EUROPEAN COMMISSION Brussels, 18.12.2017 COM(2017) 780 final REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT Eighth report under Article 12 of Regulation (EEC, Euratom) n° 1553/89 on VAT collection and control procedures



Table of Contents 1.Introduction 2.The importance of VAT as an EU revenue 3.Main findings 3.1.General remarks 3.1.1.Tax administration organisation 3.1.2.Digitalisation and Information Technology (IT) 3.1.3.Analysing the VAT Gap 3.2.VAT registration and de-registration 3.2.1.VAT registration 3.2.2.VAT de-registration 3.2.3.VIES registration and de-registration 3.3.VAT filing and payment 3.3.1.Filing 3.3.2.Payment 3.4.Recovery of VAT debts 3.5.VAT refund 3.6.VAT audit and investigation 4.Implementation of recommendations from the Seventh Article 12 Report and Staff Working Document

5.Towards better Tax (VAT) Administration by cooperation



List of Tables Table 1: EU’s total revenue from the VAT own resource in the reporting period (2013-2015) Table 2: Evolution of VAT returns in EU Member States for the period 2013-2015 List of Figures Figure 1: VAT Gap in EU 2011-2015 (in percent of VAT total liability (VTTL) and in EUR billion) Figure 2: Evolution of VAT registration requests in 21 EU Member States (2013-2015) Figure 3: Availability of main features in registration procedures in 28 EU Member States (2016) Figure 4: Time needed for obtaining a VAT and a VIES number in 22 EU Member States (2013-2015) Figure 5: Possibility to file electronically in 28 EU Member States (2013-2015) Figure 6: Electronic filing rate in 28 EU Member States (2013-2015) Figure 7: Possibility for VAT e-Payments in 28 Member States (2013-2015) Figure 8: Late payment reminders in 28 Member States (2013-2015) Figure 9: Recovery of VAT debts - overview of main tools and practices used in 28 EU Member States (2016) Figure 10: VAT collection and VAT assessed after audits in 22 EU Member States (2013 – 2015) Figure 11: Implementation rate of the recommendations per section for 27 Member States Figure 12: Overall implementation rate of previous recommendations

List of Recommendations Recommendation 1: Tax administration organisation Recommendation 2: Digitalisation and IT Recommendation 3: VAT Gap calculation and analysis Recommendation 4: VAT registration for foreign taxpayers Recommendation 5: VAT identification numbers Recommendation 6: Validity of VAT and VIES registration Recommendation 7: Post registration controls Recommendation 8: Post registration controls Recommendation 9: Late VAT refund payments Recommendation 10: Audit and compliance strategy Recommendation 11: Customs 42 procedure 1.Introduction Article 12 of Council Regulation 1553/89 on the definitive uniform arrangements for the collection of own resources accruing from VAT requires the Commission to submit a report every three years to the European Parliament and the Council on the procedures applied in the Member States for registering taxable persons and determining and collecting VAT, as well as on the modalities and results of their VAT control systems. The present eighth report covers the developments in the period 2013 to 2016. The numerical data refer to the period between 2013 and 2015. For the preparation of this report, the Commission collected information from all EU Member States tax authorities through a questionnaire. Additionally, in order to obtain more precise information and clarify some of the answers to the questionnaire, the Commission services visited ten Member States. Chapter 2 of the report explains the importance of VAT and the challenges stemming from the VAT gap for tax administrations. The main findings are presented in chapter 3 of this report, following the core phases of VAT administration: VAT registration and deregistration, VAT filing and payment, recovery of VAT debts, VAT refund, VAT audit and investigation. The findings reveal certain trends in VAT administration and lead to recommendations so as to complement the ongoing modernisation of the EU VAT System. The recommendations are presented with the relevant findings. Chapter 3 reports on the implementation of recommendations made in the previous Article 12 report that encompassed suggestions for tax administration improvements. Finally, a strategic view on the VAT administration is highlighted in chapter 4. This report is based on information received from national tax administrations. The quality and accuracy of the data varied significantly. Furthermore, since tax administrations are increasingly organised around integrated processes for all types of taxes, it was sometimes difficult to isolate specific VAT issues from the wider tax administration structure. Finally, social political, geographical, economic and historical specificities influencing the structure and organization of a national VAT collection and control system are beyond the scope of this report. 2.The importance of VAT as an EU revenue VAT revenues are an important source of income for the Member States' and the EU budgets. The total VAT based own resource revenue for the EU budget increased from EUR 14.019 billion in 2013 to EUR 18.087 billion in 2015. This corresponds to the relative share of VAT own resource revenue paid by the Member States in total own resources increasing by three percentage points from 9.4 percent in 2013 to 12.4 percent in 2015.

