COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document Proposal for a Council Directive amending Directive 2006/112/EC as regards harmonising and simplifying certain rules in the value added tax system and introducing the definitive system for the taxation of trade between Member States
Date: 2017-10-04
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: European tax cooperation, VAT, goods and services, intra-EU trade, supply, tax collection, tax evasion, tax harmonisation, tax law, taxpayer

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 4.10.2017  SWD(2017) 325 final   COMMISSION STAFF WORKING DOCUMENT  IMPACT ASSESSMENT  Accompanying the document Proposal for a Council Directive amending Directive 2006/112/EC as regards harmonising and simplifying certain rules in the value added tax system and introducing the definitive system for the taxation of trade between Member States {COM(2017) 567final} {COM(2017) 568 final} {COM(2017) 569 final} {SWD(2017) 326 final}  
 
 
TABLE OF CONTENTS 

1. 

INTRODUCTION AND CONTEXT ......................................................................... 9 

1.1.

Introduction ....................................................................................................... 9 

1.2.

  Scope of the initiative ...................................................................................... 10 

1.2.1.  Taxation of trade between Member States ........................................ 10 

1.2.2.  Rationale for a two-step approach ..................................................... 11 

1.3.

Interaction  of  the  initiative  with  the  upcoming  VAT  proposals  on 
rates, SMEs and administrative cooperation ................................................... 13 

1.3.1.  VAT rates .......................................................................................... 13 

1.3.2.  SMEs ................................................................................................. 13 

1.3.3.  Administrative cooperation ............................................................... 14 

1.4.

  Functioning of the common system of value added tax .................................. 14 

1.4.1.  Basic principle: the fractioned collection of VAT ............................ 14 

1.4.2.  VAT treatment of intra-EU supplies of goods before 1993 .............. 15 

1.4.3.  VAT treatment of intra-EU supplies of goods since 1993 ................ 16 

2.  WHAT IS THE PROBLEM AND WHY IS IT A PROBLEM? ............................... 18 

2.1.

  Problem tree ..................................................................................................... 18 

2.2.

  Evaluation  of  the  EU  VAT  system  and  other  sources  attesting  to  the 

problems .......................................................................................................... 20 

2.3.

  Problem 1: intra-EU cross-border VAT fraud ................................................. 21 

2.3.1.  The problem and its EU dimension ................................................... 21 

2.3.2.  Evolution of the problem ................................................................... 23 

2.3.3.  Problem  driver:  the  endemic  weakness  of  the  current 
transitional  VAT  system  resulting  from  the  break  in  the 
fractioned collection of VAT ............................................................. 24 

2.3.4.  Consequences: who is affected and how? ......................................... 26 

2.4.

  Problem 2: The complexity of the current transitional VAT system .............. 27 

2.4.1.  The problem and its EU dimension ................................................... 27 

2.4.2. 

Introduction and VAT notions ........................................................... 28 

2.4.3.  Driver 1: The additional VAT obligations associated with the 

current transitional VAT system ....................................................... 28 

2.4.4.  Driver  2:  Divergent  application  of  EU  VAT  rules  across  the 

Member States. .................................................................................. 28 

2.4.5.  Consequences: who is affected and how? ......................................... 29 

2.5.

  Conclusion ....................................................................................................... 30 

2.6.

  Summary  of  main  causes/consequences  to  the  complexity  of  the 

current transitional VAT system ..................................................................... 31 

2 

 
 
 
2.7.

  Evolution  of  the  problem  without  action  at  EU  level  (dynamic 

baseline) ........................................................................................................... 34 

2.7.1. 

Intra-EU cross-border VAT fraud perspective .................................. 34 

2.7.2.  Complexity perspective ..................................................................... 34 

2.7.3.  Limits  to  the  effectiveness  of  the  current  transitional  VAT 

system ................................................................................................ 35 

3.  WHY SHOULD THE EU ACT? .............................................................................. 36 

4.  WHAT SHOULD BE ACHIEVED? ........................................................................ 37 

4.1.

  General objectives ........................................................................................... 37 

4.2.

  Specific objectives ........................................................................................... 37 

4.3.

  Linking the objectives to the problem ............................................................. 37 

4.4.

  Consistency  with  other  EU  policies  and  with  the  Charter  for 

fundamental rights ........................................................................................... 38 

5.  WHAT  ARE  THE  VARIOUS  OPTIONS  TO  ACHIEVE  THE 

OBJECTIVES? .......................................................................................................... 39 

5.1.

  Selection of options ......................................................................................... 39 

5.2.

  Baseline ........................................................................................................... 40 

5.3.

  Option 1: Limited improvement of current rules ............................................ 41 

5.4.

  Option 2: Taxation following the flow of goods ............................................. 44 

5.5.

  Option 3: Reverse charge following the flow of goods ................................... 45 

5.6.

  Option 4: Alignment with the place of supply of services .............................. 46 

5.7.

  Option 5: Taxation following the contractual flow ......................................... 47 

5.8.

  Summary: main features of the options ........................................................... 48 

5.8.1.  Place of taxation ................................................................................ 48 

5.8.2.  Person liable for the payment of VAT .............................................. 48 

5.8.3.  Technological dimension ................................................................... 49 

5.8.4.  Summary table ................................................................................... 49 

5.9.

  Discarded option: Option 3 ............................................................................. 53 

6.  WHAT  ARE  THE  IMPACTS  OF  THE  DIFFERENT  POLICY  OPTIONS 

AND WHO WILL BE AFFECTED? ........................................................................ 54 

6.1.

  Methodology .................................................................................................... 54 

6.2.

  Analysis of the impacts of each of the options ................................................ 54 

6.2.1.  Baseline ............................................................................................. 54 

6.2.2.  Option 1: Limited improvement of current rules .............................. 57 

6.2.3.  Option 2: Taxation following the flow of goods ............................... 59 

6.2.4.  Option 4: Alignment with the place of supply of services ................ 63 

6.2.5.  Option 5: Taxation following the contractual flow ........................... 65 

3 

 
7.  HOW DO THE OPTIONS COMPARE? .................................................................. 68 

7.1.

  Summary assessment of the impacts ............................................................... 68 

7.1.1. 

Impact on MTIC fraud and on other fraud aspects ............................ 68 

7.1.2. 

Impact on administrative costs .......................................................... 69 

7.1.3. 

Impact on cash flow of Member States ............................................. 69 

7.1.4. 

Impact on compliance costs ............................................................... 69 

7.1.5. 

Impact on cash flow of businesses .................................................... 71 

7.1.6. 

Internal market perspective ............................................................... 71 

7.1.7.  Macroeconomic impact ..................................................................... 72 

7.2.

  Overall feedback of stakeholders on the options ............................................. 73 

7.3.

  Comparison of options .................................................................................... 73 

7.3.1.  Comparison of effectiveness ............................................................. 73 

7.3.2.  Comparison of efficiency .................................................................. 74 

7.3.3.  Comparison of coherence .................................................................. 74 

7.4.

Identification  of  the  preferred  option:  Option  2  (combined  with 
Option 1) .......................................................................................................... 76 

7.4.1.  Option 2 and final target .................................................................... 76 

7.4.2.  A  staggered  and  balanced 

implementation:  combining 

Option 1 and Option 2 ....................................................................... 77 

7.5.

  Subsidiarity of the preferred option ................................................................. 79 

7.6.

  Proportionality of the preferred option ............................................................ 79 

7.7.

Impact on SMEs .............................................................................................. 80 

8.  HOW  WOULD  ACTUAL 

IMPACTS  BE  MONITORED  AND 

EVALUATED? ......................................................................................................... 81 

8.1.

Indicators for monitoring and evaluation ........................................................ 81 

8.2.

  Monitoring structures ...................................................................................... 83 

8.3.

