COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL AND THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE on an action plan on VAT Towards a single EU VAT area - Time to decide
Date: 2016-04-07
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: VAT, action programme, cooperation policy, electronic commerce, single market, small and medium-sized enterprises, tax collection, tax harmonisation

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 7.4.2016  COM(2016) 148 final   COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL AND THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE   on an action plan on VAT Towards a single EU VAT area - Time to decide  
 
 
Table of contents 

1 

Introduction: The case for a single EU VAT area .............................................................. 3 

2  Recent and ongoing policy initiatives ................................................................................ 4 

2.1  Removing VAT obstacles to e-commerce in the single market .................................. 5 

2.2  Towards an SME VAT Package .................................................................................. 6 

3  Urgent measures to tackle the VAT gap ............................................................................ 6 

3.1 

Improving cooperation within the EU and with non-EU countries ............................. 6 

3.2  Towards more efficient tax administrations ................................................................ 7 

3.3 

Improving voluntary compliance ................................................................................. 8 

3.4  Tax collection .............................................................................................................. 8 

3.5  Temporary derogation for Member States to tackle national and structural fraud ...... 8 

4  Medium term measure to tackle the VAT gap: towards a robust single European VAT 
area 9 

5 

Towards a modernised rates policy .................................................................................. 11 

5.1  Option 1: Extension and regular review of the list of goods and services eligible for 
reduced rates ......................................................................................................................... 12 

5.2  Option 2: Abolition of the list .................................................................................... 12 

6  Conclusion ........................................................................................................................ 13 

7 

Timeline ........................................................................................................................... 14 

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1 

INTRODUCTION: THE CASE FOR A SINGLE EU VAT AREA  

This action plan sets out the pathway to the creation of a single EU VAT1 area. A VAT area 
that can support a deeper and fairer single market, and help to boost jobs, growth, investment 
and competitiveness. A VAT area that is fit for purpose in the 21st century. 

The common VAT system is a core element of Europe's single market. By removing obstacles 
that distorted competition and prevented the free movement of goods, it has facilitated trade 
within  the  single  market.  It  is  a  major  and  growing  source  of  revenue  in  the  EU,  raising 
almost EUR 1 trillion in 2014, which corresponds to 7% of EU GDP.2 One of the EU’s own 
resources  is  also  based  on  VAT.  As  a  broad-based  consumption  tax,  it  is  one  of  the  most 
growth-friendly forms of taxation. 

But  the  VAT  system  has  been  unable  to  keep  pace  with  the  challenges  of  today's  global, 
digital and mobile economy. The current VAT system, which was intended to be a transitional 
system, is fragmented, complex for the growing number of businesses operating cross-border 
and  leaves  the  door  open  to  fraud:  domestic  and  cross-border  transactions  are  treated 
differently and goods or services can be bought free of VAT within the single market.  

It now urgently needs reform:  

 

 

 

 

It  needs  to  be  simpler  for  businesses  to  use.  Compliance  costs  are  significantly 
higher in single market trade than in domestic trade3, while complexity is stifling 
business, especially small and medium-sized businesses (SMEs);4 
It  must  combat  the  growing  risk  of  fraud.  The  "VAT  gap"  between  expected 
revenue  and  revenue  actually  collected  is  estimated  at  EUR  170  billion5,  while 
cross-border fraud alone accounts for EUR 50 billion of revenue loss each year;6 
It needs to be more efficient, in particular at exploiting the opportunities of digital 
technology and reducing the costs of revenue collection;  
It must be based on greater trust: trust between business and tax administrations, 
and between EU tax administrations. 

To sum up, VAT needs to be modernised and rebooted. Reaching this goal will not be easy. 
The current system has proved difficult to reform and the requirement for unanimity between 
all Member States to change anything presents a serious challenge. Yet increasingly business 
as  usual  is  not  an  option.  Simply  adding  new  layers  of  obligations  and  checks  in  order  to 

1  
2  
3  

4  

5  

6  

Value Added Tax. 
17.5 % of national tax revenues, including social contributions (Eurostat). 
Ernst  &  Young,  Implementing  the  ‘destination  principle’  to  intra-EU  B2B  supplies  of  goods  – 
Feasibility and economic evaluation study, 2015.  
Compliance  costs  for  business  are  estimated  between  2  and  8  %  of  the  VAT  collection  (Institute  for 
Fiscal Studies, A retrospective evaluation of elements of the EU VAT system, 2011). 
The  difference  between  the  VAT  revenue  expected  and  the  VAT  actually  collected  by  national 
authorities. The VAT gap provides an estimate of revenue lost due to fraud and evasion, tax avoidance, 
bankruptcies, financial insolvencies and miscalculations (CASE, Study to quantify and analyse the VAT 
Gap in the EU Member States, 2015). 
Ernst & Young, 2015.  