VAT OWN RESOURCE (EUR million) Total EU VAT revenue Percentage of EU's total revenue 2013 14 019 9.4 % 2014 17 667 12.3% 2015 18 087 12.4 % Source: EU budget (DG BUDG Financial reports 2013, 2014, 2015) However, the size of the VAT Gap, that is the difference between the amounts of total VAT revenue collected and the theoretical amounts that are expected to be collected, is significant in the EU. In the period 2011-2015, the VAT Gap first increased, reaching its top in 2013, and then decreased, reaching its lowest percentage in 2015 (around 152 billion euro). Figure 1: VAT Gap in EU 2011-2015 (in percent of VAT total liability (VTTL) and in EUR billion) VAT Gap (percent of VTTL) VAT Gap (EUR billion) Source: Study and Reports on the VAT Gap in the EU-28 Member States: 2017 Final Report The collection of VAT is among others impacted by the efficiency and effectiveness of tax administration processes and procedures. Consequently, the performance of tax administration influences the amount of VAT own resources due by Member States to the EU. Therefore, managing the VAT system is a critical part of tax administration. 3.Main findings 3.1.General remarks 3.1.1.Tax administration organisation In the period 2013 – 2016, several Member States have reformed or are in the process of reforming (parts of) their tax administration. The trend of changing from a tax-type based administration towards a tax administration organised around types of taxpayers (large companies, SME's and private persons) or functions (registration, filing, payment, etc.) is continuing. Therefore, instead of separate processes for Value Added Tax (VAT), Corporate Income Tax, Personal Income Tax etc., these processes are integrated into a single one for all taxes. Hence, measuring the effectiveness of VAT procedures as mentioned in Article 12 of the Regulation implies an assessment of the main functions of a tax administration regardless of the type of tax. Tax authorities are facing increasing challenges that are often perceived as risks, such as the complexity and innovations in business models (in particular in the field of the so-called collaborative economy), new financial products, large numbers of taxable persons and services, digitalisation of the economy and the booming of e-commerce. At the same time, tax administrations are requested to improve their efficiency and accountability while reducing budgets and staff recruitments. This forces tax administrations to look for new and flexible actions and approaches to collect taxes, including VAT. To create synergies and cut costs, several Member States merged the tax administration with the customs administration and/or financial investigation departments. Furthermore, all tax authorities are using to a greater or lesser extent a risk-based approach when performing their core tax administration functions. Several tax administrations have created a dedicated data analytics and risk management function responsible for the detection of risks and the design and implementation of a risk management strategy. Others have incorporated risk-based procedures in all or part of the core functions of tax administration in order to better allocate resources and be more efficient and effective. Moreover, due to legislative changes (for instance the introduction of the Mini One Stop Shop, the application of the reverse charge mechanism in certain sectors, changes in VAT rates or the cash accounting scheme), the VAT system had to be modified at national level. For assessing the impact of changes in managing the VAT system (i.e. reforms in organisation, processes and procedures), Member States should have a monitoring and evaluation system in place to report on the efficiency and effectiveness of the measures taken. 3.1.2.Digitalisation and Information Technology (IT) Current administrative processes are characterised by digitalization and IT. These developments impact the relationship between taxpayers and tax administrations: they facilitate the fulfilment of taxpayers' obligations and help tax authorities in detecting and analysing VAT risks. Due to a need for more revenues, greater efficiency and improved compliance in an environment of shrinking resources, tax authorities are increasingly relying on digital tax data gathering and analysis. It allows tax authorities to collect tax data in almost real time, in particular when the information can be collected directly from the taxpayer’s own systems. VAT is one of the first taxes to be fully digitized. E-services, taxpayer accounts, e-invoicing, the use of national control statements are examples of these developments. In the reporting period, this trend towards an increasing use of IT is clearly identified, although the level of implementation differs between the Member States. Data mining and analysis are playing a growing role in compliance and audit initiatives. Based on the data received from taxpayers, tax authorities are better equipped to uncover complex business relationships and fraudulent activities, which for instance trigger audits or stop the payment of refunds.

