COMMISSION STAFF WORKING DOCUMENT Accompanying document to the   GREEN PAPER  on the future of VAT  Towards a simpler, more robust and efficient VAT system     {COM(2010) 695 final}
Date: 2010-12-01
Institutions: European Commission
Subjects: VAT, delivery, intra-EU trade, tax evasion, tax system

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EUROPEAN COMMISSION 

Brussels, 1.12.2010 
SEC(2010) 1455 final 

COMMISSION STAFF WORKING DOCUMENT 

Accompanying document to the 

GREEN PAPER 

on the future of VAT 

Towards a simpler, more robust and efficient VAT system 

{COM(2010) 695 final} 

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COMMISSION STAFF WORKING DOCUMENT 

Accompanying document to the 

GREEN PAPER 

on the future of VAT 

Towards a simpler, more robust and efficient VAT system 

INTRODUCTION 

This Staff Working Document, which supplements the Green Paper on the future of 
VAT,  consists  of  a  series  of  individual  topic  papers  which  can  be  read  separately, 
allowing stakeholders to go directly to those topics they have a particular interest in 
without  having  to  read  the  whole  document.  The  order  of  the  topics  follows  the 
structure of the Green Paper. 

The aim is to supply additional background information on a number of issues raised 
in the Green Paper, in order to provide food for thought. The aim is not to provide 
comprehensive  guidance  on  all  issues  relevant  to  the  topic  or  an  exhaustive  list  of 
options; solutions other than those mentioned here are equally welcome. 

Furthermore,  the  solutions  given  here  should  not  be  seen  as  Commission  policy. 
They  are  merely  illustrative  of  potential  solutions  that  could  be  considered  in  a 
specific area of VAT. 

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CONTENTS 

1. 

2. 

3. 

4. 

5. 

6. 

7. 

8. 

9. 

10. 

11. 

12. 

13. 

14. 

15. 

16. 

VAT treatment of cross-border transactions within the single market ........................ 4 

Scope of VAT: The VAT treatment of the public sector ........................................... 24 

Exemptions from VAT and the specific problem of passenger transport.................. 27 

Deductions.................................................................................................................. 38 

International services ................................................................................................. 49 

The legal process........................................................................................................ 52 

Derogations and the ability to react quickly .............................................................. 59 

VAT rates ................................................................................................................... 64 

The Commission action programme for reducing administrative burdens and 
streamlining VAT obligations.................................................................................... 69 

Small businesses......................................................................................................... 80 

A one stop shop system.............................................................................................. 87 

Adapting the VAT system to large and Pan-European businesses ............................ 92 

Synergies with other legislation - Customs legislation ............................................ 100 

Reviewing the way VAT is collected....................................................................... 101 

Protecting bona fide traders against potential involvement in VAT fraud .............. 105 

Efficient and modern administration of the VAT system ........................................ 113 

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Topic 1. 

1. 

VAT TREATMENT OF CROSS-BORDER TRANSACTIONS WITHIN THE SINGLE MARKET 

1.1. 

History and references 

When  the  First  and  Second  VAT  Directives  were  adopted  in  19671,  the  Council 
made a legal and political commitment as part of the Treaty’s objective to create the 
most  efficient  possible  common  market,  within  which  there  would  be  healthy 
competition, similar to a domestic market. It decided to establish a common system 
of value added tax which would not distort conditions of competition or hinder the 
free  movement  of  goods  or  services  within  the  common  market.  Accordingly,  the 
taxation of imports and the non-taxation of exports in trade within what was then the 
European  Economic  Community  were  to  be  abolished.  The  Council  reaffirmed  its 
commitment  when,  in  1977,  the  Second  VAT  Directive  was  replaced  by  the  Sixth 
VAT Directive2. 

The ‘origin’ system of VAT (first attempt) 

That Council commitment underpinned the objective of designing a VAT system that 
was tailored to the internal market and operated within the EU, as it is now, in the 
same way as it would within a single country. The Commission made proposals for 
such a system in 19873 to complete the internal market by 1 January 1993 in keeping 
with the removal of formalities and fiscal controls at borders for intra-EU trade, but 
with goods circulating within the EU still being subject to VAT. 

The proposals were based on the principle of ‘taxation in the country of origin’, i.e. 
at the place where the goods are when transport to another Member State begins or 
the sale is made. Their key features were a harmonised tax structure with two rates of 
VAT;  harmonisation,  within  two  defined  bands,  of  the  rates  applied  by  Member 
States;  and  a  clearing  mechanism  for  redistributing  VAT  receipts  to  the  Member 
State  where  consumption  takes  place  on  the  basis  of  declarations  made  by  taxable 
persons. 

The transitional system 

By 1989, despite the new approach proposed by the Commission, which included a 
transitional phase until the end of 1992, a minimum standard rate and a new clearing 

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First  Council  Directive  67/227/EEC  of  11 April  1967  on  the  harmonisation  of  legislation  of  Member 
States  concerning  turnover  taxes,  Second  Council  Directive  67/228/EEC  of  11 April  1967  on  the 
harmonisation of legislation of Member States concerning turnover taxes — Structure and procedures 
for application of the common system of value added tax. 
Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member 
States relating to turnover taxes — Common system of value added tax: uniform basis of assessment. 
Fifth recital. 
COM(87) 321, COM(87) 322 and COM(87) 324, 21.8.1987. 

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mechanism  based  on  macroeconomic  data4,  it  had  become  clear  that  it  would  be 
impossible to adopt the Commission’s proposals by 1 January 19935.  

Beside  the  resistance  to  the  close  harmonisation  of  rates  that  they  required  and  the 
potential national budgetary implications of the rates chosen by other Member States, 
certain  Member  States  considered  that  the  remaining  rates  differences  would  be 
excessive and could lead to distortions of competition and budgetary risks as regards 
sales  to  final  consumers  (in  particular  sales  of  cars  and  mail-orders)  including 
institutional  non-taxable  persons  and  exempt  taxable  persons  and  also  to  the 
relocation of the sellers. 

Some  Member  States  also  felt  that  the  clearing-house  mechanism  would  over-
centralise administration of the system and that the redistribution system would not 
offer all the necessary guarantees as to fiscal controls and might therefore be a source 
of dispute and budgetary conflicts between Member States. 

The  Council  therefore  decided  to  adopt  transitional  arrangements  proposed  by  the 
Commission6 which would enable fiscal frontiers to be abolished whilst allowing tax 
to continue to be collected in the Member State of destination of the goods at the rate 
and under the conditions of that country. This involved a system of exemption for the 
supplier and taxation by the acquirer, taxable persons and non-taxable legal persons, 
with additional reporting obligations for both7. 

For  sales  to  private  individuals,  the  principle  of  taxation  in  the  Member  State  of 
origin  was  accepted  other  than  for  distance  sales  exceeding  a  significant  threshold 
and the sales of new means of transport. As a general rule, the place of taxation of 
services  remained  the  place  where  the  supplier  was  established  or,  for  intangible 
services provided to a taxable person, where the latter was established. 

At  the  same  time,  however,  in  Directive  91/680/EEC  the  Council  reaffirmed  the 
commitment made in 1967 and confirmed in 1977 of abolishing the imposition of tax 
on  importation  and  the  remission  of  tax  on  exportation  in  trade  between  Member 
States and acknowledged that such an objective required a definitive system for the 
taxation of that trade based on the principle of taxation in the Member State of origin 
of the goods or services, supplied with the tax revenue at the final consumption stage 
accruing to the Member State where that final consumption takes place. The Council 
set a new target date of 31 December 1996.  

The origin system of VAT (second attempt) 

Before making new proposals, the Commission carried out a thorough evaluation of 
the operation of the transitional arrangements8 and polled the Member States on their 

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Completion  of  the  internal  market  and  approximation  of  indirect  taxes,  Communication  from  the 
Commission to the Council and the European Parliament, COM(89) 260, 14.6.1989. 
Council Conclusion (Economic and Financial Affairs) of 9 October 1989. 
COM(90) 182, as amended by COM(91) 157. 
Council  Directive  91/680/EEC  of  16 December  1991  supplementing  the  common  system  of  value 
added tax and amending Directive 77/388/EEC with a view to the abolition of fiscal frontiers. 
Report  by  the  Commission  to  the  Council  and  the  European  Parliament  on  the  operation  of  the 
transitional  arrangements  for  charging  VAT  in  intra-Community  trade  (COM(94) 515  final  of 
23 November 1994, unpublished). 

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views.  It  concluded  that  a  different  approach  to  that  proposed  in  1987  would  be 
needed  to  achieve  a  VAT  system  tailored  to  the  internal  market.  In  1996,  the 
Commission put forward a gradual programme9 which differed in two main respects 
from the 1987 proposals. 

It proposed that taxation should be based on a trader’s ‘tax domicile’, with his entire 
economic  activity  being  taxed  in  one  single  Member  State  and  redistribution  based 
on  official  macroeconomic  statistics  to  ensure  that  VAT  receipts  accrued  to  the 
Member  State  of  consumption.  It  also  envisaged  a  gradual  changeover  to  the 
definitive  system,  the  first  stage  being  to  modernise  and  more  uniformly  apply  the 
existing  system  whilst  introducing  changes  which  would  shape  it  into  a  definitive 
system. 

However,  it  very  soon  became  clear,  as  it  had  in  1987,  that  the  degree  of 
harmonisation  required  by  this  system,  notably  for  the  level  and  structure  of  rates, 
could  not  be  achieved  because  of  differing  domestic  arrangements  in  the  Member 
States.  Consequently,  very  little  progress  was  made  in  the  Council  on  the 
Commission’s  proposed  1996  programme  even  though  it  was  accepted  that  the 
transitional  arrangements  had  a  number  of  shortcomings.  They  were  complicated, 
susceptible to fraud and did not help achieve the objectives of an internal market. 

The VAT Strategy (2000) 

Therefore,  in  2000,  the  Commission  presented  a  communication  setting  out  its 
strategic  programme  for  improving  the  operation  of  the  VAT  system  within  the 
context of the single market10. The strategy set four main objectives — simplifying 
and  modernising  existing  rules,  applying  them  more  uniformly  and  enhancing 
administrative  cooperation  —  and  a  pragmatic  programme  of  action  for  achieving 
them.  

Its  main  objective  was  to  give  new  momentum  in  the  Council  to  concrete  and 
essential  improvements  in  the  existing  tax  system  in  the  short  term,  without, 
however,  questioning  the  ultimate  shift  to  the  origin  principle  as  a  long-term  EU 
goal. At the end of three years, the Commission reviewed progress, presenting new 
initiatives  and  highlighting  a  number  of  emerging  guidelines  for  future  action11.  It 
also raised some questions about what kind of common VAT system was best suited 
to an internal market of, at that stage, 25 Member States. 

Several of the Commission proposals made in that framework and related to intra-EU 
trade  were  adopted  by  the  Council.  These  included  abolishing  the  requirement  that 
taxable  persons  established  in  the  EU  appoint  a  tax  representative,  if  they  are  not 
established in the Member State where the tax is due; taxing electronically supplied 
services provided from non-EU countries to EU private individuals at their place of 
residence,  linked  to  an  online  one  stop  shop  for  the  non-established  supplier’s 
compliance obligations, and taxing supplies of electricity and natural gas to a taxable 

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A common system of VAT — a programme for the single market (COM(96) 328 final of 22 July 1996, 
unpublished). 
COM(2000) 348. 
COM(2003) 614. 

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dealer  where  he  is  established  and  the  same  supply  to  other  customers  where  they 
actually use and consume the goods. 

In  the  mean  time,  a  new  regulation12  boosted  administrative  cooperation  on  cross-
border  transactions.  Regrettably,  no  agreement  was  reached  on  other  proposals  to 
reduce the administrative burdens on intra-EU supplies, such as a single threshold for 
distance sales and the introduction of a generalised one stop shop for non-established 
taxable persons,13 extending to B2C transactions, in particular distance sales, and to 
B2B supplies not subject to ‘reverse charge’. 

The VAT Package 

These  moves  away  from  the  principle  of  taxation  at  origin  towards  taxation  in  the 
Member  State  of  destination  (i.e.  of  establishment  of  the  customer  or  of 
consumption,  with  either  the  administrative  obligations  fulfilled  at  a  distance  or 
increased use of reverse charge and more cooperation between tax authorities) were 
confirmed with the adoption in 2008 of the ‘VAT package’. 

From 1 January  2010,  supplies of  services  to taxable persons and non-taxable legal 
persons  identified  for  VAT  purposes  are  in  principle  taxed  in  the  Member  State 
where the customer is established, with the reverse charge applying if the supplier is 
not established in the same State. 

From 2015, the current rules for taxation in the Member State of residence of private 
individuals receiving electronic services supplied by non-EU-established businesses, 
and the corresponding online one stop shop, will be extended to telecommunications 
and radio and television broadcasting services and to the same services provided by 
EU  businesses.  Strengthened  means  of  assistance  between  the  Member  States  of 
consumption and of establishment are also provided for with  the possibility for  the 
former to require from the latter to hold an administrative enquiry or to obtain in any 
event minimum information. 

VAT fraud 

In the mean time, VAT fraud had grown as a result of the systemic weaknesses in the 
transitional  system  which  allows  cross-border  VAT-free  purchases  of  goods  and 
services. This greatly preoccupied Member States and the Commission. In 2006, the 
Commission  presented  a  Communication  on  the  need  to  develop  a  coordinated 
strategy to improve the fight against fiscal fraud14. 

The debate which followed focused on the reinforcement of the existing VAT system 
but also on the possibility for introducing a general reverse charge system or for the 
the  Commission  presented  a 
In  2008, 
taxation  of 
Communication15 analysing these latter, more far-reaching options. 

supplies. 

intra-EU 

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15 

Directives 2006/65/EC, 2002/38/EC, 2003/92/EC and Regulation (EC) No 1798/2003. 
COM(2004) 728. 
COM(2006) 254. 
COM(2008) 109. 

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It looked in particular at the possibility to replace the exemption of intra-EU supplies 
of goods by a system of taxation at a single rate of 15 %. Here, the Member State of 
arrival  would  either  collect  the  additional  VAT  from  the  customer  to  reach  the 
applicable  rate  or  refund  the  VAT  paid  in  excess.  This  would  be  combined  with  a 
redistribution  mechanism  between  Member  States  based  on  monthly  recapitulative 
statements. The Council  did  not  however invite the Commission to proceed further 
with these concepts. 

In absence of political agreement on the more ‘far reaching measures’, efforts were 
concentrated  on  the  so-called  conventional  measures  to  enhance  the  traditional 
methods in the fight against VAT fraud. The Commission therefore presented a short 
term action plan16 containing a range of measures.  

All the legislative proposals announced therein have in the meantime been presented 
and  all  of  them  except  for  one  have  been  adopted  by  the  Council,  notably  the 
Commission’s proposal for reducing the timeframes for submitting and transmitting 
recapitulative  statements  of  supplies  of  goods  and  tightening  the  conditions  for 
exemption  on  importation  followed  by  an  intra-EU  supply17.  The  adoption  of  the 
recast of new Council Regulation on administrative cooperation and combating fraud 
in the field of VAT18, providing notably the legal base for the setting up of Eurofisc, 
has completed this short term action plan. 

1.2. 

Evaluation of the current VAT system for intra-EU transactions 

1.2.1.  Overview of the current rules on cross-border supplies of goods and services 

The  place  of  supply  of  goods  is  situated,  and  the  transaction  taxed  at  the  rate  and 
conditions  of  the  relevant  Member  State,  where  the  goods  are  located  when  the 
supply  takes  place  and,  in  the  case  of  transport,  where  the  goods  are  located  when 
transport to the customer begins. 

However,  firstly,  the  cross-border  supply  of  goods  to  a  taxable  person  or  a  non-
taxable  legal  person  is  exempt  whilst  the  acquisition  of  the  goods  is  subject  to 
taxation  in  the  Member  State  where  the  transport  ends,  the  VAT  being  paid  by  the 
customer19. The same rule applies to the supply of new means of transport, including 
those carried out by private individuals as sellers or purchasers and the transfer by a 
taxable person of goods forming part of his business assets to another Member State. 

Secondly,  the  place  of  supply  of  goods  to  non-taxable  persons20  above  a  certain 
threshold  or  subject  to  excise  duty  or  on  option  and  transported  by  the  supplier 
(distance  sales)  is  situated  where  the  transport  ends,  the  VAT  being  paid  by  the 

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COM(2008) 807 
Council  Directive  2008/117/EC  of  16 December  2008  amending  Directive  2006/112/EC  on  the 
common system of value added tax to combat tax evasion connected with intra-Community transactions 
and Council Directive 2009/69/EC of 25 June 2009 amending Directive 2006/112/EC on the common 
system of value added tax as regards tax evasion linked to imports. 
Council Regulation (EU) N° 904/2010 of 7 October 2010 on administrative cooperation and combating 
fraud in the field of VAT (recast). 
Special and simplified rules apply to so-called ‘triangular supplies’. 
Or to taxable persons or non-taxable legal persons whose intra-EU acquisitions of goods are not subject 
to VAT. 

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supplier in the Member State concerned. The supply of electricity and natural gas to 
a  taxable  dealer  is  situated  where  he  is  established  and  the  same  supply  to  other 
persons where the customer actually uses and consumes the goods21. If the supplier is 
not established in the Member State in which the VAT is due, the customer identified 
for VAT purposes there is liable for payment of the tax (reverse charge). 

The  place  of  supply  of  services  to  a  taxable  person  or  a  non-taxable  legal  person 
identified for VAT purposes is situated as a general rule in the Member State where 
the  customer  is  established,  whereas  the  same  supply  to  a  non-taxable  person  is 
situated  where  the  supplier  is  established.  In  the  former  case,  if  the  supplier  is  not 
established  in  the  Member  State  where  the  VAT  is  due,  the  customer  is  liable  for 
payment of the tax (reverse charge). 

Specific  rules  apply  to  supplies  connected  to  immovable  and  movable  property, 
transport,  vehicle  hire  or  restaurants  and  catering22.  Electronic  services  supplied  by 
non-EU-established  businesses  to  private  individuals  are  situated  in  the  Member 
State of their residence. The VAT declaration and payment are made in one Member 
State through an online one stop shop. 

These rules and practical arrangements will be extended as from 2015 to electronic, 
telecommunications and  radio  and television broadcasting  services provided by EU 
businesses  to  private  individuals.  Certain  intangible  services,  such  as  those  of 
consultants or banking, financial and insurance transactions provided to non-taxable 
persons established in non-EU countries, are situated outside the EU. 

1.2.2.  Positive aspects 

The transitional arrangements, whatever their shortcomings, allowed the abolition of 
fiscal  borders  and  the  ending  of  checks  at  the  EU’s  internal  borders.  These  were 
clearly incompatible with the principle of free movement of goods and persons and 
the smooth functioning of the single market. That is obviously a major achievement. 

Nevertheless,  without  any  redistribution  mechanism,  VAT  revenue  directly  accrues 
to the Member State of consumption according to its own rates and exemption rules 
in  almost  all  cases.  That  avoids  one  major  distortion  of  competition  which  could 
occur between businesses operating in the same local market based on their place of 
establishment or the origin of the goods or services. 

Such rules allow Member States to enjoy a high degree of flexibility when setting the 
rates  of  VAT  and  the  scope  of  exempt  transactions.  They  can  decide  the  fiscal 
pressure  on  households  that  they  deem  appropriate  and  sustainable,  and  the 
corresponding  revenue  needed,  without  undermining  the  competitiveness  of  their 
businesses. 

21 

22 

Special rules also apply to supplies of goods on board ships, aircraft and trains and supplies of goods 
installed and assembled by the supplier. 
And  to  the  supply  of  services  by  intermediaries,  cultural,  artistic,  sporting,  scientific,  educational, 
entertainment and similar services, ancillary transport services, and restaurant and catering services for 
consumption on board ships, aircraft or trains. 

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With  the  reverse  charge  mechanism  and  the  taxation  of  intra-EU  acquisitions  of 
goods,  persons  liable  for  the  payment  of  VAT  on  cross-border  transactions  to  the 
Member  States  are  mainly  established  on  their  own  territory  and  thus  under  their 
direct  supervision  and  primary  responsibility  in  case  of  fraud,  avoidance  or 
insolvency.  They  therefore  have  a  strong  incentive  to  encourage  compliance  and 
perform fiscal controls. 

This  system  of  exemption  or  reverse  charge  applicable  to  intra-EU  supplies  also 
releases non-established suppliers from having to be registered and pay VAT in each 
Member State of taxation and thus from various administrative obligations.  

The  abolition  of  fiscal  borders  and  the  circulation  of  VAT-free  goods  led  the 
Member States to strengthen the system of cooperation between tax authorities, first 
with the adoption in 1992 of a new Regulation supplementing Directive 77/799/EEC, 
then  with  the  single  new  Regulation  in  200323  which  combined  and  improved  the 
previous texts, and recently with the recast adopted in 2010.  

1.2.3. 

Shortcomings of the current VAT system 

1.2.3.1.  Differences  in  treatment  between  domestic  and  intra-EU  transactions  may  hamper 

the proper functioning of the single market 

Under  the  principles  of  the  free  movement  of  persons,  goods,  services  and  capital, 
coupled with harmonised rules and de-regulation in key sectors, widespread progress 
has been made, notably in services, to make it easier for enterprises to do business 
within the European Union. In a VAT system perfectly adapted to the single market, 
there should be no distinction between supplies or purchases made by a business with 
a customer or supplier established in its Member State or in another Member State. 
Every difference in treatment is therefore to be considered a potential obstacle to the 
single market and implies that traders and consumers are not benefitting from the full 
advantages of a real single market. 

Despite  the  adjustments  made  over  the  years  to  the  VAT  system,  in  particular  the 
abolition  of  fiscal  borders,  a  business  willing  to  take  full  advantage  of  the  single 
market has still to apply diverse VAT rules which often are not easy to handle. This 
may involve additional VAT obligations merely because a customer or a supplier is 
not established in his Member State. Additional obligations may also arise when, in 
establishing a branch,  it  crosses  one of the  European Union’s  internal borders. The 
transitional arrangements applicable to supplies of goods, and subsequent changes to 
improve  taxation  in  the  Member  State  of  consumption  of  intra-EU  transactions  in 
services  or 
transitional 
arrangements, have led to a complicated and heterogeneous system which puts high 
administrative burdens on businesses.  

tackle  fraud  resulting  from  weaknesses 

the 

to 

in 

Equality  between  domestic  and  intra-EU  transactions  has  almost  been  achieved  for 
supplies made to private individuals where the supply of goods or services is taxed 
where the sale takes place or where the supplier is established. However, equality is 

23 

Council Regulation (EEC) No 218/92 of 27 January 1992 on administrative cooperation in the field of 
indirect taxation (VAT). Council Regulation (EC) No 1798/2003 of 7 October 2003 on administrative 
cooperation in the field of value added tax and repealing Regulation (EEC) No 218/92. 

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valid only in so far as these supplies do not fall under one of the numerous specific 
rules (e.g. distance sales, new means of transport, certain services etc). Furthermore, 
suppliers  need,  in  any  event,  to  know  the  status  of  their  customers  beforehand. 
Sometimes, for services to taxable persons, even the purpose of a service is relevant. 

Complexity of the rules  

On  the  whole,  the  VAT  system  is  now  built  on  taxation  at  the  presumed  place  of 
consumption  instead  of  the  place  of  establishment  of  the  supplier  or  origin  of  the 
goods  as  initially  foreseen.  Therefore,  for  each  transaction  with  a  cross-border 
element (a non-established customer or supplier, the dispatch or location of goods or 
services elsewhere etc.), businesses are faced with complex rules for determining the 
place  of  supply  and  the  person  liable  for  VAT  and  identifying  the  reporting 
obligations  and  checks  that  follow  from  these  decisions.  This  complexity  leaves 
businesses unsure of their legal position. 

The place of supply depends on many factors. These include the kind of transactions 
(services  or  goods)  and  their  nature.  For  goods,  their  location  at  different  points  of 
the transaction, their dispatch, the person carrying out that dispatch, the status of the 
customer and the relevance for both parties of different thresholds or options may all 
be  determining  factors.  For  services,  the  status  of  the  customer,  their  VAT 
identification  number  and  their  place  of  establishment  (place  of  business,  fixed 
establishment,  domicile  or  residence)  may  play  a  role.  In  addition,  businesses  can 
face different national interpretations of ‘place of supply’ rules. 

In  principle,  once  the  place  of  supply  is  determined,  the  supplier  has  then  to 
calculate, declare and pay the tax. This may even be in a Member State where he is 
not established. However, in some cases, those obligations can be transferred to the 
customer  either  directly  under  the  ‘reverse  charge’  rules  or,  in  two  steps,  by 
exempting  the  supply  of  goods  and  taxing  intra-EU  acquisition  by  the  customer. 
Again, the transfer of liability and the exemption of the supply have to be assessed 
by the supplier and depend on many factors: in particular, for goods, the status of his 
customer  and  dispatch  or  transport;  for  services,  their  nature,  the  customer's  tax 
status and VAT number and any intervention in the supply by a fixed establishment 
in the Member State where the tax is due. 

Moreover, the Member State where the tax is due may have made use of the option 
referred to in Article 194 of the VAT Directive to apply the reverse charge to some 
supplies of goods or services carried out by non-established businesses, which are in 
principle not covered. 

However complex, in many cases the rules allow businesses operating in the Member 
States where they are not established (or deemed so) to be released from any VAT 
obligations there. That might be thought to encourage such transactions compared to 
domestic ones in certain situations. Such an assumption is nevertheless questionable. 
Aside from the complexity of the rules and the specific obligations attached to them 
(see  below),  there  are  cash  flow  consequences  for  suppliers,  who  are  paid 
immediately, and for purchasers with a right of deduction, who pay later. Moreover, 
the supplier cannot immediately subtract the VAT incurred in the Member State of 
taxation but has to submit a refund claim. 

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In any event, transferring liability for the VAT is not always possible, in particular 
where the customer is not a taxable person (or cannot be deemed a taxable person).  

Special and additional obligations and risks 

The  general  rules  applicable  to  intra-EU  transactions  exempt  or  subject  to  reverse 
charge  imply  additional  obligations  for  both  the  supplier  and  the  customer.  Those 
particular burdens on cross-border activities and sometimes the enforcement of those 
obligations  by  national  tax  authorities  hinder  businesses,  especially  SMEs,  in 
developing  trade  within  the  European  Union  and  can  even  deter  a  purchaser  from 
buying goods or services from a seller in another Member State.  

For  each  intra-EU  supply,  the  supplier  has  to  keep  additional  and  specific  records, 
e.g. of the validation of the customer’s VAT identification number, evidence of his 
tax status and compliance, his address, and evidence of transport even where it has 
been arranged by the customer. Such details are needed not only to justify the VAT 
treatment  of  the  transaction  but  also  to  avoid  the  supplier  being  subsequently  held 
jointly and severally liable if the customer liable for the payment of VAT does not 
pay it. To hold the supplier jointly and severally liable, the tax administration must 
prove  that  he  knew  or  should  have  known  that  the  customer  would  not  pay  the 
VAT24. The question has even been put to the European Court of Justice whether that 
exemption can be denied for a supply has actually been made, if it can be determined 
that  the  vendor  knew  that  he  was  participating  in  a  transaction  aimed  at  evading 
VAT25 . 

The  inherent  weakness  of  the  transitional  arrangements  and  the  need  for  Member 
States to tackle the consequential risk of fraud has added new burdens to operators in 
a  chain  of  transactions  where  an  intra-EU  supply  is  exempt  or  subject  to  reverse 
charge. The  ECJ  introduced  a first link between the customer’s right to deduct and 
the payment of VAT by the supplier, putting new responsibilities on customers26. If 
the tax administration can prove that the customer knew or should have known that 
he  was  participating  in  a  transaction  linked  to  VAT  evasion,  the  tax  administration 
can refuse the right to deduct to that taxable person. 

With  the  ‘knowledge  test’  and  the  consequential  risk  for  a  time  (which  could  be 
several  years)  of  being  held  indirectly  liable  for  a  fraud  committed  by  somebody 
else, compliant businesses have to take ‘every precaution which could reasonably be 
required of them to ensure that their transactions are not connected with fraud, be it 
the  fraudulent  evasion  of  VAT  or  other  fraud’27.  The  constant  need  to  meet  this 
requirement for each transaction could be very burdensome and carries no guarantee 
that it will satisfy the tax administrations or national courts. 

The  supplier  must  also  complete  a  monthly  (quarterly  for  small  businesses  and 
services)  recapitulative  statement  of  all  intra-EU  customers  for  exempt  goods  and 

24 

25 
26 
27 

On  the  so-called  ‘knowledge  test’,  see  case  C-384/03,  Federation  of  Technological  Industries  and 
Others. 
See the pending case C-285/09. 
See case C-439/04, Axel Kittel. 
See case C-439/04, Axel Kittel, para. 51. 

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services  subject  to  the  general  intra-EU reverse  charge.  This  must  show  their  VAT 
identification numbers and the value of sales. 

The  customer  has  to  calculate,  declare  and  pay  the  VAT  on  the  supply  or  the 
corresponding intra-EU acquisition of goods. He also needs to have obtained a VAT 
identification number, which may involve burdensome formalities. 

Where, in the Member State where the tax is due, the supplier only makes supplies 
subject to reverse charge, he cannot subtract from the output VAT due the VAT he 
has  incurred  on  this  territory  notably  in  order  to  carry  out  those  transactions.  He 
cannot  simply  put  the  corresponding  amount  on  a  VAT  return.  He  has  to  submit  a 
special  claim  and  provide  further  information  and  evidence  not  usually  required 
where the input VAT is directly subtracted.  

According to a study made for DG Enterprise and Industry28, the administrative costs 
of  submitting  intra-EU  sales  listings  or  refund  claims  in  another  Member  State  are 
high.  For  sales  listing,  these  costs  have  been  estimated  at  € 706 million  per  year, 
increasing  by  € 204 million  with  the  introduction  of  a  monthly  listing.  The 
administrative costs for 800 000 businesses submitting VAT refund claims in another 
Member  State  each  year  have  been  estimated  at  € 705 million  (€ 881  per  business). 
This  is,  however,  expected  to  be  reduced  by  € 447 million  with  the  new  refund 
Directive29.  

Distortions in the conditions of competition 

In  the  First  Council  Directive,  the  Council  indicated  that  establishing  a  common 
market  within  which  there  is  no  distortion  of  competition  and  where  goods  and 
services move freely as within a domestic market requires that Member States adopt 
in  their  legislation  a  model  of  turnover  taxes  such  as  will  ensure  that  outcome  and 
which is ‘bound to result in neutrality’30. 

The system which has evolved aims at taxing supplies of services and goods in the 
Member State of consumption, extending to the more economically important cross-
border  purchases  by  private  consumers  (distance  sales,  cars  etc.);  one  could  thus 
suppose that the risk of distortion of competition is low. However, certain features of 
the VAT system put at risk just such an outcome within the single market. 

•  Threshold and options 

The simplification measures for distance-selling arrangements could cause the same 
product purchased cross-border to be taxed under the rate of either the Member State 
of the seller or of the Member State of the customer. Whilst for e-services there will 
be no threshold or option, for e-commerce in goods, the rules applicable can depend 

28 

29 

30 

Communication from the Commission to the Council and the European Parliament, Action Programme 
for  Reducing  Administrative  Burdens  in  the  EU  —  Sectoral  Reductions  Plans  and  2009  Actions 
(COM(2009) 544). 
Council  Directive  2008/9/EC  of  12 February  2008  laying  down  detailed  rules  for  the  refund  of  value 
added  tax,  provided  for  in  Directive  2006/112/EC,  to  taxable  persons  not  established  in  the  Member 
State of refund but established in another Member State. 
Eighth recital in the preamble to the First Directive. 

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on the seller’s turnover in the Member State of destination or a decision to make use 
of the option to tax his supplies there.  

The  VAT  obligations  (identification,  returns,  payment,  additional  checks)  for  intra-
EU  acquisitions  above  the  minimum  threshold  of  € 10 000  made  by  fully  exempted 
taxable  persons  (such  as  small  businesses),  and  non-taxable  legal  persons  (such  as 
public  bodies)  could  deter  them  from  purchasing  goods  in  other  Member  States, 
impeding full market access in particular for public procurement. This could be even 
worse for intra-EU acquisitions of services where no such threshold has been set for 
taxable persons. 

•  Right to deduct 

When  assessing  whether  businesses  operate  on  a  level  playing  field,  one  cannot 
ignore the costs that they incur. With the principle of neutrality, VAT should have no 
influence  on  business  costs.  However,  in  some  Member  States  certain  business 
expenses are excluded from the right to deduct, or pro rata or capital goods scheme 
calculations  are  applied  differently.  The  system  of  taxation  is  now  based  on  the 
application of the rules of the Member State of taxation whilst the deduction system 
depends on the Member State where the expense occurs. The supply will be taxed at 
the same rate whether the supplier is established in the Member State or not. 

It  can,  however,  happen  that,  because  of  the  particular  rules  in  the  Member  State 
where the trader is established, certain business expenses are excluded from the right 
to deduct. A trader in this position will be forced to reflect this non-deductible VAT 
in selling prices. He therefore suffers an appreciable competitive disadvantage when 
selling in other Member States which do not apply such a restriction or when selling 
in his own Member State in competition with suppliers established in Member States 
not applying that restriction. 

1.2.3.2.  Derogations  and  options  have  led  to  a  complicated  system  and  added  unnecessary 

administrative burdens on businesses 

The VAT system was designed to sustain the single market. Simplifying obligations 
on businesses, notably those operating in several Member States, has been a focus in 
so far as this is possible. However, in the interest of preserving Member States’ fiscal 
sovereignty and to allow them appropriate flexibility, businesses, whether established 
there  or  not,  have  to  comply  with  diverse  legislation  on  VAT  due  to  the  numerous 
options  and  derogations  available.  Differences  in  interpretation,  transposition  and 
enforcement of the VAT Directive add to the diversity. 

Traders  therefore  require  knowledge  of  the  differences  in  application  in  different 
Member  States,  particularly  when  operating  through  a  branch  or  a  subsidiary.  This 
makes  the  VAT-related  costs  of  doing  business  in  the  single  market  higher  than  in 
the  domestic  market.  Businesses  do  not  find  this  encourages  them  to  expand  their 
activities in other Member States or establish branches there.  

1.2.3.3.  Non-taxation of intra-EU transactions is a source of fraud  

Since the transitional arrangements began, the Commission and Member States have 
become  aware  of  fraud  opportunities  in  the  current  system.  Put  simply,  if  a  person 

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gives  a  VAT  number  to  his  supplier  established  in  another  Member  State,  and,  for 
supplies  of  goods,  provides  proof  that  they  have  left  the  Member  State  of  the 
supplier, he acquires the goods or services without paying the VAT to his supplier. 
An operator who acquires goods or services in this way and then does not pay VAT 
on their subsequent resale circumvents the self-policing feature of the VAT system, 
in  which  the  right  of  deduction  provides  an  effective  incentive  to  declare  the 
corresponding output sale. Any resulting fraud is rendered more lucrative because no 
input tax has been incurred on the cross border purchase. The current system is thus 
amenable to fraud and has a systemic weakness.  

In 2009, the Commission published a study31 which set out to quantify and analyse 
the  VAT  gap  for  each  Member  State,  based  on  a  comparison  of  national  VAT 
receipts with a theoretical net VAT liability for the national economy as a whole. The 
VAT gap includes factors other than fraud such as legal avoidance and unpaid VAT 
from insolvencies. This means that the entire VAT gap is not due to fraud. The study 
estimates  the  gap  at  € 106.7 billion  in  2006  within  the  EU-25  (excluding  Cyprus). 
This  represents  an  average  of  12 %  of  the  net  theoretical  liability,  although  several 
Member States are above 20 %. 

The  systems  put  in  place  in  1993  to  manage  such  risks  (EC  listings  initially  for 
goods, then for services) are not very efficient in tackling certain types of fraud such 
as  where  the  intra-EU  acquirer  promptly  disappears.  Some  Member  State  therefore 
implemented  a  domestic  reverse  charge  for  certain  high-value  goods  (cell-phones, 
computer chips) and certain services (CO2 emission allowances). The latest attempts 
to  combat  fraud,  arising  from  the  Commission’s  2006  Communication  on  fraud 
strategy (reducing timeframes for submitting EC listings and boosting administrative 
cooperation)  have  yet  to  prove  their  efficiency  and  the  systemic  weaknesses  of  the 
transitional system persist. 

With several Member States implementing derogations and imposing new reporting 
obligations  on  businesses,  the  underlying  weaknesses  have  certainly  led  to  less 
harmonisation, a greater administrative burden on businesses and additional costs for 
tax  administrations,  particular  in  control  and  administrative  assistance.  It  could  be 
argued  that  the  costs  (VAT  losses  plus  additional  burdens  for  both  Member  States 
and  businesses)  are  too  high  compared  to  the  actual  benefits  of  applying  an 
exemption or the reverse charge to intra-EU transactions. 