3 

 
 
 
                                                 
tackle  fraud  will  add  even  more  compliance  costs  and  legal  uncertainty  for  all  businesses, 
including the trusted ones, and further hamper the functioning of the single market. Piecemeal 
simplification is also unlikely to work. 

Action  is  now  needed.  It  is  time  for  the  creation  of  a  genuine  single  EU  VAT  area  for  the 
single market. 

To  this  end,  the  Commission  now  plans  to  present  a  legislative  proposal  to  put  in  place  a 
definitive VAT system7. This definitive system will rest upon the agreement of EU legislators 
that the VAT system should be based on the principle of taxation in the country of destination 
of  the  goods.  This  means  that  the  taxation  rules  according  to  which  the  supplier  of  goods 
collects  VAT  from  his  customer  will  be  extended  to  cross-border  transactions.  This  change 
alone should help reduce cross-border VAT fraud by EUR 40 billion per year.8 

Since  preparing  and  adopting  such  a  major  change  in  the  way  VAT  works  will  take  some 
time, the Commission will in parallel take forward a number of other linked initiatives to help 
resolve the challenges presented by the VAT system. Some of these initiatives have already 
been announced, and they will be completed with other measures to help immediately address 
the fraud issue.  

The current system is also struggling to address innovative business models and technological 
progress  in  today’s  digital  environment.  Different  VAT  rates  between  physical  and  digital 
goods and services do not fully reflect today's realities. Moreover Member States feel unduly 
constrained in their rates-setting policy. The paradigm shift in the last few years towards the 
destination principle requires a broader reflection about the consequences to be drawn for the 
VAT system and EU rules governing VAT rates. 

Overall, this action plan sets out the progressive steps required toward a single EU VAT area. 
It sets out immediate and urgent actions to tackle the VAT gap and adapt the VAT system to 
the digital economy and the needs of SMEs. And it provides clear longer-term orientations on 
the definitive VAT system and VAT rates. Decisions on all of these issues are now needed. 
Above  all,  political  leadership  is  needed,  to  overcome  the  deep-rooted  obstacles  that  have 
blocked  progress  in  the  past  and  finally  adopt  the  reforms  needed  to  combat  fraud,  remove 
administrative barriers and reduce regulatory costs to simplify life for Europe’s businesses.  

2  RECENT AND ONGOING POLICY INITIATIVES 

The Commission has consistently pressed for the reform of the VAT system. Recently, after a 
broad  and  fruitful  public  debate  launched  by  the  Green  Paper  on  the  future  of  VAT  in 
December 20109, the Commission presented its conclusions in a Communication on the future 
of VAT in December 201110 and set out the priority actions for the coming years. 

On this occasion, after many years of unsuccessful attempts, the Commission abandoned the 
objective of implementing definitive VAT arrangements based  on the principle of taxing all 

7  
8  
9  
10  

As part of the Regulatory Fitness and Performance Program (REFIT). 
Ernst & Young, 2015.  
COM(2010) 695, Commission Staff Working Document SEC(2010) 1455, 1.12.2010. 
COM(2011) 851, 6.12.2011. 

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cross-border supplies of goods in the Member State of their origin, under the same conditions 
that  apply  to  domestic  trade  including  VAT  rates.  The  European  Parliament11  and  the 
Council12 agreed that the definitive system should be based on the principle of taxation in the 
Member State of the destination of the goods.  

The initiatives that were then achieved included: 

 
 

the Quick Reaction Mechanism to combat sudden and massive VAT fraud;13 
implementation of the new place of supply rules, in line with the general principles, at 
the place of destination, for telecommunications, broadcasting and electronic services 
provided to final consumers with a One Stop Shop to facilitate tax compliance;14 
  a  new,  more  transparent  governance  system  for  EU  VAT  system,  in  which  all 

stakeholders were more closely involved.15 

Following  this,  other  initiatives  have  been  initiated  to  remove  VAT  obstacles  to  digital  and 
SMEs development in the single market and review the VAT rules in the public sector16. 