The use of data analytics for compliance purposes is expanding. In the field of VAT, several Member States have taken or are in the process of introducing initiatives to collect information on invoice level, with a view to improving the transparency of transactions in their territory or are gathering data about movements of goods. Whereas IT helps tax administrations in gathering more and more data, increasing amounts of information do not necessarily lead to a better risk assessment: too much information could even hinder the identification of relevant data and result in less compliance. Therefore, tax administrations need to strike a proper balance between the need for information and its proper processing and analysing on the one hand, and the administrative burden put on businesses on the other hand. Furthermore, tax authorities feel constraints when it comes to investing in IT. Often, IT systems (hardware and software) are costly and not always compatible with each other, which can hamper the exchange of information between tax authorities and/or with other government bodies. Member States may benefit from a closer cooperation between each other in order not to duplicate efforts and systems, cut IT-costs and gain mutual advantages by investing in compatible IT solutions. Recommendation 2: Digitalisation and IT As digitalisation and IT turned into critical elements of tax administration, Member States should carry on digitalizing and automating data and tasks. Subsequently, together with other Member States, they should explore ways how their domestic data could be best used in also helping other Member States. To this end, the ongoing Transaction Network Analysis (TNA) project could serve as useful point of reference. 3.1.3.Analysing the VAT Gap In the reporting period the VAT Gap showed a slight decrease in volume as well as percentage (see figure 1). Nevertheless, at individual level the differences in the VAT Gap between the Member States are still significant (ranging from 0 percent to 36.9 percent). Although there might be various reasons for the decrease in the size of the VAT Gap, for instance improved data or economic growth, the reduction might be related to better tax administration as well. In the assessed years (2013-2016) many tax authorities have taken a number of sometimes far-reaching measures aiming at reducing the VAT Gap. Although there is no hard evidence of the impact of these measures on the size of the VAT Gap, it is likely that they influenced the level of compliance and thus, the size of the VAT Gap. In addition to the VAT Gap report published by the Commission, an increasing number of Member States are calculating their own VAT Gap, and at a more detailed level, for instance by calculating the VAT Gap per economic sector or geographical area. Member States should invest or continue investing in calculating their own VAT Gap and analysing this gap in more detail. 3.2.VAT registration and de-registration Member States must have in place a tax registration system that identifies their VAT taxpayers and must store the relevant data on intra-EU taxable transactions in the VIES system. 3.2.1.VAT registration An efficient registration procedure and correct attribution of VAT identification numbers strengthen key administrative processes associated with filing, payment, assessment, collection and dispute resolution. To this aim, the information collected at the moment of registration and stored in the tax administration databases should be complete, accurate and up-to-date. It is critical that tax authorities follow the registration and deregistration procedures accurately, since non-performance in this area will have a major impact on VAT collection in the other Member States. While the registration process needs to be fast in order not to hamper taxpayers in doing business, it is vital to avoid that VAT identification numbers are given to taxpayers with fraudulent intentions. Therefore, a balanced approach between rapidity and safekeeping is important. Legend: VAT Registration Requests (total number) VAT Registration Requests compared to 2013 (evolution) Refused registrations Source: Member States' answers to 2017 Questionnaire In the reporting period the overall number of registration requests for VAT purposes in the 21 Member States in the graphic is more or less stable, while the number of deregistrations from the VIES system increased significantly in 2015. No specific reason for this increase has been identified. Registration procedures are in place in all the Member States. "One-stop-shop" registration facilities are available in some countries. Instead of registering for different purposes in several offices (for instance Chamber of Commerce, Commercial Court and tax office) businesses can register for all commitments in one single place. This implies integrated databases and exchange of information between the relevant institutions. VAT registration info for taxpayers is available In foreign languages Online VAT registration is possible Authenticity of VAT registration is verified Pre-VAT registration checks are in place IT assisted VAT and VIES registration system VIES post-registration verifications