  Evaluation ........................................................................................................ 83 

ANNEX 1: PROCEDURAL INFORMATION ................................................................ 84 

ANNEX 2: STAKEHOLDER CONSULTATION ........................................................... 87 

ANNEX 3: WHO IS AFFECTED BY THE INITIATIVE AND HOW ........................... 99 

ANNEX  4:  ANALYTICAL  MODELS  USED  IN  PREPARING  THE  IMPACT 

ASSESSMENT ....................................................................................................... 102 

ANNEX 5: BACKGROUND INFORMATION ON VAT ............................................. 117 

ANNEX  6:  EVALUATION  AND  STUDIES  TO  SUPPORT  THE  IMPACT 

ASSESSMENT ....................................................................................................... 144 

4 

 
 
 
 
 
List of tables 

Table 1:   VAT Gap estimates, 2010 - 2014 .................................................................... 23 

Table 2:   Causes/consequences - Complexity of current transitional VAT system ........ 31 

Table 3:   Links objectives/problems ............................................................................... 37 

Table 4:   Classification of the options............................................................................. 48 

Table 5:   Main features of the options ............................................................................ 50 

Table 6:   Summary impacts on Member States in net monetary terms (EUR millions) . 68 

Table 7:   Summary impacts on compliance costs of businesses ..................................... 69 

Table 8:   Summary analysis of impacts .......................................................................... 76 

Table 9:   Monitoring and evaluation framework ............................................................ 82 

Table 10: Stakeholders consulted ..................................................................................... 87 

Table 11: Consultation activities ...................................................................................... 88 

Table 12: Primary data collection instruments ............................................................... 103 

Table 13: Criteria for defining business types ................................................................ 105 

Table 14:  Forecasts  of  the  macroeconomic  variables  under  the  baseline  (3-year 
cumulative growth) ........................................................................................ 113 

Table 15:  Difference  in  %  of  the  3-year  cumulative  growth  of  the  macroeconomic 
variables under each of the five policy options differ from the baseline ....... 113 

Table 16: Inventory of possible options ......................................................................... 132 

5 

 
 
 
 
Abbreviations 

B2B 
B2C 
CJEU 
CTP 
EU 
EUR 
FTE 
GDP 
GFV 
MOSS 
MTIC fraud 
OSS 
SME 
VAT 
VEG 
VIES 

Business to Business 
Business to Consumer (not VAT registered) 
Court of Justice of the European Union 
Certified Taxable Person 
European Union 
Euro 
Full Time Equivalent 
Gross Domestic Product 
Group on the Future of VAT 
Mini One Stop Shop 
Missing Trader Intra-Community (MTIC) fraud 
One Stop Shop 
Small and Medium-sized Enterprises 
Value Added Tax 
VAT Expert Group 
VAT Information Exchange system. 

Glossary of terms in their meaning within this document and for its specific purpose  

Administrative costs 

Costs for tax administrations. 

Business types 

Large business 

Micro business 

SME Type 1 

Administrative  costs  for  a  tax  administration  will  include 
costs  relating  to  the  following  activities:  processing  VAT 
registrations,  undertaking  VAT  audits,  reviewing  VAT 
returns,  reviewing  recapitulative  statements,  helpline  and 
written  query  handling  and  the  implementation  of  new 
legislation. 

A  large  business  is  defined  as  a  business  with  a  turnover 
exceeding EUR 50 million, having more than 250 employees, 
and  possessing  VAT  registration  in  six  or  more  Member 
States. For further details on the definition of a large business, 
please see Annex 4. 

A  micro-business  is  a  business  which  has  fewer  than  ten 
employees  and  a  turnover  or  balance  sheet  total  of  less  than 
EUR 2 million. 

An  SME  (Small  and  Medium-sized  Enterprises)  Type  1 
business is defined as a business with a turnover of less than 
EUR 50 million, having less than 250 employees and a single 
VAT  registration  in  its  Member  State  of  establishment. 
Further details  on the definition  of an  SME Type 1 business 
are available in Annex 4. 

6 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SME Type 2 

Compliance costs 

Cross-border trade  

EU VAT Forum 

EUROFISC 

Expert stakeholders  
Full Time Equivalent 
(FTE) 

Group on the Future of 
VAT (GFV) 

Treasury 

VAT Committee 

An  SME  (Small  and  Medium-sized  Enterprises)  Type  2 
business is defined as a business with a turnover of less than 
EUR  50  million,  having  less  than  250  employees  and  VAT 
registrations  in  more  than  one  (but  less  than  six)  Member 
States.  Further  details  on  the  definition  of  an  SME  Type  2 
business are available in Annex 4. 
Costs for businesses. 

Compliance costs for businesses will include costs relating to 
the  following  activities:  registration  for  VAT,  completion  of 
periodic  VAT  returns,  dealing  with  a  VAT  audit,  obtaining 
customer's VAT registration details, completing recapitulative 
statements and obtaining proof of the intra-EU movement of 
goods. 
Refers solely to intra-EU cross-border B2B trade. 

The  terms  "trading  across  the  EU",  "trading  cross-border", 
"trading  in  another  Member  State",  "doing  business  in  other 
Member  States",  "doing  business  across  the  EU",  "intra-EU 
transactions,  "intra-EU  trade"  refer  to  any  situation  where  a 
business:  (i)  makes  supplies  of  goods  taxable  in  a  Member 
State  other  than  that  in  which  he  is  established;  (ii)  acquires 
goods  from  a  business  established  in  another  Member  State; 
or  (iii)  supplies  goods  to  a  customer  established  in  another 
Member State.   
The EU VAT Forum was set up by a decision of the European 
Commission  2012/C198/05  of  3  July  2012  and  offers  a 
discussion platform where business and VAT authorities meet 
to discuss how the implementation of the VAT legislation can 
be improved in practice.   
EUROFISC  is  a  network  for  the  swift  exchange  of  targeted 
information  between  Member  States.  See  information  under 
following link EUROFISC. 
Members of the VAT Expert Group 
A Full Time Equivalent is  a unit that indicates the workload 
of an employed person of a business or a Member State Tax 
Authority. For the purposes of this document, it is defined as 
forty hours per week. 
The Group on the Future of VAT is an informal Commission 
expert  group  set  up  in  2011  in  response  to  the  need  for  a 
forum where more in-depth discussions on the topics raised in 
the 2010 Green Paper can be held. The Group is composed of 
delegates (VAT experts) from the 28 EU Member States' tax 
administrations and serves as a forum for in-depth discussion 
and exchange of opinions on the Commission's pre-legislative 
initiatives and the preparation of future VAT legislation.  
A government department related to finance and taxation of a 
particular jurisdiction (of a Member State or a third country)  
(Directive 
Under  Article 398  of 
2006/112/EC), the VAT Committee deals with the obligatory 
consultations required by certain Articles of that Directive. In 

the  VAT  Directive 

7 

 
 
 
 
VAT Expert Group 
(VEG) 

VIES  

addition,  it  examines  questions  on  the  application  of  the 
Community  VAT  provisions  raised  by  the  Chairman  on  his 
own initiative or at the request of a Member State. The VAT 
Committee is also a forum for the exchange of views in order 
to  reach  guidelines  on  a  uniform  application  of  common 
practices with regard to VAT provisions. 
The  VAT  Expert  Group  was  set  up  in  2012  by  Commission 
Decision  2012/C  188/02  of  26  June  2012  in  response  to  the 
request by stakeholders for greater involvement in the process 
of preparing EU VAT legislation expressed during the public 
consultation launched by the 2010 Green Paper on the future 
of VAT. The Group is composed of 40 members: individuals 
with  the  requisite  expertise  in  the  area  of  VAT  and 
organisations  representing 
tax 
practitioners and academics, and serves as a bilateral forum to 
allow  for  an  open,  structured  and  transparent  dialogue 
between  the  Commission  and  stakeholders  on  any  matter 
relating  to  the  preparation  and  implementation  of  EU 
legislation and other policy initiatives taken at EU level in the 
field of VAT.  
Electronic  means  of  validating  VAT-identification  numbers 
of  economic  operators  registered  in  the  European  Union  for 
cross-border transactions on goods or services. 
See more info on: http://ec.europa.eu/taxation_customs/vies/ 

in  particular  businesses, 

8 

 
 
 
 
1. 

INTRODUCTION AND CONTEXT 

1.1.

Introduction 

Value  Added Tax (VAT) is  a general  tax on consumption  applied to  supplies  of goods 
and  services  along  the  whole  production  and  distribution  process.  It  is  a  major  and 
growing  source  of  tax  revenue  in  the  European  Union  (EU).  VAT  raised  slightly  more 
than  EUR 1 trillion  in  2015,  which  corresponds  to  7%  of  EU  GDP  or  17.6%  of  total 
national tax revenues1. One of the EU's own resources is also based on VAT (12.4% of 
the EU budget in 2015)2. As a broad-based consumption tax, it is considered to be one of 
the most growth-friendly forms of taxation. 