2.1  Removing VAT obstacles to e-commerce in the single market 

The  current  VAT  system  for  cross-border  e-commerce  is  complex  and  costly  for  Member 
States and business alike. The average annual costs of supplying goods to another EU country 
are estimated at EUR 8 00017. Moreover, EU businesses are at a competitive disadvantage, as 
non-EU suppliers can  supply  VAT-free goods to consumers  in the EU under the exemption 
for imports of small consignments (nearly 150 million VAT-free consignments were imported 
in 201518). The complexity of the system also makes it difficult for Member States to ensure 
compliance, with losses estimated at around EUR 3 billion annually19. 

As  announced  in  May  2015  in  the  Digital  Single  Market  strategy,20  the  Commission  will 
present a legislative proposal by the end of 2016 to modernise and simplify VAT for cross-
border e-commerce, in particular for SMEs. This will include: 

  extending the One Stop Shop mechanism to EU and non-EU countries online sales of 

tangible goods to final consumers;  

11  

12  
13  
14  
15  

16  

17  

18  
19  
20  

http://www.europarl.europa.eu/sides/getDoc.do?type=TA&language=EN&reference=P7-TA-2011-
0436 
http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/130257.pdf. 
http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/138239.pdf   
http://ec.europa.eu/taxation_customs/taxation/vat/how_vat_works/telecom/index_en.htm#new_rules  
The  VAT  Expert  Group  and  the  EU  VAT  Forum  were  set  up,  and  explanatory  notes  and  VAT 
Committee guidelines were published. 
Under special rules dating from the 1970s certain activities of public sector bodies or deemed to be in 
the  public  interest  are  not  subject  to  VAT.  Since  then  they  have  increasingly  been  deregulated  or 
opened up to the private sector, heightening concerns about the possible distortive effect of these rules 
on competition and their complexity. The Commission has investigated possible remedies. 
Preliminary  figures  from  the  ongoing  Commission'  study  on  VAT  obstacles  to  cross-border  e-
commerce. 
Idem. 
Idem. 
COM(2015) 192, 6.5.2015. 

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 

introducing  a  common  EU-wide  simplification  measure  (VAT  threshold21)  to  help 
small start-up e-commerce businesses;  

  allowing for home country checks, including a single audit of cross-border businesses;  
 
removing  the  VAT  exemption  for  imports  of  small  consignments  from  non-EU 
suppliers. 

2.2  Towards an SME VAT Package 

More  generally,  SMEs  bear  proportionally  higher  VAT  compliance  costs  than  large 
businesses due to the complexity and fragmentation of the EU VAT system.22 Further to the 
new  Single  Market  Strategy,23  the  Commission  is  therefore  preparing  a  comprehensive 
simplification package for SMEs that will seek to create an environment that is conducive to 
their growth and favourable to cross-border trade. In particular, the special scheme for small 
enterprises will be subject to review. This package will be presented in 2017.  

The  Commission  will  also  draw  lessons  from  the  withdrawal  of  the  proposal  for  a standard 
VAT return24 which remains an important area for simplification, and continue to reflect on 
how to alleviate compliance costs for SMEs in this regard. 

3  URGENT MEASURES TO TACKLE THE VAT GAP 

The  current  levels  of  VAT  gap  call  for  urgent  action  on  three  fronts:  achieving  better 
administrative  cooperation,  improving  voluntary  compliance  and  collectively  improving  the 
performance of European tax administrations. In addition, the boom in e-commerce requires a 
new approach to tax collection.  

3.1 

Improving cooperation within the EU and with non-EU countries 

tax  administrations  are  not  being  sufficiently  exploited.  Moreover, 

As  recognised  by  the  European  Court  of  Auditors,25  the  tools  of  administrative  cooperation 
between 
the 
implementation of the Eurofisc26 was not ambitious enough. We therefore need to move from 
the  existing  cooperation  models  based  on  Member  States  exchanging  information  to  new 
models  of  sharing  and  jointly  analysing  information  and  acting  together.  Member  States 
should  benefit  from  a  risk  management  capacity  at  EU  level,  enabling  them  to  rapidly  and 
more effectively identify and dismantle fraudulent networks. 

