive use of external VAT consultants, 
would benefit most from this measure. Th ey could grant limited powers of attorney. 
They could also appoint several persons sepa rately as authorised to sign VAT returns 
and sales listings. 
Increasing the use of e-government  solutions (Recommendation 13) 
The VAT Directive allows and partly provi des for the various VAT returns and lists 
to be submitted in electronic form to tax authorities. Uptake of this option, however, 
varies between Member States and is low in some. Identifying best practice in the 
Member States and encouraging others to  adopt it would increase the use of e-
government solutions. 
More businesses would benefit from the cost savings made by switching from a 
paper to electronic communicat ion with tax authorities. 
Incorporating VAT registration into general business registration 
(Recommendation 14) 
 
EN 72   EN Taxable persons are obliged to inform the tax authorities when they begin their 
activity as taxable persons. Some Member  States have incorporated this VAT 
registration into the general business re gistration. The Commission could promote 
this practice in more Member States by disseminating the insights gained so far. 
Enterprises would no longer have to communi cate the same information to different 
authorities, which creates unnecessary cost and irritation. In particular, it would 
make it easier to set up a new business. 
Harmonising measures to combat VAT fraud in line with best practice 
(Recommendation 15) 
The VAT Directive allows Member States  to impose such obligations on taxable 
persons as are deemed necessary to ensu re the correct collection of VAT and to 
prevent tax evasion. These obligations ar e the source of major differences for 
businesses engaged in intra-EU trade, so harmonising them could be envisaged. 
All business would profit from more efficient, less burdensome anti-fraud 
obligations. Businesses conducting intra-EU trade would also benefit from having 
the same obligations in all Member States in which they operate. 
9.3. Additional recommendations sugges ted by the High Level Group  
In addition, the High Level Group of indepe ndent stakeholders recently published on 
22 October 2010 an opinion on furthe r VAT reduction recommendations89. The 
opinion suggests two further recommendations in addition to those mentioned above:  
‘(42) The VAT package entered into force on 1 January 2010. Even though the 
package has simplified cross-border Busine ss to Business (B2B) services to some 
extent, it also leads to new and unnece ssary administrative burdens. Sellers and 
buyers have to report cross border sales a nd acquisition already in  the same period 
the service was supplied. This obligation is  impossible to meet for business as no 
information is available for booking at that  time at the purchaser’s end of the 
transaction and the company providing the service cannot access information on the 
services provided at such short notice. The HLG urges the Commission to initiate changes as the present rules cannot be appl ied. The Commission is prepared to look 
at the chargeability to tax for cross borde r supplies of services in the forthcoming 
Green Paper. 
Furthermore, stakeholders underline the hi gh level of compliance cost arising from 
the package. One example is that the VAT package has increased the number of 
businesses obliged to submit periodic VAT  statements on top of their normal VAT 
returns. Business are required to submit pe riodic VAT statements from the first euro 
of supply of services B2B cross borde r and the periodic st atement requires 
specification of the sale for each buyer, id entified by VAT registration number. This 
is an increased reporting obligation and in crease of the admini strative burdens for 
business. The HLG urges the Commission to investigate the possibility of 
                                                
 
89 The web page of the High Level Group of Independent Stakeholders on Administrative Burdens - 
http://ec.europa.eu/enterprise/policies/better-regulation/administrative-burdens/high-level-
group/index_en.htm 
 
EN 73   EN introducing a threshold for bus iness with minor amounts of  cross border turnover or 
other means of simplification to avoid ex cessive information obligations that may 
otherwise discourage small business fr om starting to trade cross border.’ 
9.4. General comment on the recommendations 
It is important to point out that these recommendations resu lt from suggestions tabled 
by stakeholders and the advice given by the High Level Group of Independent 
Stakeholders on Administrative Burdens. Other opinions from the High Level Group 
can be found on their website90. 
These recommendations are still under consideration by the Commission, meaning 
that their feasibility and appropriateness are being reviewed. In particular, they need 
to be balanced with the tax authorities’ duty to ensure proper collection of VAT and 
with the need to audit taxpayers efficiently. 
9.5. Other obligations imposed by Member States  (Article 273 of the VAT Directive) 
The consortium’s reduction recommendati ons and the opinion of the High Level 
Group concentrate on obligations in the VAT Directive that specify the nature of 
information to be provided, for instance  the VAT declaration or recapitulative 
statement.  
However, in addition, the c onsortium identified other instances in which the VAT 
Directive does not specify the information obligation (IO) but allows Member States 
to do so: so-called ‘implicit IOs’. A good example is Article 273, which allows 
Member States to impose other obligations to ensure correct collection of VAT and 
to prevent evasion, without specifyi ng what those obligations might be. 
9.5.1.  Work of the consortium 
The information on implicit VAT informati on obligations can be found at the address 
below91 and was provided by the same consor tium that mapped the information 
obligations specified in the Directive. 
The consortium concentrated on Article 273, sinc e that is the legal base for most of 
the additional obligations that in crease burdens on business. It made 
recommendations on the additi onal obligations and measured the benefit of reducing 
the resulting administrative burden.  
Its main findings can be summarised as follows: Transposition of the Directive resulted in  a great variety of national IOs across the 
27 Member States. This is specifically th e case for the implicit IOs resulting from 
Article 273. Furthermore, in th e latter case the IOs often apply in very few Member 
States. 
                                                
 
90 Idem 
91 http://ec.europa.eu/enterprise/policies/better-regulation/files/abst09_taxlaw_implicit.zip. 
 
EN 74   EN The total administrative cost resulting from the selected implicit IOs is put at 
approximately EUR 1  405 million, spread over 392 national IOs. 
The number of IOs under Article 273 ha s been assessed at 208. The cost of 
complying with these obligations  is calculated at EUR 682 million. 
Extracts from the recommendations on ob ligations under Articl e 273, along with the 
burden reduction potential, are reproduced  below. They are classed according to: 
o Limited application — only one or tw o Member States apply the obligation 
o Reporting obligations o Drafting obligations o Storage for inspection obligations o Notification obligations o Record-keeping obligations o Other types of obligations 
9.5.2.  Recommendations reproduced from the consortium’s report 
Only the main recommendation for each clas s of obligation is reproduced. A full list 
of recommendations can be found in the consortium’s report. 
Information obligations with  a very low transposition variable — only one or 
two Member States impose the obligation (Report section 3.4.2) 
During this study, national VAT  experts have identified certain IOs implemented in 
only one or a few Member States which create an extremely high burden for the 
national taxpayers or a certain target group. 
In general, the fact that IOs stemming fr om Article 273 are only implemented in one 
or a few Member States, raises questions re garding the necessity of those IOs for the 
fight against fraud. 
Therefore we recommend to abolish all of these types of IOs re sulting in a reduction 
of administrative burden EUR 23
 700  139. 
Reporting obligations (section 3.4.3) 
Obligation to report transa ctions with local registered VAT taxable persons 
(Recommendation 101) 
Current reduction ideas resu lting from this study can be summarised as follows: 
•Abolishment of the IO; 
•Abolishment of the obligation to file ‘nil’ listings; 
 
EN 75   EN •Abolishment of the obligation to send the relevant invoices to the VAT authorities; 
•Encourage the use of e Government solu tions by implementing user -friendly, 
uniform and easy accessible applications; 
•Introduction of a specific reporting threshold per supplier/customer. 
The point of view of the VAT experts in th is respect is however that this IO should 
be abolished. This is substantiated by the recent abolition of this  obligation in Italy. 
Research showed that the tax authorities make only little use of  these listings and 
even have other means at their disposal to obtain the same information. Hence, the IO appears not to be essential from a VAT  audit point of view, whereas it generates 
significant costs for the VAT taxpayers. Th erefore it could be considered to 
introduce a provision in Counc il Directive 2006/112/EC wh ereby Member States are 
prohibited to impose measures in the framework of this IO. 
Costs caused by this IO, assessed at EUR 279
 566  576 will be reduced to zero. 
Drafting obligations (Report section 3.4.4)  
Obligation to draft and issue a document  when the goods are dispatched in the 
framework of a sale on trial or a sa le on consignment (Recommendation 103) 
The obligation to draft and issue a document when the goods are dispatched in the 
framework of a sale on trial or a sale on consignment, in addition to a regular 
invoice, is experienced  highly irritating by businesses. Hence, both the content to be 
mentioned and the data to b e collected with respect to these documents are in general quite similar. 
Besides as means of control on the VAT tr eatment applied (account for VAT due and 
deduct VAT), tax authorities use this document in order to follow the flow of goods. 
In order to reduce the administrative burden re sulting from this IO the abolishment of 
this IO could be considered. 
Costs caused by this IO, assessed at EUR 2
 953  870 could be reduced to zero. 
Storage for inspection obligations (Report section 3.4.5) 
Obligation to store the co nfirmation that a credit note was received by the 
addressee (Recommendation 102) 
The obligation to store the confirmation that a credit note was received by the 
addressee in order to subs tantiate the VAT adjustments, is considered highly 
irritating from a business point of view. More over, this IO creates  a financial burden 
since the adjustments of VAT paid can only be carried out once the confirmation 
receipt has been received. 
Consequently, the burdens caused by this IO are disproportionate to its purpose, i.e. 
creating an audit trail for VAT adjustment s. The VAT adjustments can sufficiently 
be substantiated by means of the mere exis tence and storage of a credit note. This 
viewpoint is founded by the fact that this approach is app lied in most Member States. 
Based on these considerations, this IO should be abolished. 
 
EN 76   EN Costs caused by this IO, assessed at EUR 3  059  990 will be reduced to zero. 
Notification obligations (Report section 3.4.6) 
Obligation to notify the t ax authorities in case of change of the VAT return 
regime 
Even though the notification of the change in the VAT return regime in principle 
does not have to be submitted on a regular basi s, it is often regarded as burdensome, 
especially where the change in VAT return regime is compulsory. Hence, in the latter case, the VAT authorities should be able to  extract the necessary  information from 
their system. In these cas es, the IO is excessive and should be abolished. 
When the VAT taxpayer can opt for a change in the VAT return regime, the 
notification should be performed by means of a written letter (s tandard or freely 
chosen format). In this respect, it could be considered to harmonise on an EU-level 
the maximum requirements which should appe ar on the document. More specifically, 
the name, address and VAT identification num ber and a detailed justification of the 
option should suffice. Furthermore the e -fil ing of this request should be possible. 
Costs caused by this IO, assessed at EUR 2
 501  484 could be reduced with 60  %. 
Keeping registers obligat ion (Report section 3.4.7) 
Obligation to keep a record of capital goods (Recommendation 103) 
In order to create an audit tr ail for the capital goods of a business during the term of 
revision, some Member States impose an obligation on VAT taxable persons to keep 
a record of capital goods. From a VAT expe rt point of view, this IO can be 
substantiated by its purpose, and in practice is experienced as a part of the accounting 
procedure. However, given the significan t differences between the information 
requirements in national VAT law, it s hould be considered to determine the 
maximum information requirements to be reported in the record in the Council 
Directive. 
Taking into account the purpose of the r ecord, the following maximum requirements 
could be imposed: 
•a specification of the capital good; 
•a reference to the purchase invoice; 
•the date on which the right of deducti on has arisen (e.g. date of purchase); 
•amount of VAT paid and deducted; 
•the ratio of VAT deduction (if applicable). 
Costs caused by this IO, assessed at EUR 214  060  406 could be reduced with 20  %. 
 
EN 77   EN Other Information Obligations stemmi ng from Article 273 Council Directive 
2006/112/EC (Report section 3.4.8) 
Obligation to provide information to th e tax authorities upon their request 
(Recommendation 101) 
Currently, the national VAT law of most Memb er States contains a general IO which 
requires taxpayers to provide information to the tax authorities upon their request. There are no specifications regarding the kind of information, the time frame in 
which the information should be provided, etc.  This lack of spec ification creates an 
irritation factor and administrative burden for taxpayers. 
Following reduction proposals were a ssessed by the national VAT experts: 
•A clear indication in the Di rective of a minimum time frame which the taxpayer is 
granted in order to gather  the information requested; 
•A clear indication in the Directive of the type of information that the VAT 
authorities are allowed to request; 
•The implementation of an obligation for the tax authorities to provide a written 
request that provides a clear and detailed description of  the information requested; 
•The implementation of the possibility for the taxable person to file a request to 
extend the period granted to gather the requested information. 
Costs caused by this IO, assessed at EUR 64
 241  071 could be reduced with 30  %. 
9.5.3.  General comment on these recommendations 
The comment made under point 9.4 ab out the need to balance these 
recommendations stemming from stakeholders  with the needs of tax administrations 
for carrying out their tasks properly is  equally valid for this second set of 
recommendations.  
9.6. An alternative way forward: a maximum list of standardised obligations in 
Article 273 
The work carried out by the consortium on Article 273 IOs has highlighted the great 
variation between Member States and, as a consequence, the difficulty and 
complexity of complying with VAT law, especially for businesses trading in many Member States. 
Efforts could be made to follow up the individual recommendations. An alternative approach, which would deal with these recommendations in a more 
systematic way, could be to define a maximu m list of standardised obligations in the 
VAT Directive. Member States would be free to impose any of these obligations. 
Such an approach would provide businesse s with a degree of certainty, since they 
would know what VAT obligations could be imposed on them.  
 