One of the key strengths of VAT is that, by allowing businesses to exactly offset the tax 
incurred  in  previous  stages  of  the  production  chain,  it  is  much  better  suited  than  other 
types of indirect taxes to operate an internal market free of tax distortions. This was the 
main reason for its early adoption by the EU. It is governed by the VAT Directive3 which 
aims  at  ensuring  that  the  principles  underlying  the  functioning  of  this  tax  apply 
consistently in all Member States. 

In  recent  years,  however,  the  VAT  system  has  been  unable  to  keep  pace  with  the 
challenges  of  the  global  economy  and  the  opportunities  offered  by  new  technologies. 
Therefore,  the  Commission  adopted  on  7 April  2016  an  Action  Plan  on  VAT4 
(hereinafter "Action Plan") setting out ways to modernise the VAT system so as to make 
it  simpler,  more  fraud-proof  and  business-friendly.  In  this  context,  the  Commission 
announced its intention to adopt in 2017 four VAT-related proposals: 

1)  a  definitive  VAT  system  for  intra-EU  cross-border  trade  based  on  the  principle  of 
taxation  in  the  Member  State  of  destination5  in  order  to  create  a  robust  single 
European VAT area (first legislative step6); 

2)  a  modernised  VAT  rates  policy  so as  to  allow Member  States  greater  autonomy  on 

setting the VAT rates; 

3)  a comprehensive simplification VAT package for SMEs7; 
4)  a proposal to enhance VAT administrative cooperation and EUROFISC8. 

This  impact  assessment  relates  to  the  first  mentioned  proposal  on  a  definitive  VAT 
system for intra-EU trade (hereafter the "initiative"). 

1  Eurostat, Tax revenue statistics, Eurostat (gov_10a_taxag)  

http://ec.europa.eu/eurostat/statistics-explained/index.php/Tax_revenue_statistics 

2  European Commission, EU Budget 2015, Financial Report  

http://ec.europa.eu/budget/financialreport/2015/lib/financial_report_2015_en.pdf 

3   Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax – as 

amended (OJ L 347, 11.12.2006, p. 1). 

4   See 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 (COM(2016) 148 final). 

5   The  principle  of  taxation  at  destination,  as  well  as  of  taxation  at  origin,  is  commented  under 

Section 1.4.2 below and in Annex 5, Section 2. 
6   See Sections 1.2.2 and 8.1 for more explanations. 
7   See Glossary. 
8   See Glossary. 

9 

 
 
 
                                                 
 
This  initiative  is  part  of  the  Commission's  Regulatory  Fitness  and  Performance 
Programme (REFIT). All the options (except baseline) of this initiative will likely have 
significant  impacts  on  simplification  and  will  reduce  administrative  burden  and 
compliance costs. These benefits for businesses (including SMEs) would have a positive 
impact on economic growth and competitiveness. 

1.2.

Scope of the initiative 

1.2.1.  Taxation of trade between Member States 

The VAT Directive defines the way in which VAT is to be collected both on domestic 
transactions  (involving  one  single  Member  State)  and  on  cross-border  transactions 
(involving more than one Member State). As explained in Section 1.4 below, the current 
system  for  the  taxation  of  trade  between  Member  States  is  based  since  1993  on 
"transitional arrangements"9. 

These transitional arrangements suffer from numerous shortcomings which result in the 
VAT system being neither fully efficient nor compatible with the requirements of a true 
single market. This has been confirmed by the large majority of stakeholders during the 
broad based public consultation on the Green Paper on the future of VAT10 and by more 
recent  feedback  received  from  business  stakeholders  via  the  REFIT  Platform11(see 
further  details  in  Annex  2  and  Annex  5,  Section 3).  The  European  Parliament,  the 
European  Economic  and  Social  Committee  and  the  Tax  Policy  Group12  also  confirmed 
the need to reform the VAT system. 

Further consultation with the Member States and other stakeholders in the framework of 
specialised and structured forums for discussion, respectively the Group on the Future of 
VAT  (GFV13)  and  the  VAT  Expert  Group  (VEG14)  (see  more  detailed  information  in 
Annex  1,  Section  4),  led  to  the  conclusion  that  the  transitional  arrangements  are  too 
complex and costly for the growing number of businesses operating cross-border. It also 
showed that the transitional arrangements leave the door open to fraud. 

While the reform of the taxation of trade between Member States regarding transactions 
between businesses and final consumers (hereafter "B2C15 transactions") has started to be 
effective as from 1 January 201516 and its further development is currently the subject of 
negotiations in Council17, the initiative that is here being assessed is focussed exclusively 
on transactions between businesses (hereafter "B2B18 transactions"). 

9   See Article 402 of the VAT Directive and further explanations in the next sections. 
10   COM(2010) 695, Commission Staff Working Document, SEC(2010) 1455, 1.12.2010. 
11   https://ec.europa.eu/info/law/law-making-process/overview-law-making-process/evaluating-and-
improving-existing-laws/reducing-burdens-and-simplifying-law/refit-platform/refit-platform-
recommendations_en 

12   Composed of the personal representatives of the EU's finance ministers. 
13   See Glossary. 
14   See Glossary. 
15   See Abbreviations. 
16   For telecommunications, broadcasting and electronic services - see Council Directive 2008/8/EC and 
legislation  here:  https://ec.europa.eu/taxation_customs/business/vat/telecommunications-

related 
broadcasting-electronic-services_en#new_rules 

17   See VAT "e-commerce" proposal (COM(2016) 757 final). 
18   See Abbreviations. 

10 

 
 
                                                 
The purpose of this initiative is to put in place a definitive VAT system so as to pave the 
way  for  the  creation  of  a  genuine  single  EU  VAT  area  for  the  internal  market.  This 
means a VAT system simpler for businesses trading across the EU while at the same time 
more  robust  to  fraud,  to  the  benefit  of  the  Member  States  and  also  of  compliant 
businesses. The efficiency of the VAT system needs to be further improved, in particular 
by  exploiting  the  opportunities  of  digital  technology  and  by  enhancing  greater  trust 
between  business  and  tax  administrations  and  between  EU  Member  States'  tax 
administrations. 

1.2.2.  Rationale for a two-step approach 

As announced in the Action Plan, the introduction of the definitive VAT system will be 
made  through  a  gradual  two-step  approach19.  As  a  first  legislative  step,  the  VAT 
treatment  of  intra-EU  B2B  supplies  of  goods  would  be  settled.  As  a  second  legislative 
step,  this  treatment  would  be  extended  to  all  cross-border  supplies,  therefore  also 
covering supplies of services. Only the first legislative step is the subject of the initiative 
that is here being assessed.  

There  are  several  reasons  for  this.  In  the  first  place,  the  introduction  of  the  definitive 
VAT  system  means,  above  all,  doing  away  with  the  transitional  arrangements.  These 
arrangements basically refer to goods. This owes to the fact that prior to 1 January 1993 
only  cross-border intra-EU supplies of goods  (and not  of services) gave rise to imports 
and exports. The transitional arrangements were a practical means of accommodating this 
situation.  Therefore  any  attempt  to  replace  those  transitional  arrangements  will  have  to 
focus essentially on goods. 

Second,  the  application  of  the  principle  of  taxation  at  destination  becomes  particularly 
necessary when it comes to goods. As regards services, on 4 December 2007 the Council 
reached  a  political  agreement  on  two  draft  Directives  and  a  draft  Regulation  (the  so-
called "VAT package") aimed at changing the rules on VAT so as to ensure that VAT on 
services accrues to the Member State where consumption occurs20, i.e. according to the 
principle of taxation at destination. Its adoption by the Council on 12 February 2008 was 
an important step towards simplification for businesses21.  

The  rules  regarding  B2B  supplies  of  goods  remained  however  unchanged.  Despite  the 
fact that, in practice, their taxation effectively occurs at destination (i.e. where the goods 
arrive) the logic of the origin principle with its two transactions22 still remains. 

