EUROPEAN COMMISSION Brussels, 18.1.2018 SWD(2018) 9 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT

Accompanying the document Proposal for a Council Directive amending Directive 2006/112/EC on the common system of value added tax as regards the special scheme for small enterprises

{COM(2018) 21 final}

{SWD(2018) 11 final}



Table of Contents 1.Introduction and context 1.1.Introduction 1.2.Scope and objective of the initiative: a modern, simplified and comprehensive regime for small enterprises 1.3.Current framework for SMEs provided for under the VAT Directive 1.3.1.Functioning of the common system of value added tax and administrative obligations 1.3.2.The notion of an SME under the VAT Directive 1.3.3.Rules on taxation of SMEs under the VAT Directive 1.3.4.Simplified VAT obligations (outside of the SME scheme) 1.3.5.Simplified procedures for charging and collecting VAT (part of the SME scheme) 1.3.6.The SME exemption (part of the SME scheme) 2.What is the problem and why is it a problem? 2.1.Introduction 2.2.The problems 2.2.1.Compliance costs: domestic and cross-border 2.2.2.Lack of neutrality of the current system 2.2.3.VAT revenue losses for Member States 2.3.Problem drivers 2.3.1.Driver 1 – The complexity of the current VAT rules on obligations

2.3.2.Driver 2 – The diversity of the current rules on VAT obligations within the EU 2.3.3.Driver 3 – Design of SME exemption 2.4.Problem Tree 2.5.Evolution of the problem without action at EU level 3.Why should the EU Act? 4.What should be achieved? 4.1.General objectives 4.2.Specific objectives 4.3.Consistency of the objectives with other EU policies 5.What are the various options to achieve the objectives? 5.1.Selection of options 5.2.Options analysed 5.2.1.Option 1: Status quo, including e-Commerce changes 5.2.2.Option 2: SME exemption extended to supplies from other Member States and including streamlined simplified VAT obligations 5.2.3.Option 3: Option 2 plus measures to reduce the negative impact of transition from exemption to taxation (the so-called ‘threshold effect’) 5.2.4.Option 4: Option 3 plus mandatory common treatment of occasional traders 5.3.Discarded options 5.3.1.Option 5: Option 2 with full harmonisation of the SME exemption threshold 5.3.2.Option 6: Removing the SME exemption from the VAT Directive 5.4.Key features of the proposed policy options

6.What are the impacts of the different policy options and who will be affected? 6.1.Methodology 6.2.Analysis of the impacts of each of the options 6.2.1.Option 1 – Status quo, including e-Commerce changes 6.2.2.Option 2B – SME exemption extended to supplies from other Member States with EU turnover threshold and including streamlined simplification measures 6.2.3.Option 3 – Option 2B plus measures to reduce the negative impact of transition from exemption to taxation 6.2.4.Option 4 – Option 3 plus mandatory common treatment of occasional traders 7.How do the options compare? 7.1.Summary assessment of the impacts 7.2.Identification of the preferred option 7.3.VAT treatment of occasional traders: option not favoured 7.4.Subsidiarity of the preferred option 7.5.Proportionality of the preferred option 7.6.Impact on SMEs 7.7.Impact from the REFIT perspective 8.How would actual impacts be monitored and evaluated? 9.Annexes Annex 1: Procedural information Annex 2: Stakeholder consultation Annex 3: Who is affected by the initiative and how

Annex 4. Analytical models used in preparing the impact assessment Annex 5: Measures for SMEs available in the VAT Directive Annex 6: Interplay among the legislative proposals on the destination principle and administrative cooperation Annex 7:Functioning of option 2 in an intra-eu context Annex 8:Evaluation of the current VAT system for SMEs Annex 9: SME exemption thresholds in the EU (April 2017) Annex 10: Special VAT SME measures applied in Member States Annex 11: VAT obligations linked to the SME exemption per Member State Annex 12: Enterprise Europe Network – SME feedback database



List of tables Table 1: Summary of VAT administrative obligations for businesses Table 2: Definition of SMEs for VAT purposes (magnitudes in EUR millions) Table 3: Linking problems to specific objectives Table 4: Overview of the key features of different policy options Table 5: Summary of methodology used Table 6: Simplification scenarios linked to Option 2 and their impact on compliance costs Table 7: Summary table of the wider economic impact of Option 2

Table 8: Overview of the impacts on compliance costs for businesses under Option 3 Table 9: Impact of Option 3 on the wider economy Table 10: Businesses’ compliance costs under Option 4 Table 11: Impacts of Option 4 on the wider economy Table 12: Summary analysis of impacts Table 13: Monitoring and evaluation framework Table 14: Overview of the consultation activities Table 15: Overview of the consultation results (by stakeholder category) Table 16: Impacts on compliance costs under Option 2 Table 17: Impacts on compliance costs under Option 3 Table 18: Impacts on compliance costs under Option 4 Table 19: Impacts on Member States’ VAT revenues under Option 2 Table 20: Impacts on Member States’ VAT revenues under Option 3 Table 21: Impacts on Member States’ VAT revenues under Option 4 Table 22: Interplay among the legislative proposals on the destination principle Table 23: Compliance costs for SMEs within and outside the SME exemption in selected Member States Table 24: Examples from the SME feedback database



List of figures

Figure 1: Measures for SMEs available in the VAT Directive Figure 2: Key VAT-related barriers to cross-border trade Figure 3: Problem Tree Figure 4: Functioning of the baseline scenario (including e-Commerce proposal) Figure 5: Simplified VAT obligations under Option 2, as compared to the baseline scenario Figure 6: SME Panel results – most burdensome VAT obligations Figure 7: OPC results – distribution of respondents (by category) Figure 8: OPC results – VAT provisions for SMEs currently applied Figure 9: OPC results – weight of VAT obligations in deciding to sell cross-border Figure 10: OPC results – opening up of the SME exemption Figure 11: OPC results – need to further simplify VAT obligations Figure 12: Example of the application of the flat-rate scheme Figure 13: Example of the application of the SME exemption Figure 14: Example of the functioning of the graduated relief in the Netherlands Figure 15: Impact of taxing at destination on the VAT rules for small businesses Figure 16: Example Option 2A Figure 17: Example Option 2B Figure 18: Example Option 2C List of Boxes