This involves looking at ways of strengthening the role and impact of Eurofisc with a view to 
making a qualitative leap forward towards a more advanced structure. With the support of the 
Commission,  competent  officials  working  in  Eurofisc  should  have  direct  access  to  relevant 
information  held  in  different  Member  States,  enabling  them  to  exchange,  share  and  analyse 

21  

22  
23  
24  
25  
26  

Under  which  no  registration  in  other  Member  States  or  to  the  One  Stop  Shop  is  required  for  cross-
border supplies. 
Institute for Fiscal Studies, see above. 
COM(2015) 550, 28.10.2015. 
COM(2013) 721, 23.10.2013. 
Special report No 24/2015: Tackling intra-Community VAT fraud: More action needed, 3 March 2016. 
Eurofisc is a network of national civil servants set up for the rapid exchange of targeted information on 
VAT fraud. 

6 

 
 
                                                 
key  information  and  launch  joint  audits.  A  legislative  proposal  to  implement  such 
improvements will be tabled in 2017.  

There is also a need to strengthen mutual assistance for the recovery of tax debts. 

Fighting  organised  crime  networks  and  VAT  fraud  on  imports  also  requires  removing  the 
obstacles  to  effective  cooperation  between  tax  administrations  and  customs,  and  with  law 
enforcement  bodies  and  financial  institutions  at  national  and  EU  level.  In  this  context, 
adoption  of  the  Commission  proposals  on  the  protection  of  the  EU  financial  interests27  to 
cover EU wide VAT fraud and the proposal to create a European Public Prosecutor's Office28 
could play a significant role. 

Finally, better cooperation with international organisations and non-EU countries over VAT 
should  make  it  possible  to  extend  the  EU  system  of  administrative  cooperation  to  non-EU 
countries, particularly to ensure effective taxation of e-commerce. 

3.2  Towards more efficient tax administrations 

It  is  the  responsibility  of  Member  States’  tax  administrations  to  enforce  tax  legislation. 
Collecting  VAT  and  fighting  fraud  in  a  global  economic  environment  requires  strong  tax 
administrations  that  are  well-equipped  to  assist  each  other.  Many  European  Semester 
recommendations  call  on  Member  States  to  improve  tax  compliance  and  their  tax 
administration  capacity.  More  should  therefore  be  done  to  exchange  and  implement  best 
practices in this area.  

Modernising VAT collection could also have significant benefits. eGovernance and digital tax 
accounts  would  simplify  the  procedures  for  the  tax  authorities  and  reduce  burdens  for 
business,  both  within  Member  States  and  across  borders.  In  addition,  it  could  help  building 
trust and combat fraud. 

The time has come to develop a common agenda for tax administrations in order to build trust 
and  to  strengthen  tax  administrations’  capacity  to  tackle  fraud  and  adapt  to  economic 
developments while working together. The Commission will: 

  provide for a strategic discussion between the heads of the 28 tax administrations, and 

 

with customs, in order to build such an agenda; 
facilitate  agreements  on  minimum  quality  standards  for  core  tax  administration 
functions and evaluation; 

  provide  platforms  for  knowledge  and  experience  sharing  and  technical  assistance  to 

support reforms.29 

27  

28  

29  

COM(2012) 363, 11.07.2012, Proposal for a Directive of the European Parliament and of the Council 
on the fight against fraud to the Union's financial interests by means of criminal law. 
COM(2013) 534, 17.07.2013, Proposal for a Council Regulation on the establishment of the European 
Public Prosecutor's Office. 
The Structural Reform Support Service (SRSS) of the Commission could play a role. 

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3.3 

Improving voluntary compliance 

It is also important to improve voluntary compliance and cooperation between businesses and 
tax authorities. The Commission will facilitate this process by running or sponsoring concrete 
projects such as effective dispute prevention and resolution mechanisms under the EU VAT 
Forum and will facilitate agreements between tax administrations and business sectors. 

3.4  Tax collection 

E-commerce, the collaborative economy and other new forms of business are both a challenge 
and  an  opportunity  in  terms  of  tax  collection.  This  is  true  domestically  as  well  as  cross-
border. Member States have to work together and with the Commission support, to define and 
exchange best practices in addressing these challenges. New approaches to tax collection may 
include, among others: new reporting tools, new auditing tools, defining new roles for certain 
market intermediaries.  