EN 78   EN Only in very specific and targeted cases wh ere Member States require extra reporting 
obligations to combat tax evasion or avoida nce would Member States need to seek a 
derogation under Article 395 of the Directive.  In their request, Me mber States would 
need to state the reasons why the obligations set out in the maximum list were not sufficient. 
This approach, of a maximum list of pre- defined obligations, would give businesses 
the chance to establish accounting and re porting IT systems and processes for VAT 
purposes that cover all thei r obligations across the EU. This would allow reporting 
obligations for VAT to be standardised across the European Union and help reduce 
the burden on business. 
9.7. A standardised EU VAT declaration 
As well as standardising the obligations Member States can impose under 
Article 273, consideration could equally be  given to having an EU standard VAT 
declaration. 
Agreed information corresponding to numbered boxes on the VAT return would 
have to be provided. So, for instance, box 1 would be VAT on standa rd rate supplies, 
box 2 VAT on reduced rate supplies, etc. Th e VAT return would be  available in all 
EU languages with common definitions of what was to be included in each box. 
Thus, for instance, a business in Greece c ould use its own language to complete an 
EU VAT return for a VAT declaration to be submitted in Finland which, since the information supplied in each box was iden tical throughout the EU, would allow the 
Finnish tax authorities to correc tly interpret the declaration. 
Given the difference between the number of boxes on VAT returns between Member 
States, agreement would need to be reach ed on how many boxes should be filled in. 
There could be a minimum number of boxes,  providing information that all Member 
States require, and other boxes requiring  supplementary information could be 
imposed should they be demanded by cert ain Member States. However, leaving 
certain VAT return boxes optional would limit the burden reduction for business, although providing more information upfront could limit additional queries from tax administrations. A finite list of boxes to be filled in for all Member States would of 
course achieve better burde n reductions for business. 
Consideration could be given to whether all businesses should be a llowed to fill in a 
standard EU VAT return. Non-established businesses or businesses that trade in 
several Member States through fixed es tablishments or gr oups of companies 
operating across the EU through subsidiaries in each Member State might find it advantageous, especially if their accounti ng and finance functions are centralised, to 
complete standard EU VAT returns in e ach Member State rather than submitting 
different national VAT returns sometimes  completed in an unknown language. In 
any case, for Member States with less information demanded on a national VAT 
return than on an EU VAT return, allowing businesses the option to submit either one should not pose too much of a problem. The same would not be true for Member 
States that have a national VAT return re quiring information in excess of the EU 
return. 
 
EN 79   EN The advantages for businesses would be th at they could create standard accounting 
reports that would provide the information on an EU VAT return and thereby satisfy 
the information requirements of all Member  States. Moreover, they could work and 
report in their own language.  
To some extent, a common VAT return will exist from 2015 for the ‘mini- one stop 
shop’, whereby non-established businesses making B2C suppliers to customers in 
another Member State will be able to subm it a VAT declaration in the Member State 
where they are established for supplies of  telecoms, broadcasting and e-services 
taxable in other Member States. 
Although the VAT declaration for the mini - one stop shop would be limited to 
certain services and only for supplies made , not for any right to deduct, it will still 
contain information on supplies at different rates, in di fferent Member States and 
from a business with VAT identification numbers in several Member States. This information will need to be harmonised at  EU level to allow Member States to 
exchange the data. This harmonisation could be then used as a basis for devising an 
EU VAT return. 
The ‘full’ one stop shop concept as set out in topic 11 requires harmonisation of the 
content of the VAT return submitted via this mechanism. 
A standard VAT declaration could also allo w Member States to exchange data more 
easily and swiftly. The information request ed from tax administrations would not 
have to be extracted and compiled to fulfil the request and the tax administration could target the information needed (box numbers) based on the standard EU VAT 
return.  
An EU VAT return would allow a Member  State requiring some basic information 
about a taxpayer in another Member State to define precisely the information they 
needed, which would speed up the exchange of information and free up resources for dealing with more complex administrative queries. 
 
EN 80   EN Topic 10.  
10. SMALL BUSINESSES  
10.1. Current legal framework 
The VAT Directive allows Member States to  provide for a special scheme for small 
enterprises. The simplified scheme may be  either an exemption from VAT or, for 
instance, a flat-rate or graduated system.  
Under a flat-rate scheme the business is allowed typically to pay VAT at a set 
percentage of its turnover  depending usually on the busin ess activity. In return the 
business is exempted from charging and reclaiming VAT on a tr ansaction basis. 
Introducing any such flat-rate scheme requ ires the VAT Committee to be consulted 
and given reasons why the normal VAT arra ngements would be difficult to apply to 
these small businesses because of their activities or structure. Member States differ in their use of this option and the schemes they  set up are primarily designed for traders 
with domestic operations only. 
Graduated tax relief may, for instance, mean allowing a business to pay no VAT 
below a given threshold but to pay an in creasing percentage of the VAT due above 
that threshold until at a certain level all the VAT is paid and no relief is given. 
Member States may provide for a sche me whereby businesses with an annual 
turnover below a certain threshold are entitled to exemption from VAT. Any 
business choosing to be exempt from char ging VAT on the supplies it makes is not 
allowed a right of deduction. Exemption from  VAT is the most widely used scheme 
in the EU for small enterprises.  
The VAT Directive also provides Member St ates with an optional common flat-rate 
scheme for farmers. Although it is not strictly limited to small businesses, it is designed for cases where applying the norma l VAT arrangements to farmers is likely 
to give rise to difficulties. When a farmer applies for this flat-rate scheme, he is no longer covered by the normal VAT rules:  he may not deduct the VAT paid on his 
inputs and he may be released from oblig ations relating to the payment of tax, 
invoicing, declarations a nd accounting. To make up for the VAT paid on inputs 
which cannot be deducted, flat-rate compen sation (calculated by each Member States 
on the basis of macro-econo mic statistics) is paid. 
10.2. The exemption scheme 
10.2.1.  History and references 
The special scheme for small enterprises was laid down in Article 14 of the Second 
VAT Directive
92 which allows Member States ‘to apply to small undertakings, 
                                                 
92 Second Council Directive 67/228/EEC of 11 April 1967 on the harmonisation of legislation of Member 
States concerning turnover taxes — Structure and procedures for application of the common system of 
value added tax (OJ 71, 14.4.1967, p. 1303). 
 
EN 81   EN whose subjection to the normal system of value added tax would meet with 
difficulties the special system best suited to national requirements and possibilities’. 
The Sixth VAT Directive93 set out further details and rules as regards the application 
of a special scheme for small enterprises. It  included thresholds for using the scheme, 
the calculation of businesses’ annual turnover,  limitation of the right to deduct if the 
VAT exemption was used and a provision allowing businesses to opt for the normal 
tax regime. 
In 1992, under Council Directive 92/111/EEC, the special scheme was adapted to 
exclude new means of transport and supp lies by a non-established taxable person. 
With the recast of the Sixth VAT Direct ive in 2006 the special scheme for small 
enterprises was brought together in Chapte r 1 of Title XII of the VAT Directive94. 
Member States which acceded before 1 January 1978 and which opted to introduce a 
special small enterprise scheme under Ar ticle 14 of the Second VAT Directive may 
retain it (Article 284(1) of the VAT Directive). Those Member States which, at 17 May 1977, exempted taxable persons w hose annual turnover was less than the 
equivalent in national currency of 5
 000 European units of account, at the conversion 
rate on that date, may raise the ceiling to up to EUR 5  000 (Article 284(2) of the 
VAT Directive), while Member States which exempted taxable persons whose 
annual turnover was equal to or higher th an that amount may raise the ceiling to 
maintain the value of the exemption in real  terms (Article 286 of  the VAT Directive). 
Member States which have not exercise d the option may exempt taxable persons 
with an annual turnover of up to EUR 5  000 or the equivalent in national currency 
(Article 285 of th e VAT Directive). 
Member States which acceded after 1 January 1978 may exempt taxable persons 
whose annual turnover is no higher than th e amount set on the day of their accession. 
Varying from one Member St ate to another (from EUR 10  000 to EUR 37  000), this 
ceiling is equal to the equivalent in nati onal currency at the c onversion rate on the 
day of their accession of the amounts re ferred to, for each Member State, in 
Article 287, points (1)–(18) of the VAT Directive. 
In addition, three Member St ates, Italy, Latvia and Pola nd, also have a derogation, 
limited in time, under Article 395 of the VAT Directive, allowing them to apply an 
annual turnover threshol d to exempt small businesses gr eater than that allowed to 
them under the VAT Directive. 
The result of these rules, set at different  times, is that, for primarily historical 
reasons, Member States have different thre sholds they may apply to exempt small 
businesses from VAT (see table for the thresholds in the Member States95). 
                                                 
93 Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member 
States relating to turnover taxes — Common system of value added tax: uniform basis of assessment 
(OJ L 145, 13.6.1977, p. 1). 
94 Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax 
(OJ L 347, 11.12.2006, p. 1). 
95 http://ec.europa.eu/taxation_customs/resource s/documents/taxation/vat/traders/vat_community/ 
vat_in_ec_annexi.pdf. 
 
EN 82   EN In 2004 the Commission came forward with a proposal96 to allow all Member States 
to set an annual turnover threshold no higher than EUR 100  000 under which 
businesses could be exempted from VAT. The amount could be increased in line 
with inflation to maintain the equivalent  value as of 1 July 2006. The Commission 
proposal remains on the table at the Counc il, although it was last  discussed in the 
Council in 2007. 
10.2.2.  Evaluation of the exemption scheme 
10.2.2.1.  The level of the threshold 
The annual turnover threshold that Member St ates may set for the special scheme for 
small enterprises differs. Ce rtain Member States are re stricted to a ceiling of 
EUR 5  000 while others have a ceiling of almost EUR 80  000. Some can increase the 
amount in line with inflation and others cannot. 
These different thresholds have arisen from  historical reasons ba sed largely on when 
Member States joined the EU and whether th ey applied any thresh old at a particular 
moment in time. Even those Member States  that would like to increase the threshold 
are hindered in doing so. Certain Member  States have asked for and received 
derogations to increase their thresholds but  this can only be seen as a short-term 
measure which, in any case, doe s not provide a long-term solu tion that is fair to all 
Member States. 
For those Member States th at have a high maximum th reshold, the special scheme 
for small enterprises offers a degree of flexib ility as they have greater freedom to set 
the annual turnover to achieve the right ba lance of collection and control costs set 
against the extra revenue. This may be one threshold or, as is the case in several 
Member States, different thresholds e.g. according to the type of supply, so there could be some differentiation betwee n suppliers of goods and services. 
Those Member States legally bound to a low threshold do not have this flexibility.  
10.2.2.2.  Administrative burden and compliance costs 
The main purpose of the scheme for small en terprises is to reduce the administrative 
burden of VAT, which weighs more heavily on them because of the scale of their 
activities. 
Article 272(1)(d) of the VAT Directive allows Member St ates to exclude businesses 
covered by the exemption for small enterprise s from certain or all of the obligations 
covered in Chapters 2 to 6 of Title XI of the VAT Directive. This includes invoices, storage of invoices, VAT declarations and certain obligations in relation to 
recapitulative statements. 
The extent of the exemption from certain obligations is determined by each Member 
State and will vary across the EU. 
                                                
 
96 Proposal for a Council Directive amending Directive 77/388/EEC with a view to simplifying value 
added tax obligations (COM(2004) 728 final). 
 