Moreover, Member States and the Commission are regularly alerted to possible fresh 
fraud  patterns  in  other  services  and  goods.  Fraudsters  repeatedly  use  the  same 
loopholes and the same schemes. Once tax administrations have plugged the gap by 
amending  the  rules,  the  fraudsters  switch  to  other  sectors  or  Member  States.  The 
continual refinement of the VAT system by means of further reverse charge schemes 
being introduced by Member States is not sustainable with the current adoption rules, 
and fire-fighting requests will be endless. Moreover, the reverse charge may result in 
further losses in particular for goods likely to be sold to final consumers and thus it 
requires additional reporting obligations and controls. 

31 

Reckon  LLP  (London),  ‘Study  to  quantify  and  analyse  the  VAT  gap  in  the  EU-25  Member  States’, 
21 September 2009. 

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1.2.3.4.  Changes in technology and the economic environment have not all been taken into 

account 

Since 1993 and even more since 1977, the way in which business is conducted on a 
daily  basis  has  changed.  Increasing  use  of  new  technologies,  where  costs  have 
tumbled  and  speed  exploded,  is  illustrated  by  the  increase  of  e-commerce  and  by 
administrative  practices  such  as  computerised  accounting.  However,  the  VAT 
system,  and  particularly  the  reporting  obligations  of  taxable  persons  operating  in 
several  Member  States  and  the  way  in  which  the  VAT  is  collected,  has  remained 
largely unchanged. The significant and appealing exception of the special scheme for 
e-services is rather limited in practice and is accessible only to a handful of non-EU-
established  businesses  until  2015.  One  significant  development  is  the  new  refund 
procedure  allowing  an  online  claim  to  be  submitted  through  the  web  portal  of  the 
Member State of establishment, although this is experiencing teething problems.  

The  nature  of  business  and  the  way  it  is  organised  have  changed  too.  Whilst 
manufacturing  remains  important  to  trade  in  the  EU,  by  2007  services  represented 
just  over  70 %  of  gross  value  added  in  the  European  Union.  Some  consideration 
therefore  needs  to  be  given  to  how  the  VAT  system  adjusts  to  a  service-driven 
economy. The special scheme for e-services could, again, be seen as a precursor.  

The VAT treatment of services has, however,32 recently been completely overhauled. 
The  new  system  uses  concepts  and  criteria  different  from  those  for  goods,  thus 
worsening  the  heterogeneity  of  VAT  treatment  of  intra-EU  supplies.  For  instance, 
small or completely exempt businesses are liable for VAT if they purchase services 
from a non-established provider, whatever their value, whereas they are accountable 
for acquisitions of goods only if they opt or reach a particular threshold. 

Many  businesses  now  operate  in  more  than  one  Member  State  as  a  result  of  the 
deepening of the single market. The EU has also experienced a wave of international 
mergers and acquisitions. Large European companies now view the whole European 
Union  as  their  ‘home  market’  and  accordingly  seek,  like  non-EU  international 
companies, to establish effective Pan-European business structures. This has resulted 
in  an  increase  in  the  proportion  of  cross-border  transactions  carried  out  within  the 
same  group  of  companies  and  centralisation  of  business  functions  such  as  finance 
and accounting. 

However,  these  groups  have  to  deal  with  up  to  27 different  sets  of  rules  notably 
regarding  invoicing  or  reporting  obligations,  without  the  option  of  using  any 
simplified rules for their intra-group cross-border transactions. These large European 
businesses have to compete with major international companies. In order to improve 
their  competitiveness  at  international  level,  the  cost  of  doing  business  in  their  own 
‘domestic’ market needs to improve. 

1.3. 

Possible alternatives to the current system 

The  purpose  here  is  to  address  options  for  removing  the  differences  in  treatment 
between  domestic  and  intra-EU  transactions  and  to  design  a  simpler  and  business-

32 

Directive 2008/8/EC. 

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friendly VAT system while allocating revenue to the Member State of consumption, 
reducing administrative burdens for businesses and limiting collection costs and the 
scope for fraud. 

Several possible solutions are available both for goods and services. Academics have 
also proposed various alternatives: Viable Integrated VAT (VIVAT), Compensating 
VAT  (C-VAT),  Dual  EU  and  local  VAT  (Dual  VAT),  a  prepaid  VAT  system 
(PVAT), etc.  

Some  solutions  have  already  been  thoroughly  discussed  with  the  Council,  mainly 
those  based  on  the  principle  of  origin.  Others,  less  analysed,  take  account  of  the 
progressive  shift  toward  a  system  based  on  taxation  in  the  Member  State  of 
destination. The question remains, however, who should be liable for payment of the 
VAT where the supplier is not established in the Member State where the tax is due 
and, if the supplier is liable, how this Member State should collect that revenue.  

Of course, all these options must not impede the free movement of goods in the sense 
that they do not give rise to controls or formalities at frontiers. 

Some  of  those  options  are  addressed  here.  They  are  as  far  as  possible  simply 
described.  All  have  both  advantages  and  disadvantages  which  will  deserve  an 
exhaustive  and  thorough  examination.  The  purpose  of  this  part  is  not  to  conclude 
such  an  assessment  but  to  try  already  to  point  out  their  major  advantages  and 
disadvantages. 

The options can be divided in two major groups according to the choice made on the 
place  of  taxation  of  the  intra-EU  supplies.  This  can  be  either  the  Member  State  of 
destination  or  the  Member  State  of  origin.  Both  concepts  can  however  again  be 
defined in different ways. 

Within  each  group,  different  alternatives  are  available  depending  on  the  way  VAT 
would be charged on the intra-EU transactions. 

1.3.1.  Place of taxation in the Member State of destination 

In  such  a  system,  the  rules  applicable  to  B2C  cross-border  transactions  would  be 
maintained, although simplified obligations such as a wider one stop shop could be 
provided for. The amendment would essentially concern the place of taxation of B2B 
supplies of goods.  

1.3.1.1.  Place of taxation where the customer is established, both for goods and services 

This would mean harmonising the rules applicable to goods and to services provided 
to  businesses.  In  B2B  transactions,  the  supplier  often  does  not  know  the  specific 
destination  of  the  goods  that  he  has  sold  because  transport  is  organised  by  the 
customer  and  also  because  of  commercial  reasons.  However,  he  always  knows  the 
identity, the location and the VAT identification number of the customer to whom he 
has transferred ownership of the goods. 

As is the case for supplies of services, it could be stipulated, as a general rule, that 
the place of supply of goods to taxable persons is where the customer has established 
his business or has his fixed establishment to which the goods have been provided.  

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A follow-on supply with no additional dispatch would be either a domestic supply, if 
the  goods  have  arrived  in  the  Member  State  where  the  customer  is  established,  or 
another intra-EU supply, if the goods were previously transported to another Member 
State or subject to a distance sale in the case of supply to a non-taxable person. 

If the customer is established outside the EU, the place of supply would be where the 
goods  are  located  when  the  supply  takes  places  or  transport  or  dispatch  begins. 
However,  the  transaction  would  be  exempt  from  VAT  as  exportation  if  the  goods 
were dispatched to or transported outside the EU.  

In the same way, if the customer is established in the EU but the goods are located 
outside the EU when the supply takes place or dispatch or transport begins, the place 
of supply would be outside the EU or where the goods enter the EU. The usual rules 
on importing goods would apply. If the goods were located in the EU and were then 
transported out of the EU, the transaction, although taking place in the Member State 
of  establishment  of  the  customer,  would  of  course  be  exempt  from  VAT  as 
exportation. 

The place of supply would be no longer linked to the actual flow of the goods within 
the EU and would remain situated in the EU as long as the goods circulate within the 
EU’s borders.  

Such a system would build on existing concepts of establishment and identification 
and  could  thus  be  introduced  without  other  major  structural  changes  to  the  VAT 
system.  Based  on  the  identification  number  of  the  customer,  it  would  be  easier  to 
manage,  both  for  the  tax  administration  and  businesses.  The  concept  of  ‘intra-
Community acquisition of goods’ or transfer of goods would no longer be needed.  

This  system  would  not  require  any  approximation  of  tax  rates,  and  so  would  give 
Member States a large leeway to set VAT rates as they see fit. The business locations 
of  suppliers  would  not  be  influenced  and  exempt  or  institutional  purchasers  would 
pay the same amount of VAT whether or not their supplier was established in their 
Member State. 

1.3.1.2.  Place of taxation where the goods arrive 

The flow of the goods would still be taken into account and the place of supply for 
intra-EU B2B supplies of goods would be the place where the transport or dispatch 
of  the  goods  ends.  Unlike  the  current  system  with  the  combination  of  two 
transactions,  the  supply  of  goods  and  intra-EU  acquisition  by  the  customer,  such  a 
rule  could  only  be  applied  where  the  supplier  knows  the  destination  of  the  goods. 
This creates no particular difficulty where transport is organised by the supplier: the 
supplier  would  apply  the  rules  currently  applicable  to  distance  sales,  but  without  a 
threshold. 

Where transport is organised by the customer, the supplier would have to rely on the 
information provided to him. One has to distinguish between two situations:  

(1) 

the  customer  provides  the  relevant  information,  with  an  incentive  to  do  so 
correctly,  as  this  determines  the  place  of  taxation  and  the  place  where  the 

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customer  can  claim  the  right  of  deduction;  to  ensure  legal  certainty  for  the 
supplier the information has to be recorded and confirmed by the customer; 

(2) 

where  the  customer  wants  to  keep  the  destination  of  the  goods  hidden  from 
the  supplier,  e.g.  for  commercial  reasons,  it  would  be  presumed  that  the 
transport has ended at the place of establishment of the purchaser (see above). 
If that place differs from the place of arrival of the goods, the customer would 
be required to declare a transfer of goods in the Member State of arrival. 

Such  a  system  would  build  on  the  existing  concepts  of  current  intra-EU  distance 
sales (to private individuals) combined with the ‘place of supply of services’ rules, 
and  could  thus  be  introduced  without  other  major  structural  changes  to  the  VAT 
system. The Member States would remain free to set the level of taxation they deem 
appropriate. 

However,  the  combination  of  both  rules,  depending  on  the  person  organising  the 
transport and/or the willingness of the customer to indicate the place of destination, 
could complicate their application. Such a system would require another transaction 
for  VAT  purposes  if  the  place  of  arrival  was  unknown  to  the  supplier  and  differs 
from the place of establishment of the customer. 

1.3.1.3.  The taxation of intra-EU transactions in such systems 

The taxation of intra-EU transaction would considerably reduce the potential impact 
of  fraud  linked  to  intra-EU  supplies  on  Member  States’  treasuries  by  removing  the 
profit for fraudsters and their accomplices in obtaining refunds of VAT on supplies 
on  which  VAT  has  been  charged  but  not  remitted  to  the  Treasury  or  in  charging  a 
customer  VAT  on  goods  or  services  acquired  free  of  VAT  and  then  going  missing 
without  accounting  for  this  VAT.  It  maintains  the  integrity  of  the  VAT  system, 
together with the fractionated payment mechanism and the existing flow of revenue. 

Generally,  B2B  intra-EU  supplies  of  services  are  already  taxed  under  the  reverse 
charge  procedure  with  the  customer,  not  the  supplier,  being  responsible  for  the 
payment of the VAT. It could also be envisaged to extend that system, to all supplies 
of goods cross border. This creates consistency between all intra-EU B2B supplies. 

With such a system, consistency between domestic and intra-EU transactions could 
be achieved by applying a reverse charge mechanism on domestic B2B transactions. 

A wider one stop shop  

Taxation  of  intra-EU  transactions  would  mean,  however,  that  the  supplier  would 
have  to  have  a  relationship  with  the  Member  State  of  arrival  of  the  goods  or  of 
establishment  of  the  customer  for  services  or/and  goods,  in  order  to  fulfil 
administrative  obligations  there.  This  would  involve  registration  in  that  Member 
State. A simpler solution would be a one stop shop scheme where the Member State 
of establishment of the supplier acted as a proxy in relations with the Member State 
of taxation. 

The  taxable  person  making  the  intra-EU  supply  would  fulfil  identification  and 
declaration  obligations  in  the  Member  State  of  taxation  through  a  one  stop  shop  in 
his own Member State. The taxable person making the supply would charge VAT at 

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the appropriate rate of the Member State of taxation and make payments directly to 
that Member State through the one stop shop.  

A  supplier  would  have  therefore  to  know  the  VAT  rates  and  their  coverage  in  the 
Member  State  of  arrival,  in  particular  the  products  and  services  covered  by  any 
reduced rate. This could be handled by appropriate computer software and a binding 
list of rates for all products and services would be made available by Member States 
(see topic 8). This could be facilitated by setting up a Pan-European database with all 
CN (customs nomenclature) codes and the corresponding VAT rates. It might also be 
advisable  to  provide  rules  by  which  Member  States  would  link  the  use  of  reduced 
rates to specific CN codes.  

Use of the one stop shop concept would minimise the burden on traders, who would 
only  need  to  allocate  the  appropriate  rate  of  tax  to  their  supply.  It  would  enable 
revenue  on  intra-EU  sales  to  accrue  directly  to  the  Member  State  of  consumption 
without using a clearing mechanism.  

The  EC-sales  listing  requirement  could  be  abolished.  The  taxable  purchaser  would 
deduct  input  VAT  in  the  normal  way.  However,  for  control  purposes,  because  the 
person  liable  for  VAT  would  be  in  another  Member  State,  the  taxable  purchaser 
might have to include the intra-EU supplies in his VAT declarations with the VAT 
identification of the supplier, in order to allow the Member State of taxation to cross-
check the input credit with the payment made through the one stop shop. 

The  right  to  deduct  could  perhaps  be  limited  to  purchases  in  the  acquirer’s 
declaration,  which  would  include  that  information.  This  would  make  the  link 
between  the  right  to  deduct  and  actual  payment  of  the  VAT  by  the  supplier  much 
stronger. The so-called ‘knowledge test’ could also be strengthened by reversing the 
burden of proof while giving the customer the option to pay the VAT charged by his 
supplier  directly  to  the  Treasury  (‘reverse  payment’  see  topic  15)  if  there  was  any 
doubt about the supplier’s compliance and he did not want to check up on it. In any 
event, Member States would use the options offered by mutual assistance (including 
recovery), particularly the new ones, for control and collection in the Member State 
of establishment of the supplier. 

Enhanced administrative cooperation, e.g. the obligation to inform the Member State 
of  consumption  of  control  visits,  that  Member  State’s  right  to  attend  multilateral 
controls,  financial  incentives  for  control  visits  (e.g.  retaining  a  percentage  of  any 
undeclared  tax  revenue)  or  compensation  for  the  Member  State  of  establishment, 
might also be considered. 

Gradual changes towards a wider OSS and possible exclusions  

In case a 'one-step' move to such a system would be considered too drastic, a gradual 
introduction  could  also  be  examined.  It  could  be  envisaged  to  extend  the  current 
reverse  charge  system  applicable  to  intra-EU  services,  initially,  to  all  intra-EU 
supplies  between 
to 
progressively include transactions in the one stop shop (on which VAT would have 
been charged by the supplier). One could start with specific goods and services that 
are  susceptible  to  fraud  (obviously  not  covered  by  domestic  reverse  charge 
derogations)  or  easy  to  follow  (new  means  of  transport  traded  between  taxable 

taxable  persons  (particularly  supplies  of  goods)  and 

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persons,  for  instance).  In  the  mean  time,  B2C  transactions  such  as  distance  sales 
could  be  rapidly  included  in  the  scope  of  the  one  stop  shop  already  used  for 
electronic, telecommunications and radio and television broadcasting services.  

Another  idea  would  be  to  make  transactions  between  members  of  a  group  of 
businesses  (parent/subsidiary)  which  account  for  a  high  proportion  of  intra-EU 
supplies  subject  to  reverse  charge  or  consider  them  non-taxable  transactions  (like 
transactions  between  branches),  possibly  subject  to  a  system  of  authorisation.  This 
would  mean  in  practice  that  the  territorial  scope  of  the  VAT  group  would  be 
extended to branches and companies established in other Member States but within 
the  EU.  The  ongoing  work  on  the  Common  Consolidated  Corporate  Tax  Base 
(CCCTB),33 in particular the scope of consolidation, might be of particular relevance 
and should be taken into account (see topic 12). 

The last step in such a development would be to merge the one stop shop firstly with 
the web portal for refund claims and secondly with national VAT declarations. That 
would allow businesses directly to subtract the VAT incurred in each Member State 
of  taxation  from  the  VAT  due  in  that  Member  State,  in  the  same  way  as  in  their 
Member State of establishment. For reasons of fiscal sovereignty, offsetting the net 
amounts due or to be refunded for each Member State could not be considered. Then 
a  single,  standard  and  EU-wide  declaration  through  the  one  stop  shop  would  cover 
all  transactions  and  would  be  submitted  with  the  corresponding  payment  in  the 
Member State of the place of business, or main establishment if the taxable person 
did not have a place of business in the EU (see topic 11). Such a scheme could also 
be envisaged for businesses not established in the EU. 

The application of the reverse charge to all B2B cross borders supplies  

The current reverse charge system, applicable generally to B2B supplies of services 
would apply to all intra-EU supplies of goods between taxable persons. As at present, 
businesses selling goods in Member States where they are not established (or deemed 
so)  would  be  released  from  any  VAT  obligations  necessary  under  a  OSS  and  they 
could preserve  the advantages of the current system. Moreover, goods and services 
sold cross border could be treated equally. 

However, current specific obligations and shortcomings (see above) would remain in 
particular  for  the  supplier  such  as  the  recapitulative  statements,  the  need  to  keep 
additional and specific records and the impossibility to subtract from the output VAT 
due the VAT incurred in the Member State where the tax is due. It would not resolve 
the endemic weakness in the current system (MTIC fraud) and the independence of 
two  transactions,  a  supply  followed  by  an  intra-Community  acquisition,  would  be 
lost  requiring  as  for  services  a  consistent  application  by  all  Member  States  of  the 
place of supply rules. 

The extension of the reverse charge to domestic B2B supplies 

Consistency between domestic and intra-EU transactions could be achieved by also 
applying a reverse charge mechanism on domestic B2B transactions. 

33 

See communications COM(2001) 582, COM(2003) 726 and COM(2007) 223. 

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This would deal with the endemic vulnerability to fraud of the current VAT system 
in  B2B  transactions  following  a  cross  border  purchase  exempt  or  subject  to  the 
reverse charge. 

On the other hand, that would mean discarding the principle of ‘fractioned payment’, 
which is a major benefit of VAT: in such a system, the Treasury would collect all the 
VAT  at  the  last  stage.  In  particular  all  the  tax  due  on  the  total  final  consumption 
would  be  paid  by  retailers  which  would  be  allowed  to  buy  VAT  free  all  their 
products.  That  risk  could  therefore  require  additional  checks  and  reporting 
obligations for all domestic B2B transactions. 

The Commission assessed such a system in 2008 and highlighted the potential shift 
in fraud to the retail sector34.  

The Commission concluded that the reverse charge concept should not be ruled out 
but  that  it  could  never  be  introduced  on  an  optional  basis  without  affecting  the 
workings  of  the  single  market.  The  Commission  was  willing  to  consider  a  pilot 
project to test the introduction of a compulsory generalised reverse charge system. 

1.3.2.  Place of taxation in the Member State of ‘origin’  

1.3.2.1.  Place of taxation in the Member State of origin of the goods and services 

First proposed in 1987 to abolish fiscal borders in 1993, raised again in 2008 as a far-
reaching measure to tackle intra-EU fraud, and ruled out twice by the Council, such a 
system provided that the place of supply of goods was deemed to be where the goods 
were located at the time when the supply took place or the dispatch or transport of 
the  goods  to  the  customer  began,  whereas  the  place  of  services  remained  situated 
where the supplier was established, with certain limited exceptions. 

No  exemption  was  applicable  to  supplies  of  goods  transported  in  another  Member 
State. All supplies were taxed according to the rules and in particular the rate of the 
Member State of origin with a reallocation of the revenues to the Member State of 
consumption  (see  below).  In  2008,  however,  the  Commission  examined  the 
possibility  of  a  two-step  approach  with  the  taxation  of  intra-EU  supplies  of  goods 
between taxable persons in the Member State of origin at a single rate of 15 %, the 
Member  State  of  arrival  either  collecting  from  the  customer  the  additional  VAT  in 
order to reach the rate applicable there or refunding the VAT paid in excess. 

1.3.2.2.  Place  of  establishment  of  the  supplier  of  goods  and  services  —  single  place  of 

taxation 

This  system  was  proposed  in  the  Commission’s  1996  work  programme.  In  such  a 
system,  all  of  a  given  supplier’s  transactions  would  be  taxed  in  one  place  for  the 
entire  EU,  with  no  distinction  any  longer  according  to  the  Member  State  in  which 
they were carried out or to the flow of goods. 

In  1996,  it  was  proposed  that  that  single  place  would  be  the  ‘tax  domicile’  of  the 
taxable  persons  but  that  concept  was  open  to  discussion.  It  could  be  the  firms’ 

34 

COM(2008) 109, 22.2.2008 and SEC(2008) 249, 22.2.2008. 

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registered office, or the place where it was actually managed, or other criteria could 
be used. One could also consider the place of establishment (place of business or/and 
fixed establishment) an appropriate place. 

1.3.2.3.  The requirements and the possible outcomes of the two systems 

Both systems would require a high degree of harmonisation of the level and structure 
of  rates  and  of  exemption  rules  in  order  to  avoid  damaging  the  conditions  of 
competition  and  causing  businesses  to  relocate  and  because  the  revenue  of  each 
Member  State  of  consumption  would  directly  depend  on  rates  and  exemption  rules 
set in the Member States of establishment of the suppliers or origin of the goods. 

It  would  also  require  close  cooperation  and  a  high  degree  of  mutual  confidence 
between  Member  States  because  the  effectiveness  with  which  each  Member  State 
administers  and  controls  the  tax  would  directly  affect  the  budget  of  other  Member 
States. However, the taxation of intra-EU transactions would considerably reduce the 
potential impact of ‘MTIC’ and carousel frauds on Member States. 

Such  systems  would  also  either  end  or  significantly  reduce  the  difference  in 
treatment between domestic and intra-EU transactions and the additional obligations 
or  complexity  of  the  latter.  They  would  greatly  simplify  and  reduce  administrative 
burdens  for  businesses,  whether  as  buyers  and  sellers.  The  obligation  to  submit  a 
recapitulative  statement  might,  however,  be  kept  to  serve  as  a  basis  for  the 
reallocation  system  (see  below).  The  single  place  of  taxation  would,  in  addition, 
allow businesses to meet their obligations to declare and pay VAT and exercise the 
right to deduct in one place. 

The  direct  allocation  of  VAT  revenues  to  the  Member  State  where  consumption 
takes  place  and  where  the  VAT  is  deducted  when  the  customer  is  a  taxable  person 
would  no  longer  be  possible.  Such  systems  would  therefore  need  a  clearing 
mechanism for the redistribution of VAT receipts to that Member State. 

Clearing could be done on the basis of declarations made by taxable persons either in 
their  VAT  returns  (as  proposed  in  1987)  or  in  monthly  sales  listings  similar  to  the 
current recapitulative statements (as envisaged in 2008). As proposed in 198935 and 
in  1996,  one  might  also  consider  macro-economic  reallocation  of  Member  States’ 
VAT  revenue  on  the  basis  of  either  trade  statistics  or  the  consumption  side  of 
National Accounts. 

35 

Completion  of  the  internal  market  and  approximation  of  indirect  taxes  —  Communication  from  the 
Commission to the Council and to the European Parliament, COM(89) 260. 

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Topic 2. 

2. 

SCOPE OF VAT: THE VAT TREATMENT OF THE PUBLIC SECTOR 

2.1. 

Introduction 

This  topic  only  deals  with  the  VAT  treatment  of  public  bodies,  which  is  a  long-
standing issue within the EU. 

The  Commission  is  aware  that  determining  the  scope  of  VAT  raises  a  number  of 
other concerns, in particular how to treat the activities of holding companies and of 
charities.  The  fact  that  these  issues  are  not  dealt  with  here  should  not  prevent 
stakeholders from contributing on them in the public debate (see questions 3 and 4 in 
the Green Paper). 

2.2. 

The legal framework 

For the purposes of the VAT Directive, a taxable person is any person who carries 
out economic activities, whatever the person’s status — private or public. 

However,  Article  13  of  the  VAT  Directive  contains  special  rules  for  public  legal 
entities where  they  engage in  transactions as a public authority. Where this occurs, 
the public body will not be considered to be a taxable person for VAT purposes and 
the activities or transactions performed as a public authority are outside the scope of 
VAT law. 

Nevertheless,  where 
distortions of competition’ they are treated as taxable activities.  

these  out-of-scope  activities  could 

lead 

to  ‘significant 

Additionally,  there  are  two  lists:  a  list  of  activities  for  which  public  bodies  will  be 
regarded  as  taxable  persons  (Annex  I  of  the  VAT  Directive)  and  a  list  of  public-
interest exemptions (Articles 132 to 134). 

Member  States  are  also  authorised  to  consider  certain  exempt  activities  engaged  in 
by  bodies  governed  by  public  law  as  activities  in  which  those  bodies  engage  as 
public authorities, thereby treating them as being outside the scope of VAT. 

There  is  a  large  body  of  case  law  in  this  area,  which  is  an  indication  of  the 
complexity of the current rules. 

2.3. 

Shortcomings 

2.3.1.  Neutrality 

Problems of distortion of competition may occur because the same activity may be 
taxed if carried out by a private body but not taxed if carried out by a public body. As 
the  status  of  the  supplier  determines  whether  the  activity  is  taxable  or  non-taxable, 
this could give rise to distortions in a liberalised environment. 

The  exempt  and  non-taxable  status  of  public  bodies  creates  an  incentive  to  self-
supply inputs since in that way non-deductible VAT can be avoided. This results in a 

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bias towards in-house supplies of goods and services and the use of own employee 
labour. This bias can create inefficiencies in public sector production and delivery of 
services.  Spending  decisions  are  often  based  on  VAT  rather  than  on  real  economic 
factors. 

As exempt or non-taxable status makes it impossible for operators to deduct the input 
VAT charged on their acquisitions of goods and services used for subsequent exempt 
or  non-taxable  transactions,  it  also  creates  a  ‘hidden  VAT’  which  will  be  passed 
forward  and  will  result  in  a  higher  cost  if  the  public  authority  supplies  goods  and 
services to a taxable person who has a right to deduct input VAT. 

Because VAT on investment by public bodies cannot be recovered, it is often argued 
that the present VAT regime works against the need to develop investment in public 
goods. 

2.3.2.  Lack of harmonisation 

The  Directive  leaves  wide  discretion  to  Member  States  to  define  notions  such  as 
‘public body’. As a result, there is no EU approach to the activities that public bodies 
engage in as ‘public authorities’. 

2.3.3.  Complexity  

The current VAT regime for public bodies recognises three categories of activities. 
They can be taxed, they can be within the scope of VAT but exempt or they can be 
outside  the  scope  of  VAT.  The  problem  is  not  restricted  to  determining  the  VAT 
status of the supply; it also makes determining the right of deduction of public bodies 
more complicated. 

Exemptions in the public interest are also not very precisely defined. The extent to 
which  an  activity  can  be  considered  as  ‘closely  linked’  is,  for  example,  difficult  to 
determine.  As  a  result,  it  is  often  difficult  to  determine  the  legal  nature  and  the 
conditions under which an entity’s activities might benefit from exemption.  

Additional complexities are created by the different options available to the Member 
States: the option in Article 13(2) of the VAT Directive to regard exempt activities as 
out  of  scope,  and  the  options  in  Article  133  to  make  the  granting  of  certain 
exemptions listed in Article 132(1) to bodies other than those governed by public law 
dependent on additional conditions.  

2.4. 

The way forward 

A  first  initiative  was  launched  by  the  Commission  in  2003  with  its  proposal  to 
remove the VAT exemption applicable to postal services. This proposal is still on the 
table at the Council. 

Beyond that proposal, the Commission has recently initiated an in-depth study of the 
current provisions on public bodies and exemptions in the public interest.  

This study will look at the problems created by the present EU and national rules on 
the application of VAT to the public sector. 

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The  study  will  go  beyond  a  description  of  the  problems  and  will  also  look  how 
economically important the differential VAT treatment is. Based on an assessment of 
the economic importance of the differences, the study will look at what options exist 
to reduce VAT distortions and present the pros and cons with a view to achieving a 
level playing field for VAT. 

Wide-ranging options like extending the regular VAT system to all the activities of 
public institutions will not be disregarded in the study. A ‘full taxation’ model of this 
type, along the lines of what is currently in force in countries such as New Zealand or 
Australia, has major advantages in terms of tax neutrality. However, it also raises a 
number  of  issues,  such  as  how  to  arrive  at  a  definition  of  many  public  services.  If 
such  a  model  were  chosen,  the  question  would  also  arise  as  to  which  VAT  rate 
(reduced or even super reduced rate) should be applied to these supplies in order to 
mitigate the impact of VAT on the final consumer. 

More  limited  reforms  could  also  be  envisaged  such  as  an  option  to  tax  for  public 
bodies, along the lines of what has been proposed by the Commission for financial 
services. Modernisation of the current exemptions and clarification of the rules laid 
down in Article 13 could also be envisaged. 

A  third  avenue  could  also  be  to  rely  on  Member  States’  present  capacity  to 
implement national refund schemes outside the VAT system. This solution, which is 
also  used  elsewhere  in  the  world  (Canada  for  example)  gives  a  lot  of  flexibility  to 
Member States. 

The study is being carried out by Copenhagen Economics and is due to be finalised 
by early 2011. Once it is finalised, the Commission will launch a public consultation 
and call on all stakeholders to contribute. 

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Topic 3. 

3. 

EXEMPTIONS FROM VAT AND THE SPECIFIC PROBLEM OF PASSENGER TRANSPORT 

This topic covers two issues. The first is exemptions from VAT in general.  

The second is the specific problem of VAT on passenger transport. VAT exemption 
is, however, only part of the issues to be examined; the place of taxation is another 
factor to be looked at when dealing with VAT on passenger transport. 

EXEMPTIONS FROM VAT 

3.1. 

History and references 

If  VAT  were  indeed  the  neutral  tax  on  consumption  that  it  is  supposed  to  be, 
exemptions would not exist. They run counter to the logic of VAT but their existence 
is nevertheless of great practical importance 

The rationale for the application of exemptions has traditionally been twofold. One is 
that  they  sustain  distributional  and  social  objectives  and  compensate  for  the 
perceived  regressive  nature  of  VAT.  Linked  to  that  may  have  been  some  desire 
expressed  in  these  ‘Exemptions  for  certain  activities  in  the  public  interest’  to 
promote  the  consumption  of  certain  goods  or  services  which  were  considered  as 
having  beneficial  qualities  and  where  VAT  exemption  was  seen  as  having  a 
beneficial effect on prices for the final consumer. To a great extent, these exemptions 
reflect  the  established  practices  in  Member  States  before  the  Sixth  Directive  came 
into existence. Probably there was also a perception that many of these exemptions 
related  to  ‘public  goods’  which  could  not  be  exchanged  in  a  market  or  consumed 
individually  and  consequently  should  be  left  outside  the  scope  of  VAT.  It  is 
noteworthy, even if it does not make any contribution to the overall coherence of the 
list,  that  these  exemptions  extend  to  ‘certain’  but  not  all  activities  in  the  public 
interest. 

The other rationale is the ‘difficult to tax’ argument which sustains the exemptions 
for  gambling,  financial  and  insurance  services  and  many  transactions  involving 
immovable property. 

In  addition,  Article 371  of  the  VAT  Directive  allows  some  Member  States  to 
continue  to  exempt  certain  transactions  (listed  in  Annex X,  Part B).  Articles 375  to 
390b  extend  this  facility  to  other  Member  States.  The  reason  here  is  that  complete 
agreement on a common list of exemptions could not be reached at the time the Sixth 
Directive  was  adopted  and  it  was  therefore  limited  to  measures  already  in  force. 
Seemingly  this  arrangement  was  envisaged  as  transitional  but  now  seems  to  have 
acquired an indefinite life. 

Taken together, these exempt goods and services constitute a considerable part of the 
potential  tax  base.  Even  disregarding  the  numerous  technical  difficulties  which 
exemption  gives  rise  to,  the  degradation  of  the  tax  base  alone  raises  serious 
questions, not only in the light of the supposedly neutral nature of the tax, but also in 

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the  context  of  the  current  economic  downturn.  The  OECD  has  drawn  attention  to 
methodologies for comparing the efficiency of VAT systems36  

The  ECJ  has  on  many  occasions  pointed  to  the  need  for  strict  interpretation  of 
exemptions since they are exceptions to the general rule that all supplies of goods or 
services  are  subject  to  VAT.  Strict  is,  however,  not  a  synonym  of  narrow  and  the 
Court  has  increasingly  taken  the  position  that  the  requirement  to  interpret  them 
strictly  must  not  have  the  effect  of  construing  the  terms  used  to  specify  VAT 
exceptions  in  such  a  manner  as  to  deprive  the  exemptions  of  their  intended  effect. 
This brings a certain tension to understanding the scope of the exemptions set out in 
the  Directive.  In  so  far  as  it  produces  uncertainty,  would  it  not  be  preferable  to 
resolve this by reforming the legislation on clear policy grounds rather than leaving it 
in the hands of the Court? 

Maurice Lauré is usually seen as the father of VAT. Writing long before the current 
crises,  he  suggested  that  in  considering  the  negative  impact  of  exemptions  in  the 
VAT  system,  the  European  VAT  system  should  be  interpreted  in  the  light  of  the 
coherent  economic  principles  on  which  a  VAT  system  should  be  based37.  The  first 
step in this process would be to develop a clear idea of the financial consequences of 
the  VAT  exemptions,  something  which  has  never  really  been  undertaken  since  the 
first steps were taken to set up the common VAT system. A critical re-examination 
along these lines seems long overdue. 

3.2. 

Evaluation of the current legislation 

3.2.1.  Exemptions and tax revenue 

Even if exemptions remove a considerable part of the tax base, Member States are to 
some extent compensated by the associated restriction on deduction. It is not easy to 
observe  and  measure  this  but  the  figures  are  probably  significant  even  if  they  fall 
short  of  what  would  be  expected  under  taxation38.  The  effect  on  revenue  probably 
also depends on where in the chain of supply the break in taxation occurs.  

In any critical review of exemptions generally, this revenue would probably act as a 
force for inertia. It is nevertheless a factor in any debate but without reliable data on 
this and the corresponding figures for revenue foregone because of the exemption, it 
will not be easy to arrive at an objective assessment.  

The non-recoverable VAT accrues to the Member State of the place where services 
or goods are supplied. For most exempt activities this will probably be the Member 
State of the exempt activity itself.  

Where,  however,  the  exempt  service  is  supplied  to  a  recipient  in  another  Member 
State,  the  place  of  supply  will  generally  be  where  the  recipient  is  established.  This 

36 
37 

38 

Consumption Tax Trends OECD Paris, annual publication. 
Les Impôts Gaspilleurs, Lauré, Babeau et Louit, Presses Universitaires de France — PUF (17 octobre 
2001). More colourfully, he also described exemptions as ‘the cancer of the VAT system’. 
Member States do not generally release this information but Jon Cannon, head of the UK Revenue and 
Customs partial exemption said last year at a seminar in Oxford University that exemptions contribute 
about 15 % of VAT yield. 

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will be the case whether this recipient is a taxable person or not. As a result, the link 
between the place where the inputs are taxed and the place where the resulting output 
is supplied (and consumed) is broken. 

For  many  of  the  exempt  services,  this  will  not  be  a  source  of  concern  as  they  are 
unlikely  to  be  supplied  across  borders  or  traded  between  Member  States.  Some 
financial and insurance services are, however, widely traded internationally and this 
pattern  can  be  expected  to  grow  with  the  deepening  of  Pan-European  markets  for 
these services. The outcome here is that those Member States who are net exporters 
of  financial  and  insurance  services  are  disproportionate  beneficiaries  of  non-
recoverable tax revenue whilst other Member States who are net recipients of these 
services contend with what is in effect a drain on their receipts. Deepening the Pan-
European market will accentuate this unevenness in the accrual of tax receipts.  

The  question  arises  whether  the  wide  de  facto  freedom  given  to  Member  States  to 
manage and set recovery levels (in effect, the level of taxation) and at the same time 
to retain this tax even when all the consumers of the exempt services are established 
in other Member States is not a potential source of mischief.  

3.3. 

Shortcomings of the current system 

3.3.1.  Distortions of economic decisions 

VAT  exemptions  encourage  internalisation  (the  performance  of  services  by  the 
taxable person’s own personnel), even if external suppliers could offer higher quality 
at  lower  VAT-exclusive  prices.  Thus,  exemptions  and  out  of  scope  activities 
discourage  outsourcing  of  activities  which  could  more  efficiently  be  performed  by 
specialised providers. This bias creates inefficiencies in the production and delivery 
of  goods  and  services.  Entities  carrying  out  exempt  activities  therefore  often  base 
spending decisions on the VAT effect rather than on real business or other economic 
factors.  