3.5  Temporary derogation for Member States to tackle national and structural fraud 

VAT  fraud  does  not  affect  all  EU  countries  equally;  indeed,  the  VAT  gap  varies  from  less 
than  5%  to  more  than  40%.  Some  Member  States  more  heavily  affected  have  asked  to  be 
allowed to implement a temporary generalised reverse charge system which would derogate 
from the general principles of the VAT Directive30. These requests would aim at addressing 
an endemic VAT fraud, taking into account the specificities of the Member States in question.  

The Commission recognises the need to find practical and short-term solutions to tackle VAT 
fraud.  While  going  beyond  the  possibilities  of  the  current  VAT  Directive31  and  requiring 
therefore  a  legislative  change,  the  Commission  takes  these  requests  very  seriously  and  will 
thoroughly  assess  their  political,  legal  and  economic  implications  before  presenting  its 
conclusions. Such derogations should not disproportionally hamper the proper functioning of 
the single market and would require unanimity in the Council. This assessment will involve 
detailed analysis so as to ensure a thorough and accurate understanding of the situation and 
the possible implications of the temporary derogations. The possible impact on business and 
tax  administrations  in  particular  in  terms  of  adjustment  costs  as  well  as  fraud  shifting  to 
neighbouring countries and retail level will be a critical element to be taken into account.  

In  any  case,  credible  administrative  measures  exist  and  have  proved  their  effectiveness  for 
containing  fraud  in  many  Member  States.  Therefore,  the  Commission  also  stands  ready  to 
help  the  Member  States  concerned  to  improve  their  tax  collection  and  inspection  capacity. 
Comprehensive  reform  programmes  based  on  thorough  analysis  of  the  VAT  gap  and  fraud 
schemes in these Member States and building on best practice could be implemented quickly. 
This  could  involve  Commission  financial  support  and  the  expertise  of  national  tax 
administrations with a good record in this field. In addition Eurofisc could help carry out risk 
analysis,  and  joint  audits  could  be  launched,  for  which  national  tax  administrations  could 
volunteer.  

30  
31  

Directive 2006/112/EC of 28 November 2006 on the common system of value added tax. 
Article 395 of the VAT Directive. 

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The assessment of these derogations will be done without prejudice to the proposals for the 
implementation  of  the  definitive  VAT  system  to  be  presented  by  the  Commission.  The 
Commission will report on the state of play of this matter by June of this year. 

4  MEDIUM  TERM  MEASURE  TO  TACKLE  THE  VAT  GAP:  TOWARDS  A  ROBUST  SINGLE 

EUROPEAN VAT AREA 

The present system, which has been in place since 1993 and was supposed to be transitional, 
splits  every  cross-border  transaction  into  an  exempted  cross-border  supply  and  a  taxable 
cross-border  acquisition.  It  is  like  a  customs  system,  but  lacks  equivalent  controls  and  is 
therefore the root of cross-border fraud.  

Such fraud occurs when a supplier pretends to have transported the goods to another Member 
State  but  the  goods  are  in  fact  consumed  VAT-free  locally  or  especially  when  a  client  of  a 
cross-border  transaction  purchases  goods  or  services  VAT-free  and  charges  VAT  without 
remitting it to tax authorities while his/her customer can deduct it.32 

It is now high time to adopt a unified approach to tackling such fraud that is fully compatible 
with the requirements of the single market. Even the ambitious administrative actions set out 
above to tackle the VAT gap, while useful, would not be sufficient on their own to put an end 
to cross-border fraud. 

A robust single European VAT area would treat cross-border transactions in the same way as 
domestic  transactions,  putting  an  end  to  the  endemic  weakness  of  the  system,  and  would 
integrate the  management and enforcement of  VAT through closer cooperation between  tax 
administrations. 

Following  the  Council  conclusions  of  May  2012,  the  Commission  engaged  in  transparent 
dialogue with Member States and other stakeholders33 with the aim of examining in detail the 
possible  options  for  implementing  the  ‘destination  principle’  in  B2B34  cross-border  trade35 
including the implementation of a generalised reverse charge system. 