Third, intra-EU B2B trade in goods still requires a number of obligations which do not 
exist  for  services  (e.g.  proof  of  intra-EU  transport  of  the  goods,  need  to  register  in 
another Member State for particular transactions like consignment stocks, need to ascribe 
the intra-EU transport to a specific supply in the case of chain transactions - see further 
explanation under Section 2.4). There is therefore now a particular need to  simplify the 
rules for goods.  

19   See Action Plan. 
20   See press release on http://europa.eu/rapid/press-release_IP-08-208_en.htm?locale=en 
21   See further information on this "VAT package" on 

http://ec.europa.eu/taxation_customs/business/vat/eu-vat-rules-topic/where-tax_en 

22   A supply of goods taxable in the Member State of origin but exempt of VAT in case it can be proved 
that these goods have been transported to another Member State, and an intra-EU acquisition of goods 
taxed in the Member State of destination – see further explanations under Section 1.4.3 below. 

11 

 
                                                 
Fourth, as will be seen further the preferred option for the definitive VAT system23 builds 
on certain new technical solutions (a one-stop-shop mechanism (OSS) which includes the 
right to deduct input VAT - see further explanation in box 5 below). It seems reasonable 
to provide for a staged application of these solutions so that once they have proven to be 
efficient  on  transactions  in  goods,  they  will  be  also  extended  to  intra-EU  supplies  of 
services. Such an approach has the advantage of limiting to one category24 the number of 
transactions that will be affected by the new rules and of reducing the amounts of VAT 
channelled through the OSS. 

In  this  regard,  the  staged  approach  is  consistent  with  the  one  taken  in  VAT  matters 
regarding the OSS. Initially a Mini One Stop Shop (MOSS  - see further explanation in 
box 5 below) was established for B2C telecommunications, broadcasting and electronic 
services provided by third country  suppliers25. That MOSS was later extended to  intra-
EU cross border supplies of those same services26. Next, it is foreseen in the e-commerce 
proposal for the OSS to be extended to intra-EU B2C supplies of goods and services and 
to  supplies  of  goods  imported  from  third  countries  or  third  territories27.  The  initiative 
means a further step in this direction targeting intra-EU B2B supplies of goods. Finally, 
the process will be completed at a later stage with the extension of the OSS to intra-EU 
B2B supplies of services. 

In any event, the stage embodied by the initiative is an essential one since, as can be seen 
from the figures below, goods remain the main elements that are being traded across the 
EU as services represent only one third of the share of goods' transactions28. In focussing 
on  goods,  as  a  first  step,  the  objective  of  reducing  VAT  losses  resulting  from  cross-
border fraud would also be better targeted.  

Cross-border transactions in the 
EU single market, 2015 

 Intra-EU 28 trade 
(2015)  

In billion EUR 

Goods 
      Export (dispatches) 

      Imports (arrivals) 

Services 
      Export (credit) 

Imports (debit) 

3.068 

2.993 

1.016 

923 

23   The  preferred  option  for  the  implementation  of  the  definitive  VAT  system  is  Option  2  (see  full 

description of Option 2 under Section 5.4). 

24   Note that the VAT system relies on a fundamental distinction between supplies of goods and supplies 
of services with consequences on a number of other elements of the tax (e.g. taxable moment, VAT 
rates). 

25   Council Directive 2002/38/EC of 7 May 2002 (OJ L 128, 15/05/2002 P. 0041 – 0044). 
26   Council  Directive  2008/8/EC  of  12  February  2008  (OJ  L  44,  20.2.2008,  p.  11–22);  Council 
Implementing Regulation (EU) No 1042/2013 of 7 October 2013 amending Implementing Regulation 
(EU) No 282/2011 as regards the place of supply of services (OJ L 284, 26.10.2013, p. 1–9). 

27   See VAT "e-commerce" Proposal (COM(2016) 757 final). 
28   Both for exports/dispatches and imports/arrivals – according to the EU terminology for intra-EU trade. 

12 

 
 
 
                                                 
Source: Eurostat 

In addition and with a view to accommodate the specific request from Member States in 
Council29,  the  initiative  will  also  propose  certain  improvements  to  the  current  VAT 
legislation.  These  improvements  (hereafter  the  "quick  fixes")  are  meant  to  address 
specific  concerns  with  the  current  rules  and  are  without  prejudice  to  the  more 
fundamental reform aimed at30. 

1.3.

Interaction  of  the  initiative  with  the  upcoming  VAT  proposals  on  rates, 
SMEs and administrative cooperation 

The initiative on the definitive VAT system is  an important step towards a modernised 
VAT  system.  It  builds  upon  previous  initiatives31  and  creates  opportunities  for  the 
following particular areas that will each give rise to own legislative proposals.   

1.3.1.  VAT rates 

Although the destination principle has been progressively implemented since 200832, the 
initiative operates a fundamental (and therefore "definitive") change in the basic logic of 
the  VAT  system.  The  choice  of  a  destination-based  system  raises  the  question  of 
whether, and to what extent, the existing legal limits on rates are still necessary. Indeed, 
while harmonisation of the VAT rates is needed under an origin-based system to avoid 
distortions of competition33, this is not the case under a destination-based system. That is 
what  the  proposal  on  VAT  rates  will  address.  However,  even  without  a  change  in  the 
current VAT rates structure, the initiative34 will have consequences on the collection of 
VAT.  Therefore,  the  initiative  will,  independently  from  the  proposal  on  VAT  rates, 
provide  for  a  central  web-portal  that  will  include  information  on  the  VAT  rates 
applicable in all Member States. 

1.3.2. 

 SMEs 

The fundamental nature of the changes made by the initiative means that all businesses 
will  be  impacted.  While  the  simplification  measures  provided  for  under  the  initiative 
would  also  benefit  SMEs,  they  are  not  specifically  targeted  to  help  SMEs.  The 

29   See Council conclusions on improvements to the current EU VAT rules for cross-border transactions 

of 8 November 2016 (No. 14257/16 FISC 190 ECOFIN 1023 of 9 November 2016).   
http://data.consilium.europa.eu/doc/document/ST-14257-2016-INIT/en/pdf   
This followed a first reaction on the VAT Action Plan of the Council of 25 May 2016  
http://www.consilium.europa.eu/en/press/press-releases/2016/05/25-conclusions-vat-action-plan/ 
30   As  will  be  explained  further  on,  these  improvements  are  those  covered  by  Option  1.  Although 
Option 1 is not as such retained as the preferred option for the implementation of the definitive VAT 
system,  Option  1  has  been  retained  to  solve  on  a  "quick"  basis  specific  problems  with  the  current 
transitional VAT system. Since the benefit for businesses of some simplifications provided for under 
this  Option  1  are  linked  to  a  concept  (the  concept  of  CTP  –  see  Box  4)  that  will  be  used  under  the 
preferred  option,  this  Option  1  is  viewed  as  preparing  the  grounds  for  the  implementation  of  the 
preferred option. 

31   Above  mentioned  "VAT  package"  concerning  supplies  of  services  and  recent  proposals  on  e-

commerce. 

32   See Section 1.2.1 above. 
33   Because suppliers located in lower-rate jurisdictions would benefit from a tax advantage.  
34   As explained in the rest of the document, the preferred Option 2 provides that the supplier will, as  a 
rule,  collect  the  VAT  on  his  cross-border  supply  at  the  rate  applicable  in  the  Member  State  of  his 
customer.  

13 

 
 
                                                 
 
difficulties of SMEs, in particular when trading cross-border, will be addressed through a 
specific proposal35.   

1.3.3.  Administrative cooperation     

As  will  be  explained  later,  one  of  the  problems  the  initiative  intends  to  tackle  is  VAT 
cross border fraud. However, since the full operation of the initiative will take some time, 
it is necessary to already improve the mechanisms in place in order to fight this type of 
fraud.  Improved  administrative  cooperation  between  the  Member  States  and  a  better 
functioning of the VIES system36 (which will allow enhancing the quality and reliability 
of  the  information  exchanged  between  the  Member  States)  are  elements  which,  at  the 
same time, will in the short term improve the fight against fraud and in the medium term 
will  support  each  step  of  the  implementation  of  the  definitive  VAT  system.  Further,  it 
will  allow  building  trust  between  the  Member  States,  which  will  facilitate  the  proper 
operation of the initiative37.       