Exempt  status  makes  it  impossible  for  the  operators  concerned  to  deduct  the  input 
VAT charged on their acquisitions of goods and services used for subsequent exempt 
supplies. It thereby creates a ‘hidden VAT’ which will be passed on and will result in 
a higher cost when these exempt supplies are made to a taxable person with a right to 
deduct input VAT. 

Because  VAT  on  investment  by  entities  that  perform  exempt  activities  cannot  be 
recovered,  it  is  often  argued  that  the  present  VAT  regime  is  a  disincentive  to 
investment.  

The result is that organisational forms are at least to some extent driven by other than 
purely  economic  considerations  and  to  that  extent  the  outcome  is  sometimes 
undesirable  and  distorted.  For  the  most  part,  the  activities  exempted  in  the  1970s 
were  not  capital  intensive  and  were  limited  in  their  distribution  to  the  national 
territories of Member States — this is far from being the case today.  

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3.3.2.  Time to re-assess the exemptions and out–of-scope status of supplies made by public 

bodies and others 

It  would  not  be  unreasonable  therefore  to  cast  a  critical  eye  on  the  existing 
exemptions and ask whether they are still justified. 

As long ago as 2003 the Commission put forward a proposal to remove the current 
exemption for the public postal services. However, the Council has still not been able 
to reach a consensus.  

As far as ‘difficult to tax’ services are concerned, their continued exemption should 
depend on the answer to two interconnected questions. Firstly, what were the original 
technical,  legal  and  economic  justifications for  them?  This  need  to  be  investigated. 
Secondly,  depending  on  the  answer  to  that  question,  can  an  alternative  and  more 
efficient VAT treatment for these services be found? 

For  immovable  property,  the  existing  legislation  has  produced  a  complex  mix  of 
taxation, exemption and optional taxation. It could be argued that as there are internal 
market  considerations  at  stake  here,  a  pragmatic  approach  would  leave  things 
unchanged.  This  ignores  the  reality  that  exempting  supplies  to  taxable  persons  is 
inefficient  and  jeopardises  the  functioning  of  the  VAT  system.  Whereas  certain 
aspects of this exemption can be justified on economic and social grounds, it is not 
so easy to find similar justification for the inclusion of transactions involving hotel 
premises  or  premises  for  industrial  or  commercial  purposes.  One  approach  to 
rationalising  the  existing  exemption  might  be  to  limit  its  scope  to  three  restricted 
categories: 

(a) 

(b) 

the letting of houses to private individuals; 

supplies of buildings that are not new and where the supplier has not 
recovered input VAT on the building’s acquisition; and 

(c) 

supplies of land other than building land. 

This indeed was what the Commission originally envisaged in its preparatory work 
on  the  Sixth  VAT  Directive.  Perhaps  it  is  now  time  to  reconsider  this  more 
streamlined approach in the interests of the efficiency of the VAT system?  

Looking beyond the outcome of the current debate in the Council on the exemption 
for financial services and insurance, the question of full taxation cannot be avoided. 
The well-known technical issues here are beyond the scope of this note and, although 
complexity  has  to  be  acknowledged,  it  is  increasingly  accepted  that  they  can  be 
overcome.  The  non-recoverable  VAT  has  become  a  significant  source  of  revenue, 
particularly for those Member States with established  financial service centres who 
have become significant exporters of these services, but this revenue does not always 
accrue where the services are consumed. Apart from correcting this misallocation of 
tax, it is clear that many of the current technical and legal VAT difficulties around 
exemption  would  simply  disappear.  The  potential  for  tax  competition  and  other 
drawbacks associated with input tax recovery would be resolved. New developments 
such as Sharia banking, which do not sit easily within the current exemption, would 
not  be  a  VAT  problem  if  all  financial  transactions  were  taxed.  The  technical 

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difficulties here cannot be minimised but in any discussions on VAT strategy for the 
next  10 years,  it  is  impossible  not  to  raise  the  point  of  ending  these  particular 
exemptions.  

As far as gambling is concerned, the Directive provides that it is exempt, subject to 
the  conditions  and  limitations  laid  down  by  each  Member  State.  A  margin  of 
discretion  is  thus  conferred  in  regard  to  the  exemption  and  it  can  in  some  cases 
extend  only  to  a  limited  number  of  forms  of  gambling  (typically  lotteries  and 
betting), even if they account for only a minor part of all gambling carried on in the 
territory of a Member States. 

The evidence, based on the actual practice in several Member States, would seem to 
point  to  a  conclusion  that  the  ‘difficult  to  tax’  argument  holds  no  water  and  the 
retention  of  a  general  exemption  must  now  be  called  into  question.  A  critical 
examination should look at any residual reasons for keeping it. This should obviously 
address the issues raised by the increasing market for online services, which is often 
supplied  by  service  providers  established  in  locations  other  than  the  Member  State 
where the customer is established.  

3.4. 

The way forward 

The primary aim of the Sixth Directive was to establish a uniform basis for collection 
of the EU’s own resources. This implied uniform rules on exemptions and deduction. 
The  optimal  solution  from  a  VAT  perspective  would  be  to  end  most  of  the 
exemptions  but,  if  this  is  not  immediately  achievable,  a  starting  point  would  be  to 
look at a more harmonised approach. 

The study that is currently being carried out by Copenhagen Economics (see topic 2) 
also  covers  exemptions  in  the  public  interest.  It  will  provide  a  useful  input  for  the 
review of these exemptions. 

The  review  should  also  include  the  derogations  covered  by  Annex X  which  were 
never really to be seen as permanent fixtures in the Directive. Consideration should 
therefore be given to whether they are still justified. 

VAT ON PASSENGER TRANSPORT 

3.5. 

The current legal framework 

Transport services, like any other service supplied by a taxable person within the EU, 
are subject to VAT. Transport may be domestic (departing from and arriving in the 
same  country)  or  international  (departing  from  and  arriving  in  different  countries). 
International transport covers transport going from one Member State to another as 
well as transport going to (outward) or coming from (inward) outside the EU. 

Where VAT is applied, the supply of passenger transport is taxed pursuant to where 
the  transport  effectively  takes  place,  proportionate  to  the  distances  covered 
(Article 48  of  the  VAT  Directive)  and  may  be  subject  to  a  reduced  rate  of  a 
minimum of 5 % by the Member States as provided for in point (5) of Annex III. 

The VAT Directive nevertheless leaves scope for passenger transport to continue to 
be  exempted  through  derogations  accorded  to  Member  States.  It  reflects  the 

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exemptions  already  in  place  in  Member  States  before  1 January  1978  or  accepted 
upon  the  accession  of  new  Member  States.  Those  exemptions  are  to  be  found  in 
Articles 371 to 390 and, from 1 January 2011, Articles 390a and 390b.  

In addition, exemptions related to international transport, allowing certain passenger 
transport providers to purchase some goods and services free of VAT, have been in 
force since the introduction of VAT for international sea and air transport.  

This  means  that  the  VAT  treatment  of  passenger  transport  combines  different 
exemptions,  depending  on  the  kind  of  means  of  transport  used  to  provide  the 
transport and the place where the transport is deemed to take place: 

–  Exemption  of  passenger  transport  provided  by  transport  providers  to  their 

customers, subject to certain conditions (output exemption); 

–  Exemption  of  some  supplies  to  transport  providers,  subject  to  certain  conditions 

(input exemption). 

3.6. 

Historical overview 

Under the definitive arrangements, according to Article 393(2) of the VAT Directive, 
passenger transport is supposed to be taxed in the Member State of departure for that 
part  of  the  journey  taking  place  within  the  EU.  In  1992,  the  Commission  therefore 
proposed to tax passenger transport at the place of departure39, but the Council could 
not reach an agreement on the proposed amendment. One of the main issues standing 
in the way of an agreement was the patchwork of exemptions in force in the different 
Member States. 

A study40 was carried out for the Commission in 1997 and confirmed the differences 
in  treatment  between  Member  States  and  also  between  the  different  means  of 
transport.  Given  the  absence  of  political  will  among  Member  States  to  change  that 
situation, the Commission took no new initiative in this field. 

In  July  2000,  the  Commission  stated  its  intention  to  put  forward  a  number  of  new 
proposals and to review existing proposals in the VAT area41. The rules on the place 
of supply of services were identified as one of the potential future priorities.  

In  its  consultation  paper42  the  Commission  again  suggested  taxing  the  supply  of 
passenger  transport  services  taking  place  in  the  EU,  irrespective  of  the  means  of 
transport used, at the place of departure. For domestic transport, this rule would not 
change the situation while, for international transport, it would ensure that to a large 
extent passenger transport services could be taxed where they are actually consumed, 
without  the  complication  of  having  to  split  up  the  price  according  to  the  distances 
covered in each Member State.  

39 
40 

41 

42 

COM(92) 416-rev2 as amended by COM(94) 378. 
KPMG.  1997.  A  study  of  the  VAT  Regime  and  Competition  in  the  Field  of  Passenger  Transport, 
http://ec.europa.eu/taxation_customs/resources/documents/pass_tran_kpmg_final.pdf. 
COM(2000) 348 Final, 7 July 2000 ‘A strategy to improve the operation of the VAT system within the 
context of the internal market’. 
Commission  Consultation  Paper:  VAT  —  The  Place  of  Supply  of  Services  to  Non-Taxable  Persons 
http://ec.europa.eu/taxation_customs/resources/documents/vat_place_of_supply_en.pdf. 

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Summarising  the  results  of  this  public  consultation43,  the  Commission  noted, 
however, that although ‘some businesses supported this idea, there was also serious 
opposition mainly from airline companies fearing that the new rules could encourage 
Member State to abolish the current exemption’, and that most businesses found that 
‘the real issue is that of the different rates and exemptions applied by Member States 
and the inequity in VAT treatment between air, sea and road/train transport’. 

Against  this  background,  it  was  decided  not  to  propose  to  change  the  rules 
concerning  the  place  of  taxation  of  passenger  transport44  The  Council  agreed  with 
this  approach  when  adopting  the  new  rules  concerning  the  place  of  supply  of 
services. 

Recently, the issue of the VAT taxation of passenger transport has again come into 
the  picture,  given  the  broad  reflection  launched  in  the  context  of  the  fight  against 
climate change. 

3.7. 

Evaluation of the current legislation or policy 

The  VAT  treatment  of  passenger  transport  differs  from  one  Member  State  to 
another45. 

Domestic passenger transport is taxed in almost all Member States, whatever means 
of  transport  are  used.  Denmark,  Ireland  and  Malta,  however,  exempt  domestic 
passenger transport, except some transport by road. International passenger transport, 
on the other hand, is in most cases exempted by Member States. Whilst international 
sea and air transport services are exempt of VAT in the whole of the EU-27, VAT is 
paid,  subject  to  varying  conditions,  on  international  passenger  transport  within  the 
EU on inland waterways, rail and road transport in nine Member States.  

Where  international  passenger  transport  is  taxed,  it  is  often  difficult  for  Member 
States  to  effectively  ensure  the  actual  taxation  when  transport  starting  and  ending 
outside  their  territory  is  supplied  by  a  transport  provider  not  established  in  that 
Member State.  

Specific  exemptions  for  international  transport  are  provided  for  in  Articles 148  to 
150  of  the  VAT  Directive.  These  exemptions,  which  are  applicable  throughout  the 
EU,  apply  to  the  input  of  certain  businesses  which  provide  international  passenger 
transport  by  air  or  by  sea,  allowing  them  to  purchase,  free  of  VAT,  vessels  and 
aircraft as well as goods for fuelling and provisioning these means of transport and 
services  to  meet  their  direct  need  or  that  of  their  cargo.  The  application  of  these 
exemptions varies across the EU, given that Member States may limit their scope and 
adopt the detailed rules for their implementation.  

These  input  exemptions  are  intrinsically  reserved  for  international  air  and  sea 
transport  at  the  exclusion  of  other  means  of  transport,  like  trains  or  busses.  They 

43 

44 
45 

http://ec.europa.eu/taxation_customs/resources/documents/common/consultations/tax/rep_vat_ 
place_of_supply_en.pdf. 
See the explanatory memorandum for the proposal COM(2005) 334 final (point 2.2.). 
A  description  of  the  current  situation  can  be  found  at:  http://ec.europa.eu/taxation_customs/ 
resources/documents/taxation/vat/how_vat_works/rates/vat_rates_en.pdf. 

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provide  a  cash-flow  advantage  for  certain  parts  of  the  transport  sector,  with 
businesses  benefiting  from  exemption  not  having  to  pre-finance  the  VAT  before 
being able to exercise their right of deduction. Given the importance of the amount 
involved, this advantage is far from negligible. 

It means that the current situation with a number of exemptions applied quite broadly 
in  the  sector  of  passenger  transport  raises  the  question  of  the  neutrality  of  the 
applicable VAT treatment and its sustainability in the long term. 

3.7.1.  Positive aspects 

3.7.1.1.  Promoting certain sectors of passenger transport 

The VAT exemption applied to international air and sea transport gives providers of 
this  kind  of  transport  within  the  EU  a  competitive  advantage  over  other  transport 
providers  who  have  to  charge  VAT.  Firstly,  the  exemption  of  passenger  transport 
leads  to  lower  operating  costs  for  providers  of  international  air  and  sea  transport 
within  the  EU.  Secondly,  it  facilitates  such  transport  operations  and  reduces  the 
administrative  burden  of  alternative  procedures  for  the  VAT  refund  in  situations 
where VAT is charged. Thirdly, numerous exemptions for the supply of goods and 
services  for  such  operators  lead  to  significant  cash-flow  advantages,  which  permit 
the operators to invest, for instance, in new means of transport. 

3.7.1.2.  Competitive prices for passenger transport for final consumers  

The VAT exemption applied to certain sectors of passenger transport allows certain 
operators to lower their costs, which can lead to lower prices for passenger transport 
and a more competitive pricing policy.  

3.7.2. 

Shortcomings 

3.7.2.1.  Economic distortions 

The difference in treatment between different means of transport may influence the 
traveller's  decision  on  the  journey  to  be  taken.  The  exemption  for  international  air 
and  sea  transport  gives  providers  of  this  kind  of  transport  a  competitive  advantage 
over  other  transport  providers  who  have  to  charge  VAT.  With  the  development  of 
international  bus  and  train  transport,  in  particular  high  speed  trains,  similar  rules 
should  be  applied  to  transport  within  the EU  irrespective  of  the  means  of  transport 
involved. 

3.7.2.2.  Lack of harmonisation  

While taxation of passenger transport is envisaged, Member States may continue to 
exempt such services by means of derogations. The potential combination of taxation 
and exemption increases the administrative burden on businesses, which first have to 
assess  whether  they  need  to  charge  VAT  on  the  services  supplied  and,  if  so,  must 
meet  their  obligations  in  each  of  the  Member  States  on  the  territory  of  which  they 
provide passenger transport services. 

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3.7.2.3.  Complexity  

Taxing  international  passenger  transport  services  in  proportion  to  the  distances 
covered makes collection of the tax both difficult and impractical.  

In  an  internal  market  without  fiscal  frontiers  it  implies  that,  for  example,  a  coach 
company  transporting  tourists  from  Paris  to  Amsterdam  needs  to  apply  French, 
Belgian  and  Dutch  VAT  to  each  relevant  part  of  the  journey  and  pay  the 
corresponding amount of VAT to the tax authority of each Member State concerned. 
For  operators,  this  may  be  difficult  to  apply  and  is  quite  burdensome.  The 
consideration  paid  by  the  customer  needs  to  be  split  between  the  Member  States 
crossed  during  the  transport  to  allow  for  VAT  to  be  paid  in  each  Member  State, 
unless some of them have decided to exempt the service.  

There  is  a  genuine  risk  that  VAT  is  not  accounted  for,  in  particular  where  the 
transport  is  only  crossing  a  Member  State  in  which  the  operator  is  not  established, 
not departing from or arriving there. 

3.8. 

A possible way forward  

Experience has shown that unless the place of taxation, the rates and the exemptions 
are addressed as a whole, little progress is likely. A piecemeal approach that would 
not  ensure  equal  treatment  of  the  different  types  of  passenger  transport,  or  of  the 
operators providing it, offers no satisfactory solution.  

3.8.1.  Full taxation of passenger transport 

Transport that takes place on the territory of a Member State, is consumed in the EU. 
This  applies  to  both  domestic  and  international  passenger  transport.  It  would 
therefore be consistent with VAT being a broadly based tax on consumption to move 
to full taxation. Where services are not provided in the public interest, there are no 
economic, social or other reasons to justify an exemption.  

Putting an end to exemptions that are applicable to international passenger transport 
by air or sea only would ensure a level playing field. There would also be a synergy 
with other EU policies, notably the fight against climate change, where the transport 
sector is identified as an important source of CO2 emissions. 

It is difficult to imagine a review of the exemptions without also looking at the rules 
governing  the  place  of  taxation  of  transport  services  and  the  rates  that  may  be 
applied. To identify solutions that are not only workable but also acceptable may be a 
challenge. 

In  taxing  passenger  transport,  only  transport  linked  to  the  EU  territory  should  be 
targeted. Other than taxing passenger transport according to the distances covered, as 
envisaged  under  the  current  rules,  alternatives  such  as  the  place  of  departure,  the 
place of arrival, the place of the supplier or the place of the customer, separately or in 
combination,  could  be  considered.  It  may  also  be  that  other  alternatives  could  be 
identified.  

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The  method  chosen  to  tax  passenger  transport  should  in  any  event  ensure  that 
transport  consumed  within  the  EU  is  taxed  whilst  not  influencing  the  proper 
functioning of the internal market. 

Taxation could result in an increase in administrative burdens for those sectors which 
currently benefit from exemption, in particular where transport is carried out by non-
EU  operators.  That  may  be  overcome  if  transport  operators  are  allowed  to  use  the 
mechanism  put  in  place  for  non-established  suppliers  of  electronic  services, 
telecommunications and broadcasting services46. 

3.8.2.  Full output exemption of passenger transport 

Taxing passenger transport is not without complication. That is particularly so with 
international  passenger  transport  and  may  in  part  explain  the  exemption  currently 
enjoyed  by  operators  providing  international  passenger  transport  by  air  or  by  sea. 
This is less so with domestic transport which is therefore in many cases taxed. 

If full taxation proves not to be an option, thought could perhaps be given to moving 
towards  exempting  international  passenger  transport  regardless  of  the  means  of 
transport  used.  Whilst  it  is  not  in  the  nature  of  VAT,  an  output  exemption  may 
nevertheless  be  justified  by  the  complexity  of  the  tax.  This  would  leave  some 
consumption  untaxed  but  at  least  it  would  ensure  equal  treatment  between  the 
different modes of transport. 

An exemption would not necessarily conflict with other policies but its consequences 
should be carefully assessed. 

Normally,  businesses  can  only  deduct  VAT  charged  on  input  used  for  taxed 
activities. An output exemption for transport would therefore impact on the right of 
transport operators to deduct VAT paid on their purchases. This could lead to serious 
financial difficulties for businesses, such as considerable amounts of non-deductible 
VAT  or  cash-flow  problems  related  to  pre-financing  substantial  amounts  of  VAT, 
which would probably create great resistance from the businesses concerned. 

3.8.3.  Taxation,  or  output  exemption,  of  passenger  transport  combined  with  partial  input 

exemption 

Given  the  level  of  investment  needed  in  the  transport  sector,  there  may  be  valid 
reasons for exempting inputs. If found appropriate, the exemption would still need to 
be partial and target certain purchases only. 

Should passenger transport be taxed, operators would be able to deduct input VAT. 
Paying  VAT  on  the  purchase  of  durable  goods  of  significant  value  which  are 
essential for carrying out transport, in particular means of transport, could, however, 
still have a non-negligible effect on the cash-flow of transport providers, who would 
need to pre-finance the tax.  

46 

This  mechanism,  which  is  already  in  place  for  non-EU  suppliers  of  electronic  services,  will  from 
1 January  2015  be  extended  to  EU  suppliers  of  electronic  services,  telecommunications  and 
broadcasting services who are not established (see Articles 357 et seq. of the VAT Directive). 

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Should an output exemption be chosen, the lack of a right of deduction would mean 
that  the  VAT  paid  by  transport  operators  becomes  a  real  cost.  This  would  increase 
the justification for an exemption for purchases made by transport operators. 

In  both  situations  —  taxation  or  exemption  —  equal  treatment  should  be  ensured. 
Should such an input exemption be put in place, it would therefore need to be applied 
to all transport sectors (air, sea, land). 

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Topic 4. 

4. 

DEDUCTIONS 

4.1. 

The current legal framework 

The  right  of  deduction  is  a  key  factor  in  ensuring  that  the  VAT  system  is  neutral, 
relieving  taxable  persons  of  the  VAT  paid  on  their  input  so  that  the  tax,  after 
collection in stages, is ultimately borne by final consumers.  

The main rules on deductions are set out in Articles 167 to 192 of the VAT Directive. 
These  cover  the  time  when  VAT  becomes  deductible,  the  scope  of  the  right  of 
deduction, restrictions, and how the right of deduction is exercised. 

Regarding  restrictions  on  the  right  of  deduction,  Article 176  of  the  VAT  Directive 
(previously  Article 17(6)  of  the  Sixth  VAT  Directive)  stipulates  that  ‘the  Council, 
acting  unanimously  on  the  basis  of  a  Commission  proposal,  shall  determine  the 
expenditure in respect of which VAT shall not be deductible’. Moreover, it contains 
a  provision  allowing  Member  States  to  retain  all  the  exclusions  provided  for  under 
their national laws at 1 January 1979 or on the date of their accession for the Member 
States which acceded to the EU after that date.  

Besides  these  main  provisions,  there  are  two  Directives  on  the  refund  of  VAT  to 
taxable  persons  who  are  not  established  in  the  Member  State  in  which  they  incur 
VAT on goods and services or on their import of goods: 

–  Council Directive 2008/9/EC, laying down rules for the refund of VAT to taxable 
persons not established in the Member State of refund but established in another 
member State; 

–  The  Thirteenth  Council  Directive  (86/560/EEC),  on  arrangements  for  the  refund 

of VAT to taxable persons not established in the European Union. 

4.2. 

Historical overview 

Several  legislative  initiatives  have  been  taken  in  the  past  to  review  the  rules  on 
deduction. 

A  first  attempt  to  harmonise  the  restrictions  on  the  right  of  deduction  was  made  in 
1982  with  the  so-called  Twelfth  Directive47  proposal.  However,  this  proposal  was 
never adopted. 

Under the SLIM (Simplifying Legislation for the Internal Market) initiative in 1997, 
the working party set up to examine VAT obligations recommended examining ways 
and  means  of  radically  reforming  the  refund  procedures  laid  down  in  the  then 
applicable  Eighth  VAT  Directive  for  non-established  EU  traders.  At  that  time,  the 
Commission  took  the  view  that  significant  simplification  could  only  be  reached  by 
replacing the refund system by a ‘cross-border deduction’, i.e. a system that allows 

47 

COM(82) 870. 

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EU taxable persons to deduct VAT incurred in another Member State where they are 
not  established  by  setting  it  off,  in  his  own  VAT  return  in  the  Member  State  of 
establishment,  against  the  amount  of  VAT  due  for  which  they  are  liable.  The 
Commission’s  proposal  for  such  a  reform,  presented  in  1998,48  again  included  a 
section  on  expenditure  not  eligible  for  a  full  VAT  deduction  with  a  view  to 
approximating national rules. This proposal was, again, never adopted. 

Under  its  VAT  strategy  launched  in  2000  and  updated  in  2003,  the  Commission 
proposed broad simplification comprising six concrete measures which included two 
items on deduction/refund: the replacement of the refund system for non-established 
EU taxable persons and harmonisation of the scope of goods and services for which 
Member  States  may  apply  restrictions  on  the  right  to  deduct49.  The  new  refund 
system, entirely electronic but still based on a system of actual refund by the Member 
State  where  the  VAT  was  incurred,  entered  into  force  on  1 January  2010.  The  part 
related to restrictions on the right of deduction is still on the table at the Council. 

In 2007, the Commission proposed, amongst other items, a Directive which included 
rules  to  refine  the  right  of  deduction's  basic  rule  that  a  taxable  person  may  deduct 
VAT on input only in so far as the goods and services are used for transactions that 
give rise to deduction. Under ECJ case law, there was no way of preventing taxable 
persons  from  allocating  mixed-use  goods  (used  for  both  business  and  non-business 
purposes)  wholly  to  business  assets  and  deducting  the  whole  amount  of  VAT 
immediately  and  in  full,  insofar  as  private  use  was  subsequently  taxed  as  a  service 
over time. This created considerable unjustified cash-flow advantages for the taxable 
persons concerned, especially in relation to immovable property. The purpose of the 
new  Directive50,  which  was  adopted  in  2009  and  will  take  effect  from  1 January 
2011,  is  to restrict upfront deduction to  effective  business  use.  At  the  same  time,  a 
correction  mechanism  should  take  fluctuations  between  business  and  private  (non-
business) use into account. 

4.3. 

Evaluation  of  the  current  legislation  or  policy:  positive  aspects  and  specific 
shortcomings 

The  principle  of  neutrality  requires  full  deductibility  of  the  VAT  on  goods  and 
services  which  are  used  for  taxed  economic  activities.  VAT  on  goods  and  services 
obtained for non-business use (private or out-of-scope activities) or exempt activities 
(with the exception of exempt activities giving rise to a right of deduction like intra-
EU  supplies  of  goods  or  exports)  is  not  deductible.  Respecting  this  requirement  is 
sometimes problematic in those cases where goods and services are used for multiple 
purposes (taxed activities, exempt activities and non-business purposes) and changes 
in this use occur during the economic lifetime of the good or service. 

Restrictions  on  deduction  should  in  principle  apply  in  situations  where  goods  and 
services  are  used  for  business/non-business  purposes  and  determining  the  effective 
proportion between the two could create major difficulties for the trader (sometimes 

48 
49 
50 

COM(1998) 377. 
COM(2004) 728. 
Council  Directive  2009/162/EU  of  22 December  2009  amending  various  provisions  of  Directive 
2006/112/EC on the common system of value added tax (OJ L 10, 15.1.2010, p. 14). 

EN 

39 

   EN 

 
                                                 
impossible  to  make  in  practice)  and  could  be  impossible  to  verify  by  the  tax 
authorities. 

4.3.1.  Use  of  goods  and  services  both  for  exempt  activities  and  activities  giving  rise  to  a 

right of deduction 

Recital 39 of the VAT Directive states that ‘the rules governing deductions should be 
harmonised to the extent that they affect the actual amounts collected. The deductible 
proportion should be calculated in a similar manner in all the Member States’.  

The  rules  which  the  Member  States  must  follow  in  achieving  that  objective  are  set 
out in Articles 173 to 175 of the Directive. Unfortunately they provide only limited 
guidance and consequently Member States have gone their own way in implementing 
them. Although it is notable that the VAT Directive only requires that the calculation 
should be established in ‘a similar manner’ (which does not mean the same manner), 
there is clearly an expectation that the actual amount collected should be harmonised 
for  similar  operations  in  different  Member  States  and  that  differences  in  the 
computation of deductible VAT should not lead to competitive imbalances.  

The ECJ has provided some limited guidance which, if followed, might be expected 
to deliver a more harmonised approach. 

Beyond  that,  however,  the  evidence  points  to  considerable  variations  in  the 
methodologies  imposed  or  accepted  by  Member  States  and,  more  worryingly,  the 
actual  rates  of  input  VAT  recovery.  A  study  carried  out  for  the  Commission51 
confirmed  this,  attributing  the  variations  in  recovery  rates  to  the  availability  of  an 
option to tax, differing business mixes, differences in the scope of the exemptions in 
national law and finally concessional arrangements or interpretations which are not 
always  documented  in  national  legislation.  In  the  latter  instance,  it  is  not  easy  to 
verify  that  such  arrangements  are  in  conformity  with  EU  law52.  In  addition, 
differences in the computational rules adopted largely on their initiative by different 
Member States, notwithstanding the First National Bank of Chicago judgment, will 
always  give  different  recovery  rates  (e.g.  using  gross  margin  or  gross  interest  will 
result in a wide variation in outcomes). 

The  consequences  of  non-harmonisation  are  particularly  troublesome  when  an 
exemption  involves  commercial  activities.  The  recovery  rate  determines  the  tax 
actually  borne  by,  for  instance  a  banking  or  an  insurance  institution.  Non-
harmonisation therefore creates competitive imbalances between operators and may 
possibly become a vehicle for tax competition between Member States. It is probable 
that  for  many  institutions  non-recoverable  VAT  may  currently  be  the  most 
significant tax they pay, even if the lack of transparency makes it difficult to say this 
with any certainty.  

51 
52 

Survey on the recovery of input VAT in the financial sector, IBFD December 2006. 
Where the arrangements with the tax authority are more favourable than might be expected under the 
VAT Directive, the beneficiary will never complain of course and the authorities will not be inclined to 
disclose the details to the Commission, perhaps on the grounds of commercial confidentiality. 

EN 

40 

   EN 

 
                                                 
4.3.2.  Provisions  dealing  with  the  non-business  (private  use)  of  business  assets; 

adjustments and corrections 

The  Directive  adopted  on  22 December  2009  provides  specific  rules  on  exercising 
the right of deduction in the light of the principle that deduction arises only in so far 
as goods and services are used for a business activity.  

Problems had at first arisen in relation to the initial exercise of the right of deduction 
for immovable property not exclusively used for business purposes. Once allocated 
to  business  assets,  even  where  business  use  was  minimal  the  total  amount  of  VAT 
could be deducted upfront and private use would be output taxed via the ‘full cost’ 
valuation rules over a period of (in some cases) up to 20 years, creating (unjustified) 
cash-flow advantages. 

The 2009 Directive, firstly, restricts the initial exercise of the right of deduction for 
immovable  property  to  effective  business  use;  immediate  and  full  deduction  in  the 
case of mixed use is therefore no longer possible. 

Secondly, it introduces a ‘correction’ mechanism’ in addition to the existing system 
of adjustment for capital goods.  

In  order  for  the  adjustment  system  to  be  applicable,  a  person  must  first  acquire 
capital goods as a taxable person and allocate them to business assets. Fluctuations 
during  the  adjustment  period  between  taxed  business  use  (giving  rise  to  a  right  of 
deduction) and exempt business use (not giving rise to a right of deduction) are taken 
into account via the adjustment system. 

However,  no  specific  comparable  parallel  rules  catering  for  a  similar  division 
between  business  and  non-business  use  of  assets  were  available.  Although  non-
business (private) use of a business asset was to be taxed as a deemed service (under 
Article 26 of the VAT Directive), there was no adjustment mechanism in favour of 
the taxable person if business use increased beyond the initial business use. 

If, under the new rules on forced apportionment, an asset were seen as being partly 
allocated  to  non-business  use  (where  the  taxable  person  was  previously  free  to 
allocate  mixed-use  goods  entirely  to  business  assets)  no  adjustment  of  the  tax 
relating to the non-business part in favour of the taxable person was allowed. 

Therefore,  the  new  rules  are  intended  to  deal  with  this  problem  via  a  ‘correction’ 
system (in relation to increase/decrease of business and non-business use) by analogy 
with  the  adjustment  system  and  by  excluding  the  otherwise  applicable  output  tax 
rules  in  the  case  of  a  subsequent  decrease  in  business  use  (Article 26  of  the  VAT 
Directive). 

Thirdly, particularly in comparison with the original Commission proposal, the scope 
of  the  Directive  was  extended,  via  an  option  for  the  Member  States,  to  all  goods 
forming part of business assets. 

As this legislation will come into effect from 1 January 2011, it is too early to assess 
its effects, but some observations may be made.  

EN 

41 

   EN 

 
The  option  of  extending  the  scope  of  these  provisions  will  lead  to  further  de-
harmonisation. As the text refers to ‘business assets as they (i.e. the Member States) 
specify’,  this  new  rule  will  have  a  different  scope  of  application  in  each  Member 
State and might create further distortions of competition within the Internal Market. 
It remains to be seen whether Member States will extend the rules to e.g. non-capital 
goods. 

For  the  new  correction  mechanism,  reference  is  made  to  the  principles  of  the 
adjustment  system  via  a  general  reference  to  Articles 184  to  192  of  the  VAT 
Directive  and  ‘as  applied  in  the  respective  Member  State’.  Any  differences  in  the 
current adjustment systems between the Member States will therefore extend to the 
new correction system. Because of the general reference to all articles on adjustment, 
Member States have some discretion in applying the new rules, e.g. the possibility to 
permit administrative simplifications (see Article 189 of the VAT Directive). 

4.3.3.  Restrictions on the right of deduction 

Article 176 of the VAT Directive as set out above is the legal base for most of the 
restrictions  currently  applied  in  the  Member  States.  Besides  that  provision, 
restrictions can be also based on the following: 

•  Each  Member  State  may,  for  cyclical  or  economic  reasons,  totally  or  partly 
exclude  all  or  some  capital  goods  or  other  goods  from  the  system  of  deduction 
after consulting the VAT Committee (Article 177 of the VAT Directive). 

•  The  Council  may  grant  individual  derogations  on  the  right  of  deduction  to  any 
Member State insofar as these measures are intended to simplify the procedure for 
collecting  VAT  or  to  prevent  certain  forms  of  tax  evasion  or  avoidance 
(Article 395 of the VAT Directive). 

4.3.3.1.  Positive aspects 

Flat-rate  restrictions  on  the  deduction  of  input  VAT  for  expenses  covering  mixed 
private and business use (cars, restaurants and mobile phones) simplify matters both 
for the taxpayer and the tax administration. 

Flat-rate restrictions are a simple way of apportioning business and non-business use, 
in  that  the  flat  rate  deduction  allowed  should  generally  reflect  the  effective 
proportion of business use. It has to be accepted that a flat-rate proportion can never 
correspond  to  each  individual  case,  and  that  there  will  be  winners  and  losers  when 
applying such a mechanism.  

Flat-rate restrictions go beyond their objective of simplification when the proportion 
no  longer  corresponds  to  the  economic  reality  (for  instance,  if  VAT  related  to  car 
expenses is fully excluded from the right of deduction).  

Positive effects of, probably, most rules that derogate from the general principle are 
that  individual  Member  States  can  maintain  existing  national  situations  which  are 
economically or even culturally accepted or desired (standstill), can react quickly to 
fluctuations  or  crisis  situations  in  the  national  economy  (exclusions  for  cyclical  or 
economic  reasons),  can  simplify  VAT  collection  for  taxable  persons  and/or  the  tax 

EN 

42 

   EN 

 
administration  in  difficult  situations  and  can  apply  measures  to  combat  tax  evasion 
and avoidance at short notice (through individual derogations). 

4.3.3.2.  Shortcomings  

•  Any restriction of the right of deduction in relation to strictly business expenditure 
affects the neutrality of the VAT system and should therefore be avoided. At the 
same time, it affects the principle that VAT should be a consumption tax. 

•  As  exceptions  exist  on  a  national  basis,  taxable  persons  operating  in  different 
Member  States  have  to  deal  with  different  sets  of  rules.  For  example,  it  makes 
cross-border  refunds  (see  further)  more  complicated  within  the  EU  as  different 
(sub)-codes  have  to  be  used  to  cover  all  existing  different  situations  in  the 
respective Member States. 

•  The  standstill  provision  in  Article 176  implies  that  new  or  previously  abolished 
restrictions  cannot  be  (re)introduced.  This  results  in  Member  States  having 
unequal rights in this respect. 

4.3.4.  The time when the right to deduct arises 

The right of deduction arises at the time the deductible tax becomes chargeable. That 
means  that  a  customer  is,  in  principle,  entitled  to  deduct  the  VAT  as  soon  as  the 
supply is made on his next VAT return, whether or not he has paid for the supply.  

This rule creates a cash flow advantage for late payers, the burden of which is in fact 
borne by the suppliers, for instance SMEs that may be unable to impose reasonable 
terms of payment on their customers but who have to pay the VAT immediately to 
the Treasury. While this rule is neutral for the State, it is doubtful whether its effects 
on the supplier and the customer are consistent with the principle of neutrality. 

Allowing businesses, particularly small ones, to pay the VAT only when they have 
received  payment  would  constitute  a  solution  already  permitted  under  the  VAT 
Directive  (see  Article 66(b)).  Several  Member  States  allow  this  option  with  in 
addition a derogation to postpone the right of deduction of businesses opting for such 
a scheme (the so-called cash accounting scheme). 

This scheme enables such taxable persons to apply a simple rule based on the date of 
payment for their input and output transactions, to determine at what point they must 
exercise  their  right  to  deduct  VAT  and  pay  the  tax  to  the  revenue  authorities.  For 
such  taxpayers,  the  scheme  simplifies  the  formalities  and  may,  furthermore,  give 
them a cash-flow advantage, particularly if most of their expenditure is not liable to 
VAT  (e.g.  salaries)  or  they  have  to  accept  lengthy  payment  terms  from  their 
customers but cannot impose similar payment terms on their suppliers.  