Box 1: Characteristics of simplified VAT obligations Box 2: Characteristics of the simplified procedures for charging and collecting VAT Box 3: Characteristics of the SME exemption Box 4: Example – VAT burdens faced by an SME wanting to engage in cross-border supplies List of abbreviations B2B Business to Business B2C Business to Consumer CGE Computable General Equilibrium CIT Corporate Income Tax CJEU Court of Justice of the European Union DG AGRI Directorate-General for Agriculture and Rural Development DG BUDG Directorate-General for Budget DG CONNECT Directorate-General for Communications Networks, Content and Technology DG COMP Directorate-General for Competition DG ENER Directorate-General for Energy DG ENV Directorate-General for Environment DG FISMA Directorate-General for Financial Stability, Financial Services and Capital Markets Union DG GROW Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs DG JUST Directorate-General for Justice and Consumers DG TAXUD Directorate-General for Taxation and Customs Union EEN Enterprise Europe Network EU European Union EUR Euro GDP Gross Domestic Product GFV Group on the Future of VAT MOSS Mini One Stop Shop OECD Organisation for Economic Co-operation and Development OLAF European Anti-Fraud Office OPC Open Public Consultation OSS One-Stop Shop REFIT Regulatory Fitness and Performance Programme SCAC Standing Committee on Administrative Cooperation SCM Standard Cost Model SG Secretariat-General SJ Legal Service SME Small and Medium-sized Enterprises TBE Telecommunications, Broadcasting and Electronic TFEU Treaty on the Functioning of the European Union VAT Value Added Tax VEG VAT Expert Group Glossary Administrative costs Costs for tax administrations. Administrative costs for a tax administration will typically include costs relating to the following activities: processing VAT registrations, undertaking VAT audits, reviewing VAT returns, reviewing recapitulative statements, helpline and written query handling and the implementation of new legislation. Cash-accounting scheme Measure optional for Member States and businesses, according to which businesses account for the VAT charged (output VAT) only when they have received payment from their customers and deduct VAT paid (input VAT) only once the purchases have been paid to their suppliers. See Annex 5 for more information. Compliance costs Costs for businesses. Compliance costs for businesses will typically include costs relating to the following activities: registration for VAT, completion of periodic VAT returns, dealing with a VAT audit, obtaining customer’s VAT registration details, completing recapitulative statements and obtaining proof of the intra-EU movement of goods. Cross-border trade Refers solely to intra-EU cross-border B2B trade. The terms ‘trading across the EU’, ‘trading cross-border’, ‘trading in another Member State’, ‘doing business in other Member States’, ‘doing business across the EU’, ‘intra-EU transactions, ‘intra-EU trade’ refer to any situation where a business: (i) makes supplies of goods taxable in a Member State other than that in which he is established; (ii) acquires goods from a business established in another Member State; or (iii) supplies goods to a customer established in another Member State. EUROFISC EUROFISC is a network for the swift exchange of targeted information between Member States. Fiscalis 2020 Fiscalis 2020 is an EU cooperation programme enabling national tax administrations to create and exchange information and expertise. Flat-rate scheme Measure optional for Member States and businesses which simplifies the calculation of the VAT due by SMEs. See Annex 5 for more information. Group on the Future of VAT (GFV) The Group on the Future of VAT is an informal Commission expert group set up in 2011 in response to the need for a forum where more in-depth discussions on the topics raised in the 2010 Green Paper can be held. The Group is composed of delegates (VAT experts) from the 28 EU Member States’ tax administrations and serves as a forum for in-depth discussion and exchange of opinions on the Commission’s pre-legislative initiatives and the preparation of future VAT legislation. Graduated relief Measure optional for Member States and businesses, according to which the amount of VAT to be collected by a business under the measure is reduced depending on its turnover, with the relief gradually decreasing with the increase of turnover. See Annex 5 for more information. Input VAT VAT paid by a business to its suppliers. Occasional trader Concept not contained in the VAT Directive, often used for describing private individuals carrying out economic activities on an irregular basis outside of their main employment (i.e. that activity is therefore incidental). For instance, private individuals with photovoltaic installations on their homes producing electricity and selling it to the general network; or also private individuals who on occasion carry out economic activities outside of their main employment, such as selling products online, or sharing goods or services on collaborative economy platforms in exchange for a compensation (e.g. sharing their houses or sharing their cars). Output VAT VAT collected by a business from its customers. Recapitulative statements (‘EU Sales Lists’) Declarations submitted by businesses making intra-EU supplies to their tax administrations, usually on a monthly or quarterly basis. In such statements, businesses have to indicate the enterprises in other Member States to whom they have supplied goods. See Annex 5 for more information. SMEs At EU level, SMEs are generally defined according to the Commission Recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises. However, for VAT purposes the definition of SMEs is much more restrictive. With its rules for small enterprises, the VAT Directive targets businesses operating on a much smaller scale, which under the general definition would be considered as ‘micro-enterprises’ (that is, with turnover of up to EUR 2 000 000). Therefore, and also in line with the 2017 Deloitte SME study, for the purposes of this Impact Assessment ‘SMEs’ (and also the terms ‘small enterprises’ and ‘small businesses’) are meant to be: ·Generally, businesses with turnover of up to EUR 2 000 000. ·However, some of the measures in the policy options (e.g. the SME exemption) target an even more restricted sub-set of SMEs. Hence, the analysis sometimes focuses on this specific category, which has been determined to cover businesses below the turnover threshold of EUR 100 000. SME exemption Measure optional for Member States and businesses according to which small enterprises are exempted from collecting and paying VAT, provided that their annual turnover does not exceed a certain threshold. See Annex 5 for more information. Treasury A government department related to finance and taxation of a particular jurisdiction (of a Member State or a third country). VAT accounting (‘VAT record keeping’ or ‘bookkeeping’) VAT obligation for businesses to keep their accounts in sufficient detail for VAT to be collected and declared, and such procedure to be checked by the tax authorities. See Annex 5 for more information. VAT Committee Under Article 398 of the VAT Directive, the VAT Committee deals with the obligatory consultations required by certain Articles of that Directive. In addition, it examines questions on the application of the EU VAT provisions raised by the Chairman on his own initiative or at the request of a Member State. The VAT Committee is also a forum for the exchange of views in order to reach guidelines on a uniform application of common practices with regard to VAT provisions. VAT Directive VAT due Difference between Output VAT and Input VAT (VAT due = Output VAT – Input VAT). VAT Expert Group (VEG) The VAT Expert Group was set up in 2012 by the Commission Decision 2012/C 188/02 of 26 June 2012 in response to the request by stakeholders for greater involvement in the process of preparing EU VAT legislation expressed during the public consultation launched by the 2010 Green Paper on the future of VAT. The Group is composed of 40 members: individuals with the requisite expertise in the area of VAT, organisations representing in particular businesses, tax practitioners and academics. The VEG serves as a bilateral forum to allow for an open, structured and transparent dialogue between the Commission and stakeholders on any matter relating to the preparation and implementation of EU legislation and other policy initiatives taken at EU level in the field of VAT. VAT invoicing VAT obligation for businesses to issue invoices for every supply made. See Annex 5 for more information. VAT payment Obligation to pay the VAT due on a transaction to the tax authorities, which usually lies on the supplier. See Annex 5 for more information. VAT registration VAT obligation for businesses to register for VAT purposes when their activity as a business starts, changes or ceases. See Annex 5 for more information. VAT reporting VAT obligation for businesses to submit VAT returns and recapitulative statements. See Annex 5 for more information. VAT return Declaration made by businesses to their tax administrations where they indicate which are the transactions made, the VAT that they have charged to their customers (output VAT), the VAT that they have paid to their suppliers (input VAT), and the amount of VAT payable or refundable (difference between output VAT and input VAT). See Annex 5 for more information.

1.Introduction and context 1.1.Introduction

Value Added Tax (VAT) is a general tax on consumption applied to supplies of goods and services along the whole production and distribution process. It is a major and growing source of tax revenue in the European Union (EU). VAT raised slightly more than EUR 1 trillion in 2015, which corresponds to 7% of EU GDP or 17.6% of total national tax revenues. One of the EU’s own resources is also based on VAT (12.4% of the EU budget in 2015). As a broad-based consumption tax, it is considered to be one of the most growth-friendly forms of taxation. One of the key strengths of VAT is that, by allowing taxpayers to exactly offset the tax incurred in previous stages of the production chain, it is much better suited than other types of indirect taxes to operate an internal market free of tax distortions. This was the main reason for its early adoption by the EU. It is governed by the VAT Directive which aims at ensuring that the principles underlying the functioning of this tax apply consistently in all Member States. In recent years, however, the VAT system has been unable to keep pace with the challenges of the global economy and the opportunities offered by new technologies. Therefore, the Commission adopted on 7 April 2016 an Action Plan on VAT (hereinafter ‘2016 VAT Action Plan’) setting out ways to modernise the VAT system so as to make it simpler, more fraud-proof and business-friendly. In this context, the Commission announced its intention to adopt in 2017 four VAT-related proposals: 1)a definitive VAT system for intra-EU cross-border trade based on the principle of taxation in the Member State of destination in order to create a robust single European VAT area (first step); 2)a modernised VAT rates policy so as to allow Member States greater autonomy on setting the VAT rates; 3)a comprehensive simplification VAT package for SMEs; 4)a proposal to enhance VAT administrative cooperation and EUROFISC . This Impact Assessment relates to the proposal for a comprehensive simplification VAT package for SMEs, which involves a review of the special scheme for small enterprises under the VAT Directive. That is a proposal which is linked in particular to two other legislative initiatives stemming from the VAT Action Plan: (i) the proposal for removing VAT obstacles to cross-border e-Commerce, which was adopted in December 2016 (hereinafter ‘e-Commerce proposal’); and (ii) the proposal on a definitive VAT system for intra-EU cross-border trade foreseen for adoption in September this year (hereinafter ‘definitive VAT system proposal’). It is also closely related to the VAT place of supply rules for telecommunications, broadcasting and electronically supplied services, which entered into force in 2015 (hereinafter ‘2015 place of supply rules’). 1.2.Scope and objective of the initiative: a modern, simplified and comprehensive regime for small enterprises The scope of the present initiative covers the review of the VAT rules for small enterprises (hereinafter ‘SMEs’) provided for in the VAT Directive, namely: the exemption in the special scheme for small enterprises laid down in Articles 281-294 (hereinafter, the ‘SME scheme’) and other measures outside the scheme which allow to simplify different VAT obligations. The other provisions provided for in the SME scheme, such as other simplified procedures for charging and collecting VAT are not part of this initiative and therefore will not be reviewed in substance. The small enterprises that will be impacted by the review are those with an annual turnover not exceeding EUR 2 000 000, as in VAT terms only these businesses are generally referred to as SMEs (see section 1.3.2). These small enterprises constitute the vast majority of businesses in the EU (98%). In addition to the review, this Impact Assessment covers a specific issue relating to the expansion of new opportunities for trade and entrepreneurship resulting from the collaborative economy and digital technologies, which is the VAT treatment of the so-called occasional traders. These traders are private individuals offering services on an occasional basis (e.g. sharing assets or selling electricity home made to the network) which may qualify as taxable person for VAT purposes and consequently benefit from the SME scheme. The increasing number of occasional traders exploiting the opportunities offered by the digital technologies can indeed be a challenge for both Member States and businesses with regard to the application of VAT rules as these traders blur the lines between consumer and supplier, professional and non-professional service provider, private and economic activity. As a result of the assessment, this issue (tackled by the policy option 4 described in section 5.2.4) has not been taken on board in the final SME package, as it would require legislative changes touching upon complex VAT issues that need a distinct evaluation exercise (see section 7.3). The review is long overdue for several reasons. First of all, despite the fact that the VAT Directive gives Member States the possibility to exempt small enterprises from VAT, a possibility widely used by the Member States, these enterprises as a category continue to suffer from disproportionate VAT compliance costs that among others represent a real obstacle to SMEs' growth (see section 2.2.1). It has been assessed indeed that the current SME scheme presents several drawbacks that make the scheme unable to fully address this problem. In particular, the SME exemption does not reflect the Single Market perspective and the move to a definitive system based on the destination principle: the scheme is distortive and targeted mostly at businesses trading domestically and in the B2C context. Moreover, there are two other reasons that call for action. Firstly, the SME scheme is obsolete already now, given that it works on the basis of deviations from the general provisions laid down in the VAT Directive. And secondly, the SME scheme, which provides for measures to be applied in the Member State where the small enterprises are established, will become unsustainable when the evolution of the VAT system towards taxation at destination is completed. This aspect is further explained in section 2.5. The goal of the initiative is therefore to set a modern, simplified and comprehensive regime for small enterprises that would allow the achievement of the general objectives: to contribute to the creation of an environment conducive to SMEs’ growth, to contribute to the creation of a single EU VAT area and to contribute to the smooth functioning of a deeper and fairer Single Market. The specific objectives are to achieve greater effectiveness in reducing VAT compliance costs for SMEs, more level playing field for them and to contribute to fighting the VAT fraud. The present initiative contributes to the construction of an efficient and robust VAT system based on the destination principle. The general and specific objectives of the initiative are further clarified in section 4. The proposal draws on the Commission’s experience as regards prior initiatives for simplifying VAT rules for small businesses. In this respect, it should be noted that this proposal will not impose harmonised exemption thresholds on Member States (see section 5.2.2). Moreover, the scope of the present initiative is much larger than the previous ones as it covers not only the exemption for small enterprises but also simplified VAT obligations for both exempt and non-exempt businesses. Finally, the initiative encompasses any type of transaction: B2B and B2C supplies of goods and services, in a domestic and cross-border context. While Member States keep their prudent attitude towards harmonisation of the VAT SME exemption and simplification of obligations, the situation has evolved since the previous proposals were adopted by the Commission in 2004 and 2013. In particular, the construction of the Single Market has progressed and the VAT system evolved towards taxation at destination. The SME initiative is particularly linked with the proposal on the definitive VAT regime because the current provisions of the SME scheme are temporary in character and apply only until the definitive arrangements for B2B cross-border trade enter into force (Article 292 of the VAT Directive). With the new rules, the currently existing exemption for the B2B cross-border supply of goods will disappear and businesses making such supplies will be liable for declaring and paying VAT in the Member State of arrival of the goods. In order to minimise the burden for SMEs making intra-EU transactions in goods, the SME package will allow them to benefit from simplified VAT obligations irrespective of whether they make use of the SME exemption. It should be noted that the move towards taxation at destination has been pursued in the VAT system already for a while. One such example referred to above are the place of supply rules for telecommunications, broadcasting and electronically supplied services, which entered into force in 2015, another – the e-Commerce proposal currently under discussion in the Council. It is therefore clear that the present initiative does not necessarily depend on the one on definitive regime and its success in the Council.