As  can  be  seen,  there  is  a  direct  link  between  the  four  proposals  in  that  they  together 
result  in  a  coherent  reform  as  put  forward  in  the  Action  Plan.  This  is  why  they  are 
planned  to  be  adopted  by  the  Commission  this  year  as  a  package.  However,  although 
they are logically connected, the four proposals are nevertheless technically  not  linked. 
This means that each proposal can work on its own independently of the others although 
it would be preferable, for the sake of soundness of the reform, to have them all adopted 
by the Council. 

1.4.

  Functioning of the common system of value added tax 

1.4.1.  Basic principle: the fractioned collection of VAT 

VAT is assessed on the value added to goods and services that are bought and sold for 
use  or  consumption  in  the  EU38.  It  is,  as  a  rule,  collected  fractionally39  by businesses40 
and, as a consumption tax, is borne ultimately by the final consumer41. 

35   As explained under Section 5.4, the preferred Option 2 entails, as a rule, the necessity for the supplier 
to charge the VAT of the Member State of his customer. While the use of the OSS is in this respect a 
simplification  for  most  businesses,  further  simplification  for  SMEs  will  be  considered  under  the 
upcoming VAT package for SMEs (see Section 1.1.).   

36   See Glossary. 
37   As explained in the rest of the document, the preferred Option 2 notably relies on the assumption that 
the VAT due on a cross-border transaction in a given Member State is collected by another Member 
State that will also have the main responsibility for auditing the VAT due.    

38   Further explanations on the common VAT system can be found here: 

http://ec.europa.eu/taxation_customs/taxation/vat/what_is_vat/index_en.htm 

39   The supplier of a good or a service is considered for VAT purposes to be the person liable to pay the 
VAT  collected  to  the  Treasury  (Article 193  of  the  VAT  Directive).  However,  under  particular 
circumstances (Articles 194 to 199b of the VAT Directive), the VAT Directive provides for (or allows 
Member  States)  the  application  of  the  so-called  "reverse  charge  mechanism"  that  deviates  from  this 
rule  which  is  the  basis  of  the  fractioned  collection  of  VAT.  Under  a  reverse  charge,  the  liability  is 
moved to another person, in general the customer. 

40   Reference  is  made  to  “businesses”  for  simplification  reasons  but  the  correct  terminology  would  be 
“taxable persons”. The scope of the concept of “taxable person” can be found in Articles 9 to 13 of the 
VAT Directive. 

41   A final consumer  means for VAT purposes the last person in a production/distribution chain who is 
not allowed to deduct the VAT he paid on his purchases (contrary to VAT taxable persons who can do 
so). 

14 

 
                                                 
 
This  system  of  partial  payments  allows  the  tax  to  be  collected  at  each  stage  in  the 
production and distribution chain42 and ensures the self-policing character of this tax (see 
box 1 below). 

Box 1: VAT system based on fractioned payments 

On  each  supply  made  by  a  business,  VAT  is  charged  to  its  customers  at  the  rate 
applicable.  That  business  then  deducts  from  the  VAT  collected  from  its  customers  the 
amount of tax it has itself paid to other businesses on purchases used for its own business 
activities. Where the customer is also a business, this system is replicated until it reaches 
the final consumer. At this last stage of the supply chain, the VAT is no more deductible 
and the tax is definitively vested to the Treasury.   

Example: VAT rate is 20% 

A, B, C and D are businesses, i.e. taxable persons with a right to deduct input VAT 

A  sells  goods  to  B  for  100  and  charges  20  VAT  which  is  paid  over  to  the  Treasury. 
B supplies the goods to C for a total amount of 240 (including 40 VAT). B then deducts 
its  input  VAT  of  20  from  the  40  received  from  C  and  pays  the  difference  of  20  to  the 
Treasury.  C  sells  these  goods  on  to  D  for  360  (including  60  VAT).  Then  C  deducts  its 
input  VAT  of  40  from  the  60  received  from  D  and  pays  the  difference  of  20  to  the 
Treasury. Finally, D sells the goods for 480 (including 80 VAT) to a final consumer. D 
deducts  its  input  VAT  of  60  from  the  80  received  and  pays  the  difference  of  20  to  the 
Treasury. 

At each stage, VAT is paid to the Treasury on the added-value. For a given business that 
is the difference between the price paid to it by its customer and the amount paid by the 
business to its supplier. 

The self-policing character of the VAT system is linked to the need for each customer to 
pay  VAT  and  to  hold  an  invoice  in  order  to  be  allowed  to  deduct  the  VAT  paid  to  its 
supplier who, in turn, is discouraged from evading taxes (as it has issued an invoice). In 
case of fraud by the retailer (D) or anyone else in the chain (A, B or C), EUR 20 is lost, 
but not the total amount of EUR 80. 

1.4.2.  VAT treatment of intra-EU supplies of goods before 1993 

When  the  common  system  of  VAT  was  established  in  196743,  intra-EU  cross-border 
supplies of goods between businesses were treated differently as compared with domestic 

42   The amount of tax collected at a particular stage of the production/distribution process corresponds to 

the tax on the value added at that stage. 

15 

 
 
                                                 
transactions (see box 8 in Section 1 of Annex 5). They gave rise to exports exempted in 
the  Member  State  of  origin  (Member  State  of  departure  of  the  goods)  and  were  taxed 
upon import in the Member State of destination (Member State of arrival of the goods), 
according  to  the  principle  of  taxation  at  the  Member  State  of  destination  (for  further 
explanation on origin and destination concepts see Section 2 of Annex 5). 

However, the commitment was made already at that time to establish a definitive VAT 
system,  based  on  the  principle  of  taxation in  the  Member  State  of  origin,  which  would 
therefore  operate  within  the  EU  in  the  same  way  as  it  would  within  a  single  Member 
State. 

1.4.3.  VAT treatment of intra-EU supplies of goods since 1993 

The abolition of fiscal frontiers between Member States by the end of 1992, of which the 
objective  and  timing  were  set  out  in  the  Single  European  Act44,  made  it  necessary  to 
reconsider the way in which trade in goods was taxed in the EU. That was due to the fact 
that  exports  and  imports  were  no  longer  possible  for  VAT  purposes  as  far  as  intra-EU 
cross-border  trade  in  goods  was  concerned.  At  that  time,  the  goal  remained  that  goods 
would be taxed in the Member State of origin, perfectly reflecting the idea of a genuine 
internal market. 

Under  that  origin  system,  a  business  established  in  a  Member  State  ("MS1")  would 
invoice its cross-border supplies of goods to other Member States ("MS2") in exactly the 
same  way  as  the  domestic  supplies  in  MS1;  i.e.  by  charging  the  VAT  of  MS1.  The 
taxable customer would be allowed to deduct that VAT, collected by MS1, in his VAT 
return  submitted  in  MS2.  Because  of  that  so-called  cross-border  deduction,  a 
compensation  or  clearing  system  had  to  be  put  in  place  for  reallocating  the  revenues 
between  the  Member  States.  This  system  would,  in  practice,  create  a  collective 
responsibility  whereas  under  the  then  existing  system  each  Member  State  was 
individually responsible for the administration, control and collection of its own VAT. A 
high  degree  of  trust  between  Member  States  was  therefore  a  pre-condition  for  the  new 
system. 

Another  essential  element  in  order  for  the  origin  system  to  work  properly  was  the 
convergence  or  approximation  of  VAT  rates  (and  some  other  technical  aspects  such  as 
exemptions).  Otherwise  major  distortions  of  competition  would  occur  since  consumers 
would tend to acquire goods, for fiscal reasons, from Member States applying low VAT 
rates. This would run counter to the basic principle of VAT neutrality. 

However, on these two essential points Member States were unable to agree before the 
foreseen date and since the political and technical conditions were not ripe, transitional 
arrangements were instead adopted and entered into force on 1 January 1993 (see box 2 
below). These arrangements split the cross-border intra-EU movement of goods into two 
different transactions: an intra-EU supply of goods exempt in the Member State of origin 
(the supplier does not charge VAT on his supply) and an intra-EU acquisition of goods 
taxed in the Member State of destination (the customer self-accounts for the VAT due via 

43  First Council Directive 67/227/EEC of 11 April 1967 on the harmonisation of legislation of Member 
States concerning turnover taxes (OJ 71, 14.4.1967, p. 1301), 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). 