EN 83   EN The advantage for small businesses of be ing exempt from VAT is increased if 
Member States also release them from VA T obligations such as invoicing. So for 
instance, while the business may in any cas e issue an invoice to provide evidence of 
a supply of goods or services  and to demand payment, the VAT rules on invoicing 
may include conditions on the content, the time of issue, outsourcing and so forth, which would impose additional invoicing burdens. 
There are advantages too for the Member  State. Notwithstanding making small 
businesses more competitive, the cost of collection and control by the Member States 
of typically small VAT payments may be seen  as not cost efficient. In any case the 
VAT revenue forgone by the Treasury is only the VAT on the margin. 
10.2.2.3.  The exemption scheme and cross-border transactions 
Supplies by non-establis hed small businesses 
One of the primary drawbacks of the scheme for small enterprises is that it is limited 
to supplies in the Member State in  which the business is established 
(Article 283(1)(c) of the VAT Directive). Thus an established business with an annual turnover below that se t by the Member State for th e special scheme for small 
businesses may exempt from VAT the suppl y in that Member State but the same 
supply to the same customer by a non-esta blished business with a similar annual 
turnover may have to be charged with VAT . Moreover, even if that non-established 
business were covered by the small business scheme in the Member State where it 
was established, it might in any case ha ve to charge VAT in the other Member 
States.  
The matter of different treatment between  an established and non-established 
business has now gone before the ECJ for a ruling
97. On 26 October 2010, the Court 
gave its ruling.  
The conclusion was that the annual turnover of a business used to determine if the 
threshold is exceeded ‘must be interpreted as meaning that the term 'annual turnover' 
refers to the turnover generated by an undertak ing in one year in the Member State in 
which it is established‘. The income of a business in relation to supplies taxable in 
another Member State shoul d therefore be excluded. 
It should be added that as the rules are interp reted as excluding from annual turnover 
supplies that are taxable in a Member Stat e where the supplier is not established the 
definition of what is a small enterprise in  the EU could be seen as distorted. For 
example, a business that ha s supplies of only EUR 10  000 in its Member State of 
establishment but has supplies taxable in another Member State of, say, 
EUR 5  000  000 would still be eligible for the scheme for small enterprises in the 
Member State where it is established. 
Conversely a small business with minor suppl ies in a Member State where it is not 
established would not be eligible for th e small business scheme. A situation could 
therefore arise where a large business is e ligible for the special scheme for small 
enterprises because very few of its supplies are taxable in the Member State where it 
                                                 
97 Case C-97/09, Ingrid Schmelz  v Finanzamt Waldviertel.  
 
EN 84   EN is established whilst a small business, by be ing non-established in that Member State, 
could not use the special scheme. 
Intra-EU supplies made by and m ade to exempt small businesses 
Member States are not required to identify  taxable persons that have no right to 
deduct VAT (Article 214(1)(a) of the VAT Directive). Since businesses opting to use 
the special scheme for small enterprises ha ve no right to deduc t (Article 289 of the 
VAT Directive) they are not requ ired to be identified for VAT. 
Nevertheless, for a small business acquiri ng goods supplied from another Member 
State, a threshold is set by the Member State of destina tion above which an intra-EU 
acquisition is subject to VAT. In this case th ere is an obligation to register for VAT, 
complete a VAT declaration and pay the VAT  to the tax authority. The threshold set 
by Member States must be at least EUR 10  000, which is indeed the case for most 
Member States although in certain  cases the amount is higher. 
Supplies made by small businesses under th e exemption scheme are excluded from 
the exemption for intra-EU supplies of goods. This can make it difficult for the 
recipient to know whether the exemption is  a result of the s upplier being under the 
small business scheme or is a result of an  intra-EU supply. The difference is that only 
the latter requires an  intra-EU acquisition. 
There is thus a difference between a sma ll business making a cross-border supply of 
goods and a small business receiving goods. So, depending on the thresholds set by 
each Member State, a small business may not  make an exempt intra-EU supply but 
for a similar value a small business receivi ng supplies is required to make an intra-
EU acquisition. 
Differences between goods and services 
As from 1 January 2010, Article 214 of th e VAT Directive was amended to require 
VAT identification for all businesses ma king and receiving supplies of services 
across borders for which the customer is  liable for payment of the VAT under the 
reverse charge procedure (Article 196 of the VAT Directive). This is the case 
irrespective of the value of the supply and includes businesses under the special scheme for small enterprises. 
Thus different thresholds for goods supplie d and received acro ss borders and the 
absence of a threshold for services complicates trade for small businesses. 
10.3. The way forward 
10.3.1.  The exemption scheme 
The current schemes are aimed principally at the very smallest businesses that have a 
turnover typically equivalent to the income of an individual worker or even less. 
Clearly, it makes sense to remove or simp lify the VAT obligations of these very 
smallest businesses as much as possibl e, when the VAT revenue collected is 
negligible. 
 
EN 85   EN The following ideas could be considered when  reviewing the curren t provision in the 
VAT Directive concerning the exemption scheme. 
10.3.1.1.  Compulsory scheme for Member States 
The current special scheme allows Member States to choose to use such a scheme 
and then to also determine the th reshold, up to a maximum level.  
A minimum compulsory level across the EU, with Member States having the option 
of applying a higher threshold, would create a more level playing field for all small 
businesses and make a signi ficant contribution to reduc ing burdens on business.  
10.3.1.2.  A common threshold for the small business scheme 
As was proposed by the Commission in 2004  to remedy the inequality of Member 
States having different thresholds for hi storical reasons, one solution could be to 
allow all Member States to set a threshold up to an agreed maximum level. The Commission proposed that the maximum threshold be EUR 100
 000. 
A common maximum threshold would give co nsideration to the relative purchasing 
power in each Member State. A threshold for small businesses in one Member State 
may be considered too high or t oo low in another Member State. 
10.3.1.3.  A threshold based on EU annual turnover 
Calculation of annual threshold is based on supplies only in the Member State where 
the business is established. Within the single market it would be more appropriate if annual turnover were based on the tota l value of EU ta xed transactions. 
10.3.1.4.  Allow small businesses to be regarded as non-taxable persons 
There are currently certain rules that apply to  all taxable persons, such as the place of 
supply of services, but equally there are specific rules for taxable persons under the 
small business scheme such as for intra-EU supplies and acquisitions of goods. This all adds complexity to the scheme and increases burdens on small businesses. 
A possible solution is to treat taxable pe rsons under the small business scheme as 
non-taxable persons. This would mean that the VAT obligations would in general not 
apply with the possible exception of Article  248, which allows Member States to 
require non-taxable persons to store invoices they receive. It would mean that small 
businesses using the special scheme for small enterprises would be treated similarly to a private individual.  
For control purposes, Member States may stil l want certain obligations to be met. A 
scheme which applies a threshold should a llow some means for business turnover to 
be checked against that threshold, so the obligation to issue and keep invoices could 
be advantageous to the Member State. E qually, notification of which businesses are 
being treated as non-taxable persons thr ough some identification system may be 
beneficial to the Member States. 
 
EN 86   EN Thus some balance may be needed between  the imposition of certain obligations on 
the business and the need to help small businesses by reducing their administrative burden. 
10.3.2.  A simplification scheme othe r than the exemption scheme 
Many businesses that have an annual turnover higher than the thresholds set by 
Member States are still cla ssed in the EU as micro-ente rprises (annual turnover less 
than EUR 2
 000  000). The invoicing Directive ( 2010/45/EU) has now introduced an 
option for Member States to introduce a cash accounting scheme for businesses with 
an annual turnover below this threshold. C onsideration could be given to offering a 
such businesses a small business scheme as well. 
This could include measures such as a fl at-rate scheme where a set percentage of 
turnover is paid to the tax authorities ra ther than payment based on recording the 
difference between all the sales and purchas es in a given period along with all the 
necessary adjustments.  
Another alternative is a gr aduated tax, whereby the amount of VAT paid is reduced 
according to specific predefined criteria su ch as turnover. In this way the small 
business is compensated for the relatively higher collection and reporting costs 
compared to a larger business. 
In terms of specific actions to reduce co mpliance costs for these businesses, the 
measures suggested under the Better Regulat ion Agenda (see topic 9) are intended to 
benefit all taxable persons. The question ther efore arises whether there is still room 
for specific relief from certain obligati ons which would not be covered by the 
broader framework of that Agenda. 
10.3.3.  The farmers scheme 
VAT is a general consumption tax and it is  therefore questionable whether special 
schemes targeting one specific sector shoul d be envisaged. On the other hand, if 
there are valid reasons for a sectoral appro ach, then the optional na ture of the scheme 
becomes questionable. 
 
EN 87   EN Topic 11.  
11. A ONE STOP SHOP SYSTEM  
11.1. The concept of a one stop shop 
The concept of a one stop shop system is simple: taxable persons taking part in 
transactions subject to VAT in different  Member States can meet all the VAT 
obligations for those transactions  in a single Member State.  
While they meet all their obligations in one  State, the transaction itself is taxed 
according to the rules (e.g. on rates, exemp tions, and deduction) of the Member State 
where the transaction is located for VAT purposes. 
This concept could be refined in various  ways: it could be limited to certain 
categories of taxpayers, to certain types of transactions or to meeting certain VAT obligations only. 
11.2. Historical overview 
As a general rule, taxable pe rsons carrying out taxable tr ansactions for which they 
are liable to pay tax in more than one Me mber State have to meet VAT obligations 
(identification, VAT returns, and payment) in each of these Member States. Member 
States have considerable freedom to decide on these oblig ations (e.g. on the 
identification process, and on what must be included in  VAT returns and how often 
they must be submitted) which makes it that  much more complicated to set up cross-
border operations.  
A first exception to this general rule wa s introduced in July 2003 with the special 
scheme for taxpayers outside the EU s upplying electronic services to non-taxable 
persons. The aim was to facilitate compliance for non-EU e-commerce operators as much as possible.
 
With the adoption of the so-called VAT p ackage, from 1 January 2015 this scheme 
will cover all EU and non-EU operator s supplying telecoms, broadcasting and 
electronic services. 
Moreover, from 1 January 2010, a one stop shop system was introduced for 
refunding VAT incurred by EU businesses in  Member States where they are not 
established. Although there have been problems with  national implementation, the 
Commission remains convinced of the merits of this approach. 
By contrast, the Council has not yet been able to reach agreement on a broader one 
stop shop system, as contained in the proposal presented by the Commission in 
October 2004, with a view to simplifyi ng VAT obligations. An expanded one stop 
shop was a major feature of this comprehensive simplif ication proposal and would 
greatly simplify formalities for a large numbe r of SMEs (e.g. distance sellers). This 
proposal is still on the table at the Council but has not been taken up by recent Presidencies. 
 
EN 88   EN 11.3. Evaluation 
The benefits of the one stop shop concept as a simplification me asure has generally 
been recognised by business. However, the scope of the systems so far agreed is limited and targeted.  
The system introduced in July 2003, which will be extended in 2015, is limited to 
certain categories of transact ions. In addition, it covers only output transactions; it 
does not allow deduction of input VAT by o ffsetting it on the return submitted via 
the one stop shop. The refund mechanism is  also limited to a specific situation. 
As a result, particularly after 2015, an EU  taxable person who uses the one stop shop 
to supply telecom, broadcasting and electroni c services will have to make use of a 
different one stop shop to obtain a ref und of the input VAT on those output 
transactions. This will reduce the simplificatio n benefits of the fi rst system from the 
outset, since it will still be simpler to deduct input VAT by offsetting the amounts on 
the VAT return than to apply for a refund. 
The concept as envisaged in the Commi ssion proposal of 2004 covered both outputs 
and inputs. It was widely supported by bus iness federations representing large, 
medium-sized and small companies.  
It therefore comes as no surprise that one  of the recommendations made by the ‘High 
Level Group of Independent stakeholders’ chaired by Mr. Stoïber (see topic 9), was 
the setting up of a wide one stop shop. 
11.4. Possible way forward 
In the current VAT system, the one stop s hop concept still deserves consideration as 
a legitimate tool to help traders comply with their VAT obligations on operations in different Member States.  
The concept as proposed in 2004 clearly need s revisiting, taking into account notably 
the changes in the ‘place of supply’ rules and the featur es of the one stop shop 
resulting from the adoption of the VAT package and the changes to the rules on 
administrative cooperation between Member States. 
11.4.1.  Potential scope of the one stop shop system 
The one stop shop proposed in 2004 was intended to cover all transactions for which 
a taxable person becomes liable in a Member State in which he is not established. This covers both B2B and B2C transactions. 
The risk of providing new scope for missing trader fraud by including B2B 
transactions was a major issue of debate. 
Changing the general rule for determining th e place of supply for B2B services (from 
the place of establishment of the supplie r to the place of establishment of the 
customer) should reduce the number of si tuations where a taxable person becomes 
liable for VAT on B2B transactions in a Member State where he is not established. Other changes to the place of supply of B2 B services which are either in force or 
 
EN 89   EN coming into force on 1 January 2011 reduce the number of such situations even 
further. 
One could, therefore, consider restricting the one stop shop to B2C transactions. The 
remaining situations in wh ich a non-established trader  becomes liable for VAT on 
B2B transactions could be systematically subject to the reverse charge procedure, 
which appears to be the simplest. Afte r the adoption of the VAT package, many 
Member States decided to go down that road.  
Even restricting the scope to B2C transact ions, these would mainly concern distance 
selling, supplies involving installation or  assembly, work on immovable property, 
sales at exhibitions and fairs, markets,  sales on board aircraft and removals. 
What should be avoided at all costs is to have taxpayers confronted with a situation 
where — in relation to a Member State in  which they are not established — they 
could use the one stop shop for certain trans actions but still be required to register 
and fulfil VAT obligations outside the one  stop shop for some other category of 
transactions.  
11.4.2.  Registration under a one stop shop concept 
The fact that registration in one Member State would automatically have effects for 
the other Member States was another point  of concern during the discussions on the 
proposal.  
This is a valid point which, however, is al so valid for intra-EU trade to a certain 
extent. When deciding how to treat the s upply for VAT purposes , the supplier will 
largely rely on whether the cust omer has a VAT number or not. 
This is why the recently adopted C ouncil Regulation 904/2010 on administrative 
cooperation and combating fr aud in the field of VAT98 introduces new provisions 
requiring Member States to carry out cer tain checks and assessments during the 
registration process. Member  States must also inform  the SCAC Committee of the 
national measures taken. The objective of informing the SCAC is to give other 
Member States sufficient confiden ce in its national procedures. 
A comparable approach could therefore be developed for taxable persons wanting to 
make use of the one stop shop. 
Another approach could be based on a system  in which Member States are consulted 
on the need to identify a taxa ble person under a one stop shop. 
11.4.3.  VAT return 
A ‘multi-country’ return form with harmonise d content would be needed. This return 
could consist of a number of ‘electronic pages’ (one page for each Member State) 
and the taxable person in question would fill in the relevant pages. The level of detail required in relation to VAT rates would have  to be decided by each Member State of 
                                                