However,  this  scheme  could  lead  to  unwanted  effects:  discrimination  against 
suppliers  who  have  opted  for  the  scheme,  because  it  indirectly  deprives  their 
customers to the right to deduct the VAT immediately as they can under the common 
rules. 

EN 

43 

   EN 

 
This  problem  could  be  tackled  by  granting  all  customers  of  a  ‘cash  accounter’  the 
right to deduct the VAT as soon as the supply has been made or the invoice issued 
and  therefore  by  separating  the  chargeability  of  the  VAT  from  the  time  of  its 
deduction.  The  cost  in  terms  of  cash  flow  would  then  be  incurred  by  the  State. 
However,  allowing  a  ‘cash  accounter’  to  issue,  for  instance,  an  invoice  for  an 
account,  without  having  to  pay  the  VAT  stated,  while  authorising  the  customer  to 
deduct it immediately, could lead  to  abuse or avoidance between persons  that have 
close ties, for example. 

The  solution  might  therefore  be  to  make  it  a  general  rule  that  the  VAT  becomes 
chargeable  when  payment  for  the  supply  is  received  by  the  supplier  with  the 
customer having the right to deduct at the same time.  

Such  a  rule  would  be  perfectly  neutral  for  most  stakeholders:  the  supplier,  the 
customer and the State. The only losers would generally be customers who are able 
to impose lengthy credit terms on their suppliers. They would no longer benefit from 
the cash-flow advantage resulting from the  period  between the  time when they can 
deduct  VAT  and  the  later  time  when  they  have  to  pay  the  VAT  to  the  supplier. 
However,  if  a  customer  has  no  right  to  deduct  VAT,  the  State  would  have  to  wait 
until the customer pays the invoice before it collects the VAT. Nevertheless, in both 
cases, the supplier would no longer suffer the cost of late payment to the benefit of 
the State and/or his customer. 

More broadly, basing the VAT system on payment and therefore reducing the time 
between payment of the VAT and remittance to the Treasury may limit losses from 
supplier insolvencies. It would also allow more modern means of collecting VAT to 
be put in place with the objective of preventing fraud due to the concealment of sales 
and  reducing  the  administrative  cost  to  both  businesses  and  the  tax  administration. 
For  instance,  a  VAT  system  based  on  payment  would  facilitate  the  setting  up  of  a 
scheme where the customer would pay the VAT directly to the Treasury while at the 
same time paying for his purchase by credit card or credit transfer (see point 5.4.1 of 
the green paper). By adapting banking payments through SEPA, it might be possible 
to pay the net amount to the supplier and the VAT to the tax authority, at the same 
time and in a single payment transaction. 

However, the cash accounting system in itself cannot be seen as an effective solution 
to major abuses such as carousel fraud. In general, the fraudster demanding a VAT 
refund complies and is able to prove that the goods acquired were actually paid for. 
Thus,  cash  accounting  could  represent  a  more  neutral  system  providing  some 
assistance to SMEs in terms of cash flow advantages and, to some extent, could limit 
VAT  losses  due  to  insolvencies.  But  to  counter  fraud,  an  additional  and  more  far-
reaching  measure  would  be  needed  such  as  imposing  conditions  on  the  right  of 
deduction itself. 

EN 

44 

   EN 

 
4.3.5.  Refunds to non-established EU operators (Directive 2008/9/EC) 

On  1 January  2010,  the  refund  system  of  the  Eighth  VAT  Directive53 was  replaced 
by  a  new  and  entirely  electronic  refund  system  for  non-established  EU  taxable 
persons.  The  previous  paper-based  system  was  considered  burdensome  to  both 
businesses and tax administrations, was characterised by increasing failure to comply 
with  time  limits  and  had  become  out  of  date.  For  tax  administrations,  each  refund 
required  physical  processing  —  stamping  and  returning  invoices  and  import 
documents  —  but  lacked  effective  means  of  verification.  In  reality,  the  available 
information  often  allowed  only  the  applicant’s  status  as  a  taxable  person  and  the 
conformity of the invoice or document to be checked. Member States of refund could 
not verify the division between taxed, exempt or out-of-scope supplies or the way the 
deduction was made (pro rata or by actual attribution). 

The new system sought to deal with a number of administrative problems, both for 
businesses  and  tax  administrations,  and  to  enhance  the  position  of  claimants.  In 
practice,  a  claim  is  introduced  via  the  web  portal  of  the  Member  State  of 
establishment  of  the  taxable  person  and  sent  over,  after  certain  checks  have  been 
made,  to  the  Member  State  where  the  VAT  was  incurred  (the  Member  State  of 
refund),  which  then  has  to  decide  whether  the  claim  is  eligible  and,  where 
appropriate, to refund the VAT to the claimant. 

4.3.5.1.  Positive effects 

the 

Because  of 
implementation  problems,  any  positive  effects  have  been 
overshadowed  by  the  rather  serious  technical  problems  in  certain  Member  States. 
Further  analysis  would  be  required  to  determine  whether  and  to  what  extent 
expectations  in  terms  of  speed  (because  of  the  electronic  procedure),  efficiency 
(introduction  of  the  claim  via  the  web  portal  of  the  claimant’s  Member  State, 
reduction of language problems via maximum use of codes), and improvement of the 
taxpayers’ status (granting interest in cases of late payment) have been met. 

4.3.5.2.  Shortcomings 

Although the EU components of the IT system were set up satisfactorily, a number of 
problems occurred in the Member States:  

•  The  late,  incorrect  or  non-transposition  of  EU  legislation  resulted  in  the  late 
opening  of  national  web  portals  (sometimes  up  to  five  months  after  1 January 
2010);  discrimination  against  non-established  agents;  limits  on  the  number  of 
invoices; incorrect treatment of VAT groups (multiple VAT numbers), and other 
problems. 

•  There were problems with and unnecessary restrictions on the proper functioning 
of the national web portals in relation to e.g. opening times, accepted formats and 
absence of batch uploads. 

53 

Eighth  Council  Directive  79/1072/EEC  of  6 December  1979  on  the  harmonisation  of  the  laws  of  the 
Member States relating to turnover taxes — Arrangements for the refund of value added tax to taxable 
persons not established in the territory of the country (OJ L 331 of 27.12.1979, p. 11). 

EN 

45 

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•  The text of the Directive contained a number of options (e.g. use of language, use 
of  codes  for  business  activity,  use  of  codes  for  sectors  of  activity),  a  few 
shortcomings (the principle of using direct contacts between the Member State of 
refund and the non-established applicant for several routine messages which could 
easily have been routed through the common IT system) and very few provisions 
enabling the Commission to adopt common implementing provisions. 

To  avoid  such  situations  in  future,  lessons  should  be  drawn  from  the  problems 
experienced  in  setting  up  the  system.  However,  a  proper  assessment  of  the 
shortcomings of the system can only be made once it is running properly. 

Some  of  these  shortcomings  are  addressed  in  the  recent  Commission  proposal54  on 
extending the deadline for cross-border refunds, as it also contains new rules aimed 
at granting the Commission the necessary powers to standardise the technical details 
needed for such a Pan-European scheme to work properly. 

4.3.6.  Refunds to non-EU operators (Thirteenth Directive 86/560/EEC) 

The  Thirteenth  Directive,  on  refunding  VAT  to  taxable  persons  that  are  not 
established in the Union55, has never been amended since its adoption. The system is 
still entirely paper-based. Unlike the refund system for EU taxable persons that are 
established  in  another  Member  State,  this  Directive  leaves  a  lot  of  discretion  to 
Member States. In particular, Member States may make the VAT refunds conditional 
upon  the  granting  by  non-EU  states  of  comparable  advantages  regarding  turnover 
taxes  (the  so-called  reciprocity  clause).  Member  States  also  decide  the  practical 
arrangements  for  claiming  these  refunds,  e.g.  time  limits  or  minimum  amounts. 
Eligibility for refunds is determined according to the Member States’ domestic rules 
on  VAT  deductions,  although  certain  expenditure  may  be  excluded  or  certain 
conditions imposed. 

4.3.6.1.  Positive effects 

With  the  refund  system  for  taxable  persons  not  established  in  the  Union,  the  EU 
seeks  to  guarantee  the  principle  of  neutrality  of  VAT  as  a  consumption  tax  in 
international trade, destined to accrue to the state or jurisdiction where consumption 
takes place. 

4.3.6.2.  Shortcomings 

Reciprocity  can  generally  be  arranged  in  different  ways:  via  formal  bilateral 
agreements  between  states  or  via  a  unilateral  decision  by  a  state  to  recognise  a 
number of countries as having a comparable VAT or indirect tax system under which 
comparable  advantages  are  granted  to  an  EU  Member  State.  The  result  is  that  the 
reciprocity conditions are not applied uniformly across the EU, which results in the 
same non-EU country being treated differently according to the conditions agreed by 
individual Member States. 

54 
55 

COM (2010) 381. 
Thirteenth Council Directive 86/560/EEC of 17 November 1986 on the harmonisation of the laws of the 
Member States relating to turnover taxes — Arrangements for the refund of value added tax to taxable 
persons not established in the Community (OJ L 326 of 21.11 1986, p. 40). 

EN 

46 

   EN 

 
                                                 
4.4. 

Possible ways forward 

4.4.1.  Mixed use of goods and services 

This is an important area of concern. The amending Directive adopted in December 
2009  brings  a  partial  solution  to  a  specific  problem  which  the  Commission  indeed 
considered it necessary to address in the short term. 

A  more  fundamental  review  of  the  provisions  governing  the  scope  of  the  right  of 
deduction, proportional deduction and adjustments would seem necessary. 

The difficulties encountered in Council when discussing the 2009 Directive already 
gives an indication of the complexity of such a task.  

A less far-reaching approach would be to further harmonise the scope and details of 
the new rules laid down by the new Directive, thereby reducing the optional aspect of 
the Directive. 

Another  more  targeted  option  would  be  to  launch  a  more  general  review  of  the 
adjustment rules (Articles 184–192 of the VAT Directive). 

4.4.2.  Restrictions on the right of deduction 

A first option would be to define in a harmonised way those goods and services for 
which  Member  States  may  impose  restrictions.  The  proportion  of  the  restriction 
could be decided by the Member States taking into account their national situation. 
This  would  be  in  line  with  the  existing  proposal  which  is  still  on  the  table  at  the 
Council. 

A more ambitious option would be fully harmonise the restrictions, leaving Member 
States no discretion in this area. 

4.4.3.  The time when the right to deduct arises 

The advantages and disadvantages of changing the time when the right of deduction 
arises in terms of cash flow for businesses and tax authorities, fraud prevention, and 
the impact on accounting obligations could be further examined.  

4.4.4.  Refunds to non-established EU operators (Directive 2008/9/EC) 

The  benefits  of  the  newly  introduced  system  can  only  be  measured  once  it  is 
functioning smoothly. The Commission still believes in its merits and is convinced 
that the current difficulties can be resolved. 

Nevertheless,  the  ultimate  simplification  would  still  be  a  cross-border  deduction 
mechanism  via  the  VAT  declaration  of  the  taxable  person  in  his  Member  State  of 
establishment, as proposed in 1997.  

Additionally, a fully worked out one stop shop mechanism (see point 5.3.4.1 of the 
Green Paper), allowing taxpayers to declare output VAT but also to exercise the right 
of deduction on the VAT return could replace the refund procedure.  

EN 

47 

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4.4.5.  Refunds to non-EU operators (Thirteenth Directive 86/560/EEC) 

In  order  to  enhance  neutrality  in  international  trade  between  the  EU  and  non-EU 
countries, one option could be to define reciprocity at EU level. 

Another  could  be  to  examine  whether  additional  conditionality  clauses  (e.g.  on 
exchange of information as regards VAT/GST) should be used. 

A more ambitious approach would be to introduce an electronic procedure, similar to 
that  recently  implemented  for  non-established  EU  operators,  with  a  single  portal 
managed by the Commission. 

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48 

   EN 

 
Topic 5. 

5. 

INTERNATIONAL SERVICES 

5.1. 

Current position 

The need to address issues relating to the supply of services across the EU’s external 
border  is  a  relatively  recent  development  in  the  history  of  the  common  system  of 
VAT.  In  all  probability,  those  who  framed  the  original  legislation  did  not  consider 
cross-border services to be of any great economic interest, especially where non-EU 
countries  were  involved.  For  a  long  time,  the  rules  on  the  place  of  supply  of  B2B 
services were seen as sufficient to deal with all likely eventualities.  

The arrival of online electronic commerce changed this, confirming that few things 
in life are really written in stone. The development of an online B2C market brought 
new  problems  for  VAT  and,  in  particular,  left  a  fledgling  European  industry  at  a 
serious competitive disadvantage. The so-called e-services VAT Directive56 rectified 
this  and,  in  so  doing,  broke  new  ground  by  setting  up  simplified,  streamlined 
compliance  procedures  for  service  suppliers  established  in  non-EU  countries  that 
made taxable supplies to EU consumers. 

These  e-commerce  services  are,  however,  only  one  part  of  a  larger  phenomenon. 
Changes  in  technology,  greater  deregulation,  innovative  business  models  and  the 
general impact of globalisation have resulted in enormous changes in the economic 
significance  of  internationally  traded  services  and  intangibles,  putting  pressure  in 
turn on international aspects of the VAT system. 

In  order  to  address  such  issues,  the  Commission  has  engaged  with  the  OECD  in  a 
process  to  develop  international  norms  for  VAT-type  taxes  based  on  taxation 
according to the rules applicable in the jurisdiction of consumption. These will have 
no impact on the rules for intra-EU transactions. In this context, therefore, the term 
‘international’ refers to transactions which involve both the EU and one or more non-
EU counties.  

Since VAT is an EU competence, the need for a coordinated EU approach is clear. 
Member States that participate in the OECD cannot enter into agreements with non-
member countries on arrangements which might interfere with the rules laid down in 
the  VAT  Directive,  even  if  such  arrangements  are  limited  to  interpretative 
commentaries  or  guidelines.  Coordination  must  also  involve  those  Member  States 
that are not members of the OECD.  

The  expectation  of  the  OECD  is  that,  over  time,  this  process  will  yield  a  body  of 
work broadly similar in status to the transfer pricing guidelines. 

56 

Council  Directive  2002/38/EC  of  7 May  2002  amending  and  amending  temporarily  Directive 
77/388/EEC as regards the value added tax arrangements applicable to radio and television broadcasting 
services and certain electronically supplied services (OJ 2002 L 128, p. 41). 

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5.2. 

Evaluation of issues being addressed and future progress 

The  work  being  pursued  at  the  OECD  falls  under  the  heading  of  ‘International 
VAT/GST Guidelines’ and has to be seen as a long-term project. The intention is that 
once finalised, it will provide governments and taxpayers with recommendations on 
how cross-border supplies of services should be taxed. 

In  international  trade  in  services,  which  can  involve  several  jurisdictions,  all 
potentially  claiming  the  right  to  tax,  taxation  according  to  the  destination  principle 
should ensure tax neutrality and prevent distortion of competition.  

The  OECD  has  just  completed  a  general  public  consultation  on  a  draft  second 
chapter  of  the  Guidelines,  dealing  with  customer  location  in  the  context  of 
identifying  the  jurisdiction  which  has  taxing  rights.  It  is  expected  that  this  chapter 
will be finalised in the near future through a process of endorsement by the OECD’s 
Committee on Fiscal Affairs. 

Progress  to  date  has,  however,  been  largely  achieved  by  avoiding  more  difficult 
issues  such  as  tax  avoidance  and  artificial  arrangements.  Currently,  questions 
involving  complex  corporate  structures,  in  particular  branches,  and  more  complex 
supplies are coming to the fore. 

The need for a coordinated EU position in these negotiations is now becoming more 
important. It is the Commission’s intention to deal with this via the VAT Committee, 
as and when the need arises. 

As pointed out above the e-services VAT Directive has ensured from a legal point of 
view taxation of  these  services within the Member  State  of consumption. From the 
outset,  it  was  acknowledged  that  this  legislation  relies  heavily  on  voluntary 
compliance from the suppliers.  

Bilateral  agreements  with  non-EU  countries  or  multilateral  agreements  covering 
VAT  could  provide  a  legal  base  for  an  exchange  of  information  and,  as  far  as  the 
joint  OECD/Council  of  Europe  multilateral  convention  is  concerned,  even  a  legal 
base for the assistance in recovery of debts. 

Because initially the e-services provisions were agreed for a limited period in time, 
little attention was given to this aspect. The adoption of the VAT package has now 
given  these  provisions  a  permanent  character  without  addressing  the  outstanding 
issue of the control of these transactions.  

It can be questioned whether such situation is acceptable in the long term. From 2015 
similar  provisions  for  ensuring  taxation  at  destination  will  be  extended  to 
telecommunications and broadcasting services, and to similar intra-EU services. The 
EU legislation adopted for that purpose at EU level strengthened the administrative 
cooperation between Member States for these intra-EU transactions to ensure that the 
Member State of consumption has the capacity to audit these transactions. 

This will stress the inequality in terms of control between EU and non EU traders in 
the same sector and subject to similar VAT rules.  

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Developing  VAT  administrative  cooperation  at  international  level  is  one  potential 
way  forward.  The  alternative,  explored  in  certain  non-EU  jurisdictions,  is  to  seek 
ways of collecting the VAT from the persons established within the EU, in this case 
the private person. 

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Topic 6. 

6. 

THE LEGAL PROCESS 

6.1. 

Current legal framework 

The Council adopts provisions harmonising turnover taxes such as VAT to the extent 
necessary to ensure the establishment and the functioning of the internal market and 
to avoid distortion of competition57. Such provisions must be adopted by unanimity 
and  after  consulting  the  European  Parliament  and  the  Economic  and  Social 
Committee.  Adoption  of  any  provision  requires  a  proposal  from  the  Commission, 
which has the right of initiative58. 

Amendments  to  a  Commission  proposal  can  be  made  by  Council.  Where  these 
changes  do  not  achieve  the  aims  of  the  proposal  or  go  beyond  those  aims,  the 
Commission’s only option is to withdraw its proposal. 

While  the  Treaty  prescribes  no  particular  legal  instrument,  VAT  has  mainly  been 
regulated by means of directives. A directive is binding upon each Member State to 
which  it  is  addressed,  but  leaves  the  choice  of  form  and  methods  to  the  national 
authorities, who transpose it into national legislation59. 

In  the  VAT  Directive,  which  establishes  the  common  system  of  VAT,  the  Council 
has  reserved  for  itself  the  power  to  adopt  implementing  measures  (Implementing 
Regulations).  By  its very  nature, this procedure is limited in scope and may not be 
used  to  amend  the  VAT  Directive.  Since  no  power  has  been  delegated  to  the 
Commission60,  all  substantive  changes  therefore  need  to  go  through  the  normal 
legislative procedure, involving unanimous adoption by the Council.  

6.2. 

Historical overview 

The legislative procedure has remained the same over the years and, with the most 
recent accession, amendments to VAT legislation now need the unanimous support 
of  27 Member  States.  Although  the  voting  regime  was  discussed,  and  indeed 
suggestions were made that certain administrative rules on VAT should not require 
unanimity, for instance invoicing rules, the Lisbon Treaty has brought no change in 
this respect.  

However,  areas  of  qualified  majority  voting  have  existed  in  VAT  legislation. 
Derogations  allowed  under  Article  13  of  the  Second  VAT  Directive  could  be 
approved  by  qualified  voting  if  the  measure  simplified  the  procedure  for  charging 

57 
58 
59 
60 

This follows from Article 113 of the Treaty on the Functioning of the European Union (TFEU). 
The legislative procedure is laid down in Article 289 TFEU. 
An outline of the legal acts that may be adopted by the EU can be found in Article 288 TFEU. 
Under  Article 290 TFEU,  a  legislative  act  may  delegate  to  the  Commission  the powers  to  adopt  non-
legislative  acts  of  general  application  to  supplement  or  amend  certain  elements  of  the  legislative  act. 
The exercise of these powers is dealt with in a Communication from the Commission to the European 
Parliament  and  the  Council:  Implementation  of  Article 290  of  the  Treaty  on  the  Functioning  of  the 
European Union (COM(2009) 673). 

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VAT or aimed to prevent fraud, provided the effect on competition between Member 
States was neutral. 

The  procedure  for  implementing  measures  for  VAT  was  introduced  as  recently  as 
200461,  with  implementing  powers  being  conferred  on  the  Council62.  An  earlier 
proposal  to  confer  such  powers  on  the  Commission,  assisted  by  the  VAT 
Committee63,  was  not  accepted  by  the  Council  given  the  use  of  qualified  majority 
this would have involved64.  

For  the  first  time,  in  2005,  the  Council  then  agreed  implementing  measures  as 
provided  for  in  the  VAT  Directive  which  are  binding  and  directly  applicable  in  all 
Member  States65  These  measures  were  derived  from  work  undertaken  by  the  VAT 
Committee,  a  consultative  body  made  up  of  representatives  of  Member  States  with 
no legislative powers of its own. 

6.3. 

Evaluation of current legislation or policy 

6.3.1.  Positive aspects 

VAT  is  an  important  source  of  income  for  Member  States  and  this  explains  the 
importance  attached  to  the  use  of  unanimity  in  this  field.  Unanimity  serves  to 
preserve the fiscal sovereignty of each Member State, which is a prerequisite for any 
sovereign State.  

Subsidiarity dictates that legislation on VAT is only proposed if action at EU level is 
more effective than action taken at national, regional or local level. Such action must 
not  go  beyond  what  is  necessary  to  achieve  the  objective  set.  Those  are  principles 
safeguarded  through  the  use  of  directives,  which  not  only  leave  much  for  Member 
States to decide but also provide for options and derogations.  

Being  a  transaction-based  tax,  VAT  is  influenced  by  elements  of  civil  legislation, 
property law and commercial law. The flexibility offered by the current framework is 
essential to accommodate differences in legal traditions across Member States. 

61 

62 

63 

64 

65 

This  change  was  introduced by  Council  Directive  2004/7/EC  of 20 January  2004  amending Directive 
77/388/EEC concerning the common system of value added tax, as regards conferment of implementing 
powers and the procedure for adopting derogations (OJ L 27, 30.1.2004, p. 44). 
Where  uniform  conditions  for  implementing  legally  binding  EU  acts  are  needed,  those  acts,  under 
Article 291(2) TFEU,  confer  implementing  powers  on  the  Commission  or,  in  duly  justified  specific 
cases, on the Council. 
Proposal  for  a  Council  Directive  amending  Directive  77/388/EEC  on  the  common  system  of  Value 
Added Tax (the Value Added Tax Committee) (COM(97) 325). 
According  to  the  rules  on  comitology  governed  by  Council  Decision  1999/468/EC  of  28 June  1999 
laying  down  the  procedures  for  the  exercise  of  implementing  powers  conferred  on  the  Commission 
(OJ L 184, 17.7.1999, p. 23), the committee assisting the Commission always needs to act by qualified 
majority. 
Regulation (EC) No 1777/2005 laying down implementing measures for Directive 77/388/EEC on the 
common system of value added tax (OJ L 288, 29.10.2005, p. 1). 

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6.3.2. 

Shortcomings 

6.3.2.1.  The need for unanimity 

The use of unanimity voting is still seen as an obstacle to real progress in improving 
the VAT system. The issues caused by the voting regime are only exacerbated with 
the accession of new Member States. 

This  obstacle  may  be  overcome,  although  often  at  the  price  of  the  time  it  takes  to 
reach  a  result,  such  as  with  the  changes  made  to  the  place  of  supply  of  services66 
where it took almost five years to reach agreement. In some cases an agreement can 
only be reached at the price of including many options, as illustrated by the invoicing 
rules67,  which  reduces  the  simplification  benefits.  In  other  cases  the  obstacle  may, 
however, be so great that it stands in the way of progress, as with the proposal for a 
one  stop  shop  to  make  it  easier  to  comply  with  tax  obligations  EU-wide,  which  is 
still pending in the Council68. 

The need for unanimity, not only in those areas directly affecting the right of taxation 
of Member States but also beyond, increasingly stands in the way of reforming the 
tax  system  in  depth  and  bringing  it  up-to-date.  This  is  especially  the  case  with 
implementing measures. 

6.3.2.2.  Flexibility causing complexity 

Member  States  have  great  discretion  because  of  the  legal  instrument  chosen  (a 
directive) combined with the fact that any legislation in the field of taxation needs to 
be adopted by unanimity (stipulated by the Treaty). This may also explain why the 
rules  adopted  at  EU  level  are  not  always  fully  harmonised  but  leave  a  degree  of 
flexibility. 

Flexibility,  however,  comes  at  the  expense  of  more  uniform  application  of  the 
common rules across the EU. This is exacerbated by the fact that each Member State 
is responsible for applying those rules within its territory. 

However, businesses with EU-wide activities are repeatedly calling for more uniform 
application with a view to lowering their costs and remaining competitive, and SMEs 
may  even  refrain  from  cross-border  transactions  because  of  the  complexities.  This 
problem  can  be  overcome  through  common  implementing  measures;  the  extent  to 
which  that  particular  procedure  is  used  has  been  limited  until  now,  but  it  is  being 
used  to  facilitate  the  implementation  of  the  new  rules  on  the  place  of  supply  of 
services.  

Given  that  unanimity  by  the  Council  is  still  required,  even  for  the  adoption  of 
implementing  measures,  this  remains  a  lengthy  procedure.  Moreover,  there  is  a 
considerable risk that only the most basic measures may be agreed, leaving unsolved 

66 
67 

68 

To be found in Directive 2008/8/EC. 
Council  Directive  2010/45/EU  of  13 July  2010  amending  Directive  2006/112/EC  on  the  common 
system of value added tax as regards the rules on invoicing (OJ L 189, 22.7.2010, p. 1). 
Proposal  for  a  Council  Directive  amending  Directive  77/388/EEC  with  a  view  to  simplifying  value 
added tax obligations (COM(2004) 728). 

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the  most  sensitive  issues  on  which  there  is  disagreement,  which  are  often  the  most 
important. 

6.3.2.3.  Differences in implementation and application 

As  Member  States  are  responsible  for  the  implementation  and  application  of  the 
common VAT rules, they are given much discretion in this respect. When these rules 
change,  Member  States  are,  however,  often  left  without  much  guidance  on  the 
implications of the legislation adopted. 

This  leaves  the  potential  for  differences  in  application  of  the  rules  across  the  EU 
resulting  in  increased  costs  for  businesses  wanting  to  operate  outside  their  own 
Member  State  and  an  obstacle  to  the  single  market.  In  certain  situations,  such 
differences also carry the risk of double taxation or non-taxation.  

Any difference there may be between Member States can be caused not only by the 
way  in  which  EU  VAT  legislation  is  transposed  into  national  law  but  also  by 
differences of interpretation of the factual situation. In the absence of a mechanism to 
deal with such matters, the only recourse for businesses is to go to court. 

6.4. 

Possible ways forward 

When  attempting  to  identify  possible  solutions,  it  is  necessary  to  keep  in  mind 
existing constraints. To imagine that changes to the main EU VAT legislation could 
be adopted by qualified majority must for example be ruled out given that unanimity 
is  prescribed  by  the  Lisbon  Treaty.  Such  a  constraint  does  not,  however,  extend  to 
implementing measures, where there could be scope for change. 

6.4.1.  What type of legislation: legal instrument to consider 

VAT is far from harmonised and the use of directives is a contributing factor. To the 
extent that this affects the internal market, it does present a problem. 

To  better  ensure  that  the  rules  governing  VAT  are  harmonised,  thought  could  be 
given  to  using  regulations  instead.  These  offer  the  advantage  of  being  binding  in 
their entirety and directly applicable in all Member States. 

A regulation would not allow for options or derogations as is currently the case and if 
the  VAT  Directive  were  to  be  transformed  into  a  regulation  it  would  therefore 
require much effort and good will.  

If such a shift is to be justified, it may be that the use of regulations would have to be 
limited to those areas of VAT where the need for harmonised rules is evident, such 
as the place of taxation. Another example could be the refund procedure for EU non-
established businesses, where a Pan-European IT system requires fully standardised 
rules to function properly. 

6.4.2.  Preparing legislation: the role of stakeholders 

When  drawing  up  a  proposal,  the  Commission  generally  discusses  it  with  Member 
States through a working group. The Commission also engages in consultation with 

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the  stakeholders69  and  the  public  consultation  makes  up  part  of  the  impact 
assessment. 

To strengthen the dialogue, it could perhaps be useful to put in place a permanent EU 
business  group.  Such  a  group  could  serve  as  a  forum  where,  in  discussions  with 
stakeholders,  problems  with  EU  legislation  may  be  identified  and  draft  proposals 
examined. The group could also be used to follow up on legislation once adopted.  

6.4.3.  Legislation to be adopted: ensuring the best outcome 

Before the Commission proposes any substantive initiatives, an impact assessment is 
drafted70.  In  consultation  with  businesses,  it  looks  at  the  advantages  and 
disadvantages of the different policy options and assesses their potential impact.  

Although, with a view to improving the quality of EU legislation, each institution is 
committed to assessing the impact of its proposals or amendments71, the Council has 
yet to rise to the challenge. This may in part be due to the confidentiality inherent in 
any negotiation.  

There  is  a  need  to  strike  a  balance  between  safeguarding  confidentiality  and 
involving  stakeholders  so  as  to  ensure  that,  prior  to  adoption,  the  Council  assesses 
the  impact  of  any  substantial  changes  it intends  to  make  to  proposals  presented  by 
the Commission. 

If  no  separate  impact  assessment  is  initiated  by  the  Council,  it  could  instead  be 
argued that the impact assessment presented by the Commission should be extended 
to cover the changes contemplated by the Council. Time would obviously be needed 
if  the  Commission  were  to  update  its  impact  assessment.  To  be  able  to  do  so,  it 
would  also  need  to  consult  business  about  those  changes.  This  would  render  the 
process more transparent. 

6.4.4.  Legislative powers: how to exercise them 

There  are  situations  where  rapid  action  to  amend  legislation  is  crucial.  This  is 
perhaps best illustrated by recent events where, in certain sectors, widespread fraud 
was detected for which quick solutions were needed. To cater for this in future, there 
may be a need to look for a way in which action could be taken rapidly (this topic is 
further dealt with in topic 7).  

On the other hand, to keep up with changes in the way business is conducted or in 
response  to  developments  in  technology,  it  is  also  important  to  update  legislation 
without  too  much  delay.  It  may  for  example  be  that,  in  response  to  new  products 
appearing,  the  list  of  electronically  supplied  services  would  need  to  be  adapted  at 
regular intervals. 

69 

70 
71 

This  is  guided  by  the  Commission  communication  Towards  a  reinforced  culture  of  consultation  and 
dialogue  —  General  principles  and  minimum  standards  for  consultation  of  interested  parties  by  the 
Commission (COM(2002) 704). 
http://ec.europa.eu/governance/impact/index_en.htm. 
In the context of the Inter-Institutional Agreement on Better Lawmaking (IIA), the three institutions — 
the  European  Parliament,  the  Council  and  the  Commission  —  have  agreed  on  an  inter-institutional 
‘Common Approach to Impact Assessment (IA)’. 

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Where  quick  solutions  are  needed,  one  response  could  be  to  delegate  powers  to 
enable the Commission, as a general measure, to supplement or amend certain points 
of  law,  as  provided  for  under  the  Lisbon  Treaty72.  The  Council,  as  the  legislator, 
must decide to give the Commission this responsibility.  

Any  delegation,  which  must  be  for  an  agreed  term,  must  be  clear,  precise  and 
detailed.  It  grants  the  Commission  quasi-legislative  powers  to  be  exercised 
autonomously,  although  consultation  of  representatives  of  Member  States  is 
envisaged. These powers may be revoked if the legislator so wishes. The legislator 
may also reserve the right of opposition, in which case the act is suspended to allow 
for objections. 

Since such delegation may only cover non-essential elements, this would only offer a 
partial  solution.  More  profound  changes  would  in  any  event  need  to  be  dealt  with 
directly by the Council. 

6.4.5.  Common rules: ensuring uniform application 

To  more  efficiently  overcome  differences  in  application,  thought  could  perhaps  be 
given to introducing a procedure by which some or all implementing measures would 
be  taken  by  the  Commission.  When  such  powers  are  conferred,  the  Commission  is 
assisted  in  the  exercise  of  its  executive  powers  by  a  Committee  (in  this  case,  the 
VAT Committee) acting by qualified majority. This procedure would provide more 
safeguards  not  only  to  businesses  but  also  to  Member  States,  as  in  the  absence  of 
implementing  measures  there  is  a  legal  vacuum  which  only  the  European  Court  of 
Justice can fill.  

In the area of excise, the Excise Committee, with a similar role to that of the VAT 
Committee,  nevertheless  has  the  ability  to  agree  implementing  measures  in  certain 
defined areas73. This approach could also be followed for VAT. 

Consideration  could  also  be  given  to  the  Commission  producing  guidance  after 
legislation  is  adopted  in  Council  and  before  implementation.  The  absence  of  any 
legal  standing  for  such  explanations  has  been  the  main  reason  for  not  taking  such 
action  until  now  but  there  are  nevertheless  other  arguments  in  favour  of  taking  a 
more  proactive  approach.  Guidance  available  shortly  after  the  adoption  of  new  EU 
legal  texts  might  be  invaluable  to  taxable  persons  in  understanding  the  changes.  It 
would  of  course  need  to  be  made  clear  that  such  guidance  was  produced  for 
information purposes only.  

6.4.6.  Changes in legislation: allowing for the necessary amendments 

Ensuring that the relevant legislation is put in place well in advance of the entry into 
force of any changes is the key to a smooth transition. When it comes to directives 
which have to be implemented into national legislation by a certain date, this is the 
responsibility of each individual Member State. Often, if not always, the changes will 
enter into force on that same date. 

72 
73 

Article 290 TFEU. 
See  Directive  2008/118  (previously  Directive  92/12),  in  Articles  13(2),  29  and  34,  all  referring  to 
Article 43 where the link is to comitology. 

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If instead, Member States were obliged to take steps to implement new rules well in 
advance of their entry into force, this would leave more time for affected businesses 
to prepare for the changes. It should make it easier for traders to apply the new rules. 
Another option could be to link the entry into force of new rules to the adoption of 
common implementing measures, with a deadline laid down. 

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Topic 7. 

7. 

DEROGATIONS AND THE ABILITY TO REACT QUICKLY 

7.1. 

History and references 

The VAT Directive contains specific rules allowing for specific national measures to 
be  taken  in  specific  circumstances.  These  measures  are  generally  referred  to  as 
‘derogations’ and are based on Articles 395 and 396 of the VAT Directive.  

In  addition,  reference  should  also  be  made  to  the  so-called  ‘notified’  derogation 
measures which, under Article 394 of the VAT Directive, Member States may retain 
if  they  were  applicable  at  1 January  1977,  were  notified  to  the  Commission  before 
1 January 1978 and fulfil certain criteria. 

Article 13  of  the  Second  VAT  Directive74  allowed  Member  States,  in  ‘exceptional 
circumstances’,  to  adopt  measures  to  simplify  the  charging  of  VAT  or  to  prevent 
fraud. The Member State applying such a derogating measure had to inform all the 
other Member States and the Commission. 

If  there  was  an  objection  from  the  Commission  or  the  other  Member  States  within 
one  month  of  notification,  the  Commission  would,  within  three  months,  come 
forward with a suitable proposal. 

If  the  measure  was  purely  national,  to  simplify  the  charging  of  VAT  or  to  prevent 
fraud, then the Council could agree the derogation by qualified majority voting. If the 
measure affected the principles of VAT, and particularly the neutrality of the system 
in relation to other Member States, then unanimity was required. 

Conversely,  Article 19  of  the  Second  VAT  Directive  required  the  Commission  to 
‘restrict  progressively  or  to  abolish  measures  adopted  by  Member  States  in 
derogation  from  this  [common  VAT]  system’.  The  aim  was  to  align  national  VAT 
systems in the interests of the common, now single, market. 

Article 27  of  the  Sixth  VAT  Directive  amended  the  derogation  procedure.  Member 
States were no longer allowed to notify derogating measures and await any objection 
but  instead  had  to  notify  the  Commission,  which  would  then  come  forward  with  a 
proposal.  The  procedure  for  adopting  derogations  was  ‘tacit’  insofar  as  a  Member 
State or the Commission explicitly had to ask that the matter be raised at the Council 
within  a  period  of  two  months  after  the Commission  circulated  the  request  and  the 
accompanying  documentation  to  the  other  Member  States.  After  that  period,  the 
derogation was deemed to have been adopted. 

74 

Second  Council  Directive  of  11 April  1967  on  the  harmonisation  of  legislation  of  Member  States 
concerning  turnover  taxes.  Structure  and  procedures  for  application  of  the  common  system  of  value 
added  tax  (OJ 71,  14.4.1967,  p. 1303–1312  (DE,  FR,  IT,  NL);  English  special  edition:  Series I 
Chapter 1967, p. 16). 