Under  a  generalised  reverse  charge  system,  VAT  is  ‘suspended’  along  the  whole  economic 
chain and is charged only to consumers. This means that total VAT collection is shifted to the 
retail stage. Such a system does not have the self-policing nature of the current VAT system 
(i.e. under the principle of fractionated payment), which ensures that a small number of fairly 
large, reliable taxable persons in the economic chain account for most of VAT.  

In  addition,  other  types  of  fraud  can  arise,  e.g.  fraudsters  claiming  to  be  taxable  persons  to 
obtain goods intended for final consumption VAT-free. There is therefore a high built-in risk 
that fraud and untaxed private consumption would soar, particularly in view of EU countries’ 
high VAT rates (up to 27 %).  

32  
33  
34  
35  

‘Missing Trader Intra-Community’ and ‘carrousel’ fraud. 
Business and tax practitioners’ representatives and academics from the VAT Expert Group. 
Business to Business. 
SWD(2014)  338,  29.10.2014  on  the  implementation  of  the  definitive  VAT  regime  for  cross-border 
trade. 

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The Commission's conclusion from this work is therefore that the best option for the EU as a 
whole  would  be  to  tax  B2B  supplies  of  goods  within  the  EU  in  the  same  way  as  domestic 
supplies,  thus  fixing  the  great  flaw  of  the  transitional  arrangements  while  keeping  the 
underlying features of the VAT system intact. 

Such  a  system  of  taxation  of  cross-border  supplies  will  ensure  consistent  treatment  of 
domestic  and  cross-border  supplies  along  the  entire  chain  of  a  production  and  distribution, 
and  re-establish  the  basic  features  of  the  VAT  in  cross-border  trade  i.e.  the  fractionated 
payments system with its self-policing character.  

Therefore,  this  change  should  reduce  cross-border  fraud  by  about  EUR 40 billion  (80%)  a 
year  in  the  EU.36  The  intermediate  and  final  consumption  of  the  goods  will  continue  to  be 
taxed  where  the  goods  are  transported  to,  which  is  a  reliable  proxy  of  the  place  of 
consumption.  Such  an  objective  criterion  would  make  it  difficult  for  taxable  persons  to 
engage in tax planning or commit fraud. This will enable tax administrations to concentrate 
resources on other challenges. 

Some  significant  simplification  measures  will  be  taken  to  accompany  this  change.  For 
instance,  the  One  Stop  Shop  that  already  exists  for  telecommunication,  broadcasting  and 
electronic services and which is due to be extended to all e-commerce transactions37, will be 
even  more  widely  implemented  and  rebooted,  so  as  to  fully  exploit  the  opportunities 
presented by digital technology to simplify, standardise and modernise processes. Businesses 
will  need  to  register  for  VAT  purposes  in  the  Member  States  where  they  were  established 
only. Collectively, businesses should save an average of around EUR 1 billion.38  

Such a system would require more trust and cooperation between tax administrations as the 
Member State where the goods arrive would have to rely on the Member State of departure to 
collect  the  VAT  due  on  the  cross-border  supply.  The  efficiency  in  collecting  VAT  and 
fighting fraud between tax administrations would therefore need to be aligned to the highest 
level. Such a system would also involve significant change for business. Any implementation 
should therefore be gradual to ensure a smooth transition for business and allow all Member 
States to reach higher levels of cooperation and administrative capacity. It should also be user 
friendly and be built on the latest digital technologies available. 

As  a  first  legislative  step,  the  principle  of  taxation  of  cross-border  supplies  will  be  re-
established  and  the  One  Stop  Shop  extended  to  cover  cross-border  B2B  supplies  of  goods. 
However, compliant businesses, certified by their tax administrations, including SMEs, would 
continue  to  be  liable  for  VAT  on  goods  purchased  from  other  EU  countries.  As  compliant 
businesses  represent  the  vast  majority  of  taxable  persons  involved  in  cross-border 
transactions, this would significantly reduce the amounts of VAT channelled through the One 
Stop Shop and would make it easier for businesses to adapt.  

As a second legislative step, taxation would cover all cross-border supplies so all supplies in 
goods and services within the single market, either domestic or cross-border, would be treated 

36  

37  
38  

In France, for instance, fraud would be reduced by about EUR 10 billion. Other figures include: Italy: 
EUR 7 billion, UK: EUR 4 billion, Romania: about 17 % of current VAT revenue, Greece: 12 %, Ernst 
& Young (2015). 
See the upcoming legislative proposal set out above. 
Ernst & Young, see above. 