The interplay among the different VAT proposals is further explained in Annex 6. This initiative is part of the Commission’s Regulatory Fitness and Performance Programme (REFIT), which aims to make EU law simple and less costly, in particular for small enterprises. 1.3.Current framework for SMEs provided for under the VAT Directive Some basic explanation of the functioning of the VAT system in general and of the VAT rules for SMEs in particular is provided below in order to set out the context of the review. A more detailed picture is provided in Annex 5. 1.3.1.Functioning of the common system of value added tax and administrative obligations VAT is a consumption tax, borne ultimately by the final consumer. Under the EU VAT system, businesses supplying goods or services collect the VAT paid by the consumer, while being able to deduct from the VAT they have collected the amount of tax they have paid to other suppliers on purchases for their business activities. The difference between VAT collected from consumers (output VAT) and VAT paid to other suppliers (input VAT) is the VAT due to the tax authorities. As a result of businesses having to collect VAT, the VAT Directive lays down a series of administrative obligations which aim at ensuring a correct functioning of the system. These obligations can be summarised as follows: Table 1: Summary of VAT administrative obligations for businesses VAT obligation Description VAT registration Registration for VAT purposes VAT invoicing Issue of invoices VAT accounting (‘record keeping’ or ‘bookkeeping’) Keeping accounts in sufficient detail for VAT to be applied and its application checked by the tax authorities VAT reporting (VAT returns) Preparing and submitting periodical VAT returns and recapitulative statements VAT payment Collecting the VAT and paying it over to the tax authorities Source: Commission services The compliance burden derived from the need to observe these obligations creates a cost for businesses that is normally referred to as ‘compliance cost’. VAT obligations are particularly burdensome for businesses that are small given that they operate with more limited resources than large enterprises, which leads to small businesses bearing proportionally higher VAT compliance costs than larger businesses. Hence, the VAT Directive sets out several provisions designed to alleviate the burden that small businesses face in dealing with VAT. 1.3.2.The notion of an SME under the VAT Directive At EU level, SMEs are generally defined according to the Commission Recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises (hereinafter ‘SME definition’). However, for VAT purposes the definition of SMEs is much more restrictive. With its rules for small enterprises, the VAT Directive targets businesses operating on a much smaller scale, which under the general definition would be considered as ‘micro-enterprises’ (see Table 2). Therefore, for the purpose of this initiative, SMEs are defined as businesses with annual turnover not exceeding EUR 2 000 000, which according to the EU definition of SME qualify as micro-businesses. These businesses make up about 98% of all EU enterprises and contribute about 15% of total turnover generated in the EU and about 25% of net VAT revenues. In addition, about 69% of all businesses have a turnover of less than EUR 50 000 and generate 1% of the total turnover in the EU. The above definition is also consistent with other simplification measures available in the VAT Directive, but outside the SME scheme, which are specific for businesses with turnover below EUR 2 000 000 (e.g. cash accounting). Table 2: Definition of SMEs for VAT purposes (magnitudes in EUR millions) Commission Recommendation 2003/361 Definition for VAT purposes ·SME definition based on the following criteria: ·Target: up to EUR 50 m ·No definition as such: reference to ‘small enterprises’ in the VAT Directive ·Target: much smaller businesses (approximately equivalent to the category ‘micro’ according to the Commission Recommendation 2003/361, up to EUR 2 m) ·Several measure-specific thresholds, the higher of which is EUR 2 m turnover (for cash-accounting) Source: Commission services 1.3.3.Rules on taxation of SMEs under the VAT Directive

The measures foreseen in the VAT Directive for small enterprises can broadly speaking be grouped into three categories: 1)Simplified VAT obligations 2)Simplified procedures for charging and collecting VAT 3)SME exemption These measures are optional for Member States to apply. In addition, small businesses are frequently, but not always, free to choose whether to avail themselves of such measures, as in certain cases an SME may have an economic advantage in using the general rules rather than the SME-specific provisions (e.g. businesses paying a high amount of VAT to other suppliers, which may not be interested in applying the SME exemption, given that it would preclude them from deducting such input VAT). The majority of such measures aim at reducing compliance costs for businesses (e.g. simplified invoicing, or longer periods for submitting a VAT return), but some are intended to alleviate cash-flow problems by deferring payment of VAT by the business collecting it to the moment that it receives the tax from its client (e.g. cash-accounting), and others release businesses from the obligation to collect VAT altogether (i.e. SME exemption). Some of those measures, but not all, are part of the SME scheme. Other measures are available for small businesses, however, outside of the SME scheme. As can be seen from Figure 1 below, the fact that all of these measures are scattered throughout the VAT Directive increases the complexity of the current rules. Moreover, they are conceived as measures independent from each other rather than as a full simplification regime for small enterprises, which affects the overall effectiveness of the SME scheme. Source: Commission services 1.3.4.Simplified VAT obligations (outside of the SME scheme) Simplified VAT obligations provided for in the VAT Directive are optional for Member States to apply and for businesses to avail themselves of. If available, Member States have considerable flexibility as regards their implementation. As a result of this extensive range of options, the existing simplified VAT obligations and their characteristics vary among Member States, thus increasing complexity for small enterprises operating cross-border. Simplification measures may therefore concern VAT obligations of a diverse nature, such as the registration of businesses, invoicing, accounting, reporting, and the payment of VAT. Some measures are available to all businesses (e.g. simplified invoicing), and others are specific for small businesses using the SME exemption (e.g. release from certain or all VAT obligations of businesses availing themselves of that exemption). Moreover, the eligibility of businesses to apply the existing simplification measures varies (e.g. some simplification measures are linked to use of the SME exemption; others, such as the cash-accounting scheme, are conditional on business turnover being below certain thresholds). Where simplification measures are linked to use of the SME exemption, small businesses not eligible for exemption or opting not to avail themselves of it cannot benefit from them. Box 1: Characteristics of simplified VAT obligations ·Optional character: For both Member States and businesses. ·Complexity of rules (at domestic level): Simplified VAT obligations may concern registration, invoicing, accounting (‘record keeping’), reporting (e.g. VAT returns), and payment of VAT. These simplification measures are provided for in the VAT Directive outside of the SME scheme, while also being available for small businesses. ·Different eligibility criteria: Requirements for businesses to be able to use existing simplification measures may vary (e.g. some are linked to the use of the SME exemption; others, such as the cash-accounting scheme, are nonetheless conditional on the business turnover being below certain thresholds). Where simplification measures are linked to the use of the SME exemption, businesses outside of the exemption cannot benefit from them. ·Diversity of rules (at EU level): Given their optional character, the applicable simplification measures vary across the EU, increasing the compliance costs of small businesses trading cross-border. Source: Commission services 1.3.5.Simplified procedures for charging and collecting VAT (part of the SME scheme) Member States which might encounter difficulties in applying the normal VAT arrangements to small businesses, by reason of the activities or structure of such enterprises, may set simplified procedures for charging and collecting VAT provided that such measures do not lead to a reduction of the tax due. Such simplified procedures are thus optional for Member States to apply (although they are not widely used, with only 8 Member States having implemented them) and for businesses to avail themselves of. An example of such simplified procedures is the flat-rate schemes used to simplify the calculation and payment of the VAT due by small businesses. Moreover, Member States may be authorised by the Council, acting unanimously on a proposal from the Commission, to introduce special measures for derogation from the provisions of the VAT Directive in order to simplify the procedure for collecting VAT or to prevent certain forms of tax evasion or avoidance, provided that certain conditions are met. Box 2: Characteristics of the simplified procedures for charging and collecting VAT ·Optional character: For both Member States and businesses. ·Different eligibility criteria: Requirements for businesses to be able to use existing simplified procedure may vary (e.g. some Member States have set a turnover threshold, while others apply the flat-rate scheme on the basis of business sectors). ·Diversity of rules (at EU level): The design of flat-rate schemes may vary among Member States having introduced such schemes, with some enabling small businesses to apply a flat-rate to calculate their output VAT and others requiring such businesses to charge VAT on their outputs in accordance with the normal VAT rules whilst allowing a fixed flat-rate sum to be deducted from the amount of VAT due.