 
98 OJ L 268, 12.10.2010, p. 1 
 
EN 90   EN consumption. Each page could automatically  display the VAT rates applying in the 
Member State in question. 
The VAT return to be submitted in the supplier’s Member State of establishment 
could be included or not (however, see topi c 9, point 9.5). In th e latter case, the 
introduction of the one stop system w ould not necessarily entail wholesale 
harmonisation of obligations in the Member State of establishment, which would be 
difficult to achieve in any event.  
11.4.4.  The right of deduction 
Under the one stop shop system proposed in  2004, a taxable person could exercise its 
right of deduction by entering the relevant  amounts in the ‘electronic page’ of the 
Member State under which VAT had been charged.  
Consequently, deductions would be made acco rding to the rules of the Member State 
of purchase.  
11.4.5.  Payment and repayment 
Under the 2004 proposal, it was envisaged that the taxable person would make the 
payment directly to the nati onal account of each Member State of consumption in the 
currency of that country. 
Under the existing system for e-commerce transactions, which will be extended on 
1 January 2015, there is only a single payment to make. It seems therefore more logical to go with that principle in the future.  
If the one stop shop covered deductions, the return could, in exceptional cases, result 
in a credit. A system of carryover or repayment would ha ve to be introduced for that 
purpose. 
11.4.6.  Providing information to taxable persons 
Although the one stop shop system would repl ace 27 different rules on identification, 
returns and payment of VAT, it does not sta ndardise the taxation rules proper (rates, 
exemptions, restrictions on the right to deduct input VAT).  
The introduction of such a system would therefore have to be accompanied by an 
efficient system of informing taxable pe rsons about the rules applicable in each 
Member State. 
In particular, computerised access to the VAT rates of all Member States needs 
further investigation. Such access would be  easier to introduce if Member States 
could agree to base their rates on a co mmon classification of goods and services. 
11.4.7.  Control by the tax authorities 
The introduction of a one stop shop should not affect the ab ility of the Member State 
of taxation to ensure th at the tax is paid.  
 
EN 91   EN The situation would be comparable to the cu rrent situation of a taxable person who is 
directly registered (but not  established) in a Member State because he carries out 
distance sales above the thres hold to that Member State. 
The recently adopted Council Regulation 904/2010 on administrative cooperation 
and combating fraud in the field of VAT contains specific and more stringent 
provision for cooperation between Member States on transactions for which the 
Member State of establishment of the suppl ier and the Member St ate of taxation are 
different.  
By introducing these provisions, which come into force on 1 January 2015, the 
Council recognised the need for closer c ooperation between ta x authorities. The 
transactions covered by these provisions would be typical candidates for the one stop 
shop concept. 
The one stop shop concept should not reduce any Member State’s control 
capabilities. Even if the general principles relating to national responsibilities for control were to remain the same under a one stop system, it woul d be appropriate to 
improve procedures by giving priority wh ere possible to simultaneous controls. 
In addition, it would greatly encourage voluntary compliance with obligations, as 
companies would be able to discharge all their obligations  through one national 
administration and in their own language. 
11.4.8.  Taxation of intra-EU supplies of goods and services 
The above factors are described in th e context of the current VAT system. 
However, as stated in point 4.2.3 of the Green Paper on the future of VAT, a well 
functioning one stop shop system is also a prerequisite of a VAT system in which 
intra-EU supplies of goods and serv ices are taxed at destination.  
In such a VAT system, unlike the present one, a one stop shop concept should not be 
limited to B2C transactions but should incl ude B2B transactions, too. It would be an 
essential instrument for dealing with all VAT  liabilities in Member States other than 
that of establishment of the supplier. 
The other information set out  above remains valid, although the scope for control by 
the tax authorities, and the instruments available for exchanging information and 
other forms of administrative coopera tion would certainly need careful 
reconsideration in such a system. 
 
EN 92   EN Topic 12.  
12. ADAPTING THE VAT  SYSTEM TO LARGE AND PAN-EUROPEAN BUSINESSES  
12.1. Background 
There are few provisions in the VAT Direc tive specific to pan- EU or other large 
businesses. However, the Directive does allow such companies both to streamline 
their VAT compliance and to manage th e creation of non-recoverable VAT in 
operations. These measures could be seen as  contributing to the efficiency of their 
operations. 
For activities conducted entirely with one Member State, the Directive provides a 
number of instruments which such busin esses can use and which, in addition to 
limiting VAT obligations, have the effect of reducing the burden of non-deductible 
VAT where this arises from transactions  with subsidiaries, partners or other 
associated parties. These include VAT  grouping and cost sharing consortia99. Similar 
effects, albeit limited to supplies of services, can result from the particular VAT treatment of such transactions between va rious branches of a Pan-European business 
situated in different Member States. 
12.2. Evaluation of current legislation and policy 
12.2.1.  Intra-EU transactions in services within the same legal entity 
There is a fundamental break in consistency in the VAT treatment of transactions in 
services between the various parts of a co mmercial organisation where these extend 
to more than one Member State, dependi ng on the legal structure it has assumed. 
This break hinges on whether these are parts of the same legal entity (branches) or 
are themselves legally independent (subsid iaries or other combinations, whether 
based on a controlling or non-controlling in terest). The most important difference 
between the two categories is that where an  organisation takes the form of several 
branches, fixed establishments or divisions it will be considered as a single entity for 
VAT purposes in line with the ‘FCE’ judgment
100. 
The European Court of Justic e (ECJ) concluded that the various establishments of a 
single legal entity cannot be treated as i ndividual taxable pers ons and as a result, 
there can be no supply for VAT purposes between them. 
In 2003, the Commission proposed amending the Directive to clarif y that services 
rendered between the various establishments of a single legal entity are not to be 
treated as supplies for VAT purposes101. This was merely to confirm the 
Commission’s own view and that of the gr eat majority of Member States, and to 
establish legal certainty and a consistent interpretation.  
                                                 
99 But this can now be extended to cross-border scenarios — see below. 
100 Case C-210/04, FCE Bank. 
101 COM(2003) 822. 
 
EN 93   EN In the event, the Council could not see its way to a consensus on the proposal. The 
Gordian knot was, however, presently reso lved by the FCE judgment. The result is 
seen as benefiting business, bringing VAT into line with the more general regulatory 
climate, which is one of reducing obstacles to consolidation and d eepening in critical 
industries. 
The continued deepening of the single market puts a new spotlight on the VAT 
treatment of such structures and transact ions. Many businesses operate in more than 
one Member State and large European comp anies seek to establish effective Pan-
European business structures. Moreover, by 2007 services represented just over 70  % 
of gross value added in the European Union. The development of the Societas 
Europaea adds a further dimension (SE)102. 
If the services were subject to VAT, the tax would generally be  accounted for by the 
recipient under the reverse charge mech anism. Besides reduc ing administrative 
burdens such as recapitulative statements, this special treatment may result in an 
advantage where the business is not entitled to deduct VAT in full. 
12.2.1.1.  Positive effects 
Not taxing transactions invol ving services between various  parts of the same legal 
entity, even when these are in different Member States, is consistent with the 
principle that activities carried out by part  of a single legal pers on for the benefit of 
other parts of the same legal person cannot  be treated as a tr ansaction s ubject to 
VAT. It might also be seen  as consistent with the principle of freedom of 
establishment within the EU, since an internal border between those parts does not undermine that favourable treatment. The outco me is conducive to the exploitation of 
single market opportunities for those busine sses which have the appropriate legal 
structure. 
There is also a strong pragmatic argument  supporting the non-taxation of intra-EU 
transactions in services between the various parts of the same entity: it prevents such 
businesses from incurring non-recove rable VAT. Financial and insurance 
institutions, in particular, are not usually entitled to deduct VAT incurred on their 
inputs except where these are used for the purposes of rende ring services to 
customers established outside the EU. This leads to accumulating and cascading tax, with the exempt supplier’s non-deductible input VAT being absorbed in the cost structure but ultimately reflected in the pr ice charged for exempt services to fully 
taxable customers who would otherwise re cover this tax. This goes against the 
principle that VAT should be  neutral: VAT is a tax on final consumption of goods 
and services which relieves businesses of the burden of VAT incurred in the process 
of production and distributi on of these goods and services. Preventing businesses 
from incurring non-recoverable VAT cannot but  be regarded in a positive light.  
                                                
 
102 Council Regulation (EC) No 2157/2001 of 8 October 2001. The registered office of the SE is in the 
Member State where it has its central administration, that  is to say its true centre of operations. SEs are, 
however, subject to VAT obligations in any Member  State where they have a fixed establishment. 
 
EN 94   EN 12.2.1.2.  Possible shortcomings 
In FCE, the ECJ limited its answers to si tuations where the entities involved are 
established in the EU. This leaves unansw ered the question of what is the correct 
treatment when a branch is established in a non-EU country or where a company 
with its headquarters outside th e EU has branches that are fixed establishments in an 
EU Member State. 
Some Member States are of the view that the provision of services within the same 
legal entity never falls within the scope of  VAT and that therefore these operations 
do not constitute taxable transactions, no matter where the various constituent parts 
of the entity are located. 
There is a defensible argument that the ECJ’s logic in FCE points towards such a 
conclusion. The practical problem here, howev er, is that it opens up a leak in the 
VAT system, whereby an institution acquiri ng services in a non-EU country can re-
route them to an establishm ent in the EU without incurring any EU VAT. Where the 
non-EU country is one which regards cross- border transactions between branches as 
within the scope of their VAT (or similar ta x), the institution may even be able to 
recover non-EU-country input tax if supply to an EU branch is considered an export. 
Even for entities entirely w ithin the EU, the risks of di stortion persist. Under the 
current rules and practice, it is possible to channel services to Member States in which, either because of the way in whic h the law is interpreted or because of 
concessional schemes, the rate of input  tax recovery is high, and subsequently 
reroute them, without any charge to VAT, to branches of the same entity in a 
Member State with a low rate of input tax recovery. 
Such distortion of the input tax incurred by companies clearly distorts competition 
between similar businesses in diffe rent Member States but also vis-à-vis competing 
businesses in the same Member State whose corporate structure do es not give them 
any such flexibility. 
An additional consequence of the current situation is that whilst the supply of 
services between the different establishments of a single entity in different Member States is outside the scope of VAT, this does not apply to transactions involving 
goods. Taken in isolation, it is difficu lt to rationalise th is situation.  
12.2.2.  Grouping provisions 
Article 11 of the VAT Direct ive provides Member States with an option to introduce 
VAT grouping schemes into their national legislation and rega rd two or more 
persons established in that Member State who, while legally independent, are closely 
bound to one another by financial, economic  and organisational links, as a single 
taxable person for VAT purposes.  
Member States who wish to exercise this option must consult the VAT Committee 
first and may adopt any measures needed to  prevent tax evasion or avoidance arising 
from the use of this option. 
 
EN 95   EN In the search for clarity, the Commi ssion recently published a Communication on the 
interpretation of Article 11103 with the objective of securing more uniform 
application of the measures on VAT gr ouping schemes and giving guidance to the 
increasing number of Member St ates which are introducing them104.  
The Commission stressed in particular that if a Member State opts for group 
registration, the effect of the arrangement is restricted to  its own jurisdiction and only 
generates benefits with respect to transact ions that are carried out between taxable 
persons established there (through a fixed es tablishment or a seat), without covering 
their foreign establishments. 
12.2.2.1.  Positive effects 
VAT grouping may simplify administration for a commercial group of companies 
because transactions between the individua l members of the group are not subject to 
VAT and are ignored for VAT purposes. This also reduces the negative 
consequences for cash flow within the group. 
Group registration may also have a positive effect on the members’ administrative 
burden because, instead of filing separate VAT  returns, they can file a single return. 
It also prevents members of the group w ho have a VAT claim on the tax authorities 
from having to await repayment. Such members can simply offset their claim against 
the VAT liabilities of the other members of the group. 
In practice, since transac tions between the members of  the group are ignored, group 
registration is particularly be neficial to groups consisting of companies with a partial 
right to deduct input tax because no VAT is charged on taxable intra-group supplies 
of services or goods (in partic ular those with mainly in-house added value) used for 
the non-taxable transactions of another member of the group. Moreover, a common 
and average ‘pro-rata’ can also reduce th e amount of irrecoverable input VAT as 
regards goods or services used both fo r taxable and non-taxable transactions. 
12.2.2.2.  Possible shortcomings 
Given the advantages a VAT group can o ffer to certain businesses, unequal and 
inconsistent implementation across the EU may produce results which run counter to 
the principle of fiscal neutrality and represent a source of fiscal competition between Member States detrimental to businesses.  
                                                
 
103 Communication from the Commission to the Council and the European Parliament on the VAT group 
option provided for in Article 11 of Council Directive 2006/112/EC on the common system of value 
added tax, COM (2009) 325 final, 2 July 2009. 
104 The national arrangements currently applicable vary s ubstantially and, in some cases at least, seem to 
take rather loose approaches to conformity with the Directive. The Commission has launched 
infringement proceedings against seven Member States because of their failure to  meet their obligations 
with regard to VAT groupings. For the Netherlands, Ireland, Finland, the UK, the Czech Republic and 
Denmark, the problem identified is that they allow non-taxable persons to join a VAT group, contrary 
to the provisions of the VAT Dir ective. There are proceedings agains t Sweden and Finland because they 
limit the VAT grouping system to financial and insu rance services. The Direc tive does not allow such 
limitation. The proceedings against the Netherlands also cover failure to notify the VAT Committee of 
changes to the application of their VAT grouping scheme. 
 
