COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL AND THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE on the future of VATTowards a simpler, more robust and efficient VAT system tailored to the single market
Date: 2011-12-06
Institutions: European Commission
Subjects: VAT, foreign trade, intra-EU trade, single market, small and medium-sized enterprises, tax evasion

EUROPEAN COMMISSION 

Brussels, 6.12.2011 
COM(2011) 851 final 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT, THE COUNCIL AND THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE 

on the future of VAT 
Towards a simpler, more robust and efficient VAT system tailored to the single market

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TABLE OF CONTENTS 

1. 

2. 

3. 

4. 

4.1. 

4.2. 

5. 

Introduction .................................................................................................................. 3 

General conclusions from the public consultation ....................................................... 3 

The purpose of this Communication ............................................................................ 4 

The fundamental features of a reshaped VAT system for the EU ............................... 5 

A EU VAT system based on the destination principle ................................................ 5 

A simpler, more efficient and robust VAT system ...................................................... 5 

The priority areas for further work............................................................................... 6 

5.1. 

Towards a simpler VAT system................................................................................... 6 

5.1.1.  The One-Stop-Shop concept ........................................................................................ 7 

5.1.2.  Providing business with more accessible and better information at EU level ............. 8 

5.1.3. 

Improving the governance of VAT at EU level ........................................................... 8 

5.1.4.  Standardising VAT obligations.................................................................................... 9 

5.2. 

Towards a more efficient VAT system ........................................................................ 9 

5.2.1.  Broadening the tax base ............................................................................................... 9 

5.2.2.  Reviewing the rate structure....................................................................................... 10 

5.3. 

Towards a more robust and fraud-proof VAT system ............................................... 12 

5.3.1.  A quick reaction mechanism to deal with sudden fraud ............................................ 12 

5.3.2.  Combating VAT fraud ............................................................................................... 12 

5.3.3.  Reviewing the way VAT is collected and monitored ................................................ 14 

5.4. 

A VAT system tailored to the single market.............................................................. 15 

6. 

7. 

Other actions to be launched in the medium term...................................................... 16 

Conclusion.................................................................................................................. 16 

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1. 

INTRODUCTION 

Accelerating  globalisation,  intensified  competition  from  new  key  economic  regions 
of the world, as well as rapidly changing business models and technical progress, are 
presenting  new  challenges  to  the  effectiveness  and  efficiency  of  the  European  tax 
system. 

Moreover, the financial crisis has exposed the Member States to a twofold economic 
policy  challenge:  namely  to  foster  sustainable  economic  growth  and  to  consolidate 
public finances. As recognised in the Annual Growth Survey 20121, taxation policies 
are an important  lever for that purpose. More attention is needed  in the  design and 
structure  of  the  tax  systems  to  make  them  more  effective,  efficient  and  fairer,  and 
this is particularly true as regards the EU VAT system. 

It is in this context that on 1 December 2010 the Commission adopted a Green Paper 
on the future of VAT2, inviting all stakeholders to take a critical look at all aspects of 
the EU VAT system which has now been in place for over 40 years. 

The overwhelming reaction from businesses, academics, citizens and tax authorities 
(more than 1 700 contributions)3 confirmed there was a need for such a debate. 

The European Parliament4, the European Economic and Social Committee5 and the 
Tax Policy Group consisting of the personal representatives of the finance ministers 
welcomed the Green Paper and confirmed the need to reform the EU VAT system. 

In parallel, the Commission carried out an economic evaluation of the VAT system6 
and  proposed  setting  up  a  new  own  resource  based  on  VAT  to  finance  the  EU 
budget7. 

2. 

GENERAL CONCLUSIONS FROM THE PUBLIC CONSULTATION 

There  is  a  general  feeling  amongst  stakeholders  that  the  fragmentation  of  the 
common  EU  VAT  system  into  27  national  VAT  systems  is  the  main  obstacle  to 
efficient  intra-EU  trade  and  thus  prevents  citizens  from  reaping  the  benefits  of  a 
genuine single market. 

Internationally active businesses consider that the price they actually pay for this lack 
of harmonisation comes in the form of complexity, extra compliance costs and legal 
uncertainty. SMEs do not always have the necessary resources to deal with this and 
therefore refrain from engaging in cross-border activities. 

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3 

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5 
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are 

available 

COM(2011) 815, 23.11.2011. 
COM(2010) 695, Commission Staff Working Document, SEC(2010) 1455, 1.12.2010. 
They 
their  main 
a 
http://ec.europa.eu/taxation_customs/common/consultations/tax/2010_11_future_vat_en.htm 
Resolution of 13 October 2011, P7_TA(2011)0436.  
OJ C 318, 29.10.2011, p. 87. 
http://ec.europa.eu/taxation_customs/common/publications/studies/index_en.htm 
COM(2011) 510, 29.6.2011. 

together  with 

summarising 

report 

elements 

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These shortcomings have an impact on commercial behaviour which may prevent the 
most  effective  business  decisions  from  being  taken.  When  tax  rules  influence  the 
decision on where to buy or sell goods and services, the economic neutrality of VAT 
is  no  longer  guaranteed  and  the  functioning  of  the  single  market  is  severely 
undermined. 