Source: Commission services 1.3.6.The SME exemption (part of the SME scheme) The VAT Directive allows Member States to exempt small businesses from VAT provided that their annual turnover does not exceed a certain threshold. The SME exemption is optional for Member States to implement and for eligible businesses to use. This measure has a very high implementation rate among Member States (26 of them have implemented the SME exemption) and also a very high participation rate among eligible businesses (on average 63% across Member States). This exemption, which for the small businesses eliminates the burden of collecting VAT, is usually accompanied by simplification measures (e.g. release of the obligation to register for VAT purposes, or to indicate VAT on invoices), which lower the compliance burden of businesses concerned. It is up to Member States, within the limits established by the VAT Directive, to set the thresholds under which the exemption applies. The threshold is an important element in the design of the scheme as it should reflect the trade-off between the need to reduce compliance and administrative costs and the need for Member States to collect VAT revenue. The level at which Member States decide to set the exemption threshold depends on the combination of different economic and policy factors linked to the national context. As a result of this, the level of thresholds varies substantially across the EU. According to information available for 2017, from the Member States making use of the exemption, the lowest threshold is that set by Sweden (EUR 3 168), while the UK applies the highest one (EUR 97 808). The SME exemption is also optional for small businesses to apply. However, small businesses using the exemption cannot deduct their input VAT (i.e. a business cannot deduct the VAT paid in respect of its input supplies from the VAT which the business is liable to pay on the output supplies). Eligible businesses may for instance decide to opt out of the exemption in cases where taxation, which entails deduction of input VAT, is more favourable than being under the exemption without the right to deduct. The SME exemption is available only to businesses established in the Member State in which VAT is due (i.e. it is not possible to apply the exemption in cross-border trade). This strict territorial application is not aligned with the ongoing reforms of the VAT system moving towards taxation at destination, according to which many small businesses may have to charge VAT to their customers in Member States other than their own. The VAT Directive also lays down a variation of the SME exemption, known as graduated relief, which reduces the burden for small businesses of collecting VAT, albeit not completely. A business applying this measure would receive a VAT relief on part of its turnover, which would gradually decrease with the increase of the turnover (the more turnover, the less VAT relief). However, due to high compliance and administrative costs that it induces the graduated relief does not seem to be a particularly effective measure in practice. It is applied by only three Member States (Spain, Finland and the Netherlands), and only 5.7% of the business respondents to the open public consultation recently carried out were using the scheme. Box 3: Characteristics of the SME exemption ·Temporary character of the exemption: Arrangements regarding exemptions and graduated relief for small businesses apply only until the definitive arrangements enter into force. ·Optional character: Both for Member States and businesses. ·Strict territorial application: Exemption only covers enterprises established in the Member State in which the VAT is due. ·Exemption thresholds: Set out in the VAT Directive or granted by way of derogation. The thresholds currently applied vary greatly and range from slightly above EUR 3 000 to about EUR 100 000 (see Annex 9). ·Basis for the calculation of the threshold: Turnover, calculated in accordance with the provisions of the VAT Directive. ·Businesses using the scheme may not indicate VAT on their invoices. ·Businesses using the scheme cannot deduct input VAT paid. Source: Commission services 2.What is the problem and why is it a problem? 2.1.Introduction As set out in the 2011 Communication and the 2016 VAT Action Plan, the EU VAT system is highly complex for businesses generally, and particularly for small enterprises which bear on average proportionally higher VAT compliance costs than large enterprises. In that regard, the Commission receives frequent complaints from business, which confirms the need for action. In addition, the current VAT system does not take into account the Single Market perspective and the evolution towards taxation at destination. According to the OECD and Eurostat statistics, the SMEs worldwide are most present in the services sector, with smaller firms active particularly in the wholesale and retail trade, horeca sector, communications, business services (e.g. computer software, information processing, marketing, human resource development, etc.) as well as construction and manufacturing, providing a very important source of employment. The sectors they tend to operate in allow their business models to reach cross-border. This, combined with increased outsourcing of specialised services (often provided by SMEs), new technologies and ever growing e-commerce, allows SMEs to break out of their traditional role and seize opportunities offered by the Single Market. However, in doing so, they face numerous problems related to complying with the diverse rules on VAT for small enterprises, which in design were to support them. The need to act was supported in the open public consultation for this initiative whereby 87% of respondents either agreed or strongly agreed with the objective of the Commission to simplify VAT obligations for small enterprises and 71% supported harmonisation of SME exemptions in the EU. Also enterprises that participated earlier, in the summer of 2016, in the SME panel consultation emphasised in their general comments the need for further harmonisation, simplification and clarification of VAT rules across the EU. 2.2.The problems There are in essence three main problems with the current VAT rules for SMEs. These problems are inter-related and stem from the complexity of the current system, the lack of alignment between the different SME schemes in place in the 28 Member States, and from the design of the SME exemption. They are further linked to the evolution of the EU VAT regime towards taxation at destination. The identification of the problems and the problem drivers derive from the 2017 Deloitte SME study and consultations with business and Member States. 2.2.1.Compliance costs: domestic and cross-border