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Currently,  the  procedure  requires  the  Commission  to  propose  an  implementing 
Decision  and  unanimous  adoption  by  the  Council.  This  ‘explicit’  procedure  has, 
however, only existed since 200475. 

With  the  VAT  Directive,  the  relevant  legislation  is  now  Article 395.  This  article 
stipulates that the Council, acting unanimously on a proposal from the Commission, 
may authorise a Member State to introduce special measures in order to simplify the 
procedure  for  collecting  VAT  or  to  prevent  certain  forms  of  tax  evasion  or 
avoidance. To that end, a specific procedure is set out in that Article. 

Article 396 of the VAT Directive, by analogy and according to the same procedure, 
allows  a  Member  State  to  conclude  an  agreement  with  a  non-EU  country  or  an 
international body which contains derogations from the VAT Directive. 

As certain derogations covering similar problems were granted to different Member 
States  under  different  terms,  the  Council  adopted  a  Commission  proposal  to 
the  so-called 
incorporate  certain  measures 
‘Rationalisation’ Directive76. As some of the special measures had proved successful, 
particularly in the fight against tax avoidance and evasion, the Commission wished to 
allow  all  Member  States  to  apply  them  without  having  to  seek  individual 
authorisations. At the same time, a number of individual derogations were repealed. 
Under this Directive, a derogating measure does not need to be granted individually; 
only the VAT Committee has to be informed of the national legislative measures. 

the  VAT  Directive  via 

into 

7.2. 

The purpose of the derogation procedure 

The purpose of the derogation procedure is to adopt (more) quickly certain specific 
measures that are needed in a specific national context in order to fight tax evasion or 
avoidance  or  to  simplify  the  procedure  for  collecting  VAT.  Generally,  derogating 
measures  are  time-limited  to  allow  for  a  review  after  a  period  of  time  to  evaluate 
whether the measure is still appropriate and needed. 

The  Commission’s  derogating  proposals  must  not  be  far-reaching  measures  that 
provide for a substantial change to the VAT system and they must comply with the 
general  principles  of  the  EU  law  such  as  proportionality,  equal  treatment  and  legal 
certainty. In particular, any measure requested by a Member State must be justified, 
targeted at the specific objective and proportionate to the aims. It must therefore be 
‘necessary  for  the  specific  objective  which  it  pursues  and  have  the  least  possible 
effect  on  the  objectives  and  principles  of  the  [VAT]  Directive’77.  Where  the 
Commission  is  not  satisfied  that  a  request  meets  these  criteria,  it  issues  a 
Communication  informing  the  Member  States  that  it  considers  an  implementing 
Decision inappropriate. 

75 

76 

77 

Council  Directive  2004/7/EC  of  20 January  2004  amending  Directive  77/388/EEC  concerning  the 
common system of value added tax, as regards conferment of implementing powers and the procedure 
for adopting derogations (OJ L 27 of 30.1.2004, p. 44). 
Council  Directive  2006/69/EC  of  24 July  2006  amending  Directive  77/388/EEC  as  regards  certain 
measures to simplify the procedure for charging value added tax and to assist in countering tax evasion 
or avoidance, and repealing certain Decisions granting derogations (OJ L 221 of 12.8.2006, p. 9). 
Case C-177/99, Ampafrance SA, case C-324/82, Commission v Belgium. 

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Derogation measures have been applied in very different fields of the  VAT system 
such  as  territoriality,  deemed  supplies,  use  of  the  open  market  value,  exemptions, 
cash  accounting,  recovery  or  refund  of  VAT,  limitations  to  the  right  of  deduction, 
persons liable for payment of the VAT (reverse charge) and special schemes78. 

7.3. 

Evaluation of the current legislation 

7.3.1.  Positive aspects 

The  main  positive  aspect  is  the  flexibility  the  derogation  procedure  offers  to  the 
Member  States  to  deal  with  specific  situations  of  tax  evasion  or  avoidance  and 
difficult  VAT  collection  issues  within  a  reasonably  short  period  through  being 
authorised to implement a measure that is not covered by the VAT Directive. On an 
international  level,  it  provides  the  same  flexibility  for  a  Member  State  to  conclude 
agreements with non-EU countries and to fulfil its international obligations. 

Businesses  might  benefit  from  simplification  measures,  such  as  cash  accounting, 
which  reduce  burdens.  They  can  also  benefit  from  the  removal  of  distortions  of 
competition when fraudsters are prevented from gaining a market advantage through 
not paying the right amount of tax. 

7.3.2. 

Shortcomings 

Many  of  the  derogations  either  have  a  legal  base  under  Article 394  of  the  VAT 
Directive (by virtue of Member States having such a measure in place on 1 January 
1977 and having notified the Commission of such measures before 1 January 1978) 
or  were  tacitly  approved  under  the  previous  derogation  procedure,  which  raises 
questions of transparency and equal treatment of Member States. Similar derogations 
would  not  necessarily  be  granted  nowadays  to  other  Member  States,  creating  an 
unfair system relating in part to the time of accession of Member States. As it is not 
possible  to  revert  back  after  a  ‘standstill’  derogation  is  repealed,  Member  States 
might be tempted to ‘freeze’ the current legal situation even where they now make 
little or no use of the derogating measure. 

Any  derogating  measure,  by  its  very  nature,  affects  the  common  VAT  system  and, 
subsequently, to varying degrees, the single market. 

As  these  derogating  measures  are  generally  applied  on  a  national  basis,  taxable 
persons operating in different Member States have to deal with different sets of rules. 
Even  similar  derogations  in  different  Member  States  may  differ  as  regards  their 
scope or conditions or the obligations of the taxable persons concerned.  

The temporary nature of the derogating measure affects the overall stability of the tax 
system and could create a feeling of lack of legal certainty for taxable persons who 

78 

derogations: 

As  the  number  of  derogations  changes  constantly,  see  the  following  webpage  for  an  overview  of 
existing 
http://ec.europa.eu/taxation_customs/taxation/vat/key_documents/ 
table_derogations/index_en.htm. As this list is generally updated once a year (and currently reflects the 
situation on 31 December 2009), reference is, in addition, made to the following webpage where this 
year’s  derogations  (amongst  other  legislation)  are  published:  http://ec.europa.eu/taxation_customs 
/common/legislation/legislation/taxation/index_en.htm. 

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first  have  to  adjust  to  a  new  system  and  then  have  to  revert  back  to  the  previous 
system later. Compliance costs can subsequently be considerable. 

The  number  of  derogation  requests  remains  high  (and  is  even  increasing),  and 
derogations  are  more  and  more  requested  in  cases  where  the  issue  at  stake  is  not 
really  specific  to  one  or  two  Member  States  and  may  therefore  be  perceived  as  a 
means  to  circumvent  ongoing  (but  blocked)  negotiations  in  the  Council  by 
introducing a derogation request within the field of the Commission proposal. This 
could even endanger the negotiations and, ultimately, call into question the need to 
adopt  the  proposal  for  a  Directive  which  nonetheless  offers  additional  guarantees 
such as common and equal rules for Member States and businesses and the adoption 
of  which  gives  a  voice  to  the  European  Parliament  and  the  Economic  and  Social 
Committee. 

Derogating measures can bring a short-term solution but could have an effect on the 
overall  VAT  system  in  the  longer  run.  For  example  the  (increased)  use  of  the 
domestic reverse charge mechanism could be a short-term solution to stop carousel 
and missing trader fraud in a particular sector and in a particular Member State but 
could also lead in the medium term to a shift in fraud to other sectors, to the retail 
trade  or  to  other  Member  States;  and  its  overall  effectiveness  could  therefore  be 
questioned. Such continual derogation requests may therefore be seen as unsuitable, 
endless  and  unsustainable  short-term  solutions  when  more  fundamental  changes  to 
the Directive are needed. 

The impact of the national measures is not assessed in a way which is comparable to 
other EU decisions. Derogation requests are not subject to an impact assessment by 
the Member States and often have no ex post evaluation. For instance, the effect of a 
reverse  charge  mechanism  in  one  Member  State  on  VAT  revenues  in  another 
Member State is not subject to any impact assessment, as would be normal for other 
Commission proposals. 

Although  usually  short  in  comparison  with  the  adoption  of  a  Directive,  the  period 
needed for the adoption of a Council Decision is typically eight months, which is still 
too long for Member States needing a measure implemented quickly to tackle fraud. 

Recent experience with VAT fraud in the emission trading sector, in particular, has 
drawn  attention  to  that  major  constraint.  The  Article  395  procedure  has  indeed 
proven  not  to  be  sufficiently  flexible  and  efficient  in  case  of  sudden  major  fraud 
attacks  requiring  an  immediate  national  legislative  reaction.  Because  of  the 
considerable impact on VAT receipts, Member States found themselves in a position 
where they had to take unilateral measures, whilst being aware that these measures 
were not in line with the VAT Directive. 

7.4. 

Possible ways forward 

A  comprehensive  evaluation  of  the  current  individual  derogations  could  pave  the 
way for common rules to be adopted in order to provide, first, the same options to all 
Member States and, second, comparable conditions of application to businesses (e.g. 
similar to the aim of the Rationalisation Directive, or to the situation as regards cash 
accounting). 

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In case of a duly justified request demonstrating the existence of serious fraud risks 
in a specific Member State which could lead to irreparable damage and which require 
immediate action not in line with the VAT Directive, a possible way forward would 
be to enable the Commission to authorise that Member State, within a few days, to 
take the necessary measures.  

Such an authorisation would be limited in time (e.g. six months) and could involve 
the Member States through the VAT Committee either immediately or at a later stage 
in  order  to  extend  the  measures  to,  for  instance,  one year.  In  the  mean  time,  the 
request  would  follow  the  normal  procedure  referred  to  in  Article 395  of  the  VAT 
Directive. 

The  legal  process  for  this  urgent  and  protective  authorisation  clearly  needs  to  be 
further  investigated.  Launching  this  rethink  seems,  however,  inevitable  after  the 
recent VAT fraud experiences. 

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Topic 8. 

8. 

VAT RATES 

8.1. 

Current legal framework 

The  basic  rules  concerning  VAT  rates  set  out  in  the  VAT  Directive  are  simple. 
Articles 96 and 97 require Member States to apply a standard rate of at least 15 %. In 
addition,  Articles 98  and  99  stipulate  that  Member  States  may  opt  to  apply  one  or 
two  reduced  rates  of  not  less  than  5 %  to  a  restricted  list  of  goods  and  services 
eligible  for  a  reduced  VAT  rate  (Annex III  to  the  VAT  Directive).  In  this  respect, 
Member States remain free to apply a reduced rate to a whole category or to restrict 
its application to (even a very small) part of it. 

However, this simple structure, which applies to all Member States, is complicated 
by  a  multitude  of  derogations  (zero  rates,  super-reduced  rates79,  individual  reduced 
rates, parking rates80, etc) laid down in Articles 102 to 129.  

Some  of  these  derogations  apply  until  the  entry  into  force  of  the  adoption  of 
definitive arrangements based on taxation in the Member State of origin. However, 
not all Member States can take advantage of them. 

Other  temporary  derogations  provided  to  individual  Member  States  result  from  the 
accession negotiations and contain a fixed end date.  

8.2. 

Historical overview 

The  current  VAT  rates  structure  is  still  based  on  the  principles  of  the  Directive81 
adopted  by  the  Council  in  1992,  as  part  of  the  package  of  measures  considered 
necessary for the abolition of controls at tax frontiers and the creation of the internal 
market. 

Since then, the standard rate and reduced rates have been dealt with separately. 

8.2.1. 

STANDARD RATE 

The level of the standard rate has to be decided by the Council at regular intervals. 
Since  1992,  the  minimum  standard  rate  of  15 %  has  been  extended  four  times  and 
applies  until  31 December  2010.  Each  time,  the  Council  has  renewed  its  political 
statement  for  the  Council  minutes  mentioning  Member  States’  efforts  to  avoid 
widening the 10 percentage point span between the lowest and highest rates applied. 
This  demonstrates  the  continued  concerns  of  Member  States  about  distortions 
between high and low rate countries and the possible budgetary effects of different 
levels of VAT rates.  

79 
80 

81 

The super-reduced rate is any rate less than 5 % but higher than 0 %. 
A  parking  rate  is  a  rate  applied  to  goods  and  services  not  included  in  Annex III  to  which  certain 
Member States applied reduced, super reduced or zero rates at 1 January 1991. 
Directive  92/77/EEC  of  19 October  1992  supplementing  the  common  system  of  VAT  and  amending 
Directive 77/388/EEC (approximation of VAT rates) (OJ L 316 , 31.10.1992, p. 1). 

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8.2.2.  REDUCED RATES 

8.2.2.1.  The labour-intensive services experiment 

As a follow up to the conclusions of the European Council of 11 and 12 December 
1998 on combating unemployment, the Commission presented a proposal82 to enable 
those Member States which so desired to experiment with the operation and impact, 
in terms of job creation, of a reduction in the VAT rates on labour-intensive services 
which were not exposed to cross-border competition. 

The  provisions  allowing  for  this  experiment,  adopted  in  1999,  were  extended  four 
times  mainly  to  ensure  continuity  and  certainty  for  the  sectors  that  benefitted  from 
the reduced rate, but also to include new Member States wishing to participate in the 
experiment while awaiting more general proposals concerning reduced rates of VAT. 

8.2.2.2.  The need for an overall assessment of the scope of reduced rates 

In February 2006, the European Council asked the Commission to present an overall 
assessment  report  on  the  impact  of  reduced  VAT  rates  in  terms  of  job  creation, 
economic growth and the proper functioning of the internal market, on the basis of a 
study carried out by an independent economic think-tank. 

The study, awarded to Copenhagen Economics83, revealed that a single VAT rate is 
by far the best policy choice from a purely economic point of view. A move towards 
more uniform rates thus has considerable advantages as it would reduce distortions in 
the  functioning  of  the  internal  market  and  simplify  the  rules,  and  thus  reduce 
compliance costs for traders. 

However, there may be specific economic benefits from operating a reduced rate in 
carefully targeted sectors using many low-skilled workers financed, for example, by 
higher  VAT  rates  elsewhere.  It  can  create  permanent  employment  gains,  but  the 
overall gains are likely to be minor. Lower VAT rates can result in economic growth 
if they can induce consumers to spend less time on do-it-yourself activities and more 
time on their ordinary job or hobbies. For (certain) locally supplied services such a 
shift could take place.  

In addition, the study makes a strong case that reduced VAT rates create significant 
compliance  costs  for  business  and  tax  authorities,  partly  at  least  because  of  the 
interpretations which often have to be made in borderline cases. 

The  study  also  stresses  that,  often,  other  alternative  policy  tools,  such  as  direct 
subsidies  for  particular  activities,  might  be  more  efficient  than  reduced  VAT  to 
achieve environmental, social, cultural, economic, etc., policy objectives with fewer 
costs.  These  subsidy  schemes  may  be  better  targeted,  better  designed  to  avoid 

82 
83 

COM(1999) 62 final (OJ C 102, 13.4.1999, p. 10). 
Study by Copenhagen Economics ApS, Nyropsgade 13/1, DK-1602 Copenhagen (2007) on the reduced 
rates of VAT applied to goods and services in the EU Member States, available on the Commission’s 
website at the following address:  
http://ec.europa.eu/taxation_customs/taxation/gen_info/economic_analysis/economic_studies/index_en.
htm. 

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negative  spill  over  effects  at  EU  level  and,  generally  speaking,  may  be  more 
transparent.  

8.2.2.3.  The agreement reached on reduced rates in 2009 

The  Council  considered  that  the  debate  on  the  reduced  VAT  rates  had  already  run 
since  the  presentation  of  Commission’s  2003  proposal  and  it  was  time  to  close  it. 
After long and thorough discussion, the debate in the Council on the overall system 
of reduced VAT rates was thus concluded with the unanimous political agreement of 
10 March 200984. 

This  political  agreement  was  formalised  in  Directive  2009/47/EC  of  5 May  2009, 
which considerably restrained the Commission’s proposal. It mainly allows — on a 
permanent  basis  —  the  optional  use  of  reduced  rates  of  VAT  for  certain  labour-
intensive local services, including restaurant services. 

8.3. 

The way forward 

The  average  level  of  rates  has  tended  to  increase  since  2000.  The  increase  was 
marginal in 2000-2002 but then, after a period of constancy, there was a sharp rise in 
2009-2010 as some Member States adopted drastic revenue-raising measures during 
the  crisis.  The  increase  is  visible  in  the  standard  rate  and  to  a  lesser  extent  in  the 
reduced rate. 

This phenomenon prompts the following observations:  

•  If the upward trend in the standard rate in the Member States were to continue, the 
question  arises  whether  the  minimum  level  of  15 %  laid  down  in  the  VAT 
Directive should not be increased in line with that trend.  

•  The  ongoing  increase  in  the  standard  VAT  rate  is  an  incentive  for  certain 
economic  sectors  to  push  for  a  reduced  rate.  Even  now  a  number  of  sectors  are 
making repeated requests for inclusion in Annex III on the grounds that they are 
also essential goods or services, like health prevention, children welfare, security 
clothes and services, etc.  

•  Article 99 of the VAT Directive sets out the principle that reduced rates are fixed 
at a level which is high enough to ensure that taxable persons, in general, do not 
end  up  in  a  constant  repayment  situation  when  offsetting  their  deductible  VAT 
(with  expenses  at  the  standard  rate)  against  their  VAT  due  (at  a  reduced  rate). 
Increasing the minimum level of the reduced rate, set at 5 % in the VAT Directive, 
might be a way to uphold this principle.  

The  guiding  principles  of  any  potential  review  of  VAT  rates  should  be 
rationalisation, simplification and consistency. 

A  list  of  goods  and  services  for  which  a  reduced  rate  would  be  compulsory  in  all 
Member States would be a good way of upholding these principles. 

84 

Council (Economic and Financial Affairs) political agreement of 10 March 2009 on reduced VAT rates: 
http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/106576.pdf. 

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But  even  a  short  and  optional  list  of  reduced  rates  would  be  a  major  step  forward 
compared with the current situation. 

Simplification  and  rationalisation  would  specifically  require  clearer  EU-wide 
definitions  of  the  categories  in  the  list,  whether  it  is  compulsory  or  optional.  If  it 
were optional, the option should cover the whole category, not just parts of it. 

Consistency would mean that comparable products are subject to the same VAT rate 
and  the  way  the  product  is  ‘delivered’,  specifically  the  use  of  modern  technology, 
should not affect the VAT rate applied to it. This is in particular the case for cultural 
products and services which can be distributed online and offline (through physical 
support). Currently Member States may apply a reduced VAT rate to certain cultural 
products  or  services  but  have  to  apply  the  standard  VAT  rate  to  competing  online 
services,  such  as  books/e-books  or  film  downloads/cinema  tickets,  even  if  they  are 
based on the same cultural content and have the same social purposes. The ‘Digital 
Agenda for Europe’ stipulates that the challenges of convergence between the online 
and  the  physical  environment  should  be  addressed  in  all  reviews  of  public  policy, 
including tax matters, to stimulate the widespread development and utilisation of the 
Internet and related goods and services.85 

As regards the goods and services to be retained on the (compulsory or alternatively 
short  and  optional)  list  of  reduced  rates,  it  should  be  pointed  out  that  the  use  of 
reduced rates is often advocated for health, cultural and environmental reasons. 

From a health perspective, access, availability and acceptability of food stuffs largely 
determine  the  diets  of  European  Citizens.  Given  the  impact  of  unhealthy 
consumption patterns on public health and Member States' budgets, taxation could be 
used to pro-actively promote healthy diets. 

Some cultural goods and services benefit from a reduced VAT rate at the discretion 
of  Member  States.  These  are  goods  and  services  which  from  a  political  and  social 
point of view have special characteristics, notably the support of cultural diversity. It 
is in Europe's interest – and in line with Europe 2020 – to promote cultural content 
and  access  to  cultural  content  which  will  raise  the  average  education  level.  Tax 
instruments have a clear impact on these policies' objectives. 

There are also strong arguments that integrating environmental aspects into taxation 
can  encourage  consumers  and  producers  to  switch  to  more  environmentally-
favourable products by adjusting price structures. The current VAT system does not 
recognise  this  phenomenon.  Broadening  the  objectives  of  VAT  by  linking  it  to 
sustainable  consumption  would  be  in  line  with  the  recent  Commission  initiatives 
aiming  at  achieving  a  resource  efficient  economy  which  is  one  of  the  key  flagship 
initiatives  of  the  EU  2020  Strategy.  Changing  price  structure  can  help  to  shift 
demand towards less polluting and more resource- and energy-efficient products. It 
will  also  encourage  further  research  into  the  development  and  innovation  of  more 
environmentally-favourable goods.  

85 

The Digital Agenda for Europe is one of the Europe 2020 flagships, COM(2010)245. 

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Market  based  instruments  (including  taxes)  can  be  one  of  the  most  effective  (and 
efficient)  policy  tools  to  change  behaviour,  in  place  of  or  complementing  direct 
regulation and many examples exist across the world. 

In the short term, providing traders with appropriate and reliable information through 
an online database on the rates applicable within the EU could be envisaged with a 
view to facilitating compliance for those businesses wanting to take full advantage of 
the single market. 

As the level and structure of VAT rates differ considerably between Member States, 
businesses  which  carry  out  supplies  of  goods  or  services  taxable  in  Member  States 
where  they  are  not  established  have  to  look  for  reliable  information  on  the  rates 
applicable. The process of information-gathering might be particularly expensive and 
burdensome, especially for SMEs.  

Setting up such a database would require a commitment from the Member States to 
provide official, accurate and detailed information on the VAT rates to be applied on 
their  territory  at  frequent  intervals.  Indeed,  taking  into  account  the  Member  States’ 
discretion  in  setting  VAT  rates,  only  they  can  provide  the  detailed  information 
required and ensure it is up to date. The Commission could, however, lend technical 
and practical support.  

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Topic 9. 

9. 

THE COMMISSION ACTION PROGRAMME FOR REDUCING ADMINISTRATIVE BURDENS 
AND STREAMLINING VAT OBLIGATIONS 

9.1. 

Introduction 

their 
The  regulatory  environment 
competitiveness  and  their  ability  to  grow  and  create  jobs.  The  Commission  is 
committed to developing a better regulatory environment for businesses; one that is 
simple, understandable, effective and enforceable. 

in  which  businesses  operate 

influences 

Amongst  the  primary  objectives  of  the  ‘Better  Regulation’  agenda  is  the  aim  to 
reduce  administrative  burdens  by  25 %  by  2012.  Thirteen  priority  areas  were 
selected, including VAT legislation.  

To  help  in  this  process,  on  31 August  2007  the  Commission  set  up  a  ‘High  Level 
Group  of  Independent  Stakeholders’  to  advise  on  carrying  out  the  Action 
Programme,  with  initially  a  three-year  mandate,  now  extended  until  31 December 
2012.  On  13  September  2007,  Edmund  Stoiber,  the  former  Minister-President  of 
Bavaria, was appointed as Chairman of the group. 

9.2. 

The  Commission’s  Communication  on  an  action  programme  for  reducing 
administrative burdens 

The  work  followed  analysis  by  a  consortium,  a  group  of  external  contractors 
undertaking studies for the Commission, and was carried out in three distinct stages. 
These are detailed below along with the corresponding links. 

(1)  Mapping  of  information  obligations  (IOs)  stemming  directly  from  VAT 

legislation (Directive 2006/112/EC) — Tax Law (VAT)86  

(2)  Measuring the cost of compliance with information obligations — Tax Law 

(VAT)87  

(3) 

Reduction recommendations — Tax Law (VAT)88  

A  Communication  was  issued  on  22 October  2009  along  with  an  Annex 
(COM(2009) 544  final  Annex)  detailing  the  results  so  far  on  the  reduction  of 
administrative  burdens  by  sector  and  providing  recommendations  for  future  action. 
The  details  of  the  VAT  recommendations  can  be  found  on  pages 81  to  91  of  the 
Annex  and,  as  mentioned  in  the  Green  Paper,  relate  to  measures  6  to  15. 
Recommendations  1  to  5  and  16  have  either  been  adopted  by  the  Council  or 
proposed by the Commission. 

86 

87 
88 

http://wcmcom-ec-europa-eu-wip.wcmvue.cec.eu.int:8080/enterprise/policies/better-
regulation/administrative-burdens/priority-areas/tax/index_en.htm 
http://ec.europa.eu/enterprise/policies/better-regulation/files/abst09_taxlaw_en.pdf 
http://ec.europa.eu/enterprise/policies/better-regulation/documents/ab_studies_2009_en.htm  (click  on 
Tax Law in the list under ‘2. Reduction Recommendations’) 

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Recommendations  6  to  15  in  the  Annex  to  the  Communication  (COM(2009) 544 
final) are reproduced below. 

Abolishing annual summary VAT returns (Recommendation 6) 

The VAT Directive allows Member States to require that taxable persons submit an 
annual  summary  VAT  return,  containing  the  information  provided  in  the  periodic 
VAT  returns  and  where  necessary  adjusting  it.  However,  most  of  the  information 
required  on  these  returns  is  redundant  or  could  be  better  obtained  in  other  ways. 
Some Member States do not require them. Abolishing annual summary VAT returns 
could be part of the options under review.  

Businesses  would  no  longer  have  to  submit  summary  annual  returns.  They  would 
make  corrections  or  amendments  in  the  periodic  returns,  as  practiced  in  those 
Member States which do not require an annual summary return. 

Reducing the frequency of the periodic VAT return (Recommendation 7) 

Taxable  persons  are  required  to  submit  a  periodic  VAT  return  (Article 250  of  the 
VAT  Directive)  in  which  they  set  out  all  the  information  needed  to  calculate  the 
VAT chargeable and the deductions to be made. The most common frequencies used 
by  Member  States  are  monthly  and  quarterly.  Frequencies  could  be  harmonised, 
revised downwards and based on turnover thresholds. The frequency could be annual 
for  enterprises  with  a  turnover  of  up  to  EUR 500 000,  quarterly  for  those  with  a 
turnover  of  up  to  EUR 2.5 million  and  monthly  for  those  above  that  threshold. 
Businesses would, however, be allowed to opt for more frequent submission. 

Changing the frequency could reduce the number of VAT returns. Businesses would 
therefore  spend  less  on  consolidating  VAT  accounts,  compiling  the  return  and 
checking or correcting mistakes. 

Simplifying 
(Recommendation 8) 

the  proof 

required 

for 

the  VAT 

export 

exemption 

Taxable persons applying  the VAT  export exemption are required to prove to their 
tax authorities that they have dispatched the goods outside the European Union. The 
burden  of  providing  this  proof  depends  on  the  number  and  type  of  documents 
required.  The  export document, drawn up for customs purposes, could normally be 
regarded  as  sufficient  proof  of  exportation.  It  could  be  sent  by  the  customs 
authorities to the VAT authorities via the electronic information exchange system. 

Paperwork related to the application for a VAT export exemption would significantly 
be reduced. 

Abolishing the intra-EU acquisitions listing (Recommendation 9) 

The  VAT  Directive  allows  Member  States  to  require  that  taxable  persons  submit  a 
list of acquisitions of goods or transactions from sellers established in other Member 
States. However, tax authorities could obtain the information provided by this listing 
from  other  sources,  such  as  the  intra-EU  supplies  listing  or  the  VAT  Information 
Exchange System.  

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Abolishing ‘nil’ intra-EU sales listings (Recommendation 10) 

The  VAT  Directive  requires  taxable  persons  to  file  lists  of  all  supplies  made  to 
taxable  persons  in  other  Member  States.  Member  States  may  require  the  list  to  be 
submitted  even  for  periods  in  which  no  intra-EU  supplies  took  place.  Businesses 
perceive this as irritating. 

Businesses  could  be  exempted  from  intra-EU  supplies  listings  for  periods  in  which 
they made no intra-EU supplies. Tax authorities could deduce the fact that there were 
no supplies from the periodic VAT return. 

Introducing a real-time VAT collection system (Recommendation 11) 

The  current  system  of  VAT  collection  is  invoice-  (not  settlement-)  based  and 
requires  businesses  to  use  significant  resources  to  comply  with  their  VAT 
obligations.  VAT  payment  and  refund  would  be  changed  to  the  point  at  which 
payment  is  settled  in  real  time  through  the  banking  system.  This  would  automate 
most  of  the  things  that  businesses  currently  have  to  do  to  comply  with  VAT 
legislation. 

All  taxable  persons  would  be  affected  by  this  measure,  notably  with  regard  to  the 
submission  of  VAT  returns  and  listings  and  the  bookkeeping  and  consolidation 
activities required to calculate the VAT amount due. 

Facilitating  use  of  the  power  of  attorney  to  submit  VAT  returns  and  listings 
(Recommendation 12) 

Use  of  the  power  of  attorney  to  submit  VAT  returns  and  listings  is  currently 
restricted, limiting the way businesses use external tax consultants. In so far as these 
limitations  stem  from  national  measures  implementing  EU  law,  the  Commission 
could consider a soft-law approach to disseminate best practice in this area and have 
more Member States opting for a lighter implementation approach. 

SMEs,  which  are  most  likely  to  make  extensive  use  of  external  VAT  consultants, 
would benefit most from this measure. They could grant limited powers of attorney. 
They could also appoint several persons separately as authorised to sign VAT returns 
and sales listings. 

Increasing the use of e-government solutions (Recommendation 13) 

The VAT Directive allows and partly provides for the various VAT returns and lists 
to be submitted in electronic form to tax authorities. Uptake of this option, however, 
varies  between  Member  States  and  is  low  in  some.  Identifying  best  practice  in  the 
Member  States  and  encouraging  others  to  adopt  it  would  increase  the  use  of  e-
government solutions. 

More  businesses  would  benefit  from  the  cost  savings  made  by  switching  from  a 
paper to electronic communication with tax authorities. 

Incorporating  VAT 
(Recommendation 14) 

registration 

into 

general  business 

registration 

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Taxable  persons  are  obliged  to  inform  the  tax  authorities  when  they  begin  their 
activity  as  taxable  persons.  Some  Member  States  have  incorporated  this  VAT 
registration  into  the  general  business  registration.  The  Commission  could  promote 
this practice in more Member States by disseminating the insights gained so far. 

Enterprises would no longer have to communicate the same information to different 
authorities,  which  creates  unnecessary  cost  and  irritation.  In  particular,  it  would 
make it easier to set up a new business. 

Harmonising  measures  to  combat  VAT  fraud  in  line  with  best  practice 
(Recommendation 15) 

The  VAT  Directive  allows  Member  States  to  impose  such  obligations  on  taxable 
persons  as  are  deemed  necessary  to  ensure  the  correct  collection  of  VAT  and  to 
prevent  tax  evasion.  These  obligations  are  the  source  of  major  differences  for 
businesses engaged in intra-EU trade, so harmonising them could be envisaged. 

All  business  would  profit  from  more  efficient,  less  burdensome  anti-fraud 
obligations.  Businesses  conducting  intra-EU  trade  would  also  benefit  from  having 
the same obligations in all Member States in which they operate. 

9.3. 

Additional recommendations suggested by the High Level Group  

In addition, the High Level Group of independent stakeholders recently published on 
22  October  2010  an  opinion  on  further  VAT  reduction  recommendations89.  The 
opinion suggests two further recommendations in addition to those mentioned above:  

‘(42)  The  VAT  package  entered  into  force  on  1 January  2010.  Even  though  the 
package  has  simplified  cross-border  Business  to  Business  (B2B)  services  to  some 
extent,  it  also  leads  to  new  and  unnecessary  administrative  burdens.  Sellers  and 
buyers have to report cross border sales and acquisition already in the  same  period 
the  service  was  supplied.  This  obligation  is  impossible  to  meet  for  business  as  no 
information  is  available  for  booking  at  that  time  at  the  purchaser’s  end  of  the 
transaction and the company providing the service cannot access information on the 
services  provided  at  such  short  notice.  The  HLG  urges  the  Commission  to  initiate 
changes as the present rules cannot be applied. The Commission is prepared to look 
at  the  chargeability  to  tax  for  cross  border  supplies  of  services  in  the  forthcoming 
Green Paper. 

Furthermore,  stakeholders  underline  the  high  level  of  compliance  cost  arising  from 
the  package.  One  example  is  that  the  VAT  package  has  increased  the  number  of 
businesses obliged to submit periodic VAT statements on top of their normal VAT 
returns. Business are required to submit periodic VAT statements from the first euro 
of  supply  of  services  B2B  cross  border  and  the  periodic  statement  requires 
specification of the sale for each buyer, identified by VAT registration number. This 
is  an  increased  reporting  obligation  and  increase  of  the  administrative  burdens  for 
business.  The  HLG  urges  the  Commission  to  investigate  the  possibility  of 

89 

The  web  page  of  the  High  Level  Group  of  Independent  Stakeholders  on  Administrative  Burdens  - 
http://ec.europa.eu/enterprise/policies/better-regulation/administrative-burdens/high-level-
group/index_en.htm 

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introducing a threshold for business with minor amounts of cross border turnover or 
other  means  of  simplification  to  avoid  excessive  information  obligations  that  may 
otherwise discourage small business from starting to trade cross border.’ 

9.4. 

General comment on the recommendations 

It is important to point out that these recommendations result from suggestions tabled 
by  stakeholders  and  the  advice  given  by  the  High  Level  Group  of  Independent 
Stakeholders on Administrative Burdens. Other opinions from the High Level Group 
can be found on their website90. 

These  recommendations  are  still  under  consideration  by  the  Commission,  meaning 
that their feasibility and appropriateness are being reviewed. In particular, they need 
to be balanced with the tax authorities’ duty to ensure proper collection of VAT and 
with the need to audit taxpayers efficiently. 

9.5. 

Other obligations imposed by Member States (Article 273 of the VAT Directive) 

The  consortium’s  reduction  recommendations  and  the  opinion  of  the  High  Level 
Group  concentrate  on  obligations  in  the  VAT  Directive  that  specify  the  nature  of 
information  to  be  provided,  for  instance  the  VAT  declaration  or  recapitulative 
statement.  

However,  in  addition,  the  consortium  identified  other  instances  in  which  the  VAT 
Directive does not specify the information obligation (IO) but allows Member States 
to  do  so:  so-called  ‘implicit  IOs’.  A  good  example  is  Article 273,  which  allows 
Member States to impose other obligations to ensure correct collection of VAT and 
to prevent evasion, without specifying what those obligations might be. 

9.5.1.  Work of the consortium 

The information on implicit VAT information obligations can be found at the address 
below91  and  was  provided  by  the  same  consortium  that  mapped  the  information 
obligations specified in the Directive. 

The consortium concentrated on Article 273, since that is the legal base for most of 
the  additional  obligations 
It  made 
recommendations on the additional obligations and measured the benefit of reducing 
the resulting administrative burden.  

increase  burdens  on  business. 

that 

Its main findings can be summarised as follows: 

Transposition  of  the  Directive  resulted  in  a  great  variety  of national  IOs  across  the 
27 Member  States.  This  is  specifically  the  case  for  the  implicit  IOs  resulting  from 
Article 273. Furthermore, in the latter case the IOs often apply in very few Member 
States. 

90 
91 

Idem 
http://ec.europa.eu/enterprise/policies/better-regulation/files/abst09_taxlaw_implicit.zip. 

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The  total  administrative  cost  resulting  from  the  selected  implicit  IOs  is  put  at 
approximately EUR 1 405 million, spread over 392 national IOs. 

The  number  of  IOs  under  Article 273  has  been  assessed  at  208.  The  cost  of 
complying with these obligations is calculated at EUR 682 million. 

Extracts from the recommendations on obligations under Article 273, along with the 
burden reduction potential, are reproduced below. They are classed according to: 

o 

o 

o 

o 

o 

o 

o 

Limited application — only one or two Member States apply the obligation 

Reporting obligations 

Drafting obligations 

Storage for inspection obligations 

Notification obligations 

Record-keeping obligations 

Other types of obligations 

9.5.2.  Recommendations reproduced from the consortium’s report 

Only the main recommendation for each class of obligation is reproduced. A full list 
of recommendations can be found in the consortium’s report. 

Information  obligations  with  a  very  low  transposition  variable  —  only  one  or 
two Member States impose the obligation (Report section 3.4.2) 

During this study, national VAT experts have identified certain IOs implemented in 
only  one  or  a  few  Member  States  which  create  an  extremely  high  burden  for  the 
national taxpayers or a certain target group. 

In general, the fact that IOs stemming from Article 273 are only implemented in one 
or a few Member States, raises questions regarding the necessity of those IOs for the 
fight against fraud. 

Therefore we recommend to abolish all of these types of IOs resulting in a reduction 
of administrative burden EUR 23 700 139. 

Reporting obligations (section 3.4.3) 

Obligation  to  report  transactions  with  local  registered  VAT  taxable  persons 
(Recommendation 101) 

Current reduction ideas resulting from this study can be summarised as follows: 

•Abolishment of the IO; 

•Abolishment of the obligation to file ‘nil’ listings; 

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•Abolishment of the obligation to send the relevant invoices to the VAT authorities; 

•Encourage  the  use  of  e  Government  solutions  by  implementing  user  -friendly, 
uniform and easy accessible applications; 

•Introduction of a specific reporting threshold per supplier/customer. 