EN 96   EN It therefore seems questionabl e, firstly, that grouping a rrangements are an option for 
Member States. That does not take away, secondly, from the imperative need for a 
level playing field even among those who c hoose otherwise. Largely because of the 
piecemeal and uncoordinated process of implementation by Member States, the 
existing range of grouping schemes does not always assure this outcome.  
The shortcomings identified in the Communi cation (and of course in the recently 
launched infringement proceedings) do not of  themselves negate the value of the 
scheme in so far as Member States ta ke the necessary steps to correct them. 
It is, however, of interest that an appreciab le, if declining, number  of Member States 
see no reason to implement this provisi on. The Commission has never investigated 
the reasons for this, but there is at leas t the perception in some cases that VAT 
grouping is difficult to administer and contro l, poses risks to revenue security and 
does not deliver proportional benefits. These concerns are not, however, universally 
shared and it is relevant that Member States may a dopt whatever measures are 
needed to prevent mischief. 
As a result of the deepening of the single ma rket, many businesses, in particular large 
European companies, operate in more than one Member St ate through either 
branches or subsidiaries. This has resu lted in an increasi ng proportion of cross-
border transactions being carri ed out within the same gr oup of companies. However, 
these groups have to deal w ith up to 27 different  sets of rules a nd special reporting 
obligations for those intern al transactions, only because they are cross-border. 
A taxable person, in particular a parent  company, cannot extend the scope of the 
VAT group and the benefits of simpler formalities beyond a domestic border and 
include fixed establishments or subsidiaries  situated in other Member States. That 
difference in treatment between domestic a nd cross-border intra- group transactions 
discourages the latter and the development of businesses acro ss the EU. This is not in 
line with the requirements of a well functioning single market. 
12.2.3.  Cost sharing arrangements 
Article 132(1)(f) of the VAT Directive prov ides an exemption for ‘the supply of 
services by independent groups of persons, who are carrying on an activity which is 
exempt from VAT or in relation to whic h they are not taxable persons, for the 
purpose of rendering their members the services  directly necessary for the exercise of 
that activity, where those groups mere ly claim from their members exact 
reimbursement of their share of the joint expenses, provided that such exemption is 
not likely to cause dist ortion of competition’. 
This provision is intended to create relief  from VAT in a situation where a group of 
businesses come together in what might be called a system of ‘cooperative self-
supply’, in circumstances in which a si ngle business which had the resources to 
conduct the activity in-house would be able to so do without incurring any VAT. 
The rationale for this exemption is of at least as much importance as its practical 
effects. The legislators intended to m itigate the burden of VAT which taxable 
persons engaged in exempt activities woul d incur on outsourcing services to third-
 
EN 97   EN party service providers. It is the arrangement itself which is to be seen as in the 
public interest rather than the individual services which the arrangement delivers.  
The Directive in the provision quoted above lists five conditions, four of which are 
relatively clear and should not give rise to any implementation problems for Member 
States. The condition relating to the absen ce of distortion of competition is, however, 
a possible exception.  
It would not be rational, how ever, to interpret this condition in su ch a restrictive 
manner so to make its application impossible.  It is a natural and entirely foreseeable 
consequence of such an arrangement that  the individual consortium members will no 
longer be in the market for such services (to the extent to which they receive these 
services under the cost sharing arrangement) so this cannot in itself give rise to a 
distortion of competition in the sense intended by the legislators.  
Although their effects might be perceived as  being the same, VAT grouping and cost 
sharing arrangements have a di fferent scope and different target groups. Cost sharing 
arrangements are only aimed at reducing the VAT costs of services rendered to their 
members. Those members have in common that , in view of their activities, they have 
no or a limited right to deduct input VAT. VAT grouping, on the other hand, is 
aimed in particular at eliminating the fi nancing of VAT on intr a-group transactions 
for both goods and services. The members of  such a group may have a full, limited 
or no right to deduct input VAT. There is, however, no obstacle to the inclusion of 
Article 11 VAT groupings and members of such groups in a cost-sharing 
arrangement. 
12.2.3.1.  Positive effects 
The exemption for cost sharing arrangements is in practice a wide ranging and 
efficient way for taxable persons engaged in exempt activities to reduce their VAT costs on services. Without that exemption, the outsourced  services would generate 
non-deductible VAT. This would lead to an accumulation of the tax at subsequent stages of the process of production and di stribution of taxable goods and services. 
That exemption also enables taxable persons  engaged in exempt activities to take 
advantage of economies of scale and speci alisation by outsourci ng services on the 
basis of covering costs in cooperation with similar ente rprises and without creating 
additional input VAT on these services. 
The cost sharing exemption can, unlik e a VAT group, embrace cross-border 
scenarios, with activities and members situ ated in more than one Member State. 
What is important is that the activity is exempt, not where it takes place. 
Correspondingly, there is of course no oblig ation to avail of the exemption in 
circumstances where the members carry out non-taxable activities only. 
The arrangement does not, however, have to be limited to members’ exempt 
activities but may embrace the supply of services for both taxed and exempt 
activities. Nor is th ere any obstacle to the supply, by a group of undertakings of the 
kind referred to, of services to  third parties, provided that those services (in so far as 
they are not covered by another exemp tion) are taxed in the normal way. 
 
EN 98   EN 12.2.3.2.  Possible shortcomings 
Although Article 132(1)(f) seems sufficientl y clear, Member States appear to 
interpret it differently in practice even to the extent that some completely fail to 
implement it. This is regrettable given the rationale for this exemption and its 
practical effects. That should yield a pow erful impetus for universal and uniform 
implementation. 
The Commission has had to insist that th e provision be applied in as uniform a 
manner as possible. This is the only pos sible way to avoid divergence in the 
application of the VAT system from one Me mber State to another, an outcome which 
would be inimical to fair competition.  
That some Member States have totally negl ected to implement cost sharing has to be 
seen as a serious and fundamental shortc oming. Other shortcomings include failure 
to observe that no right of deduction can ar ise in respect of goods and services used 
to generate services exempt  under this provision. Even mo re inimical to correct, 
uniform application would be any nationa l implementing measures which purport to 
interpose a right for members of the consortiu m to deduct input tax in so far as they 
make exempt supplies themselves. 
12.3. Possible ways forward 
12.3.1.  Intra-EU supplies within the same legal entity 
Taxable self-supply of services  
In order to correct distortions of compe tition, Member States might consider more 
widespread application of Article 27 of the VAT Directive, which allows them to 
treat as a supply of services for consideration any supply by a taxable person of a 
service for the purposes of his business wh ere the VAT on such a service, were it 
supplied by another taxable person, would not be wholly deductible. 
This provision is not widely used today a nd was probably conceived to deal with a 
limited set of circumstances and domestic s ituations. Wider, cross-border application 
would raise some technical issues and require uniform and sound application. In 
order to deal with the risk of double taxa tion or tax-cascading, the application of 
what is deemed self-supply to cross-border services (in an FCE-type scenario) would 
require a corresponding righ t to deduct input tax else where or, alternatively, 
limitation of the tax on the deemed self-supply to  the part of the value of the services 
that had not yet effectively been subject to VAT elsewhere. 
The question of course arises  as to whether the result might simply be excessively 
complicated and be seen as disproportionate  in the search for neutrality. Where a 
decision is taken to bring transactions betw een branches in different tax jurisdictions 
within the scope of VAT in order to rest rict opportunities for mischief, this should 
perhaps be limited to transactions invol ving non-EU countries. One technical issue 
which has been raised is that as transacti ons between related parts of the same legal 
entity are not always on the basis of i nvoices, it might be difficult to apply the tax 
consistently. Countries which tax such tran sactions usually do this on the basis of 
 
EN 99   EN consistency with transfer pricing rules, a solution which seems to work well in 
practice. 
Extending special treatment to intra-EU supplies of goods within the same entity 
A parallel way forward which could constitu te a major simplification would be to 
also consider the supplies of goods between branches, currently deemed to be intra-
EU supply of goods, as outside the scope of VAT. Extending the scope of Article 27 
to supplies of goods as well as services in  order to prevent distortion of competition 
could also be considered. 
12.3.2.  Offering the option of VAT grouping to busin esses and extending its territorial scope  
In order to ensure a real level playi ng field across the single market and among 
businesses, consideration should be give n to making VAT grouping compulsory or 
an option for taxable persons instead of an option for Member States, given the 
significant advantages of such a scheme. 
The issue of pan-EU VAT groupings with harmonised conditions is one which 
always recurs. It is not without its logi c, e.g. it would restore neutrality between 
different business structures such as a holding/subsidiary structure and a 
headquarter/branch one and greatly reduce the administrative burdens of large pan-
EU businesses. 
12.3.3.  Ensuring more uniform application of cost sharing arrangements 
A particular public initiati ve, similar to that launche d for VAT grouping, focusing on 
interpretation of Article  132(1)(f), could ensure more general and uniform 
application of this provision and give guidan ce to the Member States and the relevant 
businesses. 
 
EN 100   EN Topic 13.  
13. SYNERGIES WITH OTHER LEGISLATION - CUSTOMS LEGISLATION  
With the adoption of the Modernised Customs Code (Regulation 450/2008 of the 
European Parliament and of the Council of  23 April 2008) and the electronic customs 
decision (Decision 70/2008/EC of the Europe an Parliament and of the Council of 
15 January 2008 on a paperless environment for customs and trade), the European 
Union committed itself to major simplifi cation and modernisation of customs 
procedures by 2013. 
Several of these changes will have a str ong impact on import VAT collection in so 
far as the customs declaration is curre ntly the basis for calculating import VAT. 
The most important change in this c ontext is the introduction of centralised 
clearance. Under Article 106 of the Modern ised Customs Code, customs authorities 
may authorise importers to both declare a nd pay customs duties to the local customs 
administration of their establishment (Membe r State of authorisat ion), irrespective of 
where the goods are physically imported and where they are transp orted to within the 
EU. In such cases, the customs debt will be  deemed to be incurred in the Member 
State of authorisation. 
However, under the VAT legislation in force,  importers would sti ll have to assess 
and pay VAT in the Member State of actual importation.  
Given that the aim of centralised clearance  is to facilitate business obligations by 
reducing administrative burdens for truste d operators, a change in current import 
VAT procedures should be considered. A public consultation105 has therefore 
recently been launched in order to receive the views of all stakeholders on the best 
way forward in this respect. An assessment of  the impact of the different options set 
out in the consultation document  is also being carried out. 
In addition, possibly in co mbination with centralised clearance, the Modernised 
Customs Code has also foreseen the self-a ssessment of customs duties. Under Article 
116 of the Code, importers may be excuse d from lodging any customs declaration 
and allowed to declare and pay their dutie s periodically to their Member State of 
authorisation instead. This will inevitably have an impact on import VAT collection, which is still based on the customs declaration. 
There might be other areas where synergies will have to be built between customs 
and VAT legislation and feedback  from stakeholders  will be useful in this context. 
At the same time, it should be stressed that  the fundamental objectives of the two are 
not the same. While customs legislation is now more focused on security and safety 
than on its traditional fiscal function, one of the main objectives of the EU VAT system is to ensure stable revenues. 
                                                
 
105 http://ec.europa.eu/taxation_customs/common/consultations/customs/customs_clearance_2010_en.htm. 
 
EN 101   EN Topic 14.  
14. REVIEWING THE WAY VAT  IS COLLECTED  
14.1. Background 
A study was carried out for the Commissi on by Reckon to quantify and analyse the 
VAT gap in the EU 25 Member States106. For 2006, the VAT gap, which is the 
difference between the theore tical VAT liability for the economy as a whole and 
actual VAT receipts, was estimated at EUR 106 billion or about 12  % of the 
theoretical VAT liability. 
The VAT gap includes VAT uncollected due to  the inherent risk of fraud in the 
current VAT system but also covers other elements like legal avoidance and unpaid 
VAT liability due to insolvencies. 
The size of the VAT gap is one good reason to take a critical l ook at the way VAT is 
collected in the EU. 
Under the VAT system as it is  currently applied in the EU, businesses act as unpaid 
tax collectors. At regular intervals, taxabl e persons have to calculate the amount of 
VAT they have to pay to or to get back from the Treasury. 
For this (self-) assessment, taxpayers cal culate, for each tax period, the VAT due on 
their outgoing transactions and the VAT th ey can claim back on their incoming 
transactions, and the balance between the tw o amounts. This balance is either what 
the taxable person has to pay to the Treas ury or what the Treasury owes to the 
taxable person for the period in question. 
In its VAT return, the taxable person has to  provide some general figures to the tax 
authorities about the assessment, but will not usually have to provide documentary 
evidence of the figures when the VAT return is sent. 
The collection of VAT is therefore primarily based on a self-assessment system. Verification by the tax authorities mostly happens ex post and this can lead to 
adjustments of the VAT initially declared by the taxable person. 
Although this system gives the tax administ rations an easy way of collecting the tax 
(the taxpayer collects the VAT on its behalf), it also has a number of disadvantages:  
• it relies heavily on taxpayers’ compliance;  
• the data sent to the tax authorities in the VAT return allows only very basic 
control checks;  
                                                
 
106 http://ec.europa.eu/taxation_customs/resources/ documents/taxation/tax_cooperation/combating_tax_ 
fraud/reckon_report_sep2009.pdf. 
 