This problem is caused by all the three drivers discussed further below in section 2.3: complexity and diversity of rules on VAT obligations across the EU and the design of the SME exemption due to which SMEs trading cross-border cannot benefit from this exemption in Member States others than the one in which they are established. As pointed out in the 2016 VAT Action Plan and confirmed by the 2017 Deloitte SME study, small enterprises bear proportionally higher VAT compliance costs than large businesses. In more general terms, in 2008 it was estimated that where a big company spends EUR 1 per employee because of a regulatory duty, a small business might have to spend on average up to EUR 10. Compliance costs are notoriously difficult to measure. The main methodological challenge in such assessment on the targeted stakeholders is assessing the population that will have to bear the costs and the unit cost. Estimates of VAT-related burdens typically do not include the costs for international activities, let alone to the level of granularity of data distinguishing the smallest of enterprises. While Eurostat provides some data on the incidence of SMEs selling cross-border, for most countries this data does not include the smallest businesses (those with fewer than 10 employees). Moreover, the data available only covers the incidence of cross-border trade; no data is available on the value of sales in each country or the number of firms reaching the VAT registration threshold in each market. Therefore, the effective burden is difficult to pinpoint. However, the economic literature is unequivocal on the fact that any such costs are heavier for SMEs. SMEs spend on average 2.6% of their sales revenues on tax compliance costs, for large enterprises these costs represent only 0.02% of their sales revenues. These costs stem from the complexity of VAT rules relating to businesses’ obligations – as described in greater detail in section 2.3 – and the extensive and recurrent reporting requirements. In addition, compliance costs are multiplied for businesses trading cross-border due to the mere need to comply with the different sets of obligations in place in the respective Member States in which their supplies are taxable. Some of these costs are one-off, fixed setup costs, more or less independent of the size of the company or volume of taxed transactions. They could be seen as an ‘entry fee’ to another market, inhibiting the entry of new companies into cross-border trade. These costs press relatively heavier on small enterprises seeking to make the transition from a business orientated purely to the domestic market to one trading throughout Europe. They could thus distort both the pattern of trade and the size structure of industry by favouring larger firms, for whom the fixed compliance costs and burdens are smaller in proportion of total costs and revenues. Despite a certain degree of harmonisation as regards obligations, large differences remain between national systems. Research shows that on average a firm trading in two Member States would have to deal with 11 differences in VAT-related procedures. The average cost for SMEs to account for VAT in another Member State is estimated to be EUR 4 100 annually per Member State they supply to. This discourages SMEs from exploiting the opportunities offered by the Single Market by increasing the costs of border-crossing trade flows relative to domestic sales. Such costs are likely to bear relatively heavily on small and medium-sized businesses which may only be trading small volumes, creating a real market-entry barrier and anti-SME bias in intra-EU trade. The VAT regulations are complex. Small enterprises may lack the knowledge required to use the correct policies, time schedules and rates for all their transactions. The onus rests on the companies to comply with the VAT rules with financial and even criminal sanctions for failing to do so. On the other hand, companies in their willingness to comply, may register for VAT unnecessarily, potentially due to the apparent uncertainty about international VAT treatment – thereby creating additional administrative costs for tax administrations. Overall, this complexity is such that it forces the majority of small businesses to have recourse on a permanent basis to costly advisory services. In reply to the questionnaire published in the framework of an SME panel consultation in spring 2016, over 55% of respondents indicated having used services of an external consultant in the last financial year in order to advise on and help them to comply with their VAT obligations. Indeed, as demonstrated in the case study on the cost of compliance for small businesses in Germany under the 2011 IFS retrospective evaluation of the VAT system study, the proportion of firms which are exporters is very much lower among small firms than among larger firms. Fewer than 5% of firms in the two smallest size classes are engaged in any exporting at all (compared with 11% of firms overall, and more than 40% of firms with an annual turnover in excess of EUR 1 million). The export turnover of the 1.5 million German firms in the two smallest size classes is of almost trivial economic significance, less than EUR 650 million (less than 1/10 of 1% of all firms’ exports). Nevertheless, those small firms that do participate in exporting have quite substantial levels of exports in relation to their turnover – more than 20% of turnover in the lowest two size classes, a higher percentage than in medium-sized firms, and broadly equal to the export share for exporting firms as a whole. Although by no means a conclusive demonstration, this pattern of exporting behaviour strongly suggests that small firms encounter ‘fixed entry cost’ barriers to exporting that are proportionately more significant than for larger firms. Some similar concerns that engaging in international trade is a major source of complexity for small enterprises were raised as well by the UK’s Office of Tax Simplification during their investigation of the scope for further simplification of taxes for small businesses. It concluded that although international trade is dominated by large firms, it does not indicate that the small business problem is unimportant: most trade could be conducted by large firms precisely because small firms are deterred, which (if true) would indicate that the problem is severe. While it is difficult to be precise about the costs and burdens, to appreciate better the difficulties faced by the small enterprises an anecdotal example as put forward in the 2011 IFS retrospective evaluation of the VAT system study may come useful. Box 4: Example – VAT burdens faced by an SME wanting to engage in cross-border supplies Consider a small business in a provincial town, which one day receives a phone call from a firm in another EU Member State who wishes to place an order. The trader is delighted to receive the call, but is immediately apprehensive about accepting the order. First of all, she does not know which tax regime would apply to the supply. Would it be taxed in her country or in her customer’s country? Would she have to register for VAT in the destination country, and would that depend on whether sales to customers in that country alone exceeded that country’s registration threshold? If the destination country’s VAT regime is relevant at all, what VAT rate applies to her products in that country? What paperwork would she have to complete, and would her record-keeping have to change from what she already did for domestic VAT purposes? Not only does our would-be exporter not know the answers to these questions (and many more); her regular tax advisor – a high street accountant accustomed to dealing only with domestic tax – does not know either. Moreover, neither of them knows quite where to find out. Their domestic tax authority does not consider it their concern; the tax authority in the foreign country may have a website, but they do not know where to find the relevant information, and indeed the website or paper literature may be in a language they do not understand (even a different alphabet). The best way to find out the VAT implications of accepting this order may well be to approach a firm of tax advisors with greater specialist knowledge, but this is likely to be expensive. All of this is before the would-be exporter has even found out what the VAT implications of accepting this order would be, let alone actually incurred any actual additional costs of selling her products abroad. Even before considering the costs of actually complying, the costs of merely ascertaining her obligations must be considered. And at the time she receives the phone call, she may have little idea what the costs (in time and money) of finding out the VAT implications of this sale would be. The sheer uncertainty might be enough to dissuade her from accepting the order, to choose to ‘play safe’. Much of the costs described above relate to the category of costs that can be called as the ‘hassle’ costs. They are even more difficult to quantify/monetize or relate to specific obligation. They are the costs felt by the businesses and relate to situations of administrative delays, cumbersome access to information, familiarisation time, the opportunity cost of waiting time, sorting out cases of inconsistencies between received information or instructions, lengthy litigations, etc. Whereas unquantifiable, one can assume that these costs, exacerbated in the cross-border situations by other factors such as geo-blocking or simply language-related difficulties, when falling on the shoulders of fewer staff in the smallest enterprises, are felt hardest. Source: 2011 IFS retrospective evaluation of the VAT system study 2.2.2.Lack of neutrality of the current system The problem described in this section stems mainly from drivers linked respectively to the design of the SME exemption and to diversity of rules on VAT obligations. Strict territorial limitation of the VAT exemption provided for under the SME scheme, leaving only small enterprises established within the Member State of taxation to benefit, raises serious issues. It has a negative impact on the competitive situation of suppliers established in other Member States compared to that of domestic suppliers of goods and services. The issues are set to increase with the shift towards taxation at destination. One such example is linked to the rules by which telecommunications, broadcasting and electronically supplied services provided to final consumers have been taxed at destination since 1 January 2015. These rules imply that small enterprises having had no VAT obligations in their own Member State (because they were able to make use of the SME exemption) now have to charge VAT in the Member State of their customer without having access to the exemption from which their competitors established in that Member State can benefit. This means that there is no level playing field for small enterprises to trade within the European Union. Some respite is given by the common EU threshold introduced by the e-Commerce proposal (see section 5.2.1) but it is not sufficient to alleviate the distortive effects. UEAPME, the European SME umbrella organisation, representing about 12 million enterprises, in its position paper on the SME scheme, published in June 2017, confirms the distortive effects of the current VAT rules on competition and calls for a more level playing field for SMEs in order to encourage them to fully seize the potential of the Single Market. The competitive disadvantage vis-à-vis domestic suppliers contributes further to discouraging SMEs from carrying out cross-border operations and in consequence prevents broader exploitation of the opportunities that the Single Market should bring. These problems were signalled already in reaction to the 2010 Green Paper on the future of VAT (hereinafter ‘2010 Green Paper’). That Paper was followed by a six-month public consultation on how the EU VAT system could be strengthened and improved to the benefit of all stakeholders. The Commission received 1 726 replies from businesses, academics, citizens and tax authorities, which constituted a record response to a tax consultation at the time. As regards the SME scheme under the VAT Directive, these respondents pointed, indeed, to the distortion of competition created by the territorial application of the SME exemption. Also more recent data stemming from the 2017 Deloitte SME study support the above claims. It shows that while on average 30% of enterprises make supplies to other Member States, among the smallest enterprises (with turnover of less than EUR 50 000) only around 12% sell to other Member States. 45% of respondents to the recent public consultation, closed on 20 March 2017, indicated interest in benefitting from the SME exemption in other Member States. 50% of respondents found that businesses from other Member States should be able to benefit from the SME exemption provided for in their own Member State. As the most important potential benefits of the opening of the SME exemption to suppliers from other Member States, 43% of the respondents indicated that it would primarily make it easier to carry out supplies in other Member States and 39% stated that it would primarily encourage start-ups and SMEs to grow quicker and that it would help to achieve a more level playing field for companies.

In addition to the cross-border dimension, lack of neutrality of the SME exemption also affects competition on domestic markets – that is between suppliers benefitting from the exemption and suppliers not able to benefit from it despite having similar turnover; because they have exceeded the threshold or they have opted for the application of the normal VAT rules. Such a distortive effect is inherent in any threshold and is not limited to the SME exemption. In addition to distortive impact on competition, the existence of the threshold means also that SMEs due to the fear of going above the threshold may limit their turnover which would impede growth. This is supported by the analysis of ‘bunching’ behaviour of businesses below the threshold, i.e. high concentration of enterprises immediately below the threshold, limiting the growth of taxed sales, for example, by redirecting production to less taxed goods or services or by scaling down investment and marketing, in order to prevent taxation. The firms could also be artificially split when the turnover seems to exceed the threshold giving the retailer below the threshold an unfair competitive advantage over taxed retailers. On the basis of the existing evidence, it is difficult to assess the magnitude of the problem. Feedback provided by stakeholders suggests that the ‘threshold effect’ of the exemption may indeed prevent SMEs from growing, but is not conclusive. Nevertheless, addressing some of the disincentives inherent to the ‘threshold effect’ should contribute to securing more level playing field for the EU’s SMEs. Another feature of a non-neutral EU VAT system is linked to the high level of divergence between the different national rules on VAT obligations – as described further in section 2.3.2 – which creates a fixed-cost trade barrier, because of the costs that the companies would need to bear in adapting to VAT regimes of other Member States. Such fixed-cost trade barriers could have a negative impact even on the intent to participate in cross-border trade, particularly for small enterprises. On a global scale such divergence inhibits the completion of the Single Market, effectively distorting the competitive conditions for its enterprises. 2.2.3.VAT revenue losses for Member States The problem described in this section stems from all the three drivers set out in section 2.3. More precisely, challenges for Member States and tax administrations in terms of VAT losses are derived both from the VAT foregone from the SME exemption and non-compliance stemming from the complexity of VAT rules and differences between rules applicable in the respective Member States. Firstly, as regards the VAT foregone, the 2017 Deloitte SME study estimates the gross VAT revenue that exempt businesses would generate at EUR 13.4 billion or 1.3% of net VAT revenues. However, accounting for the fact that businesses would then be able to deduct their input VAT, the actual net VAT revenue at stake is estimated at EUR 3.8 billion, or 0.4% of net VAT revenues collected in the EU. It should be noted that it is Member States’ choice to forgo the VAT that would have been collected from the small enterprises. The main reason behind it is the socio-economic motives linked to the creation of growth friendly conditions for small enterprises. Moreover, the negligible contribution of the small enterprises to the overall VAT revenues is often outweighed by the enforcement costs that the authorities would need to bear to monitor SMEs’ compliance with their VAT obligations. The present initiative aims nevertheless at ensuring that within the current framework, the Member States can exert the desired level of control and ensure that VAT is duly paid and no VAT is unduly refunded. Secondly, regarding non-compliance of businesses with VAT rules, it is important to note that part of it is not necessarily due to fraudulent intentions on the side of entrepreneurs, but to complexity of VAT rules for SMEs. As pointed out in the 2017 Deloitte SME study, while SMEs already find it difficult to comply with domestic VAT obligations, compliance with cross-border obligations is an even more serious obstacle. Lack of alignment among Member States’ rules on VAT obligations for SMEs together with the domestic nature of SME schemes may create problems for businesses which start trading cross-border or have incidental cross-border supplies (taxable in another Member State). One simple example (referred by some of the businesses interviewed for the study) is where an SME supplier is benefitting from the SME exemption and is also relieved from VAT obligations on his domestic supplies. Such SMEs will not easily understand the consequences of starting trading in another Member State (e.g. that it is required to register for VAT and cannot benefit from the SME exemption in the other Member State or apply the domestic scheme to all its cross-border supplies). It should be noted that the situation should, to a certain limited extent, improve already with the introduction of the Common EU threshold set out in the e-Commerce proposal. It is, however, up to the initiative subject to this Impact Assessment to propose a more systemic solution. While the 2017 Deloitte SME study confirms broadly concerns regarding non-compliance and fraud linked to SME exemption, it provides no quantitative data. Neither are these available in the existing VAT gap calculations. Legitimate claims of input VAT may also cause problems. This is, in particular, the case of the so-called occasional traders whose treatment is currently not harmonised across the EU and puts in doubt the fairness of taxation while reducing potentially revenues due from VAT. The notion of an occasional trader would need to be further defined for the purposes of the review. In the current Impact Assessment it is used to denote individual users of the collaborative economy platforms and individuals whose incidental activities may qualify as an economic activity. While having a very limited taxable turnover and, consequently, output VAT, occasional traders may have paid important input VAT which may result in disproportionate deductions. These losses are currently of limited magnitude, but the situation is bound to evolve in the future as a result of developments relating to new forms of economic activity and technological development that ultimately blur the lines between consumers and businesses, that is, private and economic activity. The 2017 Deloitte SME study estimated the number of occasional traders at 6.4 million businesses and individuals, or 15% of all EU enterprises. The VAT treatment of an increasing number of occasional traders poses significant challenges for Member States’ tax administrations, since compliance control costs are disproportionate compared to revenue collected. Finally, the complexity of the VAT rules for SMEs alone can also have a noticeable cost to the Member States’ economic performance and, by extension, the tax revenues. In fact, the 2011 IFS retrospective evaluation of the VAT system study estimated that a 10% reduction in differences in VAT procedures could boost intra-EU trade by up to 3.7% and the GDP by up to 0.4%. In addition, compliance is difficult to monitor due to the large number of small businesses making use of the SME exemption and due to the simplification measures attached to this exemption. As businesses benefitting from the SME exemption generally do not submit VAT returns, it is reportedly challenging for tax authorities to check whether their turnover is below the SME exemption threshold. 2.3.Problem drivers The problems indicated above are caused by a set of interlinked drivers. It is not really possible to attribute a single driver to every problem. It is rather so that the combination of the drivers causes a series of problems. For example, high compliance costs for SMEs are driven not only by complexity of VAT rules, but for cross-border trading companies they result also from the diversity of rules across the EU and from the design of the SME exemption which makes it impossible for them to benefit from that exemption in other Member States. 2.3.1.Driver 1 – The complexity of the current VAT rules on obligations The evidence collected through stakeholder consultations, external studies and in-house research clearly shows that the rules on VAT obligations are complicated, non-harmonised, costly for business and difficult for Member States when it comes to ensuring compliance. Already the 2010 Green Paper emphasised compliance burdens on businesses stemming from the complexity of the VAT rules. It pointed out that dealing with VAT accounted for almost 60% of the total burden measured for 13 priority areas identified under the Better Regulation Agenda. Particular areas of concern included key elements in the system such as obligations, deduction and rates. These can be particularly severe for SMEs which cannot always afford tax expertise to deal with increasingly complex VAT rules. In this context it is telling that, according to an ongoing study, despite the fact that the average compliance cost is lower for VAT than for Corporate Income Tax (CIT), on average, enterprises find VAT compliance to be more irritating than CIT compliance. In the context of the 2015/2016 Deloitte e-Commerce study, a mix of 25 businesses across 8 Member States were interviewed with the view to rank four VAT-related barriers to cross-border trade: (1) varying distance sales thresholds, (2) monitoring of distance sales thresholds, (3) distortion of competition, and (4) dealing with different tax legislation and procedures in different countries. As shown in Figure 2, the need to deal with complex legislation and administrative procedures in different countries was found most burdensome irrespective of the size of the enterprises. The most burdensome procedures were identified to be the VAT registration and VAT declaration/refund. The interviewed companies highlighted the need to resort to external advisors to deal with national authorities of other Member States, which led to additional cost incurred. Figure 2: Key VAT-related barriers to cross-border trade