The point of view of the VAT experts in this respect is however that this IO should 
be abolished. This is substantiated by the recent abolition of this obligation in Italy. 
Research  showed  that  the  tax  authorities  make  only  little  use  of  these  listings  and 
even have other means at their disposal to obtain the same information. Hence, the 
IO appears not to be essential from a VAT audit point of view, whereas it generates 
significant  costs  for  the  VAT  taxpayers.  Therefore  it  could  be  considered  to 
introduce a provision in Council Directive 2006/112/EC whereby Member States are 
prohibited to impose measures in the framework of this IO. 

Costs caused by this IO, assessed at EUR 279 566 576 will be reduced to zero. 

Drafting obligations (Report section 3.4.4)  

Obligation to draft and issue a document when the goods are dispatched in the 
framework of a sale on trial or a sale on consignment (Recommendation 103) 

The obligation to draft and issue a document when the goods are dispatched in the 
framework  of  a  sale  on  trial  or  a  sale  on  consignment,  in  addition  to  a  regular 
invoice, is experienced highly irritating by businesses. Hence, both the content to be 
mentioned  and  the  data  to  b  e  collected  with  respect  to  these  documents  are  in 
general quite similar. 

Besides as means of control on the VAT treatment applied (account for VAT due and 
deduct VAT), tax authorities use this document in order to follow the flow of goods. 
In order to reduce the administrative burden resulting from this IO the abolishment of 
this IO could be considered. 

Costs caused by this IO, assessed at EUR 2 953 870 could be reduced to zero. 

Storage for inspection obligations (Report section 3.4.5) 

Obligation  to  store  the  confirmation  that  a  credit  note  was  received  by  the 
addressee (Recommendation 102) 

The  obligation  to  store  the  confirmation  that  a  credit  note  was  received  by  the 
addressee  in  order  to  substantiate  the  VAT  adjustments,  is  considered  highly 
irritating from a business point of view. Moreover, this IO creates a financial burden 
since  the  adjustments  of  VAT  paid  can  only  be  carried  out  once  the  confirmation 
receipt has been received. 

Consequently, the burdens caused by this IO are disproportionate to its purpose, i.e. 
creating  an  audit  trail  for  VAT  adjustments.  The  VAT  adjustments  can  sufficiently 
be  substantiated  by  means  of  the  mere  existence  and  storage  of  a  credit  note.  This 
viewpoint is founded by the fact that this approach is applied in most Member States. 
Based on these considerations, this IO should be abolished. 

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Costs caused by this IO, assessed at EUR 3 059 990 will be reduced to zero. 

Notification obligations (Report section 3.4.6) 

Obligation  to  notify  the  tax  authorities  in  case  of  change  of  the  VAT  return 
regime 

Even  though  the  notification  of  the  change  in  the  VAT  return  regime  in  principle 
does not have to be submitted on a regular basis, it is often regarded as burdensome, 
especially where the change in VAT return regime is compulsory. Hence, in the latter 
case,  the  VAT  authorities  should  be  able  to  extract  the  necessary  information  from 
their system. In these cases, the IO is excessive and should be abolished. 

When  the  VAT  taxpayer  can  opt  for  a  change  in  the  VAT  return  regime,  the 
notification  should  be  performed  by  means  of  a  written  letter  (standard  or  freely 
chosen format). In this respect, it could be considered to harmonise on an EU-level 
the maximum requirements which should appear on the document. More specifically, 
the name, address and VAT identification number and a detailed justification of the 
option should suffice. Furthermore the e -filing of this request should be possible. 

Costs caused by this IO, assessed at EUR 2 501 484 could be reduced with 60 %. 

Keeping registers obligation (Report section 3.4.7) 

Obligation to keep a record of capital goods (Recommendation 103) 

In order to create an audit trail for the capital goods of a business during the term of 
revision, some Member States impose an obligation on VAT taxable persons to keep 
a  record  of  capital  goods.  From  a  VAT  expert  point  of  view,  this  IO  can  be 
substantiated by its purpose, and in practice is experienced as a part of the accounting 
procedure.  However,  given  the  significant  differences  between  the  information 
requirements  in  national  VAT  law,  it  should  be  considered  to  determine  the 
maximum  information  requirements  to  be  reported  in  the  record  in  the  Council 
Directive. 

Taking into account the purpose of the record, the following maximum requirements 
could be imposed: 

•a specification of the capital good; 

•a reference to the purchase invoice; 

•the date on which the right of deduction has arisen (e.g. date of purchase); 

•amount of VAT paid and deducted; 

•the ratio of VAT deduction (if applicable). 

Costs caused by this IO, assessed at EUR 214 060 406 could be reduced with 20 %. 

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Other  Information  Obligations  stemming  from  Article 273  Council  Directive 
2006/112/EC (Report section 3.4.8) 

Obligation  to  provide  information  to  the  tax  authorities  upon  their  request 
(Recommendation 101) 

Currently, the national VAT law of most Member States contains a general IO which 
requires  taxpayers  to  provide  information  to  the  tax  authorities  upon  their  request. 
There  are  no  specifications  regarding  the  kind  of  information,  the  time  frame  in 
which the information should be provided, etc. This lack of specification creates an 
irritation factor and administrative burden for taxpayers. 

Following reduction proposals were assessed by the national VAT experts: 

•A clear indication in the Directive of a minimum time frame which the taxpayer is 
granted in order to gather the information requested; 

•A  clear  indication  in  the  Directive  of  the  type  of  information  that  the  VAT 
authorities are allowed to request; 

•The  implementation  of  an  obligation  for  the  tax  authorities  to  provide  a  written 
request that provides a clear and detailed description of the information requested; 

•The  implementation  of  the  possibility  for  the  taxable  person  to  file  a  request  to 
extend the period granted to gather the requested information. 

Costs caused by this IO, assessed at EUR 64 241 071 could be reduced with 30 %. 

9.5.3.  General comment on these recommendations 

The  comment  made  under  point  9.4  about 
these 
recommendations stemming from stakeholders with the needs of tax administrations 
for  carrying  out  their  tasks  properly  is  equally  valid  for  this  second  set  of 
recommendations.  

to  balance 

the  need 

9.6. 

An  alternative  way  forward:  a  maximum  list  of  standardised  obligations  in 
Article 273 

The work carried out by the consortium on Article 273 IOs has highlighted the great 
variation  between  Member  States  and,  as  a  consequence,  the  difficulty  and 
complexity  of  complying  with  VAT  law,  especially  for  businesses  trading  in  many 
Member States. 

Efforts could be made to follow up the individual recommendations. 

An  alternative  approach,  which  would  deal  with  these  recommendations  in  a  more 
systematic way, could be to define a maximum list of standardised obligations in the 
VAT Directive. Member States would be free to impose any of these obligations. 

Such  an  approach  would  provide  businesses  with  a  degree  of  certainty,  since  they 
would know what VAT obligations could be imposed on them.  

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Only in very specific and targeted cases where Member States require extra reporting 
obligations to combat tax evasion or avoidance would Member States need to seek a 
derogation under Article 395 of the Directive. In their request, Member States would 
need  to  state  the  reasons  why  the  obligations  set  out  in  the  maximum  list  were  not 
sufficient. 

This approach, of a maximum list of pre-defined obligations, would give businesses 
the chance to establish accounting and reporting IT systems and processes for VAT 
purposes  that  cover  all  their  obligations  across  the  EU.  This  would  allow  reporting 
obligations for VAT to be standardised across the European Union and help reduce 
the burden on business. 

9.7. 

A standardised EU VAT declaration 

As  well  as  standardising  the  obligations  Member  States  can  impose  under 
Article 273,  consideration  could  equally  be  given  to  having  an  EU  standard  VAT 
declaration. 

Agreed  information  corresponding  to  numbered  boxes  on  the  VAT  return  would 
have to be provided. So, for instance, box 1 would be VAT on standard rate supplies, 
box 2 VAT on reduced rate supplies, etc. The VAT return would be available in all 
EU  languages  with  common  definitions  of  what  was  to  be  included  in  each  box. 
Thus, for instance, a business in Greece could use its own language to complete an 
EU  VAT  return for  a VAT  declaration to  be submitted  in  Finland  which,  since  the 
information supplied in each box was identical throughout the EU, would allow the 
Finnish tax authorities to correctly interpret the declaration. 

Given the difference between the number of boxes on VAT returns between Member 
States, agreement would need to be reached on how many boxes should be filled in. 
There could be a minimum number of boxes, providing information that all Member 
States  require,  and  other  boxes  requiring  supplementary  information  could  be 
imposed  should  they  be  demanded  by  certain  Member  States.  However,  leaving 
certain  VAT  return  boxes  optional  would  limit  the  burden  reduction  for  business, 
although providing more information upfront could limit additional queries from tax 
administrations. A finite list of boxes to be filled in for all Member States would of 
course achieve better burden reductions for business. 

Consideration could be given to whether all businesses should be allowed to fill in a 
standard  EU  VAT  return.  Non-established  businesses  or  businesses  that  trade  in 
several  Member  States  through  fixed  establishments  or  groups  of  companies 
operating  across  the  EU  through  subsidiaries  in  each  Member  State  might  find  it 
advantageous, especially if their accounting and finance functions are centralised, to 
complete  standard  EU  VAT  returns  in  each  Member  State  rather  than  submitting 
different  national  VAT  returns  sometimes  completed  in  an  unknown  language.  In 
any  case,  for  Member  States  with  less  information  demanded  on  a  national  VAT 
return  than  on  an  EU  VAT  return,  allowing  businesses  the  option  to  submit  either 
one should not pose too much of a problem. The same would not be true for Member 
States  that  have  a  national  VAT  return  requiring  information  in  excess  of  the  EU 
return. 

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The advantages for  businesses would be  that they could create standard accounting 
reports that would provide the information on an EU VAT return and thereby satisfy 
the information requirements of all Member States. Moreover, they could work and 
report in their own language.  

To some extent, a common VAT return will exist from 2015 for the ‘mini- one stop 
shop’,  whereby  non-established  businesses  making  B2C  suppliers  to  customers  in 
another Member State will be able to submit a VAT declaration in the Member State 
where  they  are  established  for  supplies  of  telecoms,  broadcasting  and  e-services 
taxable in other Member States. 

Although  the  VAT  declaration  for  the  mini-  one  stop  shop  would  be  limited  to 
certain services and only for supplies made, not for any right to deduct, it will still 
contain  information  on  supplies  at  different  rates,  in  different  Member  States  and 
from  a  business  with  VAT  identification  numbers  in  several  Member  States.  This 
information  will  need  to  be  harmonised  at  EU  level  to  allow  Member  States  to 
exchange the data. This harmonisation could be then used as a basis for devising an 
EU VAT return. 

The ‘full’ one stop shop concept as set out in topic 11 requires harmonisation of the 
content of the VAT return submitted via this mechanism. 

A standard VAT declaration could also allow Member States to exchange data more 
easily  and  swiftly.  The  information  requested  from  tax  administrations  would  not 
have  to  be  extracted  and  compiled  to  fulfil  the  request  and  the  tax  administration 
could target the information needed (box numbers) based on the standard EU VAT 
return.  

An EU VAT return would allow a Member State requiring some basic information 
about  a  taxpayer  in  another  Member  State  to  define  precisely  the  information  they 
needed, which would speed up the exchange of information and free up resources for 
dealing with more complex administrative queries. 

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Topic 10. 

10. 

SMALL BUSINESSES 

10.1.  Current legal framework 

The VAT Directive allows Member States to provide for a special scheme for small 
enterprises.  The  simplified  scheme  may  be  either  an  exemption  from  VAT  or,  for 
instance, a flat-rate or graduated system.  

Under  a  flat-rate  scheme  the  business  is  allowed  typically  to  pay  VAT  at  a  set 
percentage  of  its  turnover  depending  usually  on  the  business  activity.  In  return  the 
business  is  exempted  from  charging  and  reclaiming  VAT  on  a  transaction  basis. 
Introducing any such flat-rate scheme requires the VAT Committee to be consulted 
and given reasons why the normal VAT arrangements would be difficult to apply to 
these small businesses because of their activities or structure. Member States differ in 
their use of this option and the schemes they set up are primarily designed for traders 
with domestic operations only. 

Graduated  tax  relief  may,  for  instance,  mean  allowing  a  business  to  pay  no  VAT 
below a given threshold but to pay an increasing percentage of the VAT due above 
that threshold until at a certain level all the VAT is paid and no relief is given. 

Member  States  may  provide  for  a  scheme  whereby  businesses  with  an  annual 
turnover  below  a  certain  threshold  are  entitled  to  exemption  from  VAT.  Any 
business choosing to be exempt from charging VAT on the supplies it makes is not 
allowed a right of deduction. Exemption from VAT is the most widely used scheme 
in the EU for small enterprises.  

The VAT Directive also provides Member States with an optional common flat-rate 
scheme  for  farmers.  Although  it  is  not  strictly  limited  to  small  businesses,  it  is 
designed for cases where applying the normal VAT arrangements to farmers is likely 
to give rise to difficulties. When a farmer applies for this flat-rate scheme, he is no 
longer  covered  by  the  normal  VAT  rules:  he  may  not  deduct  the  VAT  paid  on  his 
inputs  and  he  may  be  released  from  obligations  relating  to  the  payment  of  tax, 
invoicing,  declarations  and  accounting.  To  make  up  for  the  VAT  paid  on  inputs 
which cannot be deducted, flat-rate compensation (calculated by each Member States 
on the basis of macro-economic statistics) is paid. 

10.2.  The exemption scheme 

10.2.1.  History and references 

The special scheme for small enterprises was laid down in Article 14 of the Second 
VAT  Directive92  which  allows  Member  States  ‘to  apply  to  small  undertakings, 

92 

Second Council Directive 67/228/EEC of 11 April 1967 on the harmonisation of legislation of Member 
States concerning turnover taxes — Structure and procedures for application of the common system of 
value added tax (OJ 71, 14.4.1967, p. 1303). 

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whose  subjection  to  the  normal  system  of  value  added  tax  would  meet  with 
difficulties the special system best suited to national requirements and possibilities’. 

The Sixth VAT Directive93 set out further details and rules as regards the application 
of a special scheme for small enterprises. It included thresholds for using the scheme, 
the calculation of businesses’ annual turnover, limitation of the right to deduct if the 
VAT exemption was used and a provision allowing businesses to opt for the normal 
tax regime. 

In  1992,  under  Council  Directive  92/111/EEC,  the  special  scheme  was  adapted  to 
exclude  new  means  of  transport  and  supplies  by  a  non-established  taxable  person. 
With  the  recast  of  the  Sixth  VAT  Directive  in  2006  the  special  scheme  for  small 
enterprises was brought together in Chapter 1 of Title XII of the VAT Directive94. 

Member States which acceded before 1 January 1978 and which opted to introduce a 
special small enterprise scheme under Article 14 of the Second VAT Directive may 
retain  it  (Article 284(1)  of  the  VAT  Directive).  Those  Member  States  which,  at 
17 May  1977,  exempted  taxable  persons  whose  annual  turnover  was  less  than  the 
equivalent in national currency of 5 000 European units of account, at the conversion 
rate  on  that  date,  may  raise  the  ceiling  to  up  to  EUR 5 000  (Article 284(2)  of  the 
VAT  Directive),  while  Member  States  which  exempted  taxable  persons  whose 
annual  turnover  was  equal  to  or  higher  than  that  amount  may  raise  the  ceiling  to 
maintain the value of the exemption in real terms (Article 286 of the VAT Directive). 
Member  States  which  have  not  exercised  the  option  may  exempt  taxable  persons 
with  an  annual  turnover  of  up  to  EUR 5 000  or  the  equivalent  in  national  currency 
(Article 285 of the VAT Directive). 

Member  States  which  acceded  after  1 January  1978  may  exempt  taxable  persons 
whose annual turnover is no higher than the amount set on the day of their accession. 
Varying from one Member State to another (from EUR 10 000 to EUR 37 000), this 
ceiling  is  equal  to  the  equivalent  in  national  currency  at  the  conversion  rate  on  the 
day  of  their  accession  of  the  amounts  referred  to,  for  each  Member  State,  in 
Article 287, points (1)–(18) of the VAT Directive. 

In  addition,  three  Member  States,  Italy,  Latvia  and  Poland,  also  have  a  derogation, 
limited in time, under Article 395 of the VAT Directive, allowing them to apply an 
annual  turnover  threshold  to  exempt  small  businesses  greater  than  that  allowed  to 
them under the VAT Directive. 

The  result  of  these  rules,  set  at  different  times,  is  that,  for  primarily  historical 
reasons,  Member  States  have  different  thresholds  they  may  apply  to  exempt  small 
businesses from VAT (see table for the thresholds in the Member States95). 

93 

94 

95 

Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member 
States relating to turnover taxes — Common system of value added tax: uniform basis of assessment 
(OJ L 145, 13.6.1977, p. 1). 
Council  Directive  2006/112/EC  of  28 November  2006  on  the  common  system  of  value  added  tax 
(OJ L 347, 11.12.2006, p. 1). 
http://ec.europa.eu/taxation_customs/resources/documents/taxation/vat/traders/vat_community/ 
vat_in_ec_annexi.pdf. 

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In 2004 the Commission came forward with a proposal96 to allow all Member States 
to  set  an  annual  turnover  threshold  no  higher  than  EUR 100 000  under  which 
businesses  could  be  exempted  from  VAT.  The  amount  could  be  increased  in  line 
with  inflation  to  maintain  the  equivalent  value  as  of  1 July  2006.  The  Commission 
proposal  remains  on  the  table  at  the  Council,  although  it  was  last  discussed  in  the 
Council in 2007. 

10.2.2.  Evaluation of the exemption scheme 

10.2.2.1. The level of the threshold 

The annual turnover threshold that Member States may set for the special scheme for 
small  enterprises  differs.  Certain  Member  States  are  restricted  to  a  ceiling  of 
EUR 5 000 while others have a ceiling of almost EUR 80 000. Some can increase the 
amount in line with inflation and others cannot. 

These different thresholds have arisen from historical reasons based largely on when 
Member States joined the EU and whether they applied any threshold at a particular 
moment in time. Even those Member States that would like to increase the threshold 
are  hindered  in  doing  so.  Certain  Member  States  have  asked  for  and  received 
derogations  to  increase  their  thresholds  but  this  can  only  be  seen  as  a  short-term 
measure which, in any case, does not provide a long-term solution that is fair to all 
Member States. 

For  those  Member  States  that  have  a  high  maximum  threshold,  the  special  scheme 
for small enterprises offers a degree of flexibility as they have greater freedom to set 
the  annual  turnover  to  achieve  the  right  balance  of  collection  and  control  costs  set 
against  the  extra  revenue.  This  may  be  one  threshold  or,  as  is  the  case  in  several 
Member  States,  different  thresholds  e.g.  according  to  the  type  of  supply,  so  there 
could be some differentiation between suppliers of goods and services. 

Those Member States legally bound to a low threshold do not have this flexibility.  

10.2.2.2. Administrative burden and compliance costs 

The main purpose of the scheme for small enterprises is to reduce the administrative 
burden  of  VAT,  which  weighs  more  heavily  on  them  because  of  the  scale  of  their 
activities. 

Article 272(1)(d) of the VAT Directive allows Member States to exclude businesses 
covered by the exemption for small enterprises from certain or all of the obligations 
covered in Chapters 2 to 6 of Title XI of the VAT Directive. This includes invoices, 
storage  of  invoices,  VAT  declarations  and  certain  obligations  in  relation  to 
recapitulative statements. 

The extent of the exemption from certain obligations is determined by each Member 
State and will vary across the EU. 

96 

Proposal  for  a  Council  Directive  amending  Directive  77/388/EEC  with  a  view  to  simplifying  value 
added tax obligations (COM(2004) 728 final). 

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The  advantage  for  small  businesses  of  being  exempt  from  VAT  is  increased  if 
Member  States  also  release  them  from  VAT  obligations  such  as  invoicing.  So  for 
instance, while the business may in any case issue an invoice to provide evidence of 
a supply of goods or services and to demand payment, the VAT rules on invoicing 
may  include  conditions  on  the  content,  the  time  of  issue,  outsourcing  and  so  forth, 
which would impose additional invoicing burdens. 

There  are  advantages  too  for  the  Member  State.  Notwithstanding  making  small 
businesses more competitive, the cost of collection and control by the Member States 
of typically small VAT payments may be seen as not cost efficient. In any case the 
VAT revenue forgone by the Treasury is only the VAT on the margin. 

10.2.2.3. The exemption scheme and cross-border transactions 

Supplies by non-established small businesses 

in 

in  which 

the  business 

the  Member  State 

One of the primary drawbacks of the scheme for small enterprises is that it is limited 
to  supplies 
is  established 
(Article 283(1)(c)  of  the  VAT  Directive).  Thus  an  established  business  with  an 
annual turnover below that set by the Member State for the special scheme for small 
businesses  may  exempt  from  VAT  the  supply  in  that  Member  State  but  the  same 
supply  to  the  same  customer  by  a  non-established  business  with  a  similar  annual 
turnover may have to be charged with VAT. Moreover, even if that non-established 
business  were  covered  by  the  small  business  scheme  in  the  Member  State  where  it 
was  established,  it  might  in  any  case  have  to  charge  VAT  in  the  other  Member 
States.  

The  matter  of  different  treatment  between  an  established  and  non-established 
business has now gone before the ECJ for a ruling97. On 26 October 2010, the Court 
gave its ruling.  

The  conclusion  was  that  the  annual  turnover  of  a  business  used  to  determine  if  the 
threshold is exceeded ‘must be interpreted as meaning that the term 'annual turnover' 
refers to the turnover generated by an undertaking in one year in the Member State in 
which it is established‘. The income of a business in relation to supplies taxable in 
another Member State should therefore be excluded. 

It should be added that as the rules are interpreted as excluding from annual turnover 
supplies that are taxable in a Member State where the supplier is not established the 
definition  of  what  is  a  small  enterprise  in  the  EU  could  be  seen  as  distorted.  For 
example,  a  business  that  has  supplies  of  only  EUR 10 000  in  its  Member  State  of 
establishment  but  has  supplies 
in  another  Member  State  of,  say, 
EUR 5 000 000  would  still  be  eligible  for  the  scheme  for  small  enterprises  in  the 
Member State where it is established. 

taxable 

Conversely a small business with minor supplies in a Member State where it is not 
established  would  not  be  eligible  for  the  small  business  scheme.  A  situation  could 
therefore  arise  where  a  large  business  is  eligible  for  the  special  scheme  for  small 
enterprises because very few of its supplies are taxable in the Member State where it 

97 

Case C-97/09, Ingrid Schmelz v Finanzamt Waldviertel. 

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is established whilst a small business, by being non-established in that Member State, 
could not use the special scheme. 

Intra-EU supplies made by and made to exempt small businesses 

Member  States  are  not  required  to  identify  taxable  persons  that  have  no  right  to 
deduct VAT (Article 214(1)(a) of the VAT Directive). Since businesses opting to use 
the special scheme for small enterprises have no right to deduct (Article 289 of the 
VAT Directive) they are not required to be identified for VAT. 

Nevertheless,  for  a  small  business  acquiring  goods  supplied  from  another  Member 
State, a threshold is set by the Member State of destination above which an intra-EU 
acquisition is subject to VAT. In this case there is an obligation to register for VAT, 
complete a VAT declaration and pay the VAT to the tax authority. The threshold set 
by  Member  States  must  be  at  least  EUR 10 000,  which  is  indeed  the  case  for  most 
Member States although in certain cases the amount is higher. 

Supplies made by small businesses under the exemption scheme are excluded from 
the  exemption  for  intra-EU  supplies  of  goods.  This  can  make  it  difficult  for  the 
recipient to know whether the exemption is a result of the supplier being under the 
small business scheme or is a result of an intra-EU supply. The difference is that only 
the latter requires an intra-EU acquisition. 

There is thus a difference between a small business making a cross-border supply of 
goods and a small business receiving goods. So, depending on the thresholds set by 
each Member State, a small business may not make an exempt intra-EU supply but 
for a similar value a small business receiving supplies is required to make an intra-
EU acquisition. 

Differences between goods and services 

As from 1 January 2010, Article 214 of the VAT Directive was amended to require 
VAT  identification  for  all  businesses  making  and  receiving  supplies  of  services 
across  borders  for  which  the  customer  is  liable  for  payment  of  the  VAT  under  the 
reverse  charge  procedure  (Article 196  of  the  VAT  Directive).  This  is  the  case 
irrespective  of  the  value  of  the  supply  and  includes  businesses  under  the  special 
scheme for small enterprises. 

Thus  different  thresholds  for  goods  supplied  and  received  across  borders  and  the 
absence of a threshold for services complicates trade for small businesses. 

10.3.  The way forward 

10.3.1.  The exemption scheme 

The current schemes are aimed principally at the very smallest businesses that have a 
turnover  typically  equivalent  to  the  income  of  an  individual  worker  or  even  less. 
Clearly,  it  makes  sense  to  remove  or  simplify  the  VAT  obligations  of  these  very 
smallest  businesses  as  much  as  possible,  when  the  VAT  revenue  collected  is 
negligible. 

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The following ideas could be considered when reviewing the current provision in the 
VAT Directive concerning the exemption scheme. 

10.3.1.1. Compulsory scheme for Member States 

The  current  special  scheme  allows  Member  States  to  choose  to  use  such  a  scheme 
and then to also determine the threshold, up to a maximum level.  

A minimum compulsory level across the EU, with Member States having the option 
of applying a higher threshold, would create a more level playing field for all small 
businesses and make a significant contribution to reducing burdens on business.  

10.3.1.2. A common threshold for the small business scheme 

As  was  proposed  by  the  Commission  in  2004  to  remedy  the  inequality  of  Member 
States  having  different  thresholds  for  historical  reasons,  one  solution  could  be  to 
allow  all  Member  States  to  set  a  threshold  up  to  an  agreed  maximum  level.  The 
Commission proposed that the maximum threshold be EUR 100 000. 

A common maximum threshold would give consideration to the relative purchasing 
power in each Member State. A threshold for small businesses in one Member State 
may be considered too high or too low in another Member State. 

10.3.1.3. A threshold based on EU annual turnover 

Calculation of annual threshold is based on supplies only in the Member State where 
the business is established. Within the single market it would be more appropriate if 
annual turnover were based on the total value of EU taxed transactions. 

10.3.1.4. Allow small businesses to be regarded as non-taxable persons 

There are currently certain rules that apply to all taxable persons, such as the place of 
supply of services, but equally there are specific rules for taxable persons under the 
small business scheme such as for intra-EU supplies and acquisitions of goods. This 
all adds complexity to the scheme and increases burdens on small businesses. 

A  possible  solution  is  to  treat  taxable  persons  under  the  small  business  scheme  as 
non-taxable persons. This would mean that the VAT obligations would in general not 
apply  with  the  possible  exception  of  Article 248,  which  allows  Member  States  to 
require non-taxable persons to store invoices they receive. It would mean that small 
businesses using the special scheme for small enterprises would be treated similarly 
to a private individual.  

For control purposes, Member States may still want certain obligations to be met. A 
scheme which applies a threshold should allow some means for business turnover to 
be checked against that threshold, so the obligation to issue and keep invoices could 
be advantageous to the Member State. Equally, notification of which businesses are 
being  treated  as  non-taxable  persons  through  some  identification  system  may  be 
beneficial to the Member States. 

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Thus some balance may be needed between the imposition of certain obligations on 
the business and the need to help small businesses by reducing their administrative 
burden. 

10.3.2.  A simplification scheme other than the exemption scheme 

Many  businesses  that  have  an  annual  turnover  higher  than  the  thresholds  set  by 
Member States are still classed in the EU as micro-enterprises (annual turnover less 
than EUR 2 000 000). The invoicing Directive (2010/45/EU) has now introduced an 
option for Member States to introduce a cash accounting scheme for businesses with 
an annual turnover below this threshold. Consideration could be given to offering a 
such businesses a small business scheme as well. 

This  could  include  measures  such  as  a  flat-rate  scheme  where  a  set  percentage  of 
turnover  is  paid  to  the  tax  authorities  rather  than  payment  based  on  recording  the 
difference  between  all  the  sales  and  purchases  in  a  given  period  along  with  all  the 
necessary adjustments.  

Another alternative is a graduated tax, whereby the amount of VAT paid is reduced 
according  to  specific  predefined  criteria  such  as  turnover.  In  this  way  the  small 
business  is  compensated  for  the  relatively  higher  collection  and  reporting  costs 
compared to a larger business. 

In  terms  of  specific  actions  to  reduce  compliance  costs  for  these  businesses,  the 
measures suggested under the Better Regulation Agenda (see topic 9) are intended to 
benefit all taxable persons. The question therefore arises whether there is still room 
for  specific  relief  from  certain  obligations  which  would  not  be  covered  by  the 
broader framework of that Agenda. 

10.3.3.  The farmers scheme 

VAT  is  a  general  consumption  tax  and  it  is  therefore  questionable  whether  special 
schemes  targeting  one  specific  sector  should  be  envisaged.  On  the  other  hand,  if 
there are valid reasons for a sectoral approach, then the optional nature of the scheme 
becomes questionable. 

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Topic 11. 

11. 

A ONE STOP SHOP SYSTEM 

11.1.  The concept of a one stop shop 

The  concept  of  a  one  stop  shop  system  is  simple:  taxable  persons  taking  part  in 
transactions  subject  to  VAT  in  different  Member  States  can  meet  all  the  VAT 
obligations for those transactions in a single Member State.  

While  they  meet  all  their  obligations  in  one  State,  the  transaction  itself  is  taxed 
according to the rules (e.g. on rates, exemptions, and deduction) of the Member State 
where the transaction is located for VAT purposes. 

This  concept  could  be  refined  in  various  ways:  it  could  be  limited  to  certain 
categories  of  taxpayers,  to  certain  types  of  transactions  or  to  meeting  certain  VAT 
obligations only. 

11.2.  Historical overview 

As  a  general  rule,  taxable  persons  carrying  out  taxable  transactions  for  which  they 
are liable to pay tax in more than one Member State have to meet VAT obligations 
(identification, VAT returns, and payment) in each of these Member States. Member 
States  have  considerable  freedom  to  decide  on  these  obligations  (e.g.  on  the 
identification process, and on what must be included in VAT returns and how often 
they must be submitted) which makes it that much more complicated to set up cross-
border operations.  

A  first  exception  to  this  general  rule  was  introduced  in  July  2003  with  the  special 
scheme  for  taxpayers  outside  the  EU  supplying  electronic  services  to  non-taxable 
persons. The aim was to facilitate compliance for non-EU e-commerce operators as 
much as possible. 

With the adoption of the so-called VAT package, from 1 January 2015 this scheme 
will  cover  all  EU  and  non-EU  operators  supplying  telecoms,  broadcasting  and 
electronic services. 

Moreover,  from  1  January  2010,  a  one  stop  shop  system  was  introduced  for 
refunding  VAT  incurred  by  EU  businesses  in  Member  States  where  they  are  not 
established.  Although  there  have  been  problems  with  national  implementation,  the 
Commission remains convinced of the merits of this approach. 

By contrast, the Council has not yet been able to reach agreement on a broader one 
stop  shop  system,  as  contained  in  the  proposal  presented  by  the  Commission  in 
October  2004,  with  a  view  to  simplifying  VAT  obligations.  An  expanded  one  stop 
shop  was  a  major  feature  of  this  comprehensive  simplification  proposal  and  would 
greatly simplify formalities for a large number of SMEs (e.g. distance sellers). This 
proposal  is  still  on  the  table  at  the  Council  but  has  not  been  taken  up  by  recent 
Presidencies. 

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11.3.  Evaluation 

The benefits of the one stop shop concept as a simplification measure has generally 
been  recognised  by  business.  However,  the  scope  of  the  systems  so  far  agreed  is 
limited and targeted.  

The  system  introduced  in  July  2003,  which  will  be  extended  in  2015,  is  limited  to 
certain  categories  of  transactions.  In  addition,  it  covers  only  output  transactions;  it 
does not allow deduction of input VAT by offsetting it on the return submitted via 
the one stop shop. The refund mechanism is also limited to a specific situation. 

As a result, particularly after 2015, an EU taxable person who uses the one stop shop 
to  supply  telecom,  broadcasting  and  electronic  services  will  have  to  make  use  of  a 
different  one  stop  shop  to  obtain  a  refund  of  the  input  VAT  on  those  output 
transactions. This will reduce the simplification benefits of the first system from the 
outset, since it will still be simpler to deduct input VAT by offsetting the amounts on 
the VAT return than to apply for a refund. 

The concept as envisaged in the Commission proposal of 2004 covered both outputs 
and  inputs.  It  was  widely  supported  by  business  federations  representing  large, 
medium-sized and small companies.  

It therefore comes as no surprise that one of the recommendations made by the ‘High 
Level Group of Independent stakeholders’ chaired by Mr. Stoïber (see topic 9), was 
the setting up of a wide one stop shop. 

11.4. 

Possible way forward 

In the current VAT system, the one stop shop concept still deserves consideration as 
a legitimate tool to help traders comply with their VAT obligations on operations in 
different Member States.  

The concept as proposed in 2004 clearly needs revisiting, taking into account notably 
the  changes  in  the  ‘place  of  supply’  rules  and  the  features  of  the  one  stop  shop 
resulting  from  the  adoption  of  the  VAT  package  and  the  changes  to  the  rules  on 
administrative cooperation between Member States. 

11.4.1.  Potential scope of the one stop shop system 

The one stop shop proposed in 2004 was intended to cover all transactions for which 
a  taxable  person  becomes  liable  in  a  Member  State  in  which  he  is  not  established. 
This covers both B2B and B2C transactions. 

The  risk  of  providing  new  scope  for  missing  trader  fraud  by  including  B2B 
transactions was a major issue of debate. 

Changing the general rule for determining the place of supply for B2B services (from 
the  place  of  establishment  of  the  supplier  to  the  place  of  establishment  of  the 
customer)  should  reduce  the  number  of  situations  where  a  taxable  person  becomes 
liable for VAT on B2B transactions in a Member State where he is not established. 
Other  changes  to  the  place  of  supply  of  B2B  services  which  are  either  in  force  or 

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coming  into  force  on  1 January  2011  reduce  the  number  of  such  situations  even 
further. 

One could, therefore, consider restricting the one stop shop to B2C transactions. The 
remaining  situations  in  which  a  non-established  trader  becomes  liable  for  VAT  on 
B2B  transactions  could  be  systematically  subject  to  the  reverse  charge  procedure, 
which  appears  to  be  the  simplest.  After  the  adoption  of  the  VAT  package,  many 
Member States decided to go down that road.  

Even restricting the scope to B2C transactions, these would mainly concern distance 
selling,  supplies  involving  installation  or  assembly,  work  on  immovable  property, 
sales at exhibitions and fairs, markets, sales on board aircraft and removals. 

What should be avoided at all costs is to have taxpayers confronted with a situation 
where  —  in  relation  to  a  Member  State  in  which  they  are  not  established  —  they 
could  use  the  one  stop  shop  for  certain  transactions  but  still  be  required  to  register 
and  fulfil  VAT  obligations  outside  the  one  stop  shop  for  some  other  category  of 
transactions.  

11.4.2.  Registration under a one stop shop concept 

The fact that registration in one Member State would automatically have effects for 
the other Member States was another point of concern during the discussions on the 
proposal.  

This  is  a  valid  point  which,  however,  is  also  valid  for  intra-EU  trade  to  a  certain 
extent. When deciding how to treat the supply for VAT purposes, the  supplier will 
largely rely on whether the customer has a VAT number or not. 

This  is  why  the  recently  adopted  Council  Regulation  904/2010  on  administrative 
cooperation  and  combating  fraud  in  the  field  of  VAT98  introduces  new  provisions 
requiring  Member  States  to  carry  out  certain  checks  and  assessments  during  the 
registration  process.  Member  States  must  also  inform  the  SCAC  Committee  of  the 
national  measures  taken.  The  objective  of  informing  the  SCAC  is  to  give  other 
Member States sufficient confidence in its national procedures. 

A comparable approach could therefore be developed for taxable persons wanting to 
make use of the one stop shop. 

Another approach could be based on a system in which Member States are consulted 
on the need to identify a taxable person under a one stop shop. 

11.4.3.  VAT return 

A ‘multi-country’ return form with harmonised content would be needed. This return 
could  consist  of  a  number  of  ‘electronic  pages’  (one  page  for  each  Member  State) 
and the taxable person in question would fill in the relevant pages. The level of detail 
required in relation to VAT rates would have to be decided by each Member State of 

98 

OJ L 268, 12.10.2010, p. 1 

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consumption. Each page could automatically display the VAT rates applying in the 
Member State in question. 

The  VAT  return  to  be  submitted  in  the  supplier’s  Member  State  of  establishment 
could  be  included  or  not  (however,  see  topic  9,  point  9.5).  In  the  latter  case,  the 
introduction  of  the  one  stop  system  would  not  necessarily  entail  wholesale 
harmonisation of obligations in the Member State of establishment, which would be 
difficult to achieve in any event.  