Several contributors even pointed out that, as a result, doing business with non-EU 
partners  is  becoming  ever  easier  and  more  profitable  than  doing  business  with  EU 
firms. 

Stakeholders currently benefiting from exemptions, derogations or reduced rates are 
generally in favour of maintaining them; others even want to extend this preferential 
treatment to include their own activity. 

On the whole, the Green Paper has generated great expectations for change. At the 
same  time,  there  is  general  acknowledgement  that  a  fundamental  overhaul  of  VAT 
will inevitably be a long-term project. 

Member States  are understandably  unwilling to take any risks that are triggered by 
reform  efforts  and  could  threaten  VAT  revenues,  which  accounted  for  around 
EUR 784 billion in 2009 or 21 % of national tax revenues8. They seem therefore to 
be only prepared to consider gradual changes, for which the risks, benefits and costs 
are clear, well understood and fully assessed. 

These are the most striking general conclusions that are to be drawn from the public 
consultation;  more  specific  conclusions  have  been  included  hereafter  under  the 
specific topics to which they relate. 

3. 

THE PURPOSE OF THIS COMMUNICATION 

Being confronted with such disturbing facts almost 20 years after the introduction of 
the single market makes it clear that to simply stay in the comfort zone of ‘business 
as  usual’  will  not  be  enough.  Responding  to  these  challenges  demands  a  more 
ambitious reform of the current VAT system. Such a reform will play a crucial role 
in  supporting  the  delivery  of  the  Europe  20209  objectives  and  a  return  to  growth 
through its potential to reinvigorate the single market and underpin the current fiscal 
consolidation efforts in the Member States. 

This Communication — based on the outcome of the public consultation, but also on 
the  discussions  with  Member  States  and  the  opinions  expressed  by  the  European 
institutions — has a dual purpose: 

• 

It  sets  out  the  fundamental  features  of  a  future  EU  VAT  system  which  can 
continue  to  perform  its  function  of  raising  revenue,  while  increasing  the 
competitiveness  of  the  EU.  These  basic  features  should  be  the  long  term 
objectives guiding all future work on VAT. 

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9 

Including social security contributions, Taxation trends in the European Union, 2011, annex A, table 8. 
COM(2010) 2020, 3.3.2010. 

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• 

It lists the priority areas for further action in the coming years with a view to 
moving in the direction of these objectives. 

4. 

THE FUNDAMENTAL FEATURES OF A RESHAPED VAT SYSTEM FOR THE EU 

4.1. 

A EU VAT system based on the destination principle 

The  Single  Market  Act10  stressed  the  fundamental  importance  of  establishing  a 
definitive VAT regime applicable to cross-border transactions. 

The Green Paper provided an ideal opportunity to examine whether the commitment 
made in 196711 to establish a definitive VAT system operating within the EU in the 
same way as it would within a single country, based on the principle of taxation in 
the country of origin, is still relevant. 

Recent  discussions  with  Member  States  confirmed  that  this  principle  remains 
politically  unachievable.  This  deadlock  is  even  recognised  by  the  European 
Parliament – until now a fierce defender of the principle of origin – which has called 
for a move towards the destination principle. 

Also, stakeholders acknowledge that the origin system, which is in theory the most 
attractive  choice  for  them,  will  not  be  achievable  in  the  foreseeable  future.  They 
therefore promote a properly functioning system based on taxation at destination as a 
pragmatic and politically achievable solution. 

Thus, the Commission has come to the conclusion that there are no longer any valid 
reasons  for  keeping  this  objective,  and  will  propose  that  it  should  be  abandoned. 
Indeed,  maintaining  this  commitment  while  not  making  progress  on  this  track 
politically would affect the credibility of the European decision-making process. 

Abandoning  the  origin  principle  makes  it  possible  to  launch  substantial  efforts  to 
devise  alternative  concepts  for  a  properly  functioning  destination-based  EU  system 
of  VAT.  No  work  has  been  done  in  this  area  since  1993,  because  that  option  had 
been discarded in favour of a commitment to the origin principle. 

The guiding principles of this work will be, first, that doing business across the EU 
must  be  as  simple  and  as  safe  as  engaging  in  purely  domestic  activities  and, 
secondly,  that  the  VAT  compliance  costs  for  doing  business  in  Europe  must  be 
reduced. In any event, cross border trade must not generate additional costs. 

4.2. 