Source: Member States' answers to 2017 Questionnaire In line with the trend towards better services to taxpayers, on-line registration is also becoming a standard practice. Information about registration procedures and obligations is communicated to the taxpayers mainly via the tax administration’s website. However, still in some Member States this information is not available or accessible in a foreign language, which may cause difficulties for non-established taxpayers to fulfil the registration conditions. Despite the recommendation in the previous report, some Member States should still invest more in assisting foreign taxpayers in fulfilling their VAT registration obligations. Member States have different numbering practices in place to identify taxpayers. It varies from one single identification number for all taxes including VAT to different identification numbers for VAT and other taxes. In some Member States, even the VIES registration number is different from the VAT identification number. This fragmentation of VAT identification practices may result in extra administrative burdens for businesses operating in different Member States. With a view of reducing this administrative burden, Member States and the Commission should reflect on the allocation of VAT identification numbers and VIES registration numbers. In order to avoid that a VAT registration number is used for fraudulent activities, tax administrations have to ensure that the information provided by the taxpayer is authentic, accurate and complete. For this purpose, a large number of Member States have in place an end-to-end process that includes verification of the taxpayer’s identity, preliminary checks before registration, based on risk analysis, cross-checks with third party information, post-registration monitoring programs for risky traders, and deregistration procedures in case taxpayers no longer fulfil the conditions for registration. Although a number of Member States have implemented this end-to-end process, the accompanying activities are often carried out on an ad hoc basis, which increases the risk of unreliable data in the registration system. With a more systematic approach tax administrations are better equipped to tackle risks in the registration procedure. Member States should check the validity of the VAT and VIES registration data in a more systematic way. In general, Member States are moving towards a registration procedure based on risk assessment. In order to avoid that such an approach could entail a delay in issuing VAT identification numbers, several tax administrations have put in place procedures that mitigate this risk. Member States indicated in their replies that the time needed for submitting a VAT and/or VIES identification number is within one week, ranging from one to five days. Therefore, it seems that the risk assessment approach does not result in significant delays of submitting a registration number for VAT and/or VIES. Source: Member States' answers to 2017 Questionnaire In all Member States the VAT registration database is available in electronic format, which allows tax authorities to link the registration information with other IT subsystems dedicated to VAT filing and payments, collection and audit. Finally, it should be noted that the vast majority of tax administrations have compliance strategies in place that include initiatives to detect non-registered taxable persons. Information campaigns, on-the-spot visits and checks of domestic control statements are examples of such initiatives. 3.2.2.VAT de-registration In all Member States tax administrations deregister taxpayers on their request or ex officio, when the economic activities have ceased. A few Member States introduced a possibility of deregistering taxpayers when for a number of months they did not submit VAT returns. In other cases, such as suspicion of fraud, most Member States do not have a legal possibility to deregister these taxpayers from the VAT system. 3.2.3.VIES registration and de-registration

There are different approaches towards registration of VAT taxpayers in the VIES. In some Member States, all national VAT registrations are automatically included in the VIES system. Other Member States only include in VIES those taxpayers that, at the moment of registration or subsequently, declare to carry out intra-EU transactions. Member States' replies showed that more than thirty percent of the tax administrations did not implement a post-registration control procedure. Other Member States' tax administrations only carry out ad hoc post registration controls. Member States which conduct only preliminary checks before registration, should implement post-registration controls to ensure the reliability of VIES data 3.3.VAT filing and payment VAT is a consumption tax. It is paid by the final consumer to the supplier, who is a VAT taxable person that collects the output VAT on its sales, offsets it with input VAT on its purchases and pays the balance of VAT due to the State Budget. Since the taxable person serves as a tax collector for the State Budget, it is important that VAT returns are filed and payments are made on time. 3.3.1.Filing To improve compliance almost all Member States offer the possibility to file the VAT returns electronically. In most Member States, electronic filing is compulsory for all VAT-registered companies. Some Member States have allowed some exceptions, for instance for small companies. All Member States offer electronic filing and a large number of Member States made it compulsory for many VAT taxpayers. The electronic filing rate increased from over 83 percent in 2013 to almost 95 percent in 2015. Available (optional) Compulsory Compulsory (for some taxpayers only) Source: Member States' answers to 2017 Questionnaire Source: Member States' answers to 2017 Questionnaire All Member States monitor filing deadlines in an automatic way. In the period 2013 - 2015 the compliance rate for on-time filing of VAT returns increased and almost reached 89 percent in 2015. When taking into account the VAT returns submitted within 30 days after the deadline was expired, the compliance rate reached over 96 percent. 