44   Single European Act (SEA) signed in Luxembourg and The Hague, (OJ L 169 of 29.06.1987) 

16 

 
                                                                                                                                                 
a  mechanism  equivalent  to  a  "reverse  charge45").  With  some  few  exceptions,  these 
arrangements are essentially equivalent to the previous export/import customs system. 

These  rules  were  intended  to  be  temporary  (initially  four  years)  but  are  still  in  force. 
Further,  the  currently  applicable  VAT  legislation  provides  that  these  temporary 
arrangements  (hereinafter  referred to  as  the "current  transitional  VAT  system")  have  to 
be replaced by definitive arrangements based on the principle of taxation in the Member 
State of origin46.  

Box 2: Transitional VAT system since 1993 

As  from  1 January  1993,  the  fiscal  frontiers  and  all  corresponding  export/import 
schemes  between  Member  States  have  been  abolished  and  replaced  by  a  system  of 
exempt supplies in the Member State of origin and taxed 'intra-EU acquisitions47' (a new 
taxable  event)  in  the  Member  State  of  destination  thus  mirroring,  but  without  customs 
procedures,  the  previous  scheme.  As  customs  documentation  no  longer  guaranteed  the 
follow-up of the physical flow of the goods, a new reporting system was put in place: the 
VAT  Information  Exchange  System  (VIES).  Via  a  system  of  listings,  submitted  by  the 
supplier  in  the  Member  State  of  origin  (Member  State  1)  and  subsequently  sent  to  the 
Member State of destination (Member State 2), the latter is informed about the arrival of 
goods on its territory destined for D, a business registered for VAT purposes in Member 
State  2  and  obliged  to  declare  this  intra-EU  acquisition  in  its  VAT  return.  Preceding 
supplies  (A  to  B  and  B  to  C)  and  subsequent  supplies  (D-E)  are,  as  in  the  previous 
system, domestic supplies taxed with VAT. Both the VAT charged on the supply made by 
A to B, by B to C and by D to E and the VAT due by D on the intra-EU acquisition are as 
a  rule  deductible  (as  regards  C  through  a  refund  since  there  is  no  output  VAT  on  the 

45   See footnote 39. 
46  See Article 402 of the VAT Directive. 
47   The VAT Directive still refers to the "Community" instead of the "European Union" (EU). In the rest 
of  the  document,  it  is  referred  to  "intra-EU  acquisitions  of  goods"  but  the  term  used  in  the  VAT 
Directive is "intra-Community acquisitions of goods". 

17 

 
 
                                                 
supply made by C against which the deductible VAT of 30 can be offset). With regard to 
the intra-EU acquisition, D will account for VAT and deduct it in the same VAT return; 
the result is therefore nil.  

2.  WHAT IS THE PROBLEM AND WHY IS IT A PROBLEM?  

2.1.

  Problem tree 

The  following  figure  summarises 
consequences as explained in the next sections. 

the  problems, 

the  problem  drivers  and 

the 

18 

 
Drivers 

• Break in the 
fractional 
collection of VAT 

• Divergent rules  

• Additional VAT 
obligations 

Problems  

Intra-EU cross-
border VAT 
fraud 

Complexity of 
current 
transitional 
VAT system 

Consequences 

Member States 

Revenue losses 

Administrative costs 

 Businesses 

Distortions of 
competition 
Compliance costs 

Reduced levels of trade 
across the EU  

Lack of neutrality 

Legal uncertainty /risks 
associated with cross-
border trade 

19 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2.2.

  Evaluation  of  the  EU  VAT  system  and  other  sources  attesting  to  the 

problems     

A  comprehensive  retrospective  evaluation  of  the  EU  VAT  system48  was  conducted  in 
2011 and its findings have been used as a starting point for the examination of the current 
transitional VAT system. This evaluation was a comprehensive exercise that covered all 
important aspects for the design of an improved VAT system. 

The evaluation had been carried out before the Better Regulation Guidelines were put in 
place. This means in practice that the structure of the 2011 evaluation was not organized 
around the five evaluation criteria (Relevance, Effectiveness, Efficiency, Coherence and 
EU added value) that became mandatory later on. Nevertheless, the evaluation provided 
solid analysis of the problems underlying the current transitional VAT system, the results 
of  which  have  been  confirmed  by  further  consultation  of  stakeholders  (open  public 
consultations,  targeted  stakeholder  consultation  through  the  GFV  and  the  VEG  -  see 
Annex 2) as well as recent studies (see Annex 6). It looked in particular into the design 
and  implementation  of  the  most  important  elements  of  the  current  VAT  system, 
including  the  functioning  of  the  transitional  VAT  arrangements,  and  assessed  their 
effectiveness  and  efficiency  in  terms  of  results  (meeting  objectives  they  were  serving) 
and  impacts  (direct,  indirect,  expected  and  unexpected)  they  had  created.  It  also 
examined their relevance and coherence with the smooth functioning of the single market 
and  the  requirement  to  avoid  distortion  of  competition  specified  in  Article  113  of  the 
Treaty on the Functioning of the European Union. 

The findings of the evaluation are therefore still valid and relevant for use in this impact 
assessment. A summary of the key elements of this evaluation organised around the five 
evaluation criteria mentioned above is provided in Annex 6. 

According  to  the  evaluation  and  further  research,  there  are  two  fundamental  problems 
regarding the current transitional VAT system: 

1)  The existing levels of VAT fraud within the EU caused by fraudulent activities such 

as Missing Trader Intra-Community fraud (hereinafter MTIC fraud)49. 

This problem is referred to as "Intra-EU cross-border VAT fraud". 

2)  The complexity of the current transitional VAT system leading to additional costs for 

those businesses which engage in intra-EU cross-border trade. 

This problem is referred to as "Complexity of the current transitional VAT system".  

The  problems,  their  drivers  and  consequences  are  further  developed  below.  For  more 
details on the reform process and the sources attesting to the existence of the problems 
see respectively Sections 3 and 4 of Annex 5. 

48   IFS et al., 2011. 
49   The  concept  of  Missing  Trader  Intra-Community  fraud  (MTIC  fraud)  has  no  official  definition. 
However it is commonly referred to as a particular type of VAT fraud committed by organised crime 
gangs  which  exploit  the  fact  that,  under  the  current  transitional  VAT  system,  trading  between  EU 
jurisdictions is VAT-free. The term "missing trader" refers to the fact that the trader goes missing with 
the VAT. See further development under Section 2.3.3 below. 

20 

 
 
 
 
                                                 
2.3.

  Problem 1: intra-EU cross-border VAT fraud 

2.3.1.  The problem and its EU dimension 

The evaluation of the EU VAT system50 underlined the revenue losses that the Member 
States  face  as  a  result  of  the  high  levels  of  VAT  fraud.  According  to  this  evaluation, 
although most of the VAT fraud is considered to be domestic, it has increased at EU level 
because of the growth in the phenomenon of MTIC fraud following the abolition of the 
EU’s  internal  fiscal  frontiers51.  This  particular  fraud  is  associated  to  the  fact  that  the 
current  transitional VAT system allows trading VAT free across Member State borders 
(see further explanation under Section 2.3.3). 

The size of the VAT fraud is difficult to measure but the VAT gap52 offers a useful and 
also unique EU-wide indicator. According to the latest Commission report on the VAT 
gap53  which  relies  on  data  from  2014,  the  overall  EU  VAT  gap  in  nominal  terms  is 
estimated at almost EUR 160 billion in revenue losses each year or 14.06% of the total 
expected VAT revenue. The VAT gap varies considerably between Member States. The 
smallest  gaps  are  observed  in  Sweden  (1.24%),  Luxembourg  (3.80%),  and  Finland 
(6.92%). The largest gaps are registered in Romania (37.89%), Lithuania (36.84%) and 
Malta (35.32%). Overall, half of the EU-27 Member States54 record a gap above 10.4% 
(see Figure 1 below). 

That VAT fraud problem has been made worse, according to views expressed by certain 
Member States in the GFV and in the VAT Committee55 by the case-law of the Court of 
Justice of the European Union (CJEU). According to that case-law the exemption of an 
intra-EU supply of goods cannot be refused if the material conditions for the exemption 
are met, even in absence of the VAT identification number of the customer acquiring the 
goods56. 