A simpler, more efficient and robust VAT system 

The reform process launched by the Green Paper should ultimately result in a VAT 
system that has all the following attributes: 

• 

‘Simple’: A taxable person active across the EU should be faced with a single 
set of clear and simple VAT rules: an EU VAT Code. Such a code would lay 

10 
11 

COM(2011) 206, 13.4.2011. 
First Council Directive 67/227/EEC and Second Council Directive 67/228/EEC of 11 April 1967. 

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• 

• 

down  rules  adapted  to  modern  business  models,  and  standardised  obligations 
which  take  full  account  of  the  progress  made  in  new  technologies.  A  taxable 
person should only deal with the tax authorities of a single Member State; 

‘Efficient  and  neutral’:  Introducing  a  broader  tax  base,  as  well  as 
implementing  the  principle  of  taxation  at  the  standard  rate,  would  generate 
more revenue at less cost, or alternatively allow the standard rate to be reduced 
in a revenue-neutral way. Any derogation from those principles would have to 
be  rational  and  uniformly  defined.  Neutrality  also  requires  equal  rules 
governing the right of deduction and very limited restrictions on the exercise of 
that right; 

‘Robust  and  fraud proof’:  Modern  methods  of  collecting  and  monitoring  of 
VAT  should  maximise  the  revenues  actually  collected  and  limit  fraud  and 
avoidance as far as possible. Besides easing compliance for business, this will 
require  the  national  tax  authorities  to  concentrate  on  risky  behaviours,  target 
actual fraudsters and ultimately act collectively as a European VAT authority. 
An intensified, automated and rapid exchange of information between national 
tax administrations will be vital in achieving this goal. 

5. 

THE PRIORITY AREAS FOR FURTHER WORK 

The  various  priority  topics  are  grouped  below  under  four  headings.  However,  they 
are closely interlinked: a simpler VAT system for domestic combined with intra-EU 
transactions makes compliance easier and therefore contributes to its robustness. 

Some  of  the  corresponding  key  actions  can  be  implemented  relatively  quickly, 
whereas  others  will  obviously  require  more 
the 
Commission will carry out the usual impact assessment. 

time.  Where  appropriate, 

5.1. 

Towards a simpler VAT system 

The  responses  to  the  public  consultation  contain  a  strong  and  urgent  call  for 
simplification. This demand covers EU VAT legislation issues, but also so-called tax 
administration  issues.  Divergent  practices  at  national  level  are  increasingly  being 
highlighted  as  a  frustrating  burden.  Although  tax  administration  is  an  area  that  is 
mainly within the competence of the Member States, the Commission’s aim will be 
to substantially improve the efforts of coordination and cooperation in this area. 

The  economic  evaluation  concludes  that  compliance  costs  for  businesses  are  high, 
with  estimates  ranging  from  2 %  to  as  much  as  8 %  of  VAT  collection.  Smaller 
businesses  are  burdened  over  and  above  their  capacity,  and  these  costs  will  not 
decline over time without targeted policy action. 

Furthermore, businesses are confronted with additional burdens when they engage in 
intra-EU  trade.  The  economic  evaluation  suggests  that  the  removal  of  national 
obligations that go beyond EU requirements or a 10 % reduction in the mismatches 
between  Member  States  in  administrative  procedures  could  deliver  an  increase  in 
intra-EU  trade  of  2.6%  and  3.7%  respectively,  while  real  GDP  could  increase  by 
0.2% and 0.4%. Although the report admits these figures might be overstated, they 

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indicate  nevertheless  that  the  harmonisation  of  VAT  procedures  could  bring 
substantial gains in trade and in GDP. 

SMEs should benefit in particular from the actions set out below. They have fewer 
resources for coping with the difficulties resulting from the differences in rules and 
obligations. The economic evaluation shows that the cost is proportionally higher for 
them too. 

Giving priority to simplification in the coming years is in line with the ‘Think Small 
First’ principle of the ‘Small Business Act for Europe’12, which promotes the use of 
e-government  and  one-stop-shop  solutions  for  simplifying  the  regulatory  and 
administrative environment in which SMEs are operating. 

5.1.1.  The One-Stop-Shop concept 

Given the difficulties mentioned by businesses trading in several Member States, the 
One-Stop-Shop (OSS) – a measure proposed in the Commission’s plan to reduce the 
administrative  burdens13  and  supported  by  the  High  Level  Group  of  Independent 
Stakeholders on Administrative Burdens14 − is of course still a high priority. 

The supply of a mini OSS for the EU providers of telecommunications, broadcasting 
and  electronic  services  provided  to  final  consumers  within  the  EU  will  enter  into 
force in 2015. Some businesses – exposed to cross border trade - do not understand 
why their activities have been excluded from this facility, despite the fact that they 
are confronted with the same difficulties. 

The  implementation  of  the  mini  OSS  is  seen  by  many  Member  States  and  by 
business  as  a  major  milestone.  Its  smooth  functioning  should  pave  the  way  for  a 
more general use of this concept. However, given the lack of experience of an OSS 
for  intra-EU  trade,  Member  States  appear  to  be  somewhat  reluctant  to  consider 
broadening its scope at such an early stage. 