2013 2014 2015 Number of expected returns in EU Member States (million) 127.9 130.1 132.3 VAT returns submitted on time (%) 87.1 88.6 88.9 VAT returns delayed for less than 30 days (%) 4.6 4.4 4.7 Compliance rate in VAT returns (received/expected; %) 91.2 95.9 96.4 Source: Member States' answers to 2017 Questionnaire In case of late filing, most Member States send reminders (automatically or manually) after the deadline has expired. A few Member States send alerts prior to the forthcoming deadline. According to these Member States, this practice reduced the number of late-filers. All Member States have a sanction system in place to encourage taxpayers to file declarations on time. If no VAT returns are filed the majority of Member States calculate an estimation of the VAT due and add a penalty. A simplified VAT filing system for small taxpayers is applied in half of the Member States. 3.3.2.Payment In the majority of Member States, tax authorities offer the possibility to pay the VAT due electronically. However, only in 50 percent of the Member States electronic payment of VAT is compulsory. A few Member States still offer the possibility to pay the VAT due in cash, but are promoting the use of electronic means. Also payment deadlines are monitored electronically. The general practice is that when deadlines expire, the tax authorities send automatic reminders. For small taxpayers, tax authorities offer a special simplified payment regime.

Issued automatically Available Issued ad-hoc Not available Not issued Source: Member States' answers to 2017 Questionnaire Source: Member States' answers to 2017 Questionnaire In case of late payment, all Member States apply a penalty and interest system. The Commission is currently in the process of identifying Member States' practices in the field of imposing penalties, so as to analyse legal constraints and the impact of penalties on compliance . 3.4.Recovery of VAT debts VAT collection is based on self-assessment and voluntary payment. Tax administrations aim at achieving high rates of voluntary on-time payment and low numbers of tax arrears. To reach this goal, a high level of on-time filing of VAT returns is required for establishing the amounts of VAT owed and a quick follow-up action is needed when payment is overdue. In general this action consists of imposing penalties and interest and executing a debt recovery plan. To improve efficiency, all Member States have established dedicated debt collection units or trained specialist debt recovery staff in their tax administration, or outsourced the recovery of debts to a semi-governmental body. In case of "in-house" recovery activities, these are mainly operated at national level. The vast majority of tax administrations have an accurate overview of the VAT arrears, often classified by year, amount or origin (i.e. self-assessed or a result of an audit). For some of the Member States this overview is real-time available. New debtors: early contacting procedure Procedure for offsetting tax credits Use of instalment plans Possibility to write-off uncollectable debts Liability of company's management for VAT VAT can be paid by the buyer (outside the reverse charge) Source: Member States' answers to 2017 Questionnaire The legal tools and approaches for debt collection differ between the Member States. The general approach in tax debt collection is to put resources where there is a chance of collecting the money. Many Member States have a procedure in place that provides for early contacts with new debtors (by phone or email), either systematically or occasionally. Furthermore, emphasis is put on "young" claims for which assets have been identified. Practice indeed shows that the rate of success in recovering old debts is more limited. However, some tax administrations have a legal obligation to enforce all their claims, and recovered amounts are first imputed on their oldest claims. Instalment arrangements and offsetting tax credit entitlements (e.g. VAT refunds) against outstanding VAT debts are common practice. Less conventional and under discussion is the offsetting of a foreign VAT debt against a foreign VAT refund. In case of uncollectable tax debts, a large number of tax administrations may apply write-off procedures, as part of their management of public tax debts. Although several Member States have the legal possibility to enforce VAT arrears against a company's management or a buyer (joint and/or several liability), this tool is difficult to apply because the burden of proof is on the tax administration. The Commission is publishing an evaluation of the Directive on mutual assistance in the field of recovery. Member States are invited to take notice of this report. As recovery contributes to tax fairness, Member States should enhance the use of all available recovery instruments, including the mutual assistance mechanism. 3.5.VAT refund Resource constraints on the side of the tax administration and the need for businesses to receive the money within due time require that tax authorities strike the right balance between a swift repayment of VAT to legitimate businesses and a thorough control in case of mistakes and fraud. Almost all Member States' tax administrations have procedures in place based on risk assessment methods, which ensure that a significant part of low-risk VAT refund requests are promptly processed, while the risky ones are closely controlled. In most Member States, these procedures are automated through electronic processes. In a few Member States, all requests for VAT refunds need to be controlled before the payment can be made (systematic prior controls), which may cause a delay in the refund procedure. Budget constraints may also have an impact on the timeline for refunding VAT. Both situations (systematic prior controls and late refunds due to budget constraints) put financial pressure on legitimate businesses and cause an obstacle for cross-border trade.