The  problem  created  by  this  case-law  stems  from  the  fact  that  the  EU  legislator 
established  the  VAT  identification  number  as  the  basic  tool  to  control  the  proper 
functioning  of  the  current  transitional  VAT  system  for  intra-EU  trade.  In  fact,  the 
recapitulative  statements  and  the  VIES  system57,  which  are  also  essential  elements  of 
control in this regard, are all based on the VAT identification number and cannot work 
without it.  

50   IFS et al., 2011. 
51   Abolition  of  intra-EU  border  controls  for  the  completion  of  the  single  European  market  in  January 

1993. 

52   The VAT gap is a measure of VAT compliance and enforcement that provides an estimate of revenue 
loss  due  to  fraud  and  evasion,  tax  avoidance,  bankruptcies,  financial  insolvencies,  as  well  as 
miscalculations.  The  VAT  gap  is  defined  as  the  difference  between  the  VAT  revenue  expected  (the 
VAT  Total  Tax  Liability  or  VTTL)  and  the  VAT  actually  collected  by  national  authorities.  It  is 
expressed in both absolute and relative terms. 

53   CASE, 2016. 
54   The report does not include estimates for Cyprus due to incomplete national accounts data. 
55   See information about the role and functioning of GFV and this Committee in the Glossary. 
56   According to the CJEU the possession of the VAT identification number of the customer is a formal 
condition,  and  not  a  substantive  condition,  for  the  exemption  of  an  intra-EU  supply  –  see  the 
judgments  of  the  CJEU  in  cases  C-273/11  Mecsek-Gabona,  C-587/10  VSTR,  C-24/15  Plöckl  and  C-
21/16 Euro Tyre. 

57   See explanations under Box 10 in Annex 5, Section 6. 

21 

 
                                                 
Figure 1: VAT Gap as a percent of the VAT Total Tax Liability (VTTL) in EU-27 
Member States, 2014 and 2013 (source CASE, 2016) 

Very  few  Member  States  publish  estimates  of  the  size  of  MTIC  fraud,  supposedly 
because the nature of this type of fraud makes it difficult to measure. However, a recent 
study  commissioned  by  the  Commission  confirmed  the  findings  of  the  evaluation  as 
MTIC fraud alone is found to be responsible for VAT revenue losses of approximately 
EUR 45 billion to EUR 53 billion annually58. 

The MTIC fraud portion of the VAT gap ranges from 12% in Bulgaria to 39% in France 
(see Figure 2 below on the share of MTIC fraud in the VAT gap). On average (weighted 
average) it is estimated that 24% of the overall VAT gap is due to MTIC fraud. The rest 
of the VAT gap is attributed to losses of revenue due to domestic fraud and evasion, tax 
avoidance, bankruptcies, financial insolvencies, as well as miscalculations. 

58   EY, 2015. 

22 

 
 
                                                 
Figure 2: Share of MTIC fraud in the VAT gap (source "Own calculations" based 
on EY, 2015 study) 

2.3.2.  Evolution of the problem 

Monitoring  at  EU  level  of  VAT  collection  by  individual  Member  States  is  relatively 
recent  as  the  first  study  on  the  VAT  gap  dates  back  to  2009.  The  methodology  is 
continually improved and annual updates of the study include the latest revised figures. 
Although  the Commission is  seeking to  develop  methods to  extract data on fraud  from 
the VAT gap, such information is still not available. The next VAT gap study is expected 
for 2018. The above estimations on MTIC fraud were provided by one specific study59 
and, contrary to the VAT gap study, no further data on its trend evolution is available.   

The trend of the VAT gap over the period 2010-2014 is shown in Table 1 below. For the 
EU-2660 as a whole, the VAT gap has increased from 13.53% in 2010 to 14.06% in 2014, 
which in absolute monetary terms amounts to an increase of about EUR 25 billion.61. 

Table 1: VAT Gap estimates, 2010 - 2014 

EU-26 

2010 

2011 

2012 

2013 

2014 

VAT Gap (EUR 
million) 

134 806 

152 237 

162 537 

161 442 

159 460 

VAT Gap (%) 

13.53 

14.41 

14.97 

14.75 

14.06 

59   EY, 2015. Note that this study is based on the 2013 VAT Gap study (CASE, 2013) which is based on 

data from 2011. 

60   The  report  does  not  include  estimates  for  Croatia  and  Cyprus  due  to  incomplete  national  account 

statistics. 
61   CASE, 2016.  

23 

 
 
 
                                                 
VAT Gap 
(change pp) 

0.88 

0.56 

-0.22 

-0.69 

Source: CASE, 2016 and own calculations based on CASE, 2016. 

Information  on  the  VAT  gap  and  on  MTIC  fraud  for  the  period  1993-2009  (which 
followed the entry into force in 1993 of the current transitional VAT system put in place 
at  the  time  the  fiscal  frontiers  between  the  Member  States  were  abolished)  is  not 
available,  although  it  is  likely  that  MTIC  fraud  (which  finds  its  roots  in  the  way  the 
transitional VAT system is designed) has taken a few years to appear and to develop. 

2.3.3.  Problem  driver:  the  endemic  weakness  of  the  current  transitional  VAT  system 

resulting from the break in the fractioned collection of VAT 

In  domestic  trade,  as  a  rule62,  the  collection  of  VAT  is  based  on  fractioned  payments. 
VAT is collected at each stage in the production and distribution chain and this ensures 
the self-policing character of this tax (see box 1 above). Customers pay the VAT due on 
their purchases to their suppliers who will remit it to the Treasury after deduction of the 
VAT charged to them by their own suppliers63. The collection of VAT on behalf of the 
Treasury  is  therefore  ensured  by  suppliers  through  direct  payments  received  from  their 
customers. 

In  intra-EU  trade  in  goods,  this  fractioned  payment  system  is  broken.  The  rules  of  the 
current  transitional  VAT  system  split  every  cross-border  sale  of  goods  between 
businesses  into  an  exempted  supply  in  the  Member  State  of  origin  (i.e.  no  VAT  is 
charged by the supplier to his customer) and a taxable acquisition in the Member State of 
destination (i.e. the customer is liable to pay the VAT due to the Treasury but no VAT is 
actually  paid  as  he  has  an  immediate  right  of  deduction64  -  see  further  explanation  in 
box 2  above).  It  is  like  a  customs  export-import  scheme65,  but  lacks  equivalent  border 
controls  and  is  therefore  at  the  root  of  MTIC  fraud,  the  typical  intra-EU  cross-border 
fraud. 

MTIC  fraud  exploits  the  endemic  weakness  of  the  current  VAT  system  (which  was 
meant  to  be  transitional  –  see  explanation  in  box 2  above),  that  allows  for  goods  to  be 
bought cross-border VAT-free because of the break in the fractioned payment chain. The 
basic  MTIC  fraud  scheme  (see  further  details  in  box 3  below)  involves  a  cross-border 
purchase of goods by a fraudster, followed by a domestic supply by that fraudster. The 
cross-border purchase of goods allows the fraudster to make a VAT neutral purchase (no 
payment  of  VAT,  either  to  the  supplier  or  to  the  Treasury).  The  subsequent  domestic 
supply allows the fraudster to charge and collect the VAT from his customer. Instead of 
paying  the  whole  of  this  VAT  over  to  the  Treasury,  he  takes  the  VAT  with  him  and 
disappears. 

Another type of fraud which must be mentioned here is "diversion fraud". Although not 
considered  as  typical  intra-EU  cross-border  fraud  because  it  mainly  happens  regarding 

62   Except in cases of reverse charge: see comment in footnote 39. 
63   To note that the customer will also be allowed to deduct the VAT charged to him by his supplier from 

the VAT due on his own supplies.  

64   Based on the assumption that he has a full right of deduction. 
65   Exportation of goods is VAT exempt and importation of goods is VAT taxable – see functioning under 

box 8 in Annex 5, Section 1. 

24 

 
 
                                                 
exportation  of  goods  to  third  countries66,  diversion  fraud  also  exploits  the  rules  of  the 
current transitional VAT system. 