The  Commission  remains  convinced  that,  in  a  VAT  system  based  on  taxation  at 
destination, an OSS is a crucial instrument to facilitate access to the single market, in 
particular for SMEs. 

(1)  Ensuring the smooth introduction of the mini OSS in 2015 is a high priority for 
the  Commission,  and  it  is  relying  on  Member  States  to  make  the  necessary 
resources available. 

(2)  From  2015  onwards  the  Commission  will envisage a managed broadening of 

the concept over time. 

12 
13 
14 

COM(2008) 394, 25.6.2008. 
COM(2009) 544, 22.10.2009, Annex, p. 83. 
http://ec.europa.eu/enterprise/policies/better-regulation/administrative-burdens/high-level-
group/index_en.htm 

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5.1.2.  Providing business with more accessible and better information at EU level 

Stakeholders stressed that the availability of accurate, reliable and timely information 
on the details of the VAT regimes currently in place in Member States is a key factor 
in  facilitating  compliance  for  businesses  until  such  time  as  there  are  similar  rules 
throughout  the  EU.  Moreover,  language  is  still  perceived  as  a  barrier  to  intra-EU 
trade. 

The  Commission  considers  that  a  web  portal,  which  provides  such  information  in 
several languages on issues such as registration, invoicing, VAT returns, VAT rates, 
special  obligations  and  limitations  to  the  right  of  deduction,  is  the  obvious  way 
forward. Businesses themselves could play a role in defining the information needed. 

(3)  With  the  help  of  the  Member  States,  the  Commission  will  set  up  an  EU  VAT 
web portal. It invites Member States to confirm their willingness shown in the 
Tax  Policy  Group  by  making  a  commitment  to  provide  the  necessary 
information and to keep it up-to-date in a timely manner. 

5.1.3. 

Improving the governance of VAT at EU level 

Stakeholders  want  greater  involvement  and  more  transparency  in  the  process  of 
establishing and interpreting EU VAT law. 

The Commission will assume its responsibilities and respond positively to this valid 
claim.  Exchanges  of  views  between  the  Commission  and  stakeholders  will  be 
organised  in  a  more  structured  way.  The  Commission  will  ensure  that  more 
information related to EU VAT law is made available to the public. 

However, the call to improve governance is in part also aimed at the Council, as the 
legal  framework  governing  the  adoption  of  legislative  proposals  goes  beyond  the 
Commission’s remit. The Commission therefore invites the Council to consider how 
best to involve stakeholders when the proposals are being negotiated. 

Stakeholders  have  advocated  setting  up  a  channel  of  communication  at  EU  level 
where tax authorities, the Commission and business representatives would be able to 
exchange  views  on  practical  issues  of  VAT  administration.  Currently  they  can 
discuss such issues with national tax authorities, but they lack a broader forum which 
would involve all tax authorities, in particular on cross-border issues. 

Member States have shown a willingness to participate in such a forum. Identifying 
best practices could contribute to streamlining the VAT system and thus to reducing 
compliance costs, while securing VAT revenue at the same time. 

(4)  The  Commission  will  publish  in  2012  the  guidelines  agreed  by  the  VAT 
Committee on EU legislation and, whenever appropriate, explanatory notes on 
the new legislation before its entry into force in order to inform businesses and 
promote a more consistent application. 

(5)  The Commission will set up a tripartite EU VAT forum (Commission, Member 

States, stakeholders) in the course of 2012. 

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5.1.4. 

Standardising VAT obligations 

Invoicing  rules  have  recently  been  further  harmonised  and  the  principle  of  equal 
treatment  of  paper  and  electronic  invoicing  is  embodied  in  the  VAT  legislation. 
However,  differences  in  other  VAT  obligations  still  oblige  businesses  to  tailor  IT 
specifications  and  procedures  to  each  Member  State  in  which  they  operate.  This 
weakens  the  benefits  of  shared  service  centres  for  EU-wide  accounting  and  tax 
obligations. 

(6)  The  Commission  will  propose  in  2013  that  a  standardised  VAT  declaration 
should  be  available  in  all  languages  and  optional  for  businesses  across  the 
EU. 

(7)  The  same  standardisation  approach  could  then  be  followed  with  regard  to 
other  obligations  such  as  registration,  invoicing  and  evidence  to  justify  an 
exemption or the reverse charge. 

5.2. 

Towards a more efficient VAT system 

Broadening  the  tax  base  and  limiting  the  use  of  reduced  rates  would  generate  new 
revenue streams at less cost or alternatively would enable a significant reduction in 
the current standard rate in place which would be revenue-neutral. A more efficient 
VAT system is therefore primarily in the interest of Member States, but would also 
reduce the administrative burdens for businesses. 