Source: 2015/2016 Deloitte e-Commerce study As mentioned above, in sections 2.1 and 2.2, in spring 2016 the Commission launched an SME panel consultation with a view to reaching out to SMEs in order to obtain their input. The Commission received more than 1 700 replies to the survey, which constitute an important contribution to the works on the SME reform package. The replies gathered through the consultation help to understand the experience of SMEs with VAT obligations and the compliance burden that these entail as well as SMEs’ views on the most needed simplification measures. Of the replies received over 70% came from enterprises with a stated turnover of up to EUR 2 000 000, i.e. microenterprises in the sense of the general SME definition. One-third of all respondents were enterprises with a stated turnover not exceeding EUR 100 000, which were the ones possibly most concerned with the issues linked to the SME exemption. Almost one-third of the respondents considered complexity of VAT legislation as the main problem in ensuring compliance with VAT obligations. As the most problematic VAT obligations almost 15% of respondents indicate filing VAT returns and over 12% deadlines for VAT payments. In their spontaneous, general comments enterprises that participated in the survey emphasised the need for further harmonisation, simplification and clarification of VAT rules across the EU. In particular, several respondents referred to the need for simplification of requirements regarding record keeping, invoicing and reporting. Also in the most recent open public consultation, closed in March 2017, 87% of respondents either agreed or strongly agreed that VAT obligations on SMEs should be further simplified. 2.3.2.Driver 2 – The diversity of the current rules on VAT obligations within the EU Currently Member States apply different simplified procedures for charging and collecting VAT and a number of simplification measures aimed at reducing the compliance burden on SMEs. While all these measures are designed to simplify the obligations on SMEs, the mere existence of different sets of obligations in the respective Member States causes additional costs to small enterprises trading cross-border. The 2011 IFS retrospective evaluation of the VAT system study provided a unique matrix of VAT dissimilarity indices for every bilateral country pair in the EU, which aggregated 116 various – qualitative and quantitative – aspects and functional domains in national VAT regimes, including rate structures, heterogeneity of administrative procedures, and the compliance cost burdens created by national VAT regimes. They capture the degree to which two EU Member States differ in their policies or practices and demonstrate that, as already mentioned before, a firm trading in two Member States would have to deal on average with 11 differences out of the 30 general VAT-related procedures. This result was found statistically significant and having an impact on the levels of cross-border trade. Indeed, the VAT Directive leaves considerable flexibility to Member States as regards measures aimed at simplifying VAT obligations on SMEs. This means that, despite coordination at the EU level on the basic structure of the VAT system, the situation is still such that companies operating in the Single Market have to deal with a complex and heterogeneous web of different national VAT rules. The 2017 Deloitte SME study illustrates well the diversity of national rules on obligations which virtually form a patchwork of schemes applicable to small enterprises in the EU. An overview of the special VAT measures for SMEs applied in all 28 Member States is included in Annex 10. A table showing the diversity of obligations linked to the SME exemptions in place in the EU Member States is provided in Annex 11. Also in the before mentioned most recent open public consultation, 80% of respondents either agreed or strongly agreed that simplified VAT obligations on SMEs should be harmonised. This claim is supported as well by UEAPME in its Position Paper referred to above in section 2.2.2. However, it must be pointed out that despite a clear case for harmonisation of VAT obligations for small enterprises, the Commission while preparing a proposal in this respect must be mindful of its past experience, in particular two proposals regarding respectively the simplified VAT obligations and a standard VAT return in which simplification and harmonisation of the VAT obligations was put forward. Both proposals had to be withdrawn due to a lack of consensus in the Council. 2.3.3.Driver 3 – Design of SME exemption Another driver of the problems with the current SME schemes across the EU is linked to the way the exemption is constructed. The 2017 Deloitte SME study found that the SME schemes at national level meet their principal objective to reduce SMEs’ compliance costs. However, this assessment concerns only the small enterprises in their domestic situation whereas all of those benefits are neutralised the moment the company decides to trade cross-border and bear the costs of complying with the VAT regime of another Member State. The problems with the overall effectiveness of the SME scheme as seen from the perspective of the Single Market are linked to several factors. First of all, the SME exemption is characterised by the limitation of the territorial application of the scheme to small enterprises established in the Member State in which the VAT is due, which has a distortive impact on competition between domestic suppliers and suppliers from other Member States and renders the exemption incompatible with the evolution of the VAT system towards taxation at destination and a genuinely single VAT area. This feature of the current exemption schemes is moreover difficult to reconcile with the basic principles of the Single Market. Secondly, there are broad differences between national exemption thresholds (see Annex 9) and between simplification measures linked to the exemption in different Member States. Thirdly, optionality of the exemption for enterprises can result in disproportionate input VAT claims by the so-called ‘occasional traders’ opting for application of normal VAT rules, which means that they have the right to deduction of their input VAT, which in turn results in revenue losses for Member States. Finally, the lack of any transitional period to facilitate the transition from exemption to taxation may have an effect of discouraging small enterprises from growing. This would be due to the fact that exceeding the turnover threshold, even if temporarily, would deprive them of the possibility to benefit from the exemption, as mentioned above. They would thus be falling from a situation of being fully exempt and having lighter obligations into a situation of having to comply with a full set of VAT obligations in addition to supporting the burden of collecting VAT. This effect has been subject to a study by the existing literature. According to some authors, data suggest that as small firms grow and approach the SME exemption threshold, a non-trivial proportion of them slow down their growth to avoid crossing the threshold and having to register for VAT purposes. In such circumstances, the saving in tax and compliance costs exceeds the reduction in sales volume. Such an effect of the design of the SME exemption threshold clearly runs counter to the Commission’s objective of removing the barriers for start-ups scaling up into bigger firms as proclaimed in the 2016 Start-Up Communication. 2.4.Problem Tree A summary of the problems, the problem drivers and the effects is presented below.