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the same way. To this end a significant qualitative leap in cooperation and joint enforcement 
tools  would  be  needed  to  ensure  mutual  trust  between  tax  administrations.  Stepping  up 
cooperation  through  Eurofisc  and  improving  tax  administrations’  capacities  will  be  the  first 
stage in meeting this objective. Only when Member States consider that the qualitative leap 
has been achieved could the definitive system be fully implemented. 

5  TOWARDS A MODERNISED RATES POLICY 

The VAT Directive sets out general rules framing Member States' freedom to set VAT rates. 
These rules were intended to guarantee, above all, the neutrality, simplicity and workability of 
the VAT system. The legislator chose to apply – as the default rule – a standard VAT rate to 
all taxable supplies of goods and services and to set a minimum rate of 15%. It permitted two 
reduced rates, set at 5% or more, which were confined to certain goods and services listed in 
the  VAT  Directive39.  In  addition  a  number  of  reduced  rates,  including  lower  than  5%  are 
allowed in certain Member States according to ‘standstill derogations’.40 

But  current  rules  do  not  fully  take  into  account  technological  and  economic  developments. 
This  is  for  example  the  case  for  e-books  and  electronic  newspapers,  which  cannot  benefit 
from  reduced  rates  available  for  physical  publications.  This  issue  will  be  addressed  in  the 
context of the Digital Single Market strategy. 

Moreover,  these  rules  were  designed  over  two  decades  ago  with  the  aim  of  arriving  at  a 
definitive  VAT  system  based  on  the  origin  principle.  Since  then,  VAT  has  increasingly 
developed into a system based on the destination principle. The rules on rates, however, have 
never  been  adjusted  to  reflect  this  logic,  which  allows  for  greater  diversity  in  VAT  rates. 
Differences  in  VAT  rates  may  still  affect  the  functioning  of  the  single  market  in  a  system 
where consumers cross the border to buy goods and services. But apart from these cases, in 
contrast to what happens under an origin system, suppliers derive no significant benefit from 
being established in a lower-rate Member State, so VAT rate differences have less potential to 
disrupt the functioning of the single market. 

The rules of the VAT Directive aim to preserve the functioning of the single market and avoid 
distortions  of  competition.  In  accordance  with  the  subsidiarity  principle,  the  Commission 
recalls  that  the  EU  can  act  only  if  and  in  so  far  as  certain  objectives  cannot  be  sufficiently 
achieved by the Member States, and can be better achieved at Union level. The current rules 
make  it  slow  and  difficult  for  them  to  extend  reduced-rate  treatment  to  new  areas,  as  all 
decisions have to be taken unanimously. As a result, the VAT Directive is becoming obsolete, 
for example as regards products subject to technological progress.  

Worse, given the long time-lags for adopting changes in EU legislation, Member States find 
themselves  in  breach  of  the  rules.  To  date,  the  Commission  has  had  to  open  more  than  40 
infringement  proceedings  against  over  two  thirds  of  Member  States.  A  reform  giving  more 
freedom to Member States would enable them to take the tax policy decisions they want more 
rapidly, while relieving the EU of unnecessary litigation. 

39  
40  

In Annex III to the VAT Directive 
Articles 109-122 of the VAT Directive. 

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On  the  other  hand,  devolving  full  rate-setting  power  to  Member  States  would  not  come 
without  costs  and  disadvantages,  even  if  it  did  not  in  itself  threaten  the  functioning  of  the 
single  market.  It  might  generate  an  erosion  of  VAT  revenues,  as  individual  sectors  would 
claim  a  more  favourable  treatment.  In  the  long  run,  this  might  shrink  the  tax  base,  going 
against  the EU’s  economic  policy  recommendations.  Indeed,  the  gap  between  reduced  rates 
and  standard  rates  has  tended  to  widen  in  recent  years,  lowering  VAT  efficiency  and 
increasing  distortions.  Furthermore,  greater  decentralisation  might  result  in  an  increase  in 
complexity,  creating  additional  costs  for  businesses  and  generating  legal  uncertainty.  In  a 
destination  based  system,  under  which  businesses  in  each  Member  State  must  charge  VAT 
according to the rates applicable in other Member States, it becomes increasingly important 
that each set of national rules are simple and to the widest extent possible rely on harmonised 
product categories. 