5.2.1.  Broadening the tax base 

Public bodies 

A recent study on VAT in the public sector and exemptions in the public interest15 
highlighted the shortcomings of the current rules from an economic point of view – 
namely,  their  lack  of  neutrality,  the  distortions  of  competition  that  they  create  and 
their  complexity.  Moreover,  privatisation  and  deregulation have  frequently  resulted 
in situations where public bodies compete with private companies. 

Considering the potentially significant impact in terms of cost of public goods or on 
social  security  of  phasing  out  existing  exemptions  on  a  large  scale  such  as  on 
education  or  health,  a  gradual  approach  towards  taxation  will  be  carefully 
considered. 

(8)  The Commission will table a proposal which will concentrate on activities with 
a  greater  degree  of  private  sector  involvement  and  a  heightened  risk  of 
distorted competition. 

Passenger transport services 

The  European  Parliament  believes,  and  the  outcome  of  the  public  consultation 
confirms that the fact that passenger transport services are exempt in certain Member 

15 

http://ec.europa.eu/taxation_customs/resources/documents/common/publications/studies/ 
vat_public_sector.pdf. 

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States, depending on the means of transport used, creates distortions of competition 
within the single market. Where the exemption does not apply, the complexity of the 
current  place-of-supply  rules  increase  the  compliance  costs  of  businesses  operating 
in several Member States and could result in mistakes and even evasion. 

The  public  consultation  reveals  two  main  conflicting  approaches:  maintaining  the 
status quo or abolishing the exemption, with the latter option being in line with the 
objective of increasing the neutrality and efficiency of the tax. 

(9)  The Commission will propose a more neutral and simpler VAT framework for 

passenger transport activities. 

Other exemptions 

Other  exemptions  which  act  as  restrictions  in  the  tax  base  and  which  might  create 
distortions will be examined to see whether the economic, social or technical reasons 
for  them  are  still  valid  and  whether  the  way  they  are  applied  can  be  improved.  In 
seeking  to  broaden  the  tax  base,  no  options  should  be  discarded  at  this  stage. 
However,  some  stakeholders  have  advocated  maintaining  or  even  broadening  the 
scope of certain exemptions. 

The  VAT  treatment  of  non-profit-making  organisations  has  prompted  numerous 
reactions.  However,  those  organisations  already  benefit  from  an  exemption  which 
covers  their  activities  in  the  general  interest.  The  residual  activities  not  covered  by 
this  exemption  are  the  only  cause  of  concern.  However,  these  activities  could  be 
covered by the general exemption scheme for small businesses that have a turnover 
below a certain threshold and through further simplification measures and procedures 
which  Member  States  can  introduce.  Member  States  can  also  introduce  targeted 
compensation mechanisms, outside the VAT system, to alleviate the cost of VAT on 
their acquisitions. 

(10)  The Commission calls on Member States to make use of the existing options to 
alleviate the burden of VAT on non-profit making organisations. It can provide 
them with guidance on the VAT regime applicable to them. 

5.2.2.  Reviewing the rate structure 

Many  stakeholders  pointed  out  that  differences  in  VAT  rates  lead  to  additional 
compliance  costs.  The  economic  evaluation  provides  an  estimate  of  this  impact.  It 
established  that  reducing  by  50 %  the  dissimilarity  of  the  VAT  rates  structure 
between Member States could yield a rise of 9.8% in intra-EU trade and an increase 
in  real  GDP  of  1.1%  but  at  the  same  time  indicated  that  these  figures  might  be 
overstated. 

The  economic  evaluation  also  confirmed  the  views  already  expressed  in  earlier 
economic  studies16  that  the  use  of  reduced  rates  is  often  not  the  most  suitable 
instrument for pursuing policy objectives, particularly for ensuring redistribution to 

16 

Copenhagen Economics, Study on reduced VAT applied to goods and services in the Member States of 
the European Union, Final Report, 21.6.2007. 

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poor households or encouraging the consumption of a good that is deemed socially 
desirable. 

Stakeholders  benefiting  from  reduced  rates  invoke  those  objectives  to  justify  the 
existing reduced rates or even to extend them to environmentally friendly products in 
particular. Also, the issue of equal treatment for products which are available in both 
traditional  and  online  formats  provoked  considerable  reactions  in  the  public 
consultation. Those issues need to be addressed. 

It is worth noting that already the existing application of reduced rates translates into 
significant  subsidies.  Its  magnitude  largely  differs  between  Member  States, 
depending  on  the  use  made  of  reduced  rates.  The  economic  evaluation  calculated 
that, for a sample of 9 Member States17, these subsidies represent between 8.2% and 
53.3 % of the VAT revenues of those Member States. Abolishing the reduced rates 
would  theoretically  enable  the  standard  rate  to  be  reduced  by  between  1.9  and  7.5 
percentage points.  