The Commission launched a study on domestic and cross border VAT refunds. In the context of this study, and together with Member States, it will explore how to improve and speed up this process. 3.6.VAT audit and investigation All tax administrations have audit departments within their organisation that in many cases also include dedicated anti-fraud units. Furthermore, in addition to the traditional way of auditing, all tax administrations implemented e-audit techniques. General audit strategies and/or programmes are designed; often targeted ones for VAT are added. A variety of VAT audits (comprehensive field audits, issue-related audits, desk audits, etc.) are carried out to check the correctness of the data declared in the VAT returns. However, audit is an expensive tool as it is time-consuming and requires a large number of human resources. Moreover, the percentage of audit contribution to the total VAT collection is limited. Nowadays, many tax administrations recognise that (full) audit coverage is no longer expected to be the most efficient and effective means to deter non-compliant behaviour. Instead, these administrations consider audit as an ultimate enforcement measure to be applied when other proactive initiatives that focus on enhancing voluntary compliance with the tax laws and obligations are not or no longer effective. Striking the right balance between compliance increasing initiatives and VAT control is one of the major challenges of a tax administration. Figure 10: VAT collection and VAT assessed after audits in 22 EU Member States (2013 – 2015) Source: Member States' answers to 2017 Questionnaire Other tax administrations base their (VAT) compliance approach mainly on monitoring and control. Under this approach, it is standard practice to use risk management techniques to improve the effectiveness of audits, in particular in audit case selection. Measures are taken to support risk analysis, for instance by introducing control statements that allow the tax authorities to cross-check sales and purchases at domestic level. Also, the increased use of third party information contributes to a more targeted audit approach. The information gathered from this approach proved to be an important element for the detection of fraud. An obstacle from moving away from an audit approach to preventative measures is the way tax administration’s efficiency is measured. If the efficiency is measured based on audit/collection statistics, shifting to a compliance-based approach requires that other metrics are used, such as VAT Gaps and the assessment by businesses of fairness in treatment received from the tax administration within the competitive environment. Member States should ensure that their audit strategy is part of an overall (VAT) compliance strategy and not a stand-alone approach. Finally, combatting VAT fraud is still one of the priorities of tax administrations and of the Commission. In particular in the case of combatting cross-border VAT fraud, administrative cooperation between Member States' tax authorities needs to be strengthened. This is why the Commission has evaluated the current administrative cooperation arrangements and is tabling a proposal to amend the Council Regulation on Administrative Cooperation in the field of VAT. 4.Implementation of recommendations from the Seventh Article 12 Report and Staff Working Document The seventh Article 12 report and accompanying Staff Working Document include 32 recommendations addressed to twenty-seven Member States. The recommendations were grouped into seven sections: (a) VAT Identification, registration and deregistration; (b) Customs Procedure 42; (c) Filing and Payment of VAT returns; (d) VAT collection and debt recovery; (e) VAT audit and investigation; (f) Tax dispute resolution and (g) VAT compliance. Each recommendation was applicable for at least two up to twenty-seven Member States. Source: Seventh Article 12 Report (previous recommendations); Member States' answers to 2017 Questionnaire Based on the Member States’ replies, it appears that over two third of the recommendations were fully or partially taken on board. However, a closer look at the individual implementation rates per Member State and per recommendation shows a considerable variation. Some Member States hardly took the proposals on board, while others implemented most of the suggestions. Some recommendations were well received (for instance on VAT registration and audit), while others were hardly implemented (for instance in the field of dispute resolution). In particular, keeping the VIES system accurate and up-to-date remains a major concern. Still today in a number of Member States the validity of the data in the VIES system is not checked on a regular basis, which causes considerable difficulties for traders doing business in the internal market (see also paragraph 2.2.3).