11.4.4.  The right of deduction 

Under the one stop shop system proposed in 2004, a taxable person could exercise its 
right  of  deduction  by  entering  the  relevant  amounts  in  the  ‘electronic  page’  of  the 
Member State under which VAT had been charged.  

Consequently, deductions would be made according to the rules of the Member State 
of purchase.  

11.4.5.  Payment and repayment 

Under  the  2004  proposal,  it  was  envisaged  that  the  taxable  person  would  make  the 
payment directly to the national account of each Member State of consumption in the 
currency of that country. 

Under  the  existing  system  for  e-commerce  transactions,  which  will  be  extended  on 
1 January  2015,  there  is  only  a  single  payment  to  make.  It  seems  therefore  more 
logical to go with that principle in the future.  

If the one stop shop covered deductions, the return could, in exceptional cases, result 
in a credit. A system of carryover or repayment would have to be introduced for that 
purpose. 

11.4.6.  Providing information to taxable persons 

Although the one stop shop system would replace 27 different rules on identification, 
returns and payment of VAT, it does not standardise the taxation rules proper (rates, 
exemptions, restrictions on the right to deduct input VAT).  

The  introduction  of  such  a  system  would  therefore  have  to  be  accompanied  by  an 
efficient  system  of  informing  taxable  persons  about  the  rules  applicable  in  each 
Member State. 

In  particular,  computerised  access  to  the  VAT  rates  of  all  Member  States  needs 
further  investigation.  Such  access  would  be  easier  to  introduce  if  Member  States 
could agree to base their rates on a common classification of goods and services. 

11.4.7.  Control by the tax authorities 

The introduction of a one stop shop should not affect the ability of the Member State 
of taxation to ensure that the tax is paid.  

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The situation would be comparable to the current situation of a taxable person who is 
directly  registered  (but  not  established)  in  a  Member  State  because  he  carries  out 
distance sales above the threshold to that Member State. 

The  recently  adopted  Council  Regulation  904/2010  on  administrative  cooperation 
and  combating  fraud  in  the  field  of  VAT  contains  specific  and  more  stringent 
provision  for  cooperation  between  Member  States  on  transactions  for  which  the 
Member State of establishment of the supplier and the Member State of taxation are 
different.  

By  introducing  these  provisions,  which  come  into  force  on  1 January  2015,  the 
Council  recognised  the  need  for  closer  cooperation  between  tax  authorities.  The 
transactions covered by these provisions would be typical candidates for the one stop 
shop concept. 

The  one  stop  shop  concept  should  not  reduce  any  Member  State’s  control 
capabilities.  Even  if  the  general  principles  relating  to  national  responsibilities  for 
control were to remain the same under a one stop system, it would be appropriate to 
improve procedures by giving priority where possible to simultaneous controls. 

In  addition,  it  would  greatly  encourage  voluntary  compliance  with  obligations,  as 
companies  would  be  able  to  discharge  all  their  obligations  through  one  national 
administration and in their own language. 

11.4.8.  Taxation of intra-EU supplies of goods and services 

The above factors are described in the context of the current VAT system. 

However,  as  stated  in  point 4.2.3  of  the  Green  Paper  on  the  future  of  VAT,  a  well 
functioning  one  stop  shop  system  is  also  a  prerequisite  of  a  VAT  system  in  which 
intra-EU supplies of goods and services are taxed at destination.  

In such a VAT system, unlike the present one, a one stop shop concept should not be 
limited to B2C transactions but should include B2B transactions, too. It would be an 
essential instrument for dealing with all VAT liabilities in Member States other than 
that of establishment of the supplier. 

The other information set out above remains valid, although the scope for control by 
the  tax  authorities,  and  the  instruments  available  for  exchanging  information  and 
other 
forms  of  administrative  cooperation  would  certainly  need  careful 
reconsideration in such a system. 

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Topic 12. 

12. 

ADAPTING THE VAT SYSTEM TO LARGE AND PAN-EUROPEAN BUSINESSES 

12.1.  Background 

There  are  few  provisions  in  the  VAT  Directive  specific  to  pan-EU  or  other  large 
businesses.  However,  the  Directive  does  allow  such  companies  both  to  streamline 
their  VAT  compliance  and  to  manage  the  creation  of  non-recoverable  VAT  in 
operations.  These  measures  could  be  seen  as  contributing  to  the  efficiency  of  their 
operations. 

For  activities  conducted  entirely  with  one  Member  State,  the  Directive  provides  a 
number  of  instruments  which  such  businesses  can  use  and  which,  in  addition  to 
limiting VAT obligations, have the effect of reducing the burden of non-deductible 
VAT  where  this  arises  from  transactions  with  subsidiaries,  partners  or  other 
associated parties. These include VAT grouping and cost sharing consortia99. Similar 
effects,  albeit  limited  to  supplies  of  services,  can  result  from  the  particular  VAT 
treatment of such transactions between various branches of a Pan-European business 
situated in different Member States. 

12.2.  Evaluation of current legislation and policy 

12.2.1.  Intra-EU transactions in services within the same legal entity 

There is a fundamental break in consistency in the VAT treatment of transactions in 
services between the various parts of a commercial organisation where these extend 
to  more  than  one  Member  State,  depending  on  the  legal  structure  it  has  assumed. 
This break hinges on whether these are parts of the same legal entity (branches) or 
are  themselves  legally  independent  (subsidiaries  or  other  combinations,  whether 
based  on  a  controlling  or  non-controlling  interest).  The  most  important  difference 
between  the  two  categories  is  that  where  an  organisation  takes  the  form  of  several 
branches, fixed establishments or divisions it will be considered as a single entity for 
VAT purposes in line with the ‘FCE’ judgment100. 

The European Court of Justice (ECJ) concluded that the various establishments of a 
single  legal  entity  cannot  be  treated  as  individual  taxable  persons  and  as  a  result, 
there can be no supply for VAT purposes between them. 

In  2003,  the  Commission  proposed  amending  the  Directive  to  clarify  that  services 
rendered  between  the  various  establishments  of  a  single  legal  entity  are  not  to  be 
treated  as  supplies  for  VAT  purposes101.  This  was  merely  to  confirm  the 
Commission’s  own  view  and  that  of  the  great  majority  of  Member  States,  and  to 
establish legal certainty and a consistent interpretation.  

99 
100 
101 

But this can now be extended to cross-border scenarios — see below. 
Case C-210/04, FCE Bank. 
COM(2003) 822. 

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In the event, the Council could not see its way to a consensus on the proposal. The 
Gordian knot was, however, presently resolved by the FCE judgment. The result is 
seen as benefiting business, bringing VAT into line with the more general regulatory 
climate, which is one of reducing obstacles to consolidation and deepening in critical 
industries. 

The  continued  deepening  of  the  single  market  puts  a  new  spotlight  on  the  VAT 
treatment of such structures and transactions. Many businesses operate in more than 
one  Member  State  and  large  European  companies  seek  to  establish  effective  Pan-
European business structures. Moreover, by 2007 services represented just over 70 % 
of  gross  value  added  in  the  European  Union.  The  development  of  the  Societas 
Europaea adds a further dimension (SE)102. 

If the services were subject to VAT, the tax would generally be accounted for by the 
recipient  under  the  reverse  charge  mechanism.  Besides  reducing  administrative 
burdens  such  as  recapitulative  statements,  this  special  treatment  may  result  in  an 
advantage where the business is not entitled to deduct VAT in full. 

12.2.1.1. Positive effects 

Not  taxing  transactions  involving  services  between  various  parts  of  the  same  legal 
entity,  even  when  these  are  in  different  Member  States,  is  consistent  with  the 
principle that activities carried out by part of a single legal person for the benefit of 
other  parts  of  the  same  legal  person  cannot  be  treated  as  a  transaction  subject  to 
VAT.  It  might  also  be  seen  as  consistent  with  the  principle  of  freedom  of 
establishment  within  the  EU,  since  an  internal  border  between  those  parts  does  not 
undermine that favourable treatment. The outcome is conducive to the exploitation of 
single  market  opportunities  for  those  businesses  which  have  the  appropriate  legal 
structure. 

from 

incurring  non-recoverable  VAT.  Financial  and 

There  is  also  a  strong  pragmatic  argument  supporting  the  non-taxation  of  intra-EU 
transactions in services between the various parts of the same entity: it prevents such 
businesses 
insurance 
institutions,  in  particular,  are  not  usually  entitled  to  deduct  VAT  incurred  on  their 
inputs  except  where  these  are  used  for  the  purposes  of  rendering  services  to 
customers established outside the EU. This leads to accumulating and cascading tax, 
with  the  exempt  supplier’s  non-deductible  input  VAT  being  absorbed  in  the  cost 
structure  but  ultimately  reflected  in  the  price  charged  for  exempt  services  to  fully 
taxable  customers  who  would  otherwise  recover  this  tax.  This  goes  against  the 
principle that VAT should be neutral: VAT is a tax on final consumption of goods 
and services which relieves businesses of the burden of VAT incurred in the process 
of  production  and  distribution  of  these  goods  and  services.  Preventing  businesses 
from incurring non-recoverable VAT cannot but be regarded in a positive light.  

102 

Council  Regulation  (EC)  No 2157/2001  of  8 October  2001.  The  registered  office  of  the  SE  is  in  the 
Member State where it has its central administration, that is to say its true centre of operations. SEs are, 
however, subject to VAT obligations in any Member State where they have a fixed establishment. 

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12.2.1.2. Possible shortcomings 

In  FCE,  the  ECJ  limited  its  answers  to  situations  where  the  entities  involved  are 
established  in  the  EU.  This  leaves  unanswered  the  question  of  what  is  the  correct 
treatment  when  a  branch  is  established  in  a  non-EU  country  or  where  a  company 
with its headquarters outside the EU has branches that are fixed establishments in an 
EU Member State. 

Some Member States are of the view that the provision of services within the same 
legal entity never falls within the scope of VAT and that therefore these operations 
do not constitute taxable transactions, no matter where the various constituent parts 
of the entity are located. 

There  is  a  defensible  argument  that  the  ECJ’s  logic  in  FCE  points  towards  such  a 
conclusion.  The  practical  problem  here,  however,  is  that  it  opens  up  a  leak  in  the 
VAT system, whereby an institution acquiring services in a non-EU country can re-
route them to an establishment in the EU without incurring any EU VAT. Where the 
non-EU country is one which regards cross-border transactions between branches as 
within  the  scope  of  their  VAT  (or  similar  tax),  the  institution  may  even  be  able  to 
recover non-EU-country input tax if supply to an EU branch is considered an export. 

Even  for  entities  entirely  within  the  EU,  the  risks  of  distortion  persist.  Under  the 
current  rules  and  practice,  it  is  possible  to  channel  services  to  Member  States  in 
which,  either  because  of  the  way  in  which  the  law  is  interpreted  or  because  of 
concessional  schemes,  the  rate  of  input  tax  recovery  is  high,  and  subsequently 
reroute  them,  without  any  charge  to  VAT,  to  branches  of  the  same  entity  in  a 
Member State with a low rate of input tax recovery. 

Such  distortion  of  the  input  tax  incurred  by  companies  clearly  distorts  competition 
between similar businesses in different Member States but also vis-à-vis competing 
businesses in the same Member State whose corporate structure does not give them 
any such flexibility. 

An  additional  consequence  of  the  current  situation  is  that  whilst  the  supply  of 
services between the different establishments of a single entity in different Member 
States  is  outside  the  scope  of  VAT,  this  does  not  apply  to  transactions  involving 
goods. Taken in isolation, it is difficult to rationalise this situation.  

12.2.2.  Grouping provisions 

Article 11 of the VAT Directive provides Member States with an option to introduce 
VAT  grouping  schemes  into  their  national  legislation  and  regard  two  or  more 
persons established in that Member State who, while legally independent, are closely 
bound  to  one  another  by  financial,  economic  and  organisational  links,  as  a  single 
taxable person for VAT purposes.  

Member  States  who  wish  to  exercise  this  option  must  consult  the  VAT  Committee 
first and may adopt any measures needed to prevent tax evasion or avoidance arising 
from the use of this option. 

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In the search for clarity, the Commission recently published a Communication on the 
interpretation  of  Article 11103  with  the  objective  of  securing  more  uniform 
application  of  the  measures  on  VAT  grouping  schemes  and  giving  guidance  to  the 
increasing number of Member States which are introducing them104.  

The  Commission  stressed  in  particular  that  if  a  Member  State  opts  for  group 
registration, the effect of the arrangement is restricted to its own jurisdiction and only 
generates  benefits  with  respect  to  transactions  that  are  carried  out  between  taxable 
persons established there (through a fixed establishment or a seat), without covering 
their foreign establishments. 

12.2.2.1. Positive effects 

VAT  grouping  may  simplify  administration  for  a  commercial  group  of  companies 
because transactions between the individual members of the group are not subject to 
VAT  and  are  ignored  for  VAT  purposes.  This  also  reduces  the  negative 
consequences for cash flow within the group. 

Group  registration  may  also  have  a  positive  effect  on  the  members’  administrative 
burden because, instead of filing separate VAT returns, they can file a single return. 
It also prevents members of the group who have a VAT claim on the tax authorities 
from having to await repayment. Such members can simply offset their claim against 
the VAT liabilities of the other members of the group. 

In practice, since transactions between the members of the group are ignored, group 
registration is particularly beneficial to groups consisting of companies with a partial 
right to deduct input tax because no VAT is charged on taxable intra-group supplies 
of services or goods (in particular those with mainly in-house added value) used for 
the non-taxable transactions of another member of the group. Moreover, a common 
and  average  ‘pro-rata’  can  also  reduce  the  amount  of  irrecoverable  input  VAT  as 
regards goods or services used both for taxable and non-taxable transactions. 

12.2.2.2. Possible shortcomings 

Given  the  advantages  a  VAT  group  can  offer  to  certain  businesses,  unequal  and 
inconsistent implementation across the EU may produce results which run counter to 
the principle of fiscal neutrality and represent a source of fiscal competition between 
Member States detrimental to businesses.  

103 

104 

Communication from the Commission to the Council and the European Parliament on the VAT group 
option  provided  for  in  Article  11  of  Council  Directive  2006/112/EC  on  the  common  system  of  value 
added tax, COM (2009) 325 final, 2 July 2009. 
The national arrangements currently applicable vary substantially and, in some cases at least, seem to 
take  rather  loose  approaches  to  conformity  with  the  Directive.  The  Commission  has  launched 
infringement proceedings against seven Member States because of their failure to meet their obligations 
with regard to VAT groupings. For the Netherlands, Ireland, Finland, the UK, the Czech Republic and 
Denmark, the problem identified is that they allow non-taxable persons to join a VAT group, contrary 
to the provisions of the VAT Directive. There are proceedings against Sweden and Finland because they 
limit the VAT grouping system to financial and insurance services. The Directive does not allow such 
limitation. The proceedings against the Netherlands also cover failure to notify the VAT Committee of 
changes to the application of their VAT grouping scheme. 

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It therefore seems questionable, firstly, that grouping arrangements are an option for 
Member States. That does not take away, secondly,  from the imperative need  for a 
level playing field even among those who choose otherwise. Largely because of the 
piecemeal  and  uncoordinated  process  of  implementation  by  Member  States,  the 
existing range of grouping schemes does not always assure this outcome.  

The  shortcomings  identified  in  the  Communication  (and  of  course  in  the  recently 
launched  infringement  proceedings)  do  not  of  themselves  negate  the  value  of  the 
scheme in so far as Member States take the necessary steps to correct them. 

It is, however, of interest that an appreciable, if declining, number of Member States 
see  no  reason to implement this  provision. The Commission has never investigated 
the  reasons  for  this,  but  there  is  at  least  the  perception  in  some  cases  that  VAT 
grouping  is  difficult  to  administer  and  control,  poses  risks  to  revenue  security  and 
does not deliver proportional benefits. These concerns are not, however, universally 
shared  and  it  is  relevant  that  Member  States  may  adopt  whatever  measures  are 
needed to prevent mischief. 

As a result of the deepening of the single market, many businesses, in particular large 
European  companies,  operate  in  more  than  one  Member  State  through  either 
branches  or  subsidiaries.  This  has  resulted  in  an  increasing  proportion  of  cross-
border transactions being carried out within the same group of companies. However, 
these groups have to deal with up to 27 different sets of rules and special reporting 
obligations for those internal transactions, only because they are cross-border. 

A  taxable  person,  in  particular  a  parent  company,  cannot  extend  the  scope  of  the 
VAT  group  and  the  benefits  of  simpler  formalities  beyond  a  domestic  border  and 
include  fixed  establishments  or  subsidiaries  situated  in  other  Member  States.  That 
difference  in  treatment  between  domestic  and  cross-border  intra-group  transactions 
discourages the latter and the development of businesses across the EU. This is not in 
line with the requirements of a well functioning single market. 

12.2.3.  Cost sharing arrangements 

Article 132(1)(f)  of  the  VAT  Directive  provides  an  exemption  for  ‘the  supply  of 
services by independent groups of persons, who are carrying on an activity which is 
exempt  from  VAT  or  in  relation  to  which  they  are  not  taxable  persons,  for  the 
purpose of rendering their members the services directly necessary for the exercise of 
that  activity,  where  those  groups  merely  claim  from  their  members  exact 
reimbursement of their share of the joint expenses, provided that such exemption is 
not likely to cause distortion of competition’. 

This provision is intended to create relief from VAT in a situation where a group of 
businesses  come  together  in  what  might  be  called  a  system  of  ‘cooperative  self-
supply’,  in  circumstances  in  which  a  single  business  which  had  the  resources  to 
conduct the activity in-house would be able to so do without incurring any VAT. 

The  rationale  for  this  exemption  is  of  at  least  as  much  importance  as  its  practical 
effects.  The  legislators  intended  to  mitigate  the  burden  of  VAT  which  taxable 
persons  engaged  in  exempt  activities  would  incur  on  outsourcing  services  to  third-

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party  service  providers.  It  is  the  arrangement  itself  which  is  to  be  seen  as  in  the 
public interest rather than the individual services which the arrangement delivers.  

The Directive in the provision quoted above lists five conditions, four of which are 
relatively clear and should not give rise to any implementation problems for Member 
States. The condition relating to the absence of distortion of competition is, however, 
a possible exception.  

It  would  not  be  rational,  however,  to  interpret  this  condition  in  such  a  restrictive 
manner so to make its application impossible. It is a natural and entirely foreseeable 
consequence of such an arrangement that the individual consortium members will no 
longer be in the market for such services (to the extent to which they receive these 
services  under  the  cost  sharing  arrangement)  so  this  cannot  in  itself  give  rise  to  a 
distortion of competition in the sense intended by the legislators.  

Although their effects might be perceived as being the same, VAT grouping and cost 
sharing arrangements have a different scope and different target groups. Cost sharing 
arrangements are only aimed at reducing the VAT costs of services rendered to their 
members. Those members have in common that, in view of their activities, they have 
no  or  a  limited  right  to  deduct  input  VAT.  VAT  grouping,  on  the  other  hand,  is 
aimed in particular at eliminating the financing of VAT on intra-group transactions 
for both goods and services. The members of such a group may have a full, limited 
or no right to deduct input VAT. There is, however, no obstacle to the inclusion of 
Article 11  VAT  groupings  and  members  of  such  groups  in  a  cost-sharing 
arrangement. 

12.2.3.1. Positive effects 

The  exemption  for  cost  sharing  arrangements  is  in  practice  a  wide  ranging  and 
efficient way for taxable persons engaged in exempt activities to reduce their VAT 
costs  on  services.  Without  that  exemption,  the  outsourced  services  would  generate 
non-deductible  VAT.  This  would  lead  to  an  accumulation  of  the  tax  at  subsequent 
stages  of  the  process  of  production  and  distribution  of  taxable  goods  and  services. 
That  exemption  also  enables  taxable  persons  engaged  in  exempt  activities  to  take 
advantage  of  economies  of  scale  and  specialisation  by  outsourcing  services  on  the 
basis of covering costs in cooperation with similar enterprises  and without  creating 
additional input VAT on these services. 

The  cost  sharing  exemption  can,  unlike  a  VAT  group,  embrace  cross-border 
scenarios,  with  activities  and  members  situated  in  more  than  one  Member  State. 
What  is  important  is  that  the  activity  is  exempt,  not  where  it  takes  place. 
Correspondingly,  there  is  of  course  no  obligation  to  avail  of  the  exemption  in 
circumstances where the members carry out non-taxable activities only. 

The  arrangement  does  not,  however,  have  to  be  limited  to  members’  exempt 
activities  but  may  embrace  the  supply  of  services  for  both  taxed  and  exempt 
activities. Nor is there any obstacle to the supply, by a group of undertakings of the 
kind referred to, of services to third parties, provided that those services (in so far as 
they are not covered by another exemption) are taxed in the normal way. 

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12.2.3.2. Possible shortcomings 

Although  Article  132(1)(f)  seems  sufficiently  clear,  Member  States  appear  to 
interpret  it  differently  in  practice  even  to  the  extent  that  some  completely  fail  to 
implement  it.  This  is  regrettable  given  the  rationale  for  this  exemption  and  its 
practical  effects.  That  should  yield  a  powerful  impetus  for  universal  and  uniform 
implementation. 

The  Commission  has  had  to  insist  that  the  provision  be  applied  in  as  uniform  a 
manner  as  possible.  This  is  the  only  possible  way  to  avoid  divergence  in  the 
application of the VAT system from one Member State to another, an outcome which 
would be inimical to fair competition.  

That some Member States have totally neglected to implement cost sharing has to be 
seen as a serious and fundamental shortcoming. Other shortcomings include failure 
to observe that no right of deduction can arise in respect of goods and services used 
to  generate  services  exempt  under  this  provision.  Even  more  inimical  to  correct, 
uniform application would be any national implementing measures which purport to 
interpose a right for members of the consortium to deduct input tax in so far as they 
make exempt supplies themselves. 

12.3. 

Possible ways forward 

12.3.1.  Intra-EU supplies within the same legal entity 

Taxable self-supply of services  

In  order  to  correct  distortions  of  competition,  Member  States  might  consider  more 
widespread  application  of  Article 27  of  the  VAT  Directive,  which  allows  them  to 
treat  as  a  supply  of  services  for  consideration  any  supply  by  a  taxable  person  of  a 
service  for  the  purposes  of  his  business  where  the  VAT  on  such  a  service,  were  it 
supplied by another taxable person, would not be wholly deductible. 

This provision is not widely used today and was probably conceived to deal with a 
limited set of circumstances and domestic situations. Wider, cross-border application 
would  raise  some  technical  issues  and  require  uniform  and  sound  application.  In 
order  to  deal  with  the  risk  of  double  taxation  or  tax-cascading,  the  application  of 
what is deemed self-supply to cross-border services (in an FCE-type scenario) would 
require  a  corresponding  right  to  deduct  input  tax  elsewhere  or,  alternatively, 
limitation of the tax on the deemed self-supply to the part of the value of the services 
that had not yet effectively been subject to VAT elsewhere. 

The  question  of  course  arises  as  to  whether  the  result  might  simply  be  excessively 
complicated  and  be  seen  as  disproportionate  in  the  search  for  neutrality.  Where  a 
decision is taken to bring transactions between branches in different tax jurisdictions 
within  the  scope  of  VAT  in  order  to  restrict  opportunities  for  mischief,  this  should 
perhaps  be  limited  to  transactions  involving  non-EU  countries.  One  technical  issue 
which has been raised is that as transactions between related parts of the same legal 
entity are not always on the basis of invoices, it might be difficult to apply the tax 
consistently.  Countries  which  tax  such  transactions  usually  do  this  on  the  basis  of 

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consistency  with  transfer  pricing  rules,  a  solution  which  seems  to  work  well  in 
practice. 

Extending special treatment to intra-EU supplies of goods within the same entity 

A  parallel  way  forward  which  could  constitute  a  major  simplification  would  be  to 
also consider the supplies of goods between branches, currently deemed to be intra-
EU supply of goods, as outside the scope of VAT. Extending the scope of Article 27 
to supplies of goods as well as services in order to prevent distortion of competition 
could also be considered. 

12.3.2.  Offering the option of VAT grouping to businesses and extending its territorial scope  

In  order  to  ensure  a  real  level  playing  field  across  the  single  market  and  among 
businesses,  consideration  should  be  given  to  making  VAT  grouping  compulsory  or 
an  option  for  taxable  persons  instead  of  an  option  for  Member  States,  given  the 
significant advantages of such a scheme. 

The  issue  of  pan-EU  VAT  groupings  with  harmonised  conditions  is  one  which 
always  recurs.  It  is  not  without  its  logic,  e.g.  it  would  restore  neutrality  between 
different  business  structures  such  as  a  holding/subsidiary  structure  and  a 
headquarter/branch one and greatly reduce the administrative burdens of large pan-
EU businesses. 

12.3.3.  Ensuring more uniform application of cost sharing arrangements 

A particular public initiative, similar to that launched for VAT grouping, focusing on 
interpretation  of  Article 132(1)(f),  could  ensure  more  general  and  uniform 
application of this provision and give guidance to the Member States and the relevant 
businesses. 

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Topic 13. 

13. 

SYNERGIES WITH OTHER LEGISLATION - CUSTOMS LEGISLATION 

With  the  adoption  of  the  Modernised  Customs  Code  (Regulation  450/2008  of  the 
European Parliament and of the Council of 23 April 2008) and the electronic customs 
decision  (Decision  70/2008/EC  of  the  European  Parliament  and  of  the  Council  of 
15 January  2008  on  a  paperless  environment  for  customs  and  trade),  the  European 
Union  committed  itself  to  major  simplification  and  modernisation  of  customs 
procedures by 2013. 

Several of these changes will have a strong impact on import VAT collection in so 
far as the customs declaration is currently the basis for calculating import VAT. 

The  most  important  change  in  this  context  is  the  introduction  of  centralised 
clearance. Under Article 106 of the Modernised Customs Code, customs authorities 
may authorise importers to both declare and pay customs duties to the local customs 
administration of their establishment (Member State of authorisation), irrespective of 
where the goods are physically imported and where they are transported to within the 
EU.  In  such  cases,  the  customs  debt  will  be  deemed  to  be  incurred  in  the  Member 
State of authorisation. 

However,  under  the  VAT  legislation  in  force,  importers  would  still  have  to  assess 
and pay VAT in the Member State of actual importation.  

Given  that  the  aim  of  centralised  clearance  is  to  facilitate  business  obligations  by 
reducing  administrative  burdens  for  trusted  operators,  a  change  in  current  import 
VAT  procedures  should  be  considered.  A  public  consultation105  has  therefore 
recently been launched in order to receive the views of all stakeholders on the best 
way forward in this respect. An assessment of the impact of the different options set 
out in the consultation document is also being carried out. 

In  addition,  possibly  in  combination  with  centralised  clearance,  the  Modernised 
Customs Code has also foreseen the self-assessment of customs duties. Under Article 
116  of  the  Code,  importers  may  be  excused  from  lodging  any  customs  declaration 
and  allowed  to  declare  and  pay  their  duties  periodically  to  their  Member  State  of 
authorisation instead. This will inevitably have an impact on import VAT collection, 
which is still based on the customs declaration. 

There  might  be  other  areas  where  synergies  will  have  to  be  built  between  customs 
and  VAT  legislation  and  feedback  from  stakeholders  will  be  useful  in  this  context. 
At the same time, it should be stressed that the fundamental objectives of the two are 
not the same. While customs legislation is now more focused on security and safety 
than  on  its  traditional  fiscal  function,  one  of  the  main  objectives  of  the  EU  VAT 
system is to ensure stable revenues. 

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Topic 14. 

14. 

REVIEWING THE WAY VAT IS COLLECTED 

14.1.  Background 

A study was carried out for the Commission by Reckon to quantify and analyse the 
VAT  gap  in  the  EU  25 Member  States106.  For  2006,  the  VAT  gap,  which  is  the 
difference  between  the  theoretical  VAT  liability  for  the  economy  as  a  whole  and 
actual  VAT  receipts,  was  estimated  at  EUR 106 billion  or  about  12 %  of  the 
theoretical VAT liability. 

The  VAT  gap  includes  VAT  uncollected  due  to  the  inherent  risk  of  fraud  in  the 
current VAT system but also covers other elements like legal avoidance and unpaid 
VAT liability due to insolvencies. 

The size of the VAT gap is one good reason to take a critical look at the way VAT is 
collected in the EU. 

Under the VAT system as it is currently applied in the EU, businesses act as unpaid 
tax collectors. At regular intervals, taxable persons have to calculate the amount of 
VAT they have to pay to or to get back from the Treasury. 

For this (self-) assessment, taxpayers calculate, for each tax period, the VAT due on 
their  outgoing  transactions  and  the  VAT  they  can  claim  back  on  their  incoming 
transactions, and the balance between the two amounts. This balance is either what 
the  taxable  person  has  to  pay  to  the  Treasury  or  what  the  Treasury  owes  to  the 
taxable person for the period in question. 

In its VAT return, the taxable person has to provide some general figures to the tax 
authorities  about  the  assessment,  but  will  not  usually  have  to  provide  documentary 
evidence of the figures when the VAT return is sent. 

The collection of VAT is therefore primarily based on a self-assessment system. 

Verification  by  the  tax  authorities  mostly  happens  ex  post  and  this  can  lead  to 
adjustments of the VAT initially declared by the taxable person. 

Although this system gives the tax administrations an easy way of collecting the tax 
(the taxpayer collects the VAT on its behalf), it also has a number of disadvantages:  

•  it relies heavily on taxpayers’ compliance;  

•  the  data  sent  to  the  tax  authorities  in  the  VAT  return  allows  only  very  basic 

control checks; 

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fraud/reckon_report_sep2009.pdf. 

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•  therefore,  it  is  also  vulnerable  to  fraudulent  behaviour  that  can  only  be  detected 
during a later audit or through an efficient and timely risk management system; 

•  finally, it is often difficult to collect the VAT after the event, as the taxable person 

might in the meantime have disappeared, or gone bankrupt, etc. 

This way of collecting VAT has not changed substantially since VAT was introduced 
in the EU. The content of VAT returns might have been refined, and their electronic 
submission  facilitated.  The  data  is  also  processed  and  used  much  more  for  risk 
management purposes now, allowing audits to be better targeted. 

Recent  developments  in  technology  might,  however,  offer  new  opportunities  for 
collecting VAT, opportunities that did not exist when the common VAT system was 
introduced.  Furthermore,  it  is  now  easier  for  tax  administrations  to  handle  large 
amounts  of  data  than  it  was  at  the  time  the  common  VAT  system  was  introduced. 
Tax administrations also need much quicker access to data in order to react rapidly to 
new fraud threats and to secure VAT revenue. 

It  is  against  this  background  that  the  Commission  decided  to  order  a  study  on  the 
feasibility  of  alternative  methods  for  improving  and  simplifying  the  collection  of 
VAT by means of modern technologies and/or financial intermediaries. 

14.2.  The results of the study 

The  first  task  was  to  draw  up  an  inventory  of  alternative  VAT  collection  models. 
After a high level assessment of these alternatives, 4 models were selected for further 
analysis. 

14.2.1.  The four models analysed as part of the study 

The  split  payment  model  is  a  model  in  which  the  purchaser  pays  the  VAT  to  a 
blocked VAT bank account which can only be used by the supplier for paying VAT 
to his suppliers’ blocked VAT bank account. The advantage of this model is that, in 
an  early  stage  of  the  VAT  collection  process,  the  VAT  collected  is  physically 
transferred  to  a  blocked  VAT  bank  account  with  the  tax  authorities’  bank.  This 
model  allows  the  tax  authorities  to  monitor  and  block  funds  on  the  VAT  bank 
accounts  and  prevent  taxable  persons  from  disappearing  with  VAT  funds  paid  to 
them.  

The central VAT monitoring database model is a model whereby all invoice data 
is sent to a central VAT monitoring database. The way VAT is paid to the State is 
unchanged  but  the  scope  for  real-time  auditing  and  fraud  investigation  by  the  tax 
authority  is  increased.  This  model  can  only  work  if  e-invoicing  is  made  obligatory 
for B2B transactions and if the data contained in e-invoices is actively mined by the 
tax authorities.  

The  data  warehouse  model  is  a  model  whereby  the  taxable  person  uploads 
predefined transaction data structured in an agreed format into a secured VAT data 
warehouse  maintained  by  the  taxable  person.  The  data  to  be  archived  in  the  VAT 
data warehouse could be based on the Standard Audit File for Tax (SAF-T) as laid 
down  in  OECD  Guidance.  Data  should  include  invoice  data,  proof  of  delivery  and 

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payment data, i.e. all data needed for a VAT audit. The tax authority would be given 
direct  access  to  those  transaction  data  of  a  taxable  person  in  this  VAT  data 
warehouse.  If  necessary,  the  tax  authority  could  pull  out  the  data  as  needed  to 
perform  real-time  VAT  monitoring  and  to  mitigate  risks  of  VAT  fraud.  The  tax 
authority would only have direct access to the set of data that is stored and uploaded 
by the taxable person into the secured VAT data warehouse either every 24 hours or 
upon the tax authority’s request. 

The  certified  taxable  person  model  is  a  model  wherein  a  taxable  person’s  VAT 
compliance  process  and  internal  controls  are  certified.  In  order  to  be  certified,  the 
taxable  person  must  have  an  ‘Internal  Control  Framework’  that  includes  a  ‘VAT 
Control Framework’ covering people, processes and technology (systems). Where an 
ICF is in place, the taxable person carries out a ‘risk self-assessment’ of all its control 
and  monitor  functions  and  is  in  a  position  to  provide  a  statement,  known  as  an  ‘in 
control  statement’,  in  relation  to  those  functions.  With  an  ‘in  control  statement’,  a 
management  board  affirms  that  it  is  in  control  of  the  processes  taking  place  in  its 
business. If the taxable person is in a position to detect any meaningful risks and to 
report  them  to  the  tax  authority,  the  role  of  the  tax  authority  can  change  to  that  of 
assessing  the  monitoring  system  of  the  taxable  person  itself,  rather  than  intrusive 
auditing.  

14.2.2.  The assessment of the models 

The study included a high-level quantitative assessment of the costs and benefits of 
the four models, regardless of which stakeholders would eventually bear the burdens 
or reap the benefits. 

The consultant encountered several data issues (data which were lacking, data from 
different  sources  which  were  contradictory,  available  data related  to  different  years 
or based on different calculation methods or definitions). A number of assumptions 
had to be made in order to overcome these problems.  

The consultant points out that the results of the study are therefore merely indicative. 
Nevertheless, since the calculations for each model are based on the same data and 
assumptions,  the  lack  of  data  quality  should  not  greatly  influence  the  major 
preliminary conclusions that can be drawn from this assessment.  

14.2.3.  Conclusions and recommendations 

The  assessment  shows  that,  in  a  timeframe  of  about  20 years,  the  benefits  that  all 
four models would generate in reducing the VAT gap should be substantially higher 
than  the  investment  and  operational  costs.  It  means  that  all  four  models  have  the 
potential to reduce the VAT gap.  

The  data  warehouse  model  has  the  greatest  estimated  benefits,  as  it  includes  all 
transactions by all taxable persons (B2B and B2C) and would allow for nearly real-
time  auditing.  When  tax  authorities  can  efficiently  audit  transactions  promptly,  the 
potential  benefits  are  larger  than  for  the  split  payment  model  and  the  central  VAT 
monitoring database model, as these models only include B2B transactions.  

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The split payment model requires more time to become fully operational. Hence the 
benefits are only accounted from 2020 onwards.  

The  certified  taxable  person  model  has  the  lowest  benefits  of  the  four  models 
because  of  its  limited  capability  to  reduce  missing  trader  intra-EU  fraud  and  other 
components of the VAT gap (e.g. insolvencies).  

One model on its own might not be sufficient. A combination of models that tackles 
both tracing transactions on a real-time or nearly real-time basis (the data warehouse 
model) and offers the ability to block funds for some transactions (the split payment 
model) seems to offer the greatest prospects of success. Additional assurance can be 
gained from further monitoring transactions and enhanced control requirements (e.g. 
by means of certification requirements for certain types of businesses).  

The consultant concludes,  therefore, that  a  combination  of  the  split  payment  model 
with  a  limited  version  of  the  data  warehouse  model,  i.e.  a  model  where  data  is 
produced in a standard format but without direct access in a data warehouse, offers 
the best combination for reducing the VAT gap while keeping the estimated costs as 
low as possible.  

14.3.  The way forward 

The  study’s  conclusions  and  recommendations  are  the  result  of  independent  work 
carried  out  by  PWC  and  do  not  necessarily  reflect  the  opinions  or  position  of  the 
European Commission. 

Moreover,  the  study  is  an  initial  assessment  of  the  feasibility  of  changing  the  way 
VAT is currently collected. 

It  does  have  the  benefit  of  indicating  that  new  ways  of  collecting  VAT  are  worth 
analysing further.  