The  application  of  the  standard  rate  remains  the  basic  principle  and  the  VAT 
Directive does not compel Member States to make use of reduced rates. The Member 
States are therefore primarily responsible for limiting as far as possible the scope of 
such rates where they constitute an unjustified tax break. The current economic and 
financial context, which demands a strong fiscal consolidation of national budgets, is 
a further reason for limiting their  use as compared to increasing the standard rates. 
Nonetheless,  the  potential  benefits  of  a  limited  use  of  reduced  rates,  if  rationally 
defined and applied, should not be disregarded. 

There are therefore a number of factors justifying a review of the current VAT rates 
structure.  The  Commission  believes  that  such  a  review  should  be  based  on  a 
thourough  impact  assessment  covering  all  aspects  and  on  the  following  guiding 
principles: 

• 

• 

• 

Abolition  of  those  reduced  rates  which  constitute  an  obstacle  to  the  proper 
functioning of the internal market. Reduced rates justified in the past can have 
distorting effects today because the economic, business and legal environments 
have changed in the meantime; 

Abolition of reduced rates on goods and services for which the consumption is 
discouraged by other EU policies. This could notably be the case for goods and 
services harmful to the environment, health and welfare;  

Similar  goods  and  services  should  be  subject  to  the  same  VAT  rate  and 
progress in technology should be taken into account in this respect, so that the 
challenge of convergence between the on-line and the physical environment is 
addressed. 

17 

Belgium, France, Germany, Greece, Hungary, Italy, Poland, Spain and United Kingdom. 

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(11)  In order to increase the efficiency of the VAT system, the Commission favours a 
restricted use of reduced VAT rates. It will launch in 2012 an assessment of the 
current  VAT  rates  structure  in  the  light  of  the  abovementioned  guiding 
principles and will subsequently make proposals along those lines after ample 
consultation with stakeholders and Member States by the end of 2013. 

(12)  To tackle the legal uncertainty and the compliance costs stemming from the 27 
different  rate  structures,  the  Commission  will  propose  to  include  in  the  EU 
VAT web portal a clear and binding information on the list of the goods and 
services that are not covered by the standard rates in each Member State. To 
this end, the Combined Nomenclature could be used. 

5.3. 

Towards a more robust and fraud-proof VAT system 

A study carried out on behalf of the Commission some years ago demonstrated that, 
generally, 12 % of the theoretical VAT is not collected. Fraud is an important aspect 
of the so-called VAT gap, but this gap also consists of other aspects, such as VAT 
that is not collected due to errors, negligence and bankruptcy. 

This is why the Commission believes that, in addition to the ongoing need to tackle 
VAT fraud, there is also a need to look at the broader picture and explore better ways 
of collecting and monitoring VAT. 

5.3.1.  A quick reaction mechanism to deal with sudden fraud 

Recent experience with organised, massive and sudden VAT fraud schemes showed 
that  the  procedure  for  amending  the  legislation  or  granting  derogations  to  Member 
States is not always flexible enough to ensure a prompt and appropriate reaction. 

Many  Member  States  have  welcomed  the  possibility  of  having  a  legal  base  to  take 
immediate national measures, albeit on a temporary basis, to stop certain fraudulent 
practices. 

(13)  The Commission will table a quick reaction mechanism proposal in 2012. 

5.3.2.  Combating VAT fraud 

The  ‘Anti-Fraud  Strategy’  launched  in  200618  resulted  in  a  short-term  action  plan 
which  was  presented  by  the  Commission  in  December  200819.  Since  then  the 
Commission has tabled all the legislative proposals announced in this action plan and 
the Council has adopted almost all of them. 

The  result  is  a  range  of  new  measures  such  as  the  creation  of  Eurofisc20  and  more 
automated  exchanges  of  information,  which  are  about  to  enter  into  force  or  have 
done so only recently. 

18 
19 
20 

COM(2006) 254, 31.5.2006; COM(2007) 758, 23.11.2007. 
COM(2008) 870, 1.12.2008. 
Council Regulation (EU) No 904/2010 of 7 October 2010. 

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Their efficiency in terms of reducing VAT fraud will be carefully assessed, but this 
can  only  be  done  once  all  the  measures  are  fully  in  force.  New  initiatives  may  be 
needed if these measures prove to be insufficient. 

A  few  proposed  measures  have  not  been  adopted  or  have  been  watered  down  in 
Council  in  search  of  unanimity,  such  as  automated  access  to  information.  The 
Commission  will  revisit  these  measures  with  a  view  to  achieving  a  consensus  on 
them.  It  will  notably  explore  an  extension  of  information  to  which  an  automated 
access would be granted between those Member States who would be willing to do 
so. 

Multilateral controls (MLC) have proven to be a valuable tool to deal with complex 
fraud  situations  involving  operators  in  different  Member  States.  In  the  long  run, 
attached  to  Eurofisc,  a  EU  cross  border  audit  team,  composed  of  experts  from 
national  tax  authorities,  could  be  envisaged.  It  could  lead  to  more  systematic  cross 
border  audits  and  benefit  from  the  knowledge  and  experience  already  gained  by 
auditors and MLC-coordinators in this field. 