EN 102   EN • therefore, it is also vulnerable to fraudul ent behaviour that can only be detected 
during a later audit or thr ough an efficient and timely risk management system;  
• finally, it is often difficult to collect the VAT after the event, as the taxable person 
might in the meantime have disappeared, or gone bankrupt, etc.  
This way of collecting VAT has not change d substantially since VAT was introduced 
in the EU. The content of VAT returns might  have been refined, and their electronic 
submission facilitated. The da ta is also processed and used much more for risk 
management purposes now, allowing audits to be better targeted. 
Recent developments in technology mi ght, however, offer new opportunities for 
collecting VAT, opportunities that did not exist when the common VAT system was 
introduced. Furthermore, it is  now easier for tax administrations to handle large 
amounts of data than it was at the time  the common VAT system was introduced. 
Tax administrations also need much quicker ac cess to data in order to react rapidly to 
new fraud threats and to secure VAT revenue. 
It is against this background that the Commission decided to  order a study on the 
feasibility of alternative methods for im proving and simplifying the collection of 
VAT by means of modern technologies  and/or financial intermediaries. 
14.2. The results of the study 
The first task was to draw up an invent ory of alternative VAT  collection models. 
After a high level assessment of  these alternatives, 4 models were selected for further 
analysis. 
14.2.1.  The four models analysed as part of the study 
The split payment model  is a model in which the purchaser pays the VAT to a 
blocked VAT bank account which can only be used by the supplier for paying VAT to his suppliers’  blocked VAT bank account. The advantag e of this model is that, in 
an early stage of the VAT collection pr ocess, the VAT colle cted is physically 
transferred to a blocked VAT bank account with the tax authorities’ bank. This 
model allows the tax aut horities to monitor and bl ock funds on the VAT bank 
accounts and prevent taxable persons from disappearing with VAT funds paid to 
them.  
The central VAT monitoring database model  is a model whereby all invoice data 
is sent to a central VAT monitoring databa se. The way VAT is paid to the State is 
unchanged but the scope for real-time aud iting and fraud investigation by the tax 
authority is increased. This model can onl y work if e-invoicing is made obligatory 
for B2B transactions and if the data cont ained in e-invoices is  actively mined by the 
tax authorities.  
The data warehouse model  is a model whereby the taxable person uploads 
predefined transaction data structured in an agreed format into a secured VAT data 
warehouse maintained by the taxable person. The data to be archived in the VAT 
data warehouse could be based on the Standa rd Audit File for Tax (SAF-T) as laid 
down in OECD Guidance. Data should incl ude invoice data, pr oof of delivery and 
 
EN 103   EN payment data, i.e. all data needed for a VAT audit. The tax authority would be given 
direct access to those transaction data of a taxable person in this VAT data 
warehouse. If necessary, the tax authority could pull out the data as needed to 
perform real-time VAT monitoring and to  mitigate risks of VAT fraud. The tax 
authority would only have direct  access to the set of data that is stored and uploaded 
by the taxable person into the secured VAT  data warehouse either every 24 hours or 
upon the tax authority’s request. 
The certified taxable person model  is a model wherein a taxable person’s VAT 
compliance process and internal controls ar e certified. In order to be certified, the 
taxable person must have an ‘ Internal Control Framework ’ that includes a ‘ VAT 
Control Framework ’ covering people, processes and technology (systems). Where an 
ICF is in place, the taxa ble person carries out a ‘ risk self-assessment ’ of all its control 
and monitor functions and is in a position to provide a statement, known as an ‘ in 
control statement ’, in relation to those functions. With an ‘ in control statement ’, a 
management board affirms that it is in co ntrol of the processe s taking place in its 
business. If the taxable person is in a position to detect any meaningful risks and to 
report them to the tax authority, the role of  the tax authority can change to that of 
assessing the monitoring system of the taxable person itself, rather than intrusive 
auditing.  
14.2.2.  The assessment of the models 
The study included a high-level quantitative assessment of th e costs and benefits of 
the four models, regardless of which stakeh olders would eventually bear the burdens 
or reap the benefits. 
The consultant encountered several data i ssues (data which were  lacking, data from 
different sources which were contradictory, available data related to different years 
or based on different calculation methods or  definitions). A number of assumptions 
had to be made in order to overcome these problems.  
The consultant points out that the results of  the study are therefor e merely indicative. 
Nevertheless, since the calculations for each  model are based on the same data and 
assumptions, the lack of da ta quality should not gr eatly influence the major 
preliminary conclusions that can be drawn from this assessment.  
14.2.3.  Conclusions and recommendations 
The assessment shows that, in a timeframe of about 20 years, th e benefits that all 
four models would generate in reducing th e VAT gap should be substantially higher 
than the investment and operational costs. It means that all four models have the 
potential to reduce the VAT gap.  
The data warehouse model has the greatest estimated benefits, as it includes all 
transactions by all taxable persons (B2B a nd B2C) and would allow for nearly real-
time auditing. When tax authorities can effi ciently audit transactions promptly, the 
potential benefits are larger than for th e split payment model and the central VAT 
monitoring database model, as these m odels only include B2B transactions.  
 
EN 104   EN The split payment model requires more time to become fully operational. Hence the 
benefits are only accounte d from 2020 onwards.  
The certified taxable person model has the lowest benefits of the four models 
because of its limited capability to redu ce missing trader intra-EU fraud and other 
components of the VAT gap (e.g. insolvencies).  
One model on its own might not be sufficient.  A combination of models that tackles 
both tracing transactions on a real-time or nearly real-time basis (the data warehouse 
model) and offers the ability to block funds for some tran sactions (the split payment 
model) seems to offer the greatest prosp ects of success. Additio nal assurance can be 
gained from further monitoring transactions  and enhanced control requirements (e.g. 
by means of certification requirements for certain types of businesses).  
The consultant concludes, therefore, that  a combination of the split payment model 
with a limited version of the data ware house model, i.e. a model where data is 
produced in a standard format but without direct access in a data warehouse, offers 
the best combination for reducing the VAT gap while keeping the estimated costs as 
low as possible.  
14.3. The way forward 
The study’s conclusions and recommendations  are the result of independent work 
carried out by PWC and do not necessarily reflect the opinions or position of the 
European Commission. 
Moreover, the study is an initial assessmen t of the feasibility of changing the way 
VAT is currently collected. 
It does have the benefit of indicating th at new ways of coll ecting VAT are worth 
analysing further.  
The study has recently been finalised, so it has not been discussed yet with any 
stakeholders. For instance, the banking s ector has not yet been consulted on its 
potential role in split payment. 
The Green Paper, however, provides a good opportunity to collect  reactions to the 
four models at an early stage. 
Clearly further investigation is necessar y, and in its report  (see page 252) PWC 
makes some recommendations on the next step to take. 
 
EN 105   EN Topic 15.  
15. PROTECTING BONA FIDE TRADERS AGAINST POTENTIAL INVOLVEMENT IN VAT  
FRAUD  
15.1. Background 
One of the advantages attached to a VAT  system, in comparison to a sales tax 
system, is its self-policing character. Firstly, with the system of fractionated payment, any supplier who is tempted not to declare to the Treasury the VAT on his 
sales runs a high risk, compar ed with what is often a small reward (e.g. the margin 
between the output VAT less the input VAT),  particularly for supplies of goods, on 
which it is difficult to rec over the input VAT without declaring the corresponding 
output transactions. Secondly, each trader has an incentive to obtain a proper invoice from his supplier in order to be able to  deduct the input VAT. The supplier is then 
encouraged to declare the VAT to the Treas ury, since his customer could be required 
to provide the tax administration with the invoice, so the transaction can be 
effectively checked by matching the VAT deducted by the customer with the VAT declared by the supplier. 
However, there is no absolute guarantee that the supplier will actually pay the 
Treasury the VAT he received fr om his customer. This is particularly the case if the 
chain of fractionated payments is broken a nd the supplier is able  to acquire goods or 
services free of VAT, via an intra-EU acquisition or under the reverse charge 
procedure, and resell them. In that case,  ‘stealing’ all the VAT charged to the 
customer because no input tax was paid, might be worth the risk.  
To allow Member States to tackle this kind of fraud, the ECJ introduced a link 
between the customer’s right to deduct i nput VAT and the supplier’s payment of the 
VAT to the Treasury and so tried to put new responsibilities onto the shoulders of 
customers. If the tax administration is able to prove that the customer knew or should 
have known that, by his purchase, he was pa rticipating in a transaction connected 
with fraudulent evasion of VAT (the so- called ‘knowledge test’,  see C-439/04 Axel 
Kittel), the tax administration can refuse th at taxable person the right to deduct the 
VAT incurred on that purchase. 
With the ‘knowledge test’ and therefore the risk for a time, which could be several 
years, of being held i ndirectly liable for fraud committed by somebody else, 
compliant businesses have to take ‘eve ry precaution which could reasonably be 
required of them to ensure that their tran sactions are not connected with fraud, be it 
the fraudulent evasion of VAT or other fra ud’. Trying to fulfil th is requirement for 
each transaction with each supplier in the course of normal business could be very 
burdensome with, moreover, no guarantee that  it would satisfy the tax administration 
or national courts. Taxable persons therefor e suffer from a lack of legal certainty. 
On the other hand, without using extensive re sources tax administrations could find it 
very difficult to prove that the customer  in each transaction carried out by the 
fraudster knew or should have known that his purchase was connected with fraud.  
 
EN 106   EN The measure envisaged below, an ‘optiona l reverse payment’, could perhaps iron out 
those difficulties whilst increasing the positive effects of the link introduced by the Court in B2B transactions.  
15.2. The ‘optional reverse payment’ system 
A supplier usually has to fulfil two main obligations: being liable for payment of 
VAT to the tax authorities and paying the VAT when submitting the VAT return. Under the ‘optional reverse payment’ syst em, the customer could choose to take on 
the second obligation and pay the tax directl y. The idea is to give the customer an 
option with advantages that might be worth the extra formalities: no particular checks of the supplier required and no risk of  being denied the right to deduct input 
VAT later on. 
Under this system, put simply, when receiv ing an invoice, the customer would have a 
choice: paying the supplier the total amount charged in cluding VAT or paying the 
VAT directly to the tax authorities, with a few details added (the  invoice number, the 
supplier’s and customer’s VAT identific ation numbers and possibly the taxable 
amount) and paying the remaining net amount to the supplier. 
This system has similarities with the firs t model (split payment) set out in point 5.4.1 
of the Green Paper (see also topic 14 on reviewing the way VAT is collected). 
However, the split payment model completely overhauls the way VAT is collected while reverse payment is different in scope and objective, as it would be simpler and 
optional and therefore used only in specific circumstances. 
15.2.1.  How would the customer opt for reverse payment? 
The only way to opt for reverse payment would be by actually making the VAT 
payment to the tax authorities. Neither a commitment made by the customer in an 
agreement or contract with the supplie r nor a mere declaration to the tax 
administration would be legally considered  as making use of th e option. Therefore, 
if, in such cases, despite his commitment, the customer did not actually pay the VAT to the Treasury, the supplier would remain obliged to pay the VAT. 
In practice, payment would be made as si mple as possible by using common modern 
solutions already used by tax authorities for the payment of taxes (payment online 
via credit card, money transfer, direct debit, etc.) or via financial intermediaries such 
as banks. Some information would be given at the same time: the invoice number, the VAT numbers of the supplier and of the customer and possibly the taxable 
amount. 
By adapting banking payments through SEPA , it might be possible to pay the net 
amount to the supplier and the VAT to the tax authority at the same time and by a 
single payment transaction (e.g. by credit card or credit transfer), while providing the 
same information as before. For instance, when making a purchase in a shop and paying by credit card, the customer, prompted by the credit card device, could choose to pay the VAT directly to the Tr easury and the net am ount to the store. 
In any event, as in certain Member States, payment in cash to the tax authorities 
could not be excluded a prio ri. In that case, the tax au thorities would themselves 
 