The  appraisal  of  a  more  decentralised  system  ultimately  depends  on  political  preferences. 
Therefore  the  implementation  of  such  a  system  cannot  be  decided  upon  as  a  pure  technical 
matter,  but  requires  political  discussion.  There  are  several  possible  sub-options  at  technical 
level,  but  first  a  consensus  should  be  reached  on  the  broad  direction  of  reform.  Two  main 
options are outlined below. They are not contradictory. They represent different degrees in the 
flexibility that could be granted to Member States. 

5.1  Option 1: Extension and regular review of the list of goods and services eligible for 

reduced rates 

The minimum standard VAT rate of 15% would be maintained. The list of goods and services 
that can benefit from the application of a reduced rate would be reviewed in the context of the 
transition to the definitive system and then at regular intervals, in particular taking account of 
political priorities. Member States would be able to submit to the Commission their views on 
the needs for adjustment.  

The  Commission,  with  the  support  of  the  Member  States,  would  analyse  whether  such 
changes  would  pose  any  risk  to  the  functioning  of  the  single  market  or  distort  competition, 
and would report its findings before any change.  

Under this option all currently existing reduced rates, including derogations, legally applied in 
Member  States  would  be  maintained  and  could  be  included  in  the  list  of  optional  reduced 
rates available to all Member States, ensuring equal treatment.  

5.2  Option 2: Abolition of the list 

The most ambitious approach in terms of granting Member States greater rate-setting power 
would be to abolish the list and allow them greater freedom on the number of reduced rates 
and their level.  

While Member States would remain constrained by EU legislation, such as single market or 
competition rules, and the EU’s economic governance framework, this option would require 
safeguards to be put in place to avoid unfair tax competition within the single market, while 
also  guaranteeing  legal  certainty  and  reducing  compliance  costs.  The  freedom  to  set  VAT 
rates  should  be  thus  accompanied  by  a  number  of  basic  rules  framing  the  cases  in  which 
reduced rates may be applied. 

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In  particular,  Member  States  could  be  asked  to  inform  the  Commission  and  other  Member 
States about any new measure and to assess any impact it might have on the single market. To 
prevent  unfair  tax  competition  in  cross-border  shopping,  one  possible  solution  could  be  to 
prevent  application  of  reduced  rates  to  high-value  goods  and  services,  in  particular  easily 
transportable items. To ensure the overall consistency and simplicity of the rates system, the 
total  number  of  reduced  rates  allowed  by  Member  States  could  be  limited.  These  elements 
would limit the possibility of narrowly targeting sectors for unfair tax relief. 

Also  under  this  option  all  currently  existing  reduced  rates,  including  derogations,  legally 
applied in Member States would be maintained, the possibility to apply them could be made 
available to all Member States. The minimum standard VAT rate would be removed. 

6  CONCLUSION 

The action plan has designed a way forward to achieve a single EU VAT Area. The initiatives 
stemming from this Communication will be developed in accordance with the Commission's 
Better Regulation guidelines. 41 

The  Commission  calls  on  the  European  Parliament  and  the  Council  supported  by  the 
European  Economic  and  Social  Committee  to  provide  as  soon  as  possible  clear  political 
guidance, confirming their willingness to support the actions set out in this Communication. 

In  order  to  ensure  a  continued  steering  of  the  overhaul  of  the  EU  VAT  system  initiated  in 
2011, the Commission will continue reporting regularly on the state of play of this review and 
set out new actions. 

41  

SWD(2015) 111, 19.5.2015.  

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7  TIMELINE 

Adapting the VAT system to the digital economy and the needs of SMEs 

2016 

Proposal for removing VAT obstacles to cross-border e-commerce (Digital Single 
Market - REFIT) - e-publications 

2017  SME VAT package 

Towards a robust single European VAT area 

2016 

Measures to improve cooperation between tax administrations and with customs and 
law enforcement bodies and to strengthen tax administrations' capacity 

2016  Evaluation report of the Directive on the mutual assistance for the recovery of tax debts 

2017  Proposal to enhance VAT administrative cooperation and Eurofisc 

2017 

Proposal for the definitive VAT system for cross-border trade (single European VAT 
area – first step - REFIT) 

Towards a modernised rates policy 

2017  Reform of VAT rates (REFIT) 

14