(14)  The Commission will ensure and monitor the full implementation  of the Anti-
Fraud measures and report on their efficiency and the need for further action 
in 2014. 

(15)  The  Commission  encourages  the  Council  to  progress  in  the  adoption  of  the 
proposals  still  on  the  table.  It  will  examine  ways  to  significantly  broaden 
automated access to information.  

(16)  The  Commission  will  explore  the  possibility  of  setting  up  a  EU  cross  border 

audit team to facilitate and improve multilateral controls. 

The  success  of  any  anti-fraud  measure  depends  directly  on  the  administrative 
capacity of the national tax authorities. This has become more apparent in light of the 
current  budgetary  difficulties  that  several  Member  States  are  facing  and  for  which 
the need for an efficient and effective tax administration has been advocated. 

Under the current VAT own resources Regulation21, the Commission has to report on 
a regular basis on the procedures applied by Member States to administer and control 
VAT and examine possible improvements (the "Article 12" Report). 

In  the  next  report,  the  Commission  will  establish  some  benchmarks  to  measure  the 
performance of each tax administration. This approach would allow Member States 
to position themselves as compared to EU averages. 

Successful approaches from certain Member States in fraud-sensitive sectors should 
be shared in a more methodical way. Tax authorities do face common problems and 
could make large benefits in terms of resources from being able to build their action 
upon the experiences from other Member States. In this context the Commission will 
also  follow  closely  the  activities  of  Eurofisc,  more  specifically  its  working  field 
dealing with new fraud trends (the VAT Observatory).  

21 

Council Regulation No 1553/89 of 29 May 1989. 

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(17)  The  Commission  will  strengthen  the  monitoring  of  the  efficiency  and 
effectiveness of the tax administrations of the Member States in the next Article 
12 Report. 

(18)  The  Commission  will,  with  the  help  of  the  Member  States,  intensify  the 

exchange of best practices in combating fraud in high risk sectors. 

(19)  The  Commission  will  continue  to  follow  the  work  of  Eurofisc  and  encourage 
Member  States  to  further  develop  this  tool  in  order  to  try  to  find  new  fraud 
schemes or to prevent them from developing. 

The  Commission  considers  also  a  ‘soft  law’  (administration  of  the  tax)  approach  a 
promising step forward in the fight against VAT fraud. Member States will therefore 
be  encouraged  to  focus  on  increasing  compliance  by  enhancing  their  relationship 
with business and their VAT procedures. 

Such an approach will aim in particular at preventing potential fraudsters to enter the 
VAT  system  and  enable  tax  authorities  to  reallocate  staff  to  combat  non-compliant 
behavior.  

(20)  The  Commission  will  support  Member  States  in  their  efforts  to  enhance 

compliance by using the EU VAT forum mentioned in point 5.1.3. 

Since VAT fraud patterns change rapidly and include third countries, a new impetus 
will  be  needed  to  address  the  need  for  a  further  and  coordinated  cooperation  with 
these countries. The changing fraud patterns also require a stronger cooperation and 
exchange of information between tax and customs authorities. 

(21)  The Commission will explore the possibilities of strengthened cooperation with 
third  countries  with  a  view  to  exchanging  information  in  the  field  of  indirect 
taxation  by  requesting  a  EU  mandate  for  making  agreements  with  third 
countries. 

(22)  The  Commission  will  initiate  and  facilitate  initiatives  for  a  stronger 

cooperation between tax and customs authorities. 

5.3.3.  Reviewing the way VAT is collected and monitored 

The  new  methods  of  collection  as  mentioned  in  the  Green  Paper  were  the  subject 
which provoked probably the most outspoken reactions. 

In  particular,  the  split  payment  model22,  which  was  considered  to  be  the  most  far 
reaching  change,  prompted  generally  negative  reactions  from  business  and  tax 
practitioners. The latter were concerned about the impact of the method with regard 
to  cash  flow,  compliance  costs  and  commercial  issues.  Moreover,  they  had  doubts 
about its ability to actually reduce the VAT gap. However, some Member States still 
have an interest in exploring it further. 

22 

A model in which the purchaser pays the VAT to a blocked VAT bank account with the tax authorities’ 
bank  which  can  only  be  used  by  the  supplier  for  paying  VAT  to  his  suppliers’  blocked  VAT  bank 
account. 

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The lack of detailed data about its impact and imprecision about its workings might 
go some way to explaining this criticism. The Commission therefore believes that it 
is premature to discard the model. 

As  regards  the  data  warehouse  model  (SAFT)23,  which  is  already  implemented  by 
some  Member  States,  many  stakeholders  asked  for  its  implementation  to  be  made 
easier and uniform. 