EN 107   EN enter the information in the IT system, which would then be used to notify the 
supplier and probably give a receipt to the customer. 
15.2.2.  How would the supplier be informed? 
The ‘reverse’ payment could be checked eith er via access to a VAT  account held by 
the tax administration in the name of the s upplier, showing online and in real time all 
reverse payments made by his customers,  or via a tax administration portal 
confirming the payment. 
It could also be envisaged that the total in reverse payments received by the Treasury 
during a certain period (e.g. a month or a quarter) would be written directly on the 
next VAT return related to this period (pre-filled VAT return). 
15.2.3.  Consequences of the use of th e option regarding VAT legislation? 
For the customer 
Since the VAT would have been paid directly  to the Treasury, the customer could not 
be held liable for non-payment and therefore,  be denied the right  of deduction. The 
right to deduct input VAT would remain subj ect to the normal rules contained in the 
VAT Directive, e.g. that the goods or services  are used for taxed transactions and for 
business purposes by the taxable person. The rules on pro rata calculations would 
continue to apply. 
Therefore, the customer would no longer have to carry out checks to pass the 
‘knowledge test’. 
As regards the obligation to pay the supplie r, the part of the debt corresponding to 
the VAT directly paid to the Treasury would be considered paid.  
For the supplier 
The supplier would remain liable for paym ent of the VAT but would not have to 
make the payment; i.e. he would be obliged to pay the VAT in due time until the customer, by paying the tax di rectly, released him from this obligation. If the 
supplier had in the mean time paid the Tr easury, (because the VAT declaration was 
due before the invoice fell due), the supp lier would be repaid immediately by the 
Treasury or, more simply, by means of a credit on his next VAT return.  
The tax authorities would hold the evidence  that the customer had paid the VAT 
directly to the Treasury. The supplier woul d easily be able to obtain and keep such 
evidence for his own records or accounts (via electronic statements from the 
Treasury, like bank statements, for instance). 
This means that, in contrast to a reverse charge, reverse payment would always leave 
the supplier responsible for meeting any ob ligations linked to his liability (e.g. 
submitting a VAT return, issuing a complete invoice with the taxa ble amount per rate 
or exemption, the VAT rate and the VAT am ount payable). In pa rticular, he would 
remain liable for deciding the appropriate VAT treatment for the transaction that he has carried out (apply ing any exemptions, selecting th e rate, calculating the taxable 
amount and the VAT etc.). With this option, the supplier would only be released 
 
EN 108   EN from the obligation of paying the VAT for th is particular transaction with the next 
VAT return.  
Since the customer would already have pr ovided the information to the Treasury, it 
could be thought that the supplier would not have to list ‘reverse payment’ 
transactions on his VAT return at all. But it seems more appropriate to take reverse 
payments into account only in calculating the final amount to be paid on the regular 
VAT return (although the template would have to be changed slightly). So the supplier would still declare all supplies on the VAT return, calculate the VAT due 
and — this would be the only new thing — deduct the amount of VAT directly paid 
by his customers from the total VAT amou nt due to the Treasury. The latter 
information would be provided by the tax admi nistration (via its we bsite, a dedicated 
portal for each taxable person, e-mails, a pre-filled return with a special box, etc.). The reasons for still listing reverse payment transactions are that, firstly, a return almost identical to the normal one would be easier to manage for the supplier and, 
secondly, a return listing all the transactions carried out could still be needed 
particularly for pr o-rata calculations. 
If the supplier gives a large payment period to this customer, the current VAT system 
mainly based on the time of the supply woul d not be problematic with the reverse 
payment. A supplier who had already declar ed and paid the VAT would be entitled 
to an immediate refund from the tax authorities based on the evidence of the customer’s VAT payment that they alr eady held. A simple way would be to 
automatically deduct the VAT paid directly by the customers from the total VAT due by the supplier on the next VAT return  following the reverse payment. 
The customer’s option to pay the VAT w ould not affect his obligations to the 
supplier unless they both decided otherwise in  the contract. However, as pointed out 
above, once the customer actually remitted the VAT to the Treasury, it would be 
considered paid and the supplier would have no claim on the VAT amount in the 
invoice. 
15.3. Advantages 
A general advantage of the optional reverse payment is that there are no substantial 
changes to the VAT system. All the basi c principles are maintained e.g. the 
chargeability of tax, the right of deducti on, reporting obligations, the person liable 
etc. The only change is that when a reverse payment is made the supplier no longer has to pay the VAT, which has been paid by th e customer: if he has already paid it, it 
must be swiftly and easily repaid.  
In practice, of course, custom ers and suppliers will, in general, be the same taxable 
person: businesses buy and se ll. The distinction is made here to highlight the 
advantages and disadvantages for the partie s in a single transaction. Bear in mind, 
too, that, like the disadvant ages described below, the following is only a rough 
evaluation of the possible e ffects of this option in terms of legal certainty, 
administrative burdens and cash flow , and (for the Treasury), fraud. 
 
EN 109   EN 15.3.1.  For the customer 
Legal certainty:  the customer would no longer be held liable later for any fraud 
committed by the supplier. 
Administrative burden : the customer would no longer have to check the supplier’s 
compliance. 
Cash flow : No effect on cash flow. When require d to pay, instead of paying the VAT 
to the supplier (or factor), the customer w ould remit the VAT directly to the Treasury 
at the same time. 
15.3.2.  For the supplier 
Administrative burden : the supplier would no longer ha ve to pay the Treasury the 
VAT directly remitted by the customer. 
15.3.3.  For the Treasury 
Fraud : The Treasury would benefit from re duced fraud in B2B transactions. 
Compliant traders would tend to use the syst em for suspect supplie rs (new ones, or 
those selling products suscepti ble to fraud) or as a general policy in order to avoid 
risk. 
Experience has shown that pinpointing ne w sectors used by fraudsters in B2B 
transactions in good time is difficult for th e tax authorities. Businesses are often 
aware of new signs of fraud in their own sector before the ta x authorities (for 
instance, the appearance of  unknown traders selling at unexp ectedly low prices). An 
optional reverse payment system would theref ore be very efficient. Compliant traders 
would spontaneously use the system to pr otect themselves and prevent any risk 
arising when the tax administration finally  reacted. A new trend in the use of the 
option in a particular s ector would not only prev ent fraud but alert the tax 
administration. 
In addition, reverse payment would provi de the administration with additional 
information on a transaction-by-transaction basis. This information would allow the 
tax administration to detect more easily any suspect traders th at might go missing, 
for instance those subject to a high propor tion of reverse payments compared with 
similar suppliers or to detect traders conceal ing a part of their sales, by matching this 
information with the VAT returns submitted. 
Administrative burden : Certain resources dedicated to detecting fraud in B2B 
transactions (notably MTIC fraud)  could be used for other purposes. 
Cash flow : Reverse payment would provide th e administration with real-time 
payment of VAT when the customer pays fo r the supply before the next VAT return 
is submitted by the supplier. If payment is delayed, the supplier pays the VAT as at present, on the next VAT re turn. However, VAT paid by a customer making use of 
reverse payment might be refunded to th e supplier only with the following VAT 
return. That would give the Treasury an additional cash-flow advantage. 
 
EN 110   EN 15.4. Disadvantages 
From the point of view of both the customer  and the supplier, this option might have 
an impact on relations between them and th erefore on business in general. This might 
be seen a priori as a disadvantage. 
To be precise, this option would add a new topic or factor in commercial negotiations 
between the parties alongside a quite similar issue, the terms of payment. However, adding this option (for instance, a commitme nt from the customer to use or not use 
the option) to the factors to be discussed in order to reach a sa tisfactory deal could 
also be seen as an advant age by one or both parties. 
A customer making use of the optional reverse payment could also be seen as 
signalling mistrust in his supplier. It would certainly indicate a desire to offload the 
risk of being later denied th e right of deduction. However, this also happens when a 
customer insists on paying on delivery of the goods or supply of th e service, or when 
a supplier asks for immediate payment and refuses credit. These traders show that they do not really trust their contractors and their ability or willingn ess to pay later or 
carry out the supply or, more simply, that they do not wa nt to bear any risk. Adding 
other benefits for customers using reverse payment for purchases, for instance 
swifter refund by the Treasury in case of repayment position, could make the use of 
the option more neutral and ordinary. 
15.4.1.  For the customer 
Administrative burden : The customer wishing to pay in this way would have to 
make an additional payment to the Treasury and to provide certain information. However, this burden would be easily sm oothed by allowing online declaration and 
payment or provision of this information w ith the credit transf er; it would be even 
better to adapt SEPA arrangements to allo w the customer to pay the VAT to the 
Treasury, with all the information neede d, and the net amount to the supplier, all 
through a single payment (credit transfer or credit card).  
15.4.2.  For the supplier 
Cash flow : under the current system for charging  VAT, based on the date of supply, 
reverse payment would be disadvantageous for suppliers who are paid immediately 
and thus keep the VAT until their next VAT return. Where payment is deferred, the VAT paid by the customer making use of reverse payment might be refunded to the 
supplier only on the following VAT return (w hich is a simpler solution for both the 
Treasury and the supplier). 
Refund position : It may well be that a supplier who normally pays VAT to the 
Treasury will become a ‘repayment trade r’. The conditions for refunding VAT can 
be stricter, sometimes requiring extra inform ation or additional co ntrol, and there is 
always a risk of delays in repayment. However, someone who becomes a repayment trader because of reverse payments would be easily identified by the tax 
administration. Since the situation was clearl y justified, the request  should be better 
and more rapidly managed than those of tr aders who are in that situation for other 
reasons requiring further analysis (intra-E U supplies or exports) . Moreover, it could 
 
EN 111   EN be laid down that if a supp lier uses reverse payment when  purchasing, it could obtain 
a swifter refund of the corresponding VAT. 
Administrative burden : Monitoring the payment of i nvoices issued without upfront 
payment would be more complicated. For each invoice, any s upplier who has not 
engaged a factor to manage outstandi ng invoices checks his bank accounts or 
cheques received. If the customer has paid  only the net amount, he would also have 
to check his Treasury account. 
15.4.3.  For the Treasury 
Set-up costs : Whilst many, if not all, tax administ rations keep a computerised record 
of the accounts of taxable persons with certa in data available on line to them (VAT 
returns submitted, VAT due, payments made, in terest charges, etc), they will also 
need to provide them with online access to the information provided by customers 
using the option and the corresponding pa yments made. However, the customer 
could also provide the supplier with proof of the use of the option in order to justify 
paying the net amount only. Tax administrations will also need to provide customers wishing to make use of the option via credit  card or direct deb it (at least until SEPA 
arrangements are adapted if possible) with an appropriate online payment 
application. A suitable way would be to adap t the current systems used for paying the 
VAT online. In any event, all of th is will require specific investment. 
Managing the data : The number of invoices issued in  the EU is estimated at around 
30 billion. Although this in cludes B2C invoices (50
 %), exempt supplies, etc., and 
not all invoices will be subjec t to reverse payments, it could be that several million 
invoices will be subject to reverse payment. It requires a certain le vel of resources to 
maintain a database involving millions of transactions. 
Errors in payment, cancellation of the invoice or issuance of credit note : These 
events could possibly be seen as more difficult to manage both by the tax administration and the parties to the transaction with reverse payment. However, it 
should be provided that, as at present, th e identity of the pe rson paying the VAT in 
the first place would have no bearing on the way these situations are tackled. 
For instance, if the reverse payment is lower than the VAT charged, the supplier 
would be obliged to pay the remainder to the Treasury. If the reverse payment is higher than the VAT charged, the difference having automatically been credited to 
the supplier’s Treasury account, he would be  obliged to repay his customer. In case 
of cancellation or a credit note, the supplie r is obliged to repay the corresponding net 
amount and the VAT to the customer (a cu stomer that has deduc ted this VAT will 
also have to repay it on its next VAT return). The supplier would ask the tax 
administration for repayment via, as is ofte n the case, the VAT return, for instance.  
15.5. Conclusion 
This option would allow compliant businesses to be released from certain 
administrative burdens and to obtain legal certainty where they feel this is needed. 
Fraudsters would have le ss chance of committing fraud and the Treasury could 
benefit from fraud reduction in B2B transa ctions, in particular so-called ‘missing 
trader fraud’. In allowing B2B fraud to be tackled in connection with intra-EU 
 
EN 112   EN supplies with very little change to the cu rrent basic principles of VAT, this measure 
seems promising. 
However, one could consider that such a measure could work better or give 
additional advantages if fine-tuned or combined with other solutions: 
• The reverse payment option would have to be exercised earlier — i.e. before 
payment for the supply — and for a limite d period of time, for instance, between 
the time of the supply and the deadline to be met by the supplier for submitting 
the corresponding VAT return. It would, how ever, be simpler to handle the option 
with a VAT system based on payments  for the chargeability of VAT. 
• Besides a universal option, one could envi sage a compulsory system targeting 
customers purchasing certain well defined goods or services susceptible to fraud 
or customers in particular situations (e xporters, public bodies), if necessary with a 
high threshold per transaction.  
• To counterbalance the optional reverse pa yment offered to customers, the link 
between the right of deduction and actual  payment of VAT by the supplier could 
be tightened where the customer does not make use of the option. That could be 
achieved either by strengthening the ‘knowledge test’ with new enforcement means for the tax administrations by, for in stance, transferring the burden of proof 
to the taxable person in certain cases or by automatically refusing the right of deduction in cases of non-payment targ eted on very risky and sizeable 
transactions.  
 