The  study  has  recently  been  finalised,  so  it  has  not  been  discussed  yet  with  any 
stakeholders.  For  instance,  the  banking  sector  has  not  yet  been  consulted  on  its 
potential role in split payment. 

The  Green  Paper,  however,  provides  a  good  opportunity  to  collect  reactions  to  the 
four models at an early stage. 

Clearly  further  investigation  is  necessary,  and  in  its  report  (see  page  252)  PWC 
makes some recommendations on the next step to take. 

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Topic 15. 

15. 

PROTECTING  BONA  FIDE  TRADERS  AGAINST  POTENTIAL  INVOLVEMENT  IN  VAT 
FRAUD 

15.1.  Background 

One  of  the  advantages  attached  to  a  VAT  system,  in  comparison  to  a  sales  tax 
system,  is  its  self-policing  character.  Firstly,  with  the  system  of  fractionated 
payment, any supplier who is tempted not to declare to the Treasury the VAT on his 
sales runs a high risk, compared with what is often a small reward (e.g. the margin 
between the output VAT less the input VAT), particularly for supplies of goods, on 
which  it  is  difficult  to  recover  the  input  VAT  without  declaring  the  corresponding 
output transactions. Secondly, each trader has an incentive to obtain a proper invoice 
from his supplier in order to be able to deduct the input VAT. The supplier is then 
encouraged to declare the VAT to the Treasury, since his customer could be required 
to  provide  the  tax  administration  with  the  invoice,  so  the  transaction  can  be 
effectively checked by matching the VAT deducted by the customer with the VAT 
declared by the supplier. 

However,  there  is  no  absolute  guarantee  that  the  supplier  will  actually  pay  the 
Treasury the VAT he received from his customer. This is particularly the case if the 
chain of fractionated payments is broken and the supplier is able to acquire goods or 
services  free  of  VAT,  via  an  intra-EU  acquisition  or  under  the  reverse  charge 
procedure,  and  resell  them.  In  that  case,  ‘stealing’  all  the  VAT  charged  to  the 
customer because no input tax was paid, might be worth the risk.  

To  allow  Member  States  to  tackle  this  kind  of  fraud,  the  ECJ  introduced  a  link 
between the customer’s right to deduct input VAT and the supplier’s payment of the 
VAT  to  the  Treasury  and  so  tried  to  put  new  responsibilities  onto  the  shoulders  of 
customers. If the tax administration is able to prove that the customer knew or should 
have  known  that,  by  his  purchase,  he  was  participating  in  a  transaction  connected 
with fraudulent evasion of VAT (the so-called ‘knowledge test’, see C-439/04 Axel 
Kittel), the tax administration can refuse that taxable person the right to deduct the 
VAT incurred on that purchase. 

With the ‘knowledge test’ and therefore the risk for a time, which could be several 
years,  of  being  held  indirectly  liable  for  fraud  committed  by  somebody  else, 
compliant  businesses  have  to  take  ‘every  precaution  which  could  reasonably  be 
required of them to ensure that their transactions are not connected with fraud, be it 
the fraudulent evasion of VAT or other fraud’. Trying to fulfil this requirement for 
each  transaction  with  each  supplier  in  the course  of  normal  business  could  be  very 
burdensome with, moreover, no guarantee that it would satisfy the tax administration 
or national courts. Taxable persons therefore suffer from a lack of legal certainty. 

On the other hand, without using extensive resources tax administrations could find it 
very  difficult  to  prove  that  the  customer  in  each  transaction  carried  out  by  the 
fraudster knew or should have known that his purchase was connected with fraud.  

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The measure envisaged below, an ‘optional reverse payment’, could perhaps iron out 
those difficulties whilst increasing the positive effects of the link introduced by the 
Court in B2B transactions.  

15.2.  The ‘optional reverse payment’ system 

A  supplier  usually  has  to  fulfil  two  main  obligations:  being  liable  for  payment  of 
VAT  to  the  tax  authorities  and  paying  the  VAT  when  submitting  the  VAT  return. 
Under the ‘optional reverse payment’ system, the customer could choose to take on 
the  second  obligation  and  pay  the  tax  directly.  The  idea  is  to  give  the  customer  an 
option  with  advantages  that  might  be  worth  the  extra  formalities:  no  particular 
checks of the supplier required and no risk of being denied the right to deduct input 
VAT later on. 

Under this system, put simply, when receiving an invoice, the customer would have a 
choice:  paying  the  supplier  the  total  amount  charged  including  VAT  or  paying  the 
VAT directly to the tax authorities, with a few details added (the invoice number, the 
supplier’s  and  customer’s  VAT  identification  numbers  and  possibly  the  taxable 
amount) and paying the remaining net amount to the supplier. 

This system has similarities with the first model (split payment) set out in point 5.4.1 
of  the  Green  Paper  (see  also  topic  14  on  reviewing  the  way  VAT  is  collected). 
However,  the  split  payment  model  completely  overhauls  the  way  VAT  is  collected 
while reverse payment is different in scope and objective, as it would be simpler and 
optional and therefore used only in specific circumstances. 

15.2.1.  How would the customer opt for reverse payment? 

The  only  way  to  opt  for  reverse  payment  would  be  by  actually  making  the  VAT 
payment  to  the  tax  authorities.  Neither  a  commitment  made  by  the  customer  in  an 
agreement  or  contract  with  the  supplier  nor  a  mere  declaration  to  the  tax 
administration would be legally considered as making use of the option. Therefore, 
if, in such cases, despite his commitment, the customer did not actually pay the VAT 
to the Treasury, the supplier would remain obliged to pay the VAT. 

In practice, payment would be made as simple as possible by using common modern 
solutions  already  used  by  tax  authorities  for  the  payment  of  taxes  (payment  online 
via credit card, money transfer, direct debit, etc.) or via financial intermediaries such 
as  banks.  Some  information  would  be  given  at  the  same  time:  the  invoice  number, 
the  VAT  numbers  of  the  supplier  and  of  the  customer  and  possibly  the  taxable 
amount. 

By  adapting  banking  payments  through  SEPA,  it  might  be  possible  to  pay  the  net 
amount to the supplier and the VAT to the tax authority at the same time and by a 
single payment transaction (e.g. by credit card or credit transfer), while providing the 
same  information  as  before.  For  instance,  when  making  a  purchase  in  a  shop  and 
paying  by  credit  card,  the  customer,  prompted  by  the  credit  card  device,  could 
choose to pay the VAT directly to the Treasury and the net amount to the store. 

In  any  event,  as  in  certain  Member  States,  payment  in  cash  to  the  tax  authorities 
could  not  be  excluded  a  priori.  In  that  case,  the  tax  authorities  would  themselves 

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enter  the  information  in  the  IT  system,  which  would  then  be  used  to  notify  the 
supplier and probably give a receipt to the customer. 

15.2.2.  How would the supplier be informed? 

The ‘reverse’ payment could be checked either via access to a VAT account held by 
the tax administration in the name of the supplier, showing online and in real time all 
reverse  payments  made  by  his  customers,  or  via  a  tax  administration  portal 
confirming the payment. 

It could also be envisaged that the total in reverse payments received by the Treasury 
during a certain period (e.g. a month or a quarter) would be written directly on the 
next VAT return related to this period (pre-filled VAT return). 

15.2.3.  Consequences of the use of the option regarding VAT legislation? 

For the customer 

Since the VAT would have been paid directly to the Treasury, the customer could not 
be held liable for non-payment and therefore, be denied the right of deduction. The 
right to deduct input VAT would remain subject to the normal rules contained in the 
VAT Directive, e.g. that the goods or services are used for taxed transactions and for 
business  purposes  by  the  taxable  person.  The  rules  on  pro  rata  calculations  would 
continue to apply. 

Therefore,  the  customer  would  no  longer  have  to  carry  out  checks  to  pass  the 
‘knowledge test’. 

As  regards  the  obligation  to  pay  the  supplier,  the  part  of  the  debt  corresponding  to 
the VAT directly paid to the Treasury would be considered paid.  

For the supplier 

The  supplier  would  remain  liable  for  payment  of  the  VAT  but  would  not  have  to 
make  the  payment;  i.e.  he  would  be  obliged  to  pay  the  VAT  in  due  time  until  the 
customer,  by  paying  the  tax  directly,  released  him  from  this  obligation.  If  the 
supplier had in the mean time paid the Treasury, (because the VAT declaration was 
due  before  the  invoice  fell  due),  the  supplier  would  be  repaid  immediately  by  the 
Treasury or, more simply, by means of a credit on his next VAT return.  

The  tax  authorities  would  hold  the  evidence  that  the  customer  had  paid  the  VAT 
directly to the Treasury. The supplier would easily be able to obtain and keep such 
evidence  for  his  own  records  or  accounts  (via  electronic  statements  from  the 
Treasury, like bank statements, for instance). 

This means that, in contrast to a reverse charge, reverse payment would always leave 
the  supplier  responsible  for  meeting  any  obligations  linked  to  his  liability  (e.g. 
submitting a VAT return, issuing a complete invoice with the taxable amount per rate 
or exemption, the VAT rate and the VAT amount payable). In particular, he would 
remain liable for deciding the appropriate VAT treatment for the transaction that he 
has carried out (applying any exemptions, selecting the rate, calculating the taxable 
amount  and  the  VAT  etc.).  With  this  option,  the  supplier  would  only  be  released 

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from  the  obligation  of  paying  the  VAT  for  this  particular  transaction  with  the  next 
VAT return.  

Since the customer would already have provided the information to the Treasury, it 
could  be  thought  that  the  supplier  would  not  have  to  list  ‘reverse  payment’ 
transactions on his VAT return at all. But it seems more appropriate to take reverse 
payments into account only in calculating the final amount to be paid on the regular 
VAT  return  (although  the  template  would  have  to  be  changed  slightly).  So  the 
supplier  would  still  declare  all  supplies  on  the  VAT  return,  calculate  the  VAT  due 
and — this would be the only new thing — deduct the amount of VAT directly paid 
by  his  customers  from  the  total  VAT  amount  due  to  the  Treasury.  The  latter 
information would be provided by the tax administration (via its website, a dedicated 
portal  for  each  taxable  person,  e-mails,  a  pre-filled  return  with  a  special  box,  etc.). 
The  reasons  for  still  listing  reverse  payment  transactions  are  that,  firstly,  a  return 
almost  identical to  the normal one would be easier to manage for the supplier and, 
secondly,  a  return  listing  all  the  transactions  carried  out  could  still  be  needed 
particularly for pro-rata calculations. 

If the supplier gives a large payment period to this customer, the current VAT system 
mainly  based  on  the  time  of  the  supply  would  not  be  problematic  with  the  reverse 
payment. A supplier who had already declared and paid the VAT would be entitled 
to  an  immediate  refund  from  the  tax  authorities  based  on  the  evidence  of  the 
customer’s  VAT  payment  that  they  already  held.  A  simple  way  would  be  to 
automatically deduct the VAT paid directly by the customers from the total VAT due 
by the supplier on the next VAT return following the reverse payment. 

The  customer’s  option  to  pay  the  VAT  would  not  affect  his  obligations  to  the 
supplier unless they both decided otherwise in the contract. However, as pointed out 
above,  once  the  customer  actually  remitted  the  VAT  to  the  Treasury,  it  would  be 
considered  paid  and  the  supplier  would  have  no  claim  on  the  VAT  amount  in  the 
invoice. 

15.3.  Advantages 

A general advantage of the optional reverse payment is that there are no substantial 
changes  to  the  VAT  system.  All  the  basic  principles  are  maintained  e.g.  the 
chargeability  of  tax,  the  right  of  deduction,  reporting  obligations,  the  person  liable 
etc. The only change is that when a reverse payment is made the supplier no longer 
has to pay the VAT, which has been paid by the customer: if he has already paid it, it 
must be swiftly and easily repaid.  

In practice, of course, customers and suppliers will, in general, be the same taxable 
person:  businesses  buy  and  sell.  The  distinction  is  made  here  to  highlight  the 
advantages  and  disadvantages  for  the  parties  in  a  single  transaction.  Bear  in  mind, 
too,  that,  like  the  disadvantages  described  below,  the  following  is  only  a  rough 
evaluation  of  the  possible  effects  of  this  option  in  terms  of  legal  certainty, 
administrative burdens and cash flow, and (for the Treasury), fraud. 

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15.3.1.  For the customer 

Legal  certainty:  the  customer  would  no  longer  be  held  liable  later  for  any  fraud 
committed by the supplier. 

Administrative burden: the customer would no longer have to check the supplier’s 
compliance. 

Cash flow: No effect on cash flow. When required to pay, instead of paying the VAT 
to the supplier (or factor), the customer would remit the VAT directly to the Treasury 
at the same time. 

15.3.2.  For the supplier 

Administrative burden: the supplier would no longer have to pay the Treasury the 
VAT directly remitted by the customer. 

15.3.3.  For the Treasury 

Fraud:  The  Treasury  would  benefit  from  reduced  fraud  in  B2B  transactions. 
Compliant traders would tend to use the system for suspect suppliers (new ones, or 
those  selling  products  susceptible  to  fraud)  or  as  a  general  policy  in  order  to  avoid 
risk. 

Experience  has  shown  that  pinpointing  new  sectors  used  by  fraudsters  in  B2B 
transactions  in  good  time  is  difficult  for  the  tax  authorities.  Businesses  are  often 
aware  of  new  signs  of  fraud  in  their  own  sector  before  the  tax  authorities  (for 
instance, the appearance of unknown traders selling at unexpectedly low prices). An 
optional reverse payment system would therefore be very efficient. Compliant traders 
would  spontaneously  use  the  system  to  protect  themselves  and  prevent  any  risk 
arising  when  the  tax  administration  finally  reacted.  A  new  trend  in  the  use  of  the 
option  in  a  particular  sector  would  not  only  prevent  fraud  but  alert  the  tax 
administration. 

In  addition,  reverse  payment  would  provide  the  administration  with  additional 
information on a transaction-by-transaction basis. This information would allow the 
tax  administration  to  detect  more  easily  any  suspect  traders  that  might  go  missing, 
for  instance  those  subject  to  a  high  proportion  of  reverse  payments  compared  with 
similar suppliers or to detect traders concealing a part of their sales, by matching this 
information with the VAT returns submitted. 

Administrative  burden:  Certain  resources  dedicated  to  detecting  fraud  in  B2B 
transactions (notably MTIC fraud) could be used for other purposes. 

Cash  flow:  Reverse  payment  would  provide  the  administration  with  real-time 
payment of VAT when the customer pays for the supply before the next VAT return 
is submitted by the supplier. If payment is delayed, the supplier pays the VAT as at 
present, on the next VAT return. However, VAT paid by a customer making use of 
reverse  payment  might  be  refunded  to  the  supplier  only  with  the  following  VAT 
return. That would give the Treasury an additional cash-flow advantage. 

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15.4.  Disadvantages 

From the point of view of both the customer and the supplier, this option might have 
an impact on relations between them and therefore on business in general. This might 
be seen a priori as a disadvantage. 

To be precise, this option would add a new topic or factor in commercial negotiations 
between the parties alongside a quite similar issue, the terms of payment. However, 
adding this option (for instance, a commitment from the customer to use or not use 
the option) to the factors to be discussed in order to reach a satisfactory deal could 
also be seen as an advantage by one or both parties. 

A  customer  making  use  of  the  optional  reverse  payment  could  also  be  seen  as 
signalling mistrust in his supplier. It would certainly indicate a desire to offload the 
risk of being later denied the right of deduction. However, this also happens when a 
customer insists on paying on delivery of the goods or supply of the service, or when 
a  supplier  asks  for  immediate  payment  and  refuses  credit.  These  traders  show  that 
they do not really trust their contractors and their ability or willingness to pay later or 
carry out the supply or, more simply, that they do not want to bear any risk. Adding 
other  benefits  for  customers  using  reverse  payment  for  purchases,  for  instance 
swifter refund by the Treasury in case of repayment position, could make the use of 
the option more neutral and ordinary. 

15.4.1.  For the customer 

Administrative  burden:  The  customer  wishing  to  pay  in  this  way  would  have  to 
make  an  additional  payment  to  the  Treasury  and  to  provide  certain  information. 
However, this burden would be easily smoothed by allowing online declaration and 
payment  or  provision  of  this  information  with  the  credit  transfer;  it  would  be  even 
better  to  adapt  SEPA  arrangements  to  allow  the  customer  to  pay  the  VAT  to  the 
Treasury,  with  all  the  information  needed,  and  the  net  amount  to  the  supplier,  all 
through a single payment (credit transfer or credit card).  

15.4.2.  For the supplier 

Cash flow: under the current system for charging VAT, based on the date of supply, 
reverse payment would be disadvantageous for suppliers who are paid immediately 
and thus keep the VAT until their next VAT return. Where payment is deferred, the 
VAT paid by the customer making use of reverse payment might be refunded to the 
supplier only on the following VAT return (which is a simpler solution for both the 
Treasury and the supplier). 

Refund  position:  It  may  well  be  that  a  supplier  who  normally  pays  VAT  to  the 
Treasury  will  become  a  ‘repayment  trader’.  The  conditions  for  refunding  VAT  can 
be stricter, sometimes requiring extra information or additional control, and there is 
always a risk of delays in repayment. However, someone who becomes a repayment 
trader  because  of  reverse  payments  would  be  easily  identified  by  the  tax 
administration. Since the situation was clearly justified, the request should be better 
and  more  rapidly  managed  than  those  of  traders  who  are  in  that  situation  for  other 
reasons requiring further analysis (intra-EU supplies or exports). Moreover, it could 

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be laid down that if a supplier uses reverse payment when purchasing, it could obtain 
a swifter refund of the corresponding VAT. 

Administrative burden: Monitoring the payment of invoices issued without upfront 
payment  would  be  more  complicated.  For  each  invoice,  any  supplier  who  has  not 
engaged  a  factor  to  manage  outstanding  invoices  checks  his  bank  accounts  or 
cheques received. If the customer has paid only the net amount, he would also have 
to check his Treasury account. 

15.4.3.  For the Treasury 

Set-up costs: Whilst many, if not all, tax administrations keep a computerised record 
of the accounts of taxable persons with certain data available online to them (VAT 
returns  submitted,  VAT  due,  payments  made,  interest  charges,  etc),  they  will  also 
need  to  provide  them  with  online  access  to  the  information  provided  by  customers 
using  the  option  and  the  corresponding  payments  made.  However,  the  customer 
could also provide the supplier with proof of the use of the option in order to justify 
paying the net amount only. Tax administrations will also need to provide customers 
wishing to make use of the option via credit card or direct debit (at least until SEPA 
arrangements  are  adapted  if  possible)  with  an  appropriate  online  payment 
application. A suitable way would be to adapt the current systems used for paying the 
VAT online. In any event, all of this will require specific investment. 

Managing the data: The number of invoices issued in the EU is estimated at around 
30  billion.  Although  this  includes  B2C  invoices  (50 %),  exempt  supplies,  etc.,  and 
not all invoices will be subject to reverse payments, it could be that several million 
invoices will be subject to reverse payment. It requires a certain level of resources to 
maintain a database involving millions of transactions. 

Errors in payment, cancellation of the invoice or issuance of credit note: These 
events  could  possibly  be  seen  as  more  difficult  to  manage  both  by  the  tax 
administration  and  the  parties  to  the  transaction  with  reverse  payment.  However,  it 
should be provided that, as at present, the identity of the person paying the VAT in 
the first place would have no bearing on the way these situations are tackled. 

For  instance,  if  the  reverse  payment  is  lower  than  the  VAT  charged,  the  supplier 
would  be  obliged  to  pay  the  remainder  to  the  Treasury.  If  the  reverse  payment  is 
higher  than  the  VAT  charged,  the  difference  having  automatically  been  credited  to 
the supplier’s Treasury account, he would be obliged to repay his customer. In case 
of cancellation or a credit note, the supplier is obliged to repay the corresponding net 
amount  and  the  VAT  to  the  customer  (a  customer  that  has  deducted  this  VAT  will 
also  have  to  repay  it  on  its  next  VAT  return).  The  supplier  would  ask  the  tax 
administration for repayment via, as is often the case, the VAT return, for instance.  

15.5.  Conclusion 

This  option  would  allow  compliant  businesses  to  be  released  from  certain 
administrative  burdens  and  to  obtain  legal  certainty  where  they  feel  this  is  needed. 
Fraudsters  would  have  less  chance  of  committing  fraud  and  the  Treasury  could 
benefit  from  fraud  reduction  in  B2B  transactions,  in  particular  so-called  ‘missing 
trader  fraud’.  In  allowing  B2B  fraud  to  be  tackled  in  connection  with  intra-EU 

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supplies with very little change to the current basic principles of VAT, this measure 
seems promising. 

However,  one  could  consider  that  such  a  measure  could  work  better  or  give 
additional advantages if fine-tuned or combined with other solutions: 

•  The  reverse  payment  option  would  have  to  be  exercised  earlier  —  i.e.  before 
payment for the supply — and for a limited period of time, for instance, between 
the time of the supply and the deadline to be met by the supplier for submitting 
the corresponding VAT return. It would, however, be simpler to handle the option 
with a VAT system based on payments for the chargeability of VAT. 

•  Besides  a  universal  option,  one  could  envisage  a  compulsory  system  targeting 
customers purchasing certain well defined goods or services susceptible to fraud 
or customers in particular situations (exporters, public bodies), if necessary with a 
high threshold per transaction.  

•  To  counterbalance  the  optional  reverse  payment  offered  to  customers,  the  link 
between the right of deduction and actual payment of VAT by the supplier could 
be tightened where the customer does not make use of the option. That could be 
achieved  either  by  strengthening  the  ‘knowledge  test’  with  new  enforcement 
means for the tax administrations by, for instance, transferring the burden of proof 
to  the  taxable  person  in  certain  cases  or  by  automatically  refusing  the  right  of 
deduction  in  cases  of  non-payment  targeted  on  very  risky  and  sizeable 
transactions.  

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Topic 16. 

16. 

EFFICIENT AND MODERN ADMINISTRATION OF THE VAT SYSTEM 

16.1.  Background  

In  March  2007,  the  Commission  held  a  ‘VAT  fraud  conference’  to  give  European 
businesses  the  opportunity  to  express  their  views.  One  general  conclusion  drawn 
from  the  conference  was  that  businesses  and  tax  authorities  share  an  interest  in 
combating  fraud  and  traders  are  willing  to  assist  tax  administrations  in  this  task. 
Improving  communication  between  businesses  and  tax  authorities  was  seen  as  a 
major  factor.  There  was  also  a  clear  statement  about  the  disproportionate  costs  to 
businesses of divergent national reporting requirements. 

In its Communication of December 2008107 the Commission presented a short-term 
action plan for combating VAT fraud. It also suggested reflecting on a longer-term 
approach that could take into account technological developments and new strategies 
for compliance and monitoring, all with the aim of reducing the involvement of tax 
authorities and easing the administrative burden on business. 

Initial  discussions  on  new  strategies  for  compliance  and  monitoring  took  place  in 
January  2009  at  the  Fiscalis  seminar  on  ‘VAT  fraud:  a  common  concern  for 
businesses and tax administrations’ in Amsterdam (NL). Most participants welcomed 
the  Commission’s  suggestion  of  setting  up  an  ad  hoc  working  group  involving  tax 
authorities and representatives of large, medium-sized and small enterprises.  

The Business Expert Group108 was recently set up (March 2010). Its objective is to 
explore how the relationship between tax payers and tax administrations in terms of 
VAT obligations can result in a smoother functioning of the present VAT system in 
the EU. The findings will be used for discussions with the Member States and further 
policy development. 

16.2.  Evaluation of current policy on tax administration 

16.2.1.  Tax administration and the functioning of the internal market  

Tax administration109 is about the measures, procedures or tools that a tax authority 
applies and develops to efficiently administer and manage a tax from the ‘chargeable 
event’  (‘fait  générateur’)  to  payment  of  the  correct  amount  of  tax.  For  VAT,  this 
process  also  includes  VAT  deduction  and  refund.  Tax  administration  covers  ,  inter 

107 

108 

109 

the  Commission  expert  group 

Communication  from  the  Commission  to  the  Council,  the  European  Parliament,  the  European 
Economic and Social Committee on a coordinated strategy to improve the fight against VAT fraud in 
the European Union, 1 December 2008, COM(2008) 807 final. 
See 
regexpert/detail.cfm?ref=2457. 
Conceptual aspects of tax administration are not addressed in this paper, which is more about concrete 
action  as  a  segment  of  public  administration  policy  (modernisation  and  efficiency).  However, 
international tax forums consider this new field as an important and promising part of tax policy. The 
OECD Forum on Tax Administration (FTA) has published a lot of studies on the different components 
of this policy. See http://www.oecd.org/dataoecd/2/46/42419552.pdf. 

register  No  EO  2457  http://ec.europa.eu/transparency/ 

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alia,  the  organisation  of  the  collection  systems  (resources  and  methods),  relations 
with taxpayers including taxpayers’ obligations, rights and assistance (compliance), 
audit, risk assessment, planning and controls to prevent and fight fraud. 

Tax administration is mainly a national responsibility of the Member States and the 
subsidiarity  principle  is  therefore  highly  important.  Consequently,  when  drafting 
legislative  proposals  the  Commission  has  to  balance  carefully  the  need  for  an  EU 
approach and respect for national structures and the practices of tax administrations. 
increase  business 
However,  differences 
compliance  costs,  particularly  as  a  result  of  up  to  27 different  types  of  reporting 
obligations.  Moreover,  recent  —  uncoordinated  —  efforts  by  Member  States  to 
prevent and tackle VAT fraud have given rise to new obligations and further widened 
the gap between the 27 national practices of the tax administrations. 

in  national  procedures  considerably 

Consequently  tax  administration  and  the  lack  of  a  harmonised  approach  have  an 
impact on the functioning of the internal market. The Court of Auditors also insisted 
on this point in its 2008 Annual Report110 on VAT ‘own resources’.  

The  way  Member  States  apply  VAT  legislation,  the  way  they  cooperate  in 
exchanging data to collect VAT and the procedures and tools they develop to prevent 
and  fight  fraud  is  of  common  interest  to  all  Member  States.  Moreover,  it  directly 
affects businesses, which not only expect fair competition (neutrality) but also legal 
certainty, simplicity, effectiveness, fairness and flexibility. 

16.2.2.  Weaknesses of the current system 

Up  to  now,  most  of  the  work  done  has  dealt  with  preventing  and  fighting  fraud.  It 
involved only tax authorities and addressed specific issues of tax administration with 
a  view  to  enhancing  the  efficiency  of  controls  and  audit.  For  instance,  some 
interesting materials have been drafted in the Fiscalis project groups on best practice 
among tax authorities in the field of e-audit, risk management111, etc.  

Furthermore as the Amsterdam Conference112 demonstrated, a more comprehensive 
approach  —  ‘horizontal  monitoring’  —  could  be  a  useful  way  of  making  tax 
collection  more  efficient  and  reducing  the  tax  gap.  The  idea  of  achieving  greater 
compliance  by  means  of  enhanced  cooperation  between  taxpayers  and  the  tax 
administration  is  being  explored  by  a  number  of  countries  within  and  outside  the 
European  Union.  Their  policies  may  have  different  names  such  as  ‘horizontal 
monitoring’, or ‘client relationships’, but they all aim to promote partnerships based 
on mutual respect and cooperation between the taxpayer and the tax administration. 

110 

111 

112 

In its audit work for the 2008 Annual Report, the European Court of Auditors took the view that data 
collection for the reports should become one of the means of ensuring uniform application of the VAT 
Directive  across  all  Member  States  plus  equal  treatment  of  all  taxpayers.  See  Article 12  of  Council 
Regulation 1553/89. 
See the risk management guide for Tax administrations: 
http://ec.europa.eu/taxation_customs/resources/documents/taxation/tax_cooperation/gen_overview/risk
_management_guide_for_tax_administrations_en.pdf 
‘VAT fraud: A common concern for businesses and tax administrations’. This conference organised by 
Dutch 
programme.  See: 
2009 
http://ec.europa.eu/taxation_customs/taxation/vat/vat_conferences/article_5467_en.htm. 

the  Fiscalis 

authorities 

under 

place 

took 

tax 

in 

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On  the  one  hand,  businesses  want  tax  administrations  to  keep  an  open  mind  as 
regards  their  specific  situation.  On  the  other  hand,  tax  administrations  want 
transparency  that  ensures  effective  tax  collection  at  the  right  time.  Partnerships  are 
promoted in which traders work closely with tax administrations and in return obtain 
a  decrease  in  the  administrative  burden  —  so  both  sides  gain.  As  a  result,  tax 
administrations  are  able  to  allocate  more  resources  to  targeting  non-compliant 
behaviour. 

For the time being this ‘horizontal’ approach has not been put forward as part of the 
EU’s VAT policy. It would require VAT stakeholders other than tax authorities to be 
involved.  It  means  that  taxpayers  (all  categories,  small,  medium-sized  and  large 
businesses)  and 
fiscal 
(financial 
representatives)  would  be  asked  to  contribute  valuable  experience  and  suggest 
changes making for better practical implementation of the VAT rules. This move has 
just started with the launch of the Business Expert Group.  

tax  advisors, 

intermediaries 

institutions, 

The  expert  group  only  consists  of  representatives  of  business  and  Commission 
services . Member States’ tax administrations are not involved at this first stage. The 
expert group should deal with wider issues of tax administration, such as horizontal 
monitoring  and  compliance  issues,  which  will  require  a  dialogue  with  Member 
States’ tax administrations. 

Apart from the Business Expert Group there is no specific EU-wide forum where tax 
administration  issues  as  such  can  be  discussed.  In  effect,  bodies  ensuring  the 
governance of the VAT system, such as the VAT Committee for VAT legislation and 
the  SCAC  committee  for  administrative  cooperation,  are  attended  only  by  tax 
authorities’ representatives and have mandates which do not cover the full remit of 
tax administration. 

At the same time, difficulties have arisen in the practical implementation of some of 
the new measures in recent VAT legislation. The lack of homogeneous practices or 
administrative  requirements  for  the  same  operation  between  Member  States 
particularly affects businesses involved in cross-border supplies. Moreover, different 
application of the VAT rules has detrimental consequences not only for operators but 
for tax authorities in different Member States.  

IT issues are also heavily involved in these new measures. As it appears that some of 
the  specific  difficulties  that  have  occurred  involve  reliance  on  accurate  and  timely 
data  both  from  taxpayers  and  from  tax  authorities  in  other  Member  States,  these 
issues could also be addressed in this tax administration context. 

16.3. 

Possible improvements to the system  

Improvements  to  the  system  do  not  necessarily  have  to  result  from  changes  in 
legislation. ‘Soft policy’ aimed at creating a wide spread consensus and exchanging 
best practices could be an alternative approach. 

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Apart  from  trying  to  further  harmonise  reporting  obligations  in  the  legislation 
itself113, the Commission could take a more proactive approach to tax administration 
policy.  This  can  be  done  in  different  ways  and  through  different  means.  The 
following suggestions are not exhaustive: 

(1)  To  start  with,  the  Commission  could  set  up  a  discussion  forum  open  to 
representatives  of  VAT  stakeholders,  allowing  an  exchange  of  views  with  the  tax 
authorities. It would be a proper means of holding a structured, permanent dialogue 
in  which  all  tax  administration  issues  of  interest  to  tax  authorities  and  businesses 
could be discussed. 

(2) In addition, the Commission could be a key facilitator in pooling best practice on 
all  other  tax  administration  issues  that  effect  businesses.  Pooling  best  practice  and 
drafting  guidelines  could  contribute  to  streamlining  administrative  practices  and 
abolishing unnecessary obligations on businesses. In particular, a tax administration 
platform could be set up under FISCALIS.  

(3)  EU  policy  on  voluntary  compliance  could  be  developed  to  improve  the 
relationship between tax authorities and businesses in the Member States. 

As most voluntary compliance strategies are about building trust between taxpayers 
and  tax  authorities,  the balance between  the  rights and  obligations of  taxpayers, on 
the  one  hand,  and  tax  authorities,  on  the  other,  is  the  key  to  making  tax  collection 
more  efficient  and  to  preventing  and  fighting  fraud,  while  at  the  same  time 
minimising the burden on trade.  

Legal certainty is also essential for both sides. Tax authorities need to guarantee that 
all their services apply the EU VAT rules in a uniform way, both internally and cross 
border. The rules applied by Member States should not lead to cases of no taxation or 
double taxation. Businesses, on the other hand, need to know exactly what they have 
to  do  in  order  to  comply  with  the  rules  laid  down  in  the  various  Member  States 
where  they  conduct  business,  including  the  documentation  they  need  to  provide  in 
order to prove their entitlement to an exemption or to show they acted in good faith.  

The need for specific arrangements for this and their legal effects would have to be 
considered. For instance, consideration could be given to how to apply the concept of 
‘partnerships’ (specific agreements between tax administrations and taxpayers) at EU 
level. 

(4) Since IT support also plays a major role in the implementation of VAT rules, it is 
essential to examine how to ensure better interoperability of the systems to facilitate 
automatic  transfer  of  information  directly  from  taxpayers  to  the  tax  authorities  and 
vice versa (see, for instance, work on the standard e-audit file114). Discussions could 
also focus on a proper time frame, the investment required and working methods for 
introducing  such  new  IT  systems,  both  in  businesses  and  in  the  tax  authorities, 
together  with  the  critical  need  to  limit,  as  far  as  possible,  any  additional  costs  on 

113 

114 

See, for instance, Report on the application of Article 263 of the VAT Directive 2006/112/EC (Council 
Directive 2008/117/EC of 16 December 2008 amending Directive 2006/112/EC on the common system 
of value added tax to combat tax evasion connected with intra-Community transactions). 
Guidance note for the Standard Audit file http://www.oecd.org/dataoecd/13/45/34910263.pdf. 

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either  side.  Any  reflection  in  this  field  could  also  include  ways  to  enhance  cross-
border  exchange  of  information  between  tax  administrations,  thus  reducing  the 
duplication  of  reporting  obligations  for  businesses  operating  in  different  Member 
States.  Furthermore,  it  could  be  worth  investigating  whether  a  specific  software 
could  be  developed  jointly  by  some  Member  States,  possibly  with  EU  financial 
support115,  with  a  view  to  putting  it  subsequently  at  the  disposal  of  all  Member 
States. 

(5)  The  Commission  has  also  a  responsibility  to  create  the  conditions  for  smooth 
implementation  of  EU  rules  in  the  Member  States,  by  ensuring  transparency  and 
effective  communication  with  all  stakeholders.  A  lot  has  already  been  done  in  this 
field.  However,  this  policy  of  improving  transparency  and  providing  up-to-date, 
accessible  information  to  users  could  be  worked  out  in  conjunction  with  all 
stakeholders. (New  initiatives could for example include drafting explanatory notes 
and FAQs and further developing e-learning tools).  

(6) The economic operators and other stakeholders (including national judges dealing 
with VAT cases) need also to be aware of recent changes in legislation and potential 
gaps.  Raising  awareness  on  specific  VAT  issues  can  contribute  to  better 
implementation  of  the  rules  and  neutrality  and  fairness  between  operators.  The 
Fiscalis  programme116  is  one  way  of  meeting  these  needs.  However,  given  the 
complexity of VAT legislation, at EU and national level, a network of legal experts 
in this field could provide efficient support for the Commission and Member States 
(reports  on  practical  issues,  comparative  studies  targeted  at  the  Member  States, 
training materials, etc.).  

16.4.  Conclusion 

The  approach  detailed  above  is  to  support  the  proper  implementation  of  EU  tax 
legislation with a ‘soft policy’ instrument. It is mostly about improving dialogue and 
the  relationship  between  taxpayers  and  tax  authorities,  through  a  new  space  for 
discussion and for exchanges of experience and good practices.  

In  a  difficult  economic  situation  where  fiscal  consolidation  and  long-term  financial 
sustainability  are  at  stake,  the  Commission  could  propose  to  mutualise  some 
resources for more efficient and fair tax collection in the EU. Building a relationship 
of trust and transparency between stakeholders should become a priority in work on 
compliance and on preventing and fighting fraud. 

The work carried out by the Business Expert Group could help to explore voluntary 
compliance strategies and other tax administration issues of interest to business. The 
outcome  of  the  Green  Paper  consultation  should  also  feed  into  this  process.  In  this 
context a discussion forum should be set up, to involve all stakeholders in the debate, 
too.  As  far  reaching  harmonisation  of  tax  obligations  is  not  a  feasible  short-term 
option, a Fiscalis platform on tax administration, pooling best  practice and drafting 

115 

116 

One example of this is the ECEyes software developed by the Swedish tax administration with support 
from the Fiscalis programme and made available free to the tax administrations of other Member States. 
Decision  No  1482/2007/EC  of  the  European  Parliament  and  of  the  Council  of  11  December  2007 
establishing  a  Community  programme  to  improve  the  operation  of  taxation  systems  in  the  internal 
market. 

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guidelines,  could  help  streamline  administrative  practices  and  abolish  unnecessary 
obligations on businesses and tax administrations. 

EN 

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   EN