Source: Commission services 2.5.Evolution of the problem without action at EU level SMEs with turnover of up to EUR 2 000 000 constitute about 98% of all EU enterprises and contribute about 15% of total turnover generated in the EU and about 25% of net VAT revenues. The smallest businesses, those with less than EUR 50 000 of turnover represent about 69% of all businesses and generate only about 1% of the EU-wide turnover, with a negligible or negative amount of net VAT revenues. All these SMEs face disproportionate VAT compliance costs compared to larger enterprises and as a result their performance and growth is impaired across the EU and their entry into the Single Market is discouraged. The problems identified in section 2.2, particularly the lack of a level playing field for businesses and revenue losses for Member States, will only increase if there is no action at EU level. Furthermore, the high compliance costs for businesses wishing to trade cross-border will continue, in the absence of simplification, to hold back the development of the Single Market. In addition, it must be noted that already today the provisions of the VAT Directive as regards taxation of SMEs require a serious update. The basic threshold for SME exemption set out in Article 284 amounts to EUR 5 000 of annual turnover. Today only one Member State out of 26 applying the exemption sets its threshold at a lower level and nine Member States set their exemption thresholds on the basis of derogations from the VAT Directive’s provisions. Moreover, as the VAT system gradually evolves towards taxation at destination, the current provisions of the VAT Directive on taxation of SMEs and, in particular, on the SME exemption, will become completely out of date. Strict territorial limitation of the VAT exemption provided for under the SME scheme, leaving only small enterprises established within the Member State of taxation to benefit and for their domestic supplies only, was established when the vision of the EU VAT system was still based on the principle of origin. It will not work in a system based on taxation at destination. In such a system VAT has to be declared and accounted for in the Member State where the customer is established (Member State of ‘destination’), rather than in the Member State where the SME making the supply is established (Member State of ‘origin’). The principle of taxation at destination is being mainly implemented by a set of three complementary legislative initiatives: (i) the 2015 place of supply rules, which entered into force in 2015; (ii) the e-Commerce proposal, adopted in 2016; and (iii) the definitive VAT system proposal, to be adopted in 2017. While some of these initiatives foresee measures to smooth the effects of SMEs having to declare and pay VAT in the Member State of destination, further support is needed. The above changes mean that in practice a small enterprise established in one Member State and selling to customers in all other Member States will have to declare and pay VAT in 27 different Member States from the very first supply (because no SME exemption is available in the Member State of destination); and also observe 27 different sets of VAT rules (e.g. as regards registration, or other VAT obligations). This scenario is distortive for small enterprises selling cross-border vis-à-vis those selling only domestically and also hampers SMEs’ growth and discourages them from fully seizing the opportunities of the Single Market. Some of the contributions received through the REFIT platform referred to this problem (see Annex 2). In particular, submission XVIII.3.a by the Danish Business Forum, which stressed the complexity of the VAT legislation that businesses operating at EU level must face, which goes against the Single Market: ‘In the Internal Market it should in principle be just as easy to do business with a customer in Poland and Germany as with a customer in Denmark. However, because VAT rules are not harmonised the consequence is that companies that begin to trade within the internal market often encounter difficulties’. Having said the above, it should be noted that the first step in order to address this problem, for a limited proportion of supplies, has been made in the e-Commerce proposal through the common EU threshold below which B2C sales of goods and services in other Member States can be treated as domestic transactions. It is up to the present initiative to develop a more systemic solution. 3.Why should the EU Act? SMEs are the backbone of the European economy but still in all phases of their lifecycle they face obstacles which preclude them from seizing the full potential of the Single Market. The complexity of the EU VAT system can result in a high compliance burden on SMEs, particularly when trading with other Member States. This does not only hamper their growth but may even prevent them from engaging in cross-border trade and reap the benefits of the Single Market. Despite representing a significant part of the economic activity in the EU, small businesses only generate 15% of the total EU turnover compared to large companies which contribute the rest 75%. The main problems which have been identified (distortive effects, high compliance costs, etc.) are triggered by the rules of the VAT Directive as they stand. In particular, the current VAT rules for small businesses suffer from several drawbacks: the rules do not reflect the Single Market perspective and the move to a definitive system based on the destination principle: the special scheme for businesses is targeted mostly at businesses trading domestically and in the B2C context. Given that VAT is an EU tax, Member States are currently not allowed to set different rules themselves and therefore any initiative to modernise VAT obligations and the SME exemption requires a proposal by the Commission to amend the VAT Directive. The legal basis is Article 113 of the TFEU which states that ‘The Council shall, acting unanimously in accordance with a special legislative procedure and after consulting the European Parliament and the Economic and Social Committee, adopt provisions for the harmonisation of legislation concerning turnover taxes, excise duties and other forms of indirect taxation to the extent that such harmonisation is necessary to ensure the establishment and the functioning of the internal market and to avoid distortion of competition’. Therefore, it is necessary for the Commission, which has responsibility for ensuring the smooth functioning of the Internal Market and promoting the general interest of the European Union, to propose action to improve the situation. This initiative is in line with the commitments made by the Commission to address several key difficulties faced by SMEs . In particular, in its 2015 Single Market Communication a set of actions were proposed in order to remove economically significant barriers that hold back Europe’s jobs, growth and investment agenda. Moreover, in the 2016 VAT Action Plan , the Commission took further commitment to prepare a simplification package for SMEs, as also reflected in the 2016 Start-Up Communication . 4.What should be achieved? 4.1.General objectives

The general objectives of this initiative are: 1)to contribute to the creation of an environment that is conducive to SMEs’ growth; 2)to contribute to the creation of an efficient and robust VAT system with a view to creating a single EU VAT area; and 3)to contribute to the smooth functioning of a deeper and fairer Single Market. 4.2.Specific objectives The specific objectives of this initiative are identified below, together with how they link to the problems. Problem Specific objectives 1)Compliance costs 1)To reduce VAT compliance costs for SMEs at two levels, domestically and within the EU: ·Compliance costs for domestic small businesses, derived from complex national VAT rules. ·Compliance costs for small businesses trading cross-border, derived from the diversity of VAT rules across the EU. 2)Lack of neutrality 2)To reduce distortions at two levels, domestically and within the EU (more level playing field for SMEs): ·Distortions between small businesses under the SME exemption and the small businesses that do not make use of the exemption. ·Distortions between domestic suppliers and suppliers established in other Member States. 3)To reduce the negative impact of the threshold effect (small firms slowing down their growth to avoid crossing the SME exemption threshold) – seen also in the context of providing a more level playing field. 3)VAT revenue losses for Member States 4)To facilitate compliance by SMEs and monitoring by tax administrations. 5)To reduce revenue losses caused by occasional traders. Both of the above objectives should be seen in the context of fighting the VAT fraud. Source: Commission services 4.3.Consistency of the objectives with other EU policies The initiative is consistent with the creation of a simple, modern and fraud-proof VAT system which is one of the fiscal priorities set out by the Commission for 2017 (Annual Growth Survey 2017). Moreover, the proposed initiative and its objectives are consistent with the specific policy of the EU as regards SMEs. In this respect, the need to reduce VAT compliance costs derived from the complexity of the rules for SMEs provided for in the VAT Directive, and thus ease compliance by SMEs and monitoring by tax administrations, is set out in the 2008 SBA Communication, the 2011 Communication, and the 2016 VAT Action Plan. The Commission has also committed to reduce distortions derived from the design of the current rules and to help SMEs to fully benefit from the potential of the Single Market in the 2008 SBA Communication, the 2015 Single Market Communication, the 2016 VAT Action Plan, and the 2016 Start-Up Communication. The objectives of this initiative are also consistent with the EU objectives under the REFIT programme to make EU law simple and less costly, in particular for small enterprises. They do not have an impact on fundamental rights. 5.What are the various options to achieve the objectives? 5.1.Selection of options Based on the problem assessment and policy objectives, four policy options have been identified as follows: Option 1: Status quo, including e-Commerce changes (baseline scenario) Option 2: SME exemption extended to supplies from other Member States and including streamlined simplified VAT obligations Option 3: Option 2 plus measures to reduce the negative impact of transition from exemption to taxation Option 4: Option 3 plus mandatory common treatment of occasional traders

These options, which were already laid down in the Inception Impact Assessment, have been analysed in the 2017 Deloitte SME study and tested with businesses and Member States at a Fiscalis 2020 Workshop in Wroclaw in March 2017. The options are targeted at reducing VAT compliance costs for SMEs, reducing the distortive effects of the exemption and the complex and diverse rules on VAT obligations for SMEs and at contributing to the creation of an environment that is conductive to the SMEs’ growth. The policy options also take into account the Member States’ perspective, and in particular the need to minimise the risks of abuse and to facilitate the monitoring by tax administrations. The main focus of the policy options is on simplifying VAT obligations for SMEs and reviewing the SME exemption. The need for simplified VAT obligations has been pointed out by SMEs as one of the key elements of the review during the consultation process; while the SME exemption as such remains a key element of the current rules, as further explained in section 5.3.2. The policy options are built on each other in a gradual manner so that the subsequent options add new elements to the ones included in the previous options. Option 4 represents therefore a full package of measures. This approach should allow a comprehensive assessment of the cumulative cost and benefit effect of each policy option and their comparative analysis. In addition to the options proposed for further analysis and impact assessment two discarded options are set out. Their inclusion allows a better understanding of the context of the initiative and of the way in which the options subject to impact assessment are shaped. 5.2.Options analysed 5.2.1.Option 1: Status quo, including e-Commerce changes This option serves as the benchmark against which the other options are assessed (baseline), and has the characteristics of the current system: ·SME exemption optional for both Member States and businesses. ·SME exemption limited to domestic businesses making domestic supplies only. ·National SME exemption thresholds, generally based on the total turnover derived from domestic supplies. ·Exempt SMEs not able to indicate VAT on their invoices or deduct their input VAT. ·Possible simplified VAT obligations for businesses benefitting from the SME exemption. ·Taxation in the Member State of destination of B2C supplies of telecommunications, broadcasting and electronically supplied services (2015 place of supply rules). In addition, this policy option contains the elements included in the e-Commerce proposal, notably: ·Removal of the intra-EU distance selling threshold for B2C supplies of goods. ·Extension of the existing MOSS to intra-EU distance sales of tangible goods and to services other than electronic services as well as to distance sales of goods from third countries – MOSS becomes a One-Stop Shop (OSS). As a result of this, in general all cross-border B2C supplies of goods and services, as well as imports, will be charged in the Member State of the final consumer. ·Introduction of a common EU threshold of EUR 10 000 (hereinafter, ‘common EU threshold’), optional for businesses, below which B2C sales of goods and services in other Member States can be treated as domestic transactions. Note that this threshold refers to the place of supply but it is not an exemption, unlike the SME exemption threshold. It is calculated on the basis of the turnover derived from all B2C cross-border supplies made by businesses to other Member States, and does not take into account domestic supplies. How will the common EU threshold interact with the SME exemption?