(23)  The Commission will further analyse the feasibility of the split payment and its 
design in order to allay the concerns expressed, with a view to deciding on the 
appropriate follow-up at a later stage. 

(24)  The  Commission  will  seek  a  common  approach  at  EU  level  on  the  SAFT  in 

order to streamline its implementation. 

5.4. 

A VAT system tailored to the single market 

The  Green  Paper  described  several  ways  of  achieving  taxation  at  destination.  Two 
fundamental issues need to be addressed in this connection: firstly, the definition of 
the  place  of  destination  and,  secondly,  whether  the  supplier  charges  VAT  on  intra-
EU transactions or the acquirer accounts for the VAT instead (reverse charge). 

The  current  transitional  VAT  arrangements  for  intra-EU  B2B  transactions  are 
already based on taxation at destination. However, given the shortcomings described 
under  point  2,  most  stakeholders  are  against  making  them  the  definitive  regime.  In 
their  current  form,  they  are  not  in  line  with  the  fundamental  objective  that  cross-
border transactions should not be treated differently from domestic transactions. 

Businesses stakeholders and the European Parliament have called for the concept of 
taxation  at  the  place  of  establishment  of  the  customer  to  be  explored  further.  This 
would  ensure  that  supplies  of  goods  and  services  are  treated  in  the  same  way. 
Decoupling  taxation  rules  from  the  physical  flow  of  the  goods,  while  connecting 
them to the contractual flow, seems like a promising approach that deserves further 
examination. 

As  to  the  second  issue,  charging  of  VAT  by  the  supplier  on  cross-border  B2B 
supplies  could  lead  to  equal  treatment  for  domestic  and  cross-border  transactions. 
The principle of fractioned payment of VAT would be reinstated since it would apply 
to both domestic and intra-EU transactions. Such an approach would therefore deal 
with the VAT system’s current vulnerability to fraud. 

However, intra-EU trade represents about EUR 2 500 billion which would mean that 
several  hundreds  of  billions  of  VAT  would  have  to  be  charged  on  transactions  in 
which the acquirer currently only accounts for the VAT. The impact on businesses, 
particularly in terms of cross-border cash flow, would be substantial. As regards the 
tax authorities, the business that is liable for the payment of the tax would no longer 
be the one established in the Member State where the tax is due. 

23 

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  and  accessible  to  the  tax 
authorities. 

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In  terms  of  compliance  costs,  charging  VAT  on  such  supplies  would  require  the 
implementation of a comprehensive One-Stop-Shop. For the purposes of securing the 
revenues, additional measures or guarantees might be needed. 

(25)  The  Commission  will  proceed  with  in-depth  technical  work  and  a  broadly-
based  dialogue  with  Member  States  in  the  Group  on  the  future  of  VAT  and 
stakeholders in the VAT expert group examining in detail the different possible 
ways to implement the destination principle. 

(26)  The Commission will table in the 1st half of 2014 a legislative proposal laying 

down the definitive regime of taxation of intra-EU trade. 

6. 

OTHER ACTIONS TO BE LAUNCHED IN THE MEDIUM TERM 

The  Communication  has  now  laid  down  the  priorities  and  a  practical  work 
programme  for  the  coming  years  with  several  proposals,  both  legislative  and  non-
legislative,  as  well  as  a  number  of  in-depth  studies  to  be  launched  with  a  view  to 
preparing further proposals. 

These  priority  initiatives  are  coherent  with  and  should  also  reinforce  the  proposed 
development  of  a  new  own  resource  based  on  VAT.  Broadening  the  tax  base, 
restricting the use of reduced rates and reducing the scope for fraud could increase 
revenue for the Member States. A part of these gains could be attributed to the EU 
level, and these could be further increased through improving the performance of the 
VAT system. 

Other aspects of EU VAT already raised in the Green Paper will be addressed in the 
medium term. 

A number of provisions in the VAT Directive are outdated and do not take the single 
market  aspect  into  account.  This  is  particularly  the  case  for  the  small  business 
scheme and the VAT grouping provisions. 

To  better  ensure  the  neutrality  of  the  tax,  it  will  also  be  necessary  to  review  the 
complex and divergent rules on the right of deduction and to provide a mechanism 
for resolving double taxation issues. 

A  level  playing  field  for  non-EU  and  EU  suppliers  also  has  to  be  ensured.  The 
treatment  of  small  consignments  and  other  internet  sales  is  to  be  tackled  in  this 
context. 

7. 

CONCLUSION 

The Communication has designed a way forward to achieve a simpler, more robust 
and efficient VAT system, adapted to the single market. 

The  Commission  invites  the  Council,  the  European  Parliament  and  the  European 
Economic  and  Social  Committee  to  provide  political  guidance,  confirming  their 
willingness to explore the directions set out in this Communication. 

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In order to ensure a continued steering of the overhaul of the EU VAT system, the 
Commission will report regularly on the state of play of this review and set out new 
actions. 

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