EN 113   EN Topic 16.  
16. EFFICIENT AND MODERN ADMINISTRATION OF THE VAT  SYSTEM  
16.1. Background  
In March 2007, the Commission held a ‘VAT fraud conference’ to give European 
businesses the opportunity to express thei r views. One general conclusion drawn 
from the conference was that businesses and tax authorities share an interest in combating fraud and traders are willing to as sist tax administrations in this task. 
Improving communication between businesses and tax authorities was seen as a 
major factor. There was also a clear stat ement about the disproportionate costs to 
businesses of divergent nati onal reporting requirements. 
In its Communication of December 2008
107 the Commission pres ented a short-term 
action plan for combating VAT fraud. It al so suggested reflecting on a longer-term 
approach that could take into account technological developments and new strategies for compliance and monitoring, all with the aim of reducing the involvement of tax 
authorities and easing the admi nistrative burden on business. 
Initial discussions on new strategies fo r compliance and monitoring took place in 
January 2009 at the Fiscalis seminar on ‘VAT fraud: a common concern for 
businesses and tax administrations’ in Amst erdam (NL). Most participants welcomed 
the Commission’s suggestion of setting up an ad hoc working group involving tax authorities and representatives of large,  medium-sized and small enterprises.  
The Business Expert Group
108 was recently set up (March  2010). Its objective is to 
explore how the relationship between tax paye rs and tax administrations in terms of 
VAT obligations can result in a smoother functioning of the present VAT system in the EU. The findings will be used for discus sions with the Member States and further 
policy development. 
16.2. Evaluation of current policy on tax administration 
16.2.1.  Tax administration and the functi oning of the internal market  
Tax administration
109 is about the measures, procedures  or tools that a tax authority 
applies and develops to effi ciently administer and manage  a tax from the ‘chargeable 
event’ (‘ fait générateur ’) to payment of the correct amount of tax. For VAT, this 
process also includes VAT deduction and refund. Tax administration covers , inter 
                                                 
107 Communication from the Commission to the Council, the European Parliament, the European 
Economic and Social Committee on a coordinated strategy to improve the fight against VAT fraud in the European Union, 1 December 2008, COM(2008) 807 final. 
108 See the Commission expert group register No  EO 2457 http://ec.eu ropa.eu/transparency/ 
regexpert/detail.cfm?ref=2457. 
109 Conceptual aspects of tax administration are not addressed in this paper, which is more about concrete 
action as a segment of public administration po licy (modernisation and efficiency). However, 
international tax forums consider this new field as an important and promising part of tax policy. The 
OECD Forum on Tax Administration (FTA) has published a lot of studies on the different components 
of this policy. See http://www.oecd.org/dataoecd/2/46/42419552.pdf. 
 
EN 114   EN alia, the organisation of the collection sy stems (resources and methods), relations 
with taxpayers including taxpayers’ obligat ions, rights and assistance (compliance), 
audit, risk assessment, planning and controls to prevent and fight fraud. 
Tax administration is mainly a national responsibility of the Member States and the 
subsidiarity principle is therefore highly important. Consequently, when drafting 
legislative proposals the Commi ssion has to balance carefu lly the need for an EU 
approach and respect for national structures  and the practices of  tax administrations. 
However, differences in national procedures considerably increase business compliance costs, particularly  as a result of up to 27 different types of reporting 
obligations. Moreover, recent — uncoordina ted — efforts by Member States to 
prevent and tackle VAT fraud have given ri se to new obligations and further widened 
the gap between the 27 national prac tices of the tax administrations. 
Consequently tax administration and the l ack of a harmonised approach have an 
impact on the functioning of the internal ma rket. The Court of Aud itors also insisted 
on this point in its 2008 Annual Report
110 on VAT ‘own resources’.  
The way Member States apply VAT legi slation, the way they cooperate in 
exchanging data to collect VAT and the pro cedures and tools they develop to prevent 
and fight fraud is of common interest to all Member States. Moreover, it directly 
affects businesses, which not only expect fa ir competition (neutrality) but also legal 
certainty, simplicity, effectiveness, fairness and flexibility. 
16.2.2.  Weaknesses of th e current system 
Up to now, most of the work done has de alt with preventing a nd fighting fraud. It 
involved only tax authorities and addressed sp ecific issues of ta x administration with 
a view to enhancing the efficiency of controls and audit. For instance, some 
interesting materials have been drafted in the Fiscalis project groups on best practice 
among tax authorities in the fiel d of e-audit, risk management111, etc.  
Furthermore as the Amsterdam Conference112 demonstrated, a more comprehensive 
approach — ‘horizontal monitoring’ — could be a useful way of making tax 
collection more efficient and reducing th e tax gap. The idea of achieving greater 
compliance by means of enhanced coope ration between taxpayers and the tax 
administration is being explored by a numb er of countries within and outside the 
European Union. Their policies may have different names such as ‘horizontal 
monitoring’, or ‘client relati onships’, but they all aim to promote partnerships based 
on mutual respect and coope ration between the taxpayer and the tax administration. 
                                                 
110 In its audit work for the 2008 Annual Report, the European Court of Auditors took the view that data 
collection for the reports should become one of the means of ensuring uniform application of the VAT Directive across all Member States plus equal treat ment of all taxpayers. See Article 12 of Council 
Regulation 1553/89. 
111 See the risk management guide for Tax administrations:  
http://ec.europa.eu/taxation_customs/resources/documents/taxation/tax_cooperation/gen_overview/risk
_management_guide_for_tax_administrations_en.pdf 
112 ‘VAT fraud: A common concern for businesses and tax administrations’. This conference organised by 
Dutch tax authorities took place in 2009 under the Fiscalis programme. See: 
http://ec.europa.eu/taxation_customs/taxation/ vat/vat_conferences/article_5467_en.htm. 
 
EN 115   EN On the one hand, businesses want tax administrations to keep an open mind as 
regards their specific situation. On th e other hand, tax administrations want 
transparency that ensures effective tax colle ction at the right time. Partnerships are 
promoted in which traders work closely with  tax administrations and in return obtain 
a decrease in the administrative burden  — so both sides gai n. As a result, tax 
administrations are able to allocate mo re resources to targeting non-compliant 
behaviour. 
For the time being this ‘horizontal’ approach  has not been put forward as part of the 
EU’s VAT policy. It would require VAT stake holders other than tax authorities to be 
involved. It means that taxpayers (all cat egories, small, medium-sized and large 
businesses) and intermediaries (financial institutions, tax advisors, fiscal representatives) would be asked to c ontribute valuable e xperience and suggest 
changes making for better practical implement ation of the VAT rules. This move has 
just started with the launch  of the Business Expert Group. 
 
The expert group only consists of repres entatives of busine ss and Commission 
services . Member States’ tax administrations  are not involved at this first stage. The 
expert group should deal with wider issues  of tax administration, such as horizontal 
monitoring and compliance issues, which will require a dial ogue with Member 
States’ tax administrations. 
Apart from the Business Expert Group ther e is no specific EU-wide forum where tax 
administration issues as such can be discussed. In effect, bodies ensuring the 
governance of the VAT system, such as the VAT Committee for VAT legislation and 
the SCAC committee for administrative c ooperation, are attended only by tax 
authorities’ representatives and have mandates which do not cover the full remit of 
tax administration. 
At the same time, difficulties have arisen in the practical implementation of some of 
the new measures in recent VAT legislati on. The lack of homogeneous practices or 
administrative requirements for the sa me operation between Member States 
particularly affects businesses involved in  cross-border supplies. Moreover, different 
application of the VAT rules has detrimental consequences not only for operators but for tax authorities in di fferent Member States.  
IT issues are also heavily i nvolved in these new measures. As it appears that some of 
the specific difficulties that  have occurred involve relia nce on accurate and timely 
data both from taxpayers and from tax aut horities in other Member States, these 
issues could also be addressed in  this tax administration context. 
16.3. Possible improvements to the system  
Improvements to the system do not necessari ly have to result from changes in 
legislation. ‘Soft policy’ aimed at creating a wide spread consensus and exchanging 
best practices could be an alternative approach. 
 
EN 116   EN Apart from trying to further harmonise re porting obligations in the legislation 
itself113, the Commission could take  a more proactive approa ch to tax administration 
policy. This can be done in different ways and through different means. The 
following suggestions are not exhaustive: 
(1) To start with, the Commission c ould set up a discussion forum open to 
representatives of VAT stakeholders, allo wing an exchange of views with the tax 
authorities. It would be a proper means of holding a stru ctured, permanent dialogue 
in which all tax administration issues of interest to tax authorities and businesses could be discussed. 
(2) In addition, the Commission could be a key facilitator in poo ling best practice on 
all other tax administration issues that eff ect businesses. Pooling best practice and 
drafting guidelines could contribute to streamlining administrative practices and 
abolishing unnecessary obligations on businesse s. In particular, a tax administration 
platform could be set up under FISCALIS.  
(3) EU policy on voluntary compliance could be developed to improve the 
relationship between tax authorities a nd businesses in the Member States. 
As most voluntary compliance strategies ar e about building trust between taxpayers 
and tax authorities, the balance between th e rights and obligations of taxpayers, on 
the one hand, and tax authorities, on the other, is the key to making tax collection 
more efficient and to preventing and fighting fraud, while at the same time 
minimising the burden on trade.  
Legal certainty is also essent ial for both sides. Tax authorit ies need to guarantee that 
all their services apply the EU VAT rules in  a uniform way, both internally and cross 
border. The rules applied by Member States s hould not lead to cas es of no taxation or 
double taxation. Businesses, on the other hand, need to know exactly what they have 
to do in order to comply with the rules laid down in the various Member States 
where they conduct business, including the documentation they need to provide in 
order to prove their entitlement to an exem ption or to show they acted in good faith.  
The need for specific arrangements for this and their legal effect s would have to be 
considered. For instance, cons ideration could be given to how to apply the concept of 
‘partnerships’ (specific agreements between tax administrations and taxpayers) at EU 
level. 
(4) Since IT support also plays a major role in the implementation of  VAT rules, it is 
essential to examine how to ensure better inte roperability of the systems to facilitate 
automatic transfer of information directly from taxpayers to the tax authorities and vice versa (see, for instance, work on the standard e-audit file
114). Discussions could 
also focus on a proper time frame, the i nvestment required and working methods for 
introducing such new IT systems, both in  businesses and in the tax authorities, 
together with the critical need to limit, as far as possible, any additional costs on 
                                                 
113 See, for instance, Report on the application of Article 263 of the VAT Directive 2006/112/EC (Council 
Directive 2008/117/EC of 16 December 2008 amendi ng Directive 2006/112/EC  on the common system 
of value added tax to combat tax evasion c onnected with intra-Comm unity transactions). 
114 Guidance note for the Standard Audit file http://www.oecd.org/dataoecd/13/45/34910263.pdf. 
 
EN 117   EN either side. Any reflection in  this field could also incl ude ways to enhance cross-
border exchange of information between tax administrations, thus reducing the duplication of reporting obligations for bus inesses operating in different Member 
States. Furthermore, it could be worth i nvestigating whether a specific software 
could be developed jointly by some Memb er States, possibly with EU financial 
support
115, with a view to putting it subsequently at the disposal of all Member 
States. 
(5) The Commission has also a responsibilit y to create the conditions for smooth 
implementation of EU rules in the Memb er States, by ensuring transparency and 
effective communication with all stakeholders. A lot has already been done in this 
field. However, this policy of improving transparency and providing up-to-date, 
accessible information to users could be worked out in conjunction with all 
stakeholders. (New initiatives could for example include drafting explanatory notes and FAQs and further deve loping e-learning tools).  
(6) The economic operators and other stake holders (including national judges dealing 
with VAT cases) need also to be aware of  recent changes in legislation and potential 
gaps. Raising awareness on specific VAT  issues can contribute to better 
implementation of the rules and neutrali ty and fairness between operators. The 
Fiscalis programme
116 is one way of meeting these needs. However, given the 
complexity of VAT legislation, at EU and national level, a netw ork of legal experts 
in this field could provide  efficient support for the Co mmission and Member States 
(reports on practical issues, comparative studies targeted at the Member States, 
training materials, etc.).  
16.4. Conclusion 
The approach detailed above is to s upport the proper implementation of EU tax 
legislation with a ‘soft polic y’ instrument. It is mostly  about improving dialogue and 
the relationship between taxpayers and tax authorities, through a new space for 
discussion and for exchanges of experience and good practices.  
In a difficult economic situation where fisc al consolidation and long-term financial 
sustainability are at stake, the Commi ssion could propose to mutualise some 
resources for more efficient and fair tax collection in the EU. Building a relationship of trust and transparency between stakehol ders should become a priority in work on 
compliance and on preventing and fighting fraud. 
The work carried out by the Business Expe rt Group could help to  explore voluntary 
compliance strategies and other tax administra tion issues of interest to business. The 
outcome of the Green Paper consultation should also feed into this process. In this 
context a discussion forum should be set up, to  involve all stakehol ders in the debate, 
too. As far reaching harmonisation of tax obligations is not a feasible short-term option, a Fiscalis platform on tax admini stration, pooling best practice and drafting 
                                                
 
115 One example of this is the ECEyes software developed by the Swedish tax administration with support 
from the Fiscalis programme and made available free to the tax administrations of other Member States. 
116 Decision No 1482/2007/EC of the European Parliament and of the Council of 11 December 2007 
establishing a Community programme to improve the operation of taxation systems in the internal 
market. 
 
EN 118   EN guidelines, could help str eamline administrative practices and abolish unnecessary 
obligations on businesses and tax administrations.