The introduction of the common EU threshold will relieve SMEs, particularly micro businesses with low value cross-border B2C supplies, from having to comply with the full set of VAT obligations in each Member State of destination. Although the SME exemption threshold can be applicable to both B2C and B2B transactions, the common EU threshold of EUR 10 000 only covers B2C supplies. An EU business making B2C supplies in other Member States (which should be taxed in the Member State of destination) may with the common EU threshold opt to treat these supplies as domestic transactions if its annual turnover generated from such supplies does not exceed EUR 10 000. That business could apply the SME exemption in its own Member State, if available, as long as the overall domestic turnover of the business (that is, domestic supplies plus deemed domestic supplies) remains below the SME exemption threshold. Once the common EU threshold is exceeded, the supplier will have to register, declare and account for VAT in the Member States where its customers are established but can do so through the extended OSS (goods and services). That business may decide not to make use of the common EU threshold and declare VAT in the Member State of destination straight away, in which case it will also be able to register and declare VAT through the extended OSS. Figure 4 below illustrates how the common EU threshold interacts with the SME exemption in the baseline scenario. Source: Commission services 5.2.2.Option 2: SME exemption extended to supplies from other Member States and including streamlined simplified VAT obligations This option introduces two significant changes to the current rules for SMEs: ·The SME exemption would be opened to all eligible SMEs within the EU, and ·The simplified VAT obligations would be available to an enlarged category of small businesses, irrespective of whether they use the exemption: a.Small enterprises with turnover below the SME exemption threshold: I.Exempt II.Non-exempt (opting for the application of normal VAT rules) b.Small enterprises with turnover above the SME exemption threshold and up to EUR [2 000 000] – non-exempt. SME exemption adjusted to a VAT system based on the destination principle Under current rules, SMEs can only benefit from the SME exemption in the Member State where they are established. This restrictive territorial application of the exemption creates unequal treatment of SMEs (the benefit of the scheme depends on whether the business is established) and, in particular, discourages SMEs from engaging in cross-border activities and fully seizing the opportunities of the Single Market. This option addresses these issues by opening the national SME exemption available in a Member State to supplies made by businesses established in other Member States, in line with the principle of taxation at destination. The opening up of the exemption received much support from businesses, business associations and Member States during the consultation process, while ensuring that the system is not prone to abuse. The SME exemption in the Member State of destination (where the VAT is due) would be applicable to eligible businesses having to declare VAT in that Member State (e.g. because their cross-border supplies exceed the common EU threshold, or because they have decided to opt out of that threshold). A non-established business from another Member State would be eligible for applying the SME exemption in the Member State of destination where VAT rules will apply. Therefore, SMEs engaged in B2C intra-EU trade will have different alternatives as regards the VAT treatment of their sales to other Member States: ·Use the common EU threshold and treat cross-border supplies as domestic, which could then benefit from the SME exemption in their own Member State.

·If the common EU threshold is exceeded (or not used), and VAT has to be declared in the Member State of destination, use the SME exemption in the Member State of destination, if available and business eligible. ·If the common EU threshold is exceeded (or not used), and VAT has to be declared in the Member State of destination, register and pay VAT in the Member State of destination and benefit, if eligible, from simplified VAT obligations in place in that Member State. ·If the common EU threshold is exceeded (or not used), and VAT has to be declared in the Member State of destination, declare and pay VAT in the Member State of destination on B2C sales via the extended One Stop Shop (OSS). SME exemption threshold Another element is the threshold below which businesses can apply the SME exemption. Under this option, it could be desirable, in terms of simplification for businesses, to fully harmonise the exemption threshold at EU level. However, imposing the same threshold on all Member States (notwithstanding the political challenge that such a choice implies) would have different impact on Member States 'revenues and domestic markets that not necessarily would bring a better result in terms of cost efficiency and level playing field. Indeed, it should be noted that the optimal level of the threshold varies among Member States as it depends on the combination of different economic and policy factors. Additionally, the optimal level of the threshold should reflect the trade-off between the need to reduce compliance and administrative costs and the need for Member States to collect VAT revenue. For that, the option to introduce a standard EU threshold was discarded (see section 5.3.1). Thus, it was considered more appropriate to provide Member States flexibility to tailor the scheme to the characteristics of their domestic markets and policy environment; in particular, it was decided to allow Member State to set their national thresholds. Safeguards Although the aim is to ensure equal treatment of domestic businesses selling in a Member State and non-established businesses selling in that same Member State, we cannot exclude that opening up the SME exemption as described above could create some new distortions. In fact, if the only criterion that matters for applying the SME exemption in a Member State would be the turnover generated by a business in that Member State, then non-established EU businesses trading cross-border could benefit from the SME exemption more extensively than businesses trading domestically only. During the stakeholder consultation, business associations and Member States in particular highlighted the need to limit to some extent the opening up of the SME exemption in order to avoid possible abuse. Two types of potential adverse distortions have been identified. Firstly, it could be that large companies not qualifying as small businesses for the purposes of this Impact Assessment end up benefiting from this option. For instance, let us imagine a large company with an EU turnover of EUR 10 million with a very low amount of B2C intra-EU sales in a Member State where it is not established. If the SME exemption in that Member State is available for non-established EU businesses based on the turnover generated there, that company could be eligible for applying the exemption in that Member State (and in all other Member States where it is not established and the exemption is available). Secondly, even if a business qualified as a small business for the purposes of this Impact Assessment, it would still be possible for that business to cumulatively benefit from the SME exemption in each of the Member States where the exemption is available, provided that the turnover generated in each of those Member States was below their respective SME exemption thresholds. Hence, some safeguards could be introduced in order to prevent such distortions: ·Putting in place an overall EU turnover threshold, in order to limit the size of businesses that can benefit from the SME exemption in different Member States, and thus ensure that this option is SME-targeted. ·Leaving Member States the possibility to limit the application of the SME exemption by non-established SMEs. This could involve, for instance, setting a lower SME exemption threshold for non-established businesses (which could be set by each Member State or determined at EU level). Below, we have considered three possible scenarios, depending on which safeguards would be introduced as regards the cross-border use of the SME exemption. Option 2A – No safeguards: SME exemption fully applicable The national SME exemption would be open to non-established EU businesses which meet the criteria set by the Member State of destination. The threshold(s) set by each Member State would apply in the same way to both domestic and non-established businesses. In this respect, the annual turnover to be taken into account would be that generated by a business in the Member State of destination only (with the exception of cross-border supplies which are deemed to be domestic, if the common EU threshold is applied). Use of the SME exemption in the Member State of destination would not preclude businesses from using the SME exemption in the Member State where they are established, if available. This option has an advantage for the Member States of destination as it limits the control only to the turnover generated by supplies from non-established businesses in their territory. The main downside is that it will not prevent a situation of abuse where large companies with low turnover in each such Member State could apply the SME exemption. Option 2B – Safeguards: EU turnover threshold The national SME exemption would be open to non-established EU businesses which meet the criteria set by the Member States of destination, as explained in Option 2A. However, for a business to be able to apply the SME exemption, its overall EU turnover would have to be below a certain maximum threshold, set at EU level (e.g. EUR 100 000). This EU turnover threshold would be calculated on the basis of the turnover derived from all supplies made by businesses within the EU, both domestic and cross-border. Its use would be compatible with the national SME exemption thresholds applicable in each Member State and the optional use of the common EU threshold.

While the opening up of the SME exemption would be effectively targeted at small businesses, this option would require important efforts stemming from the need to control and monitor the turnover of companies generated at EU level. Option 2C – Safeguards: EU turnover threshold and limit in the application of the SME exemption The national SME exemption would be open to non-established EU businesses which meet the criteria set by the Member States of destination, as long as the EU turnover of the business remains below a certain maximum threshold, as explained in Option 2B. Moreover, Member States would be able to limit the extent to which such a business could apply the SME exemption they provide for, by means of a lower threshold specific for non-established businesses which could be set by each Member State or determined at EU level. However, this option seems not viable for two main reasons. Firstly, this option is likely to increase the complexity of the system, due to the use of multiple thresholds for exemption in each Member State (i.e. that for domestic businesses, and that for non-established businesses). If that limited threshold for non-established businesses was determined by each Member State, rather than set out a