Intra-EU diversion fraud occurs when a fraudster reports an intra-EU supply of goods but 
then "diverts" the goods to the domestic market so that they remain in the same Member 
State  and  are  sold  without  leaving  the  territory.  The  VAT  fraud  is  crystallised  in  the 
amount of VAT charged by the fraudster to the customer, which is not accounted for to 
the  Treasury  (since  the  fraudster  has  reported  to  the  authorities  a  fake  intra-EU  supply 
exempt from the VAT) (see Section 5, box 9 in Annex 5). 

MTIC  fraud  can  be  committed  in  many  different  ways  and  the  schemes  become  more 
elaborated every time. During the nineties of the last century, the fraudsters started their 
fraudulent  activities  in  the  simplest  way.  The  typical  MTIC  fraud  was  committed  by 
three  or  four  companies  involving  two  Member  States.  The  most  serious  form  of  the 
fraud – known as carousel fraud – involves a series of contrived transactions within and 
beyond the EU, with the aim of creating large unpaid VAT liabilities and fraudulent VAT 
repayment claims. Similar to how a carousel goes round and round, the goods are passed 
around  between  companies  and  jurisdictions,  generating  each  time  losses  for  the 
Treasuries involved.  

The following scheme illustrates the typical MTIC fraud leading to carrousel fraud. 

Box 3 - Typical MTIC fraud leading to carrousel fraud  

The  basic  mechanism  usually  involves  the  following  transactions  (see  scheme  below; 
VAT rate is 20%): 

  Company A (so-called “conduite" company), registered in Member State 1, makes an 
exempted intra-EU supply to company B (so-called “missing trader”) registered and 
located in Member State 2. VAT is accounted for on the acquisition by company B but 

66   For this reason, diversion fraud as such is not the focus of the present impact assessment. However, it 
is  mentioned because some of the further developed policy options (those that restore the fractioned 
payment system – see Sections 5.4 and 5.7) would also impact this type of fraud. 

25 

 
 
                                                 
deducted in the same VAT return so that no actual payment of VAT has to be made to 
the Treasury of Member State 2. 

  Company  B  subsequently  makes  a  domestic  supply  to  company  C  (so-called 
“buffer”). Company B charges VAT on the invoice sent to company C, collects it but 
does  not  pay  the  VAT  to  the  Treasury  of  Member  State  2.  Company  B  then  rapidly 
disappears.  

  Company C (which on the basis of the invoice issued will deduct the VAT charged by 
B)  is  usually  used  as  a  means  to  distort  VAT  investigations  (in  a  three-company 
carrousel there is no buffer company). 

  Company C resells on the domestic market the goods to company D (broker) which 
will  deduct  the  VAT  charged  on  its  purchases.  D  will  eventually  make  an  intra-EU 
supply  to  company  A  in  Member  State  1  in  order  to  ask  for  refund  of  the  VAT 
charged on its purchases.  

Following the scheme, the missing trader will not declare and/or pay the charged VAT to 
the Treasury. 

At  the  end  of  the  chain,  the  broker  company  will  claim  a  refund  because  he  makes  an 
intra-EU  supply  to  another  Member  State.  At  this  moment  money  is  paid  out  by  the 
Treasury which has not been received from the missing trader earlier in the chain. 

The  loss  of  VAT  receipts  can  be  unlimited  as  the  same  goods  can  be  supplied  several 
times  over  by  including  again  exempt  intra-EU  supplies.  The  profit  of  the  fraudulent 
chain can be easily shared between all the participants. 

In  practice  the  scheme  as  illustrated  can  be  combined  with  all  possible  types  of  MTIC 
VAT fraud and developed over the borders of several Member States and eventually third 
countries. 

The recent legislative proposal submitted by the Commission to Council67, which echoes 
the  request  from  certain  Member  States  to  be  allowed  to  apply  a  generalised  reverse 
charge  mechanism  as  an  urgent  measure  to  combat  carrousel  fraud,  shows  how  the 
shortcomings of the current transitional VAT system can severely affect certain Member 
States.  It  also  reveals  the  limits  of  traditional  measures  to  combat  such  fraud.  This  is 
corroborated  by  recent  reforms  implemented  in  several  Member  States  (e.g.  new 
collection  methods  introduced  in  respect  of  certain  transactions,  compulsory  electronic 
invoicing transiting via the tax administration) with a view to improving VAT collection. 

2.3.4.  Consequences: who is affected and how? 

  Member States: MTIC fraud represents a cost for Member States through losses in 
tax  revenue  of  approximately  EUR 45 billion  to  EUR 53 billion  annually.  It  is  also 
likely  to  generate  additional  administrative  costs  through  the  need  for  additional 
audits, administrative and/or judicial proceedings. 

  Businesses:  MTIC  fraud  may  also  generate  unexpected  costs  for  businesses  that 
inadvertently  and  unknowingly  become  involved  in  a  fraudulent  supply  chain  and 

67   See  Proposal  for  a  Council  Directive  amending  Directive  2006/112/EC  on  the  common  system  of 
value  added  tax  as  regards  the  temporary  application  of  a  generalised  reverse  charge  mechanism  in 
relation to supplies of goods and services above a certain threshold (COM(2016) 811)  
Impact assessment for the Proposal (SWD(2016) 457) and its Executive summary (SWD(2016) 458) 

26 

 
                                                 
may need to bear the unpaid VAT and any relevant penalties. Further it creates unfair 
competition between compliant and non-compliant businesses since fraud enables the 
latter  to  sell  goods  in  the  market  at  a  lower  price  than  the  former68.  Finally,  it 
generates  extra  compliance  costs,  since  Member  States  in  an  attempt  to  fight  fraud 
impose new obligations which fall upon honest businesses. This problem was raised 
on  various  occasions  by  businesses  including  in  submission  XVIII.1.a  provided  via 
the REFIT platform. 

  Citizens/Society: By depriving Member States of tax revenues, MTIC fraudsters are 
effectively robbing EU citizens of the means for governments to fund the provision of 
infrastructure such as schools and hospitals as well as other public services69. Losses 
in  tax  revenues  might  also  have  to  be  compensated  by  other  forms  of  additional 
taxation.  MTIC  fraud  is  associated  to  organised  crime.  Fraudsters  often  use  their 
profits  to  fund  other  forms  of  criminality,  such  as  cigarette  smuggling  or  drug 
trafficking70.  MTIC  fraud  also  appears  to  be  used  to  launder  money  and  return  a 
healthy  profit71.  During  the  consultation  process  (see  Annex 2),  stakeholders 
concurred that MTIC fraud and other fraudulent schemes have negative effects on the 
tax collected and the protection  of the rights  of the honest businesses. Stakeholders 
insisted that fraud must be tackled by specific long term remedies addressed only to 
fraudulent  businesses  and  the  vast  majority  of  the  respondents  commented  that 
antifraud measures should be harmonised to be effective. Over 74% agreed that the 
current system is not sufficiently resistant to VAT fraud. 

2.4.

  Problem 2: The complexity of the current transitional VAT system 

2.4.1.  The problem and its EU dimension 

The  establishment  in  1993  of  the  single  market  was  meant  to  reduce  compliance  costs 
associated  with  intra-EU  trade,  chiefly  through  the  abolition  of  customs  procedures. 
However, according to the evaluation of the EU VAT system72, the parallel introduction 
of  the  current  transitional  VAT  system  resulted  in  a  very  complex  system  for  intra-EU 
trade  in  goods  (as  compared  with  the  previous  one)  which  led,  as  a  consequence,  to 
higher  compliance  costs  for  businesses  trading  cross-border  as  compared  to  businesses 
trading only domestically. 

According to the evaluation, this complexity arises not only from the new specific VAT 
rules  but  also  from  other  related  provisions.  In  this  regard,  the  statistical  requirements 
that  were  put  in  place  to  allow  identification  of  VAT-taxable  transactions  and  to  help 
record trade between Member States (the Intrastat system73) have resulted in a substantial 
burden  for  intra-EU traders (estimated  at  5%  of  the  value  of  trade,  with  wide  variation 
according to size and country). 

68   See box 3 above – Typical MTIC fraud leading to carrousel fraud. 
69   Source: Europol. 
70   Source: Europol. 
71   International  Tax  Review  –  "UK:  Missing  trader  intra-community  fraud:  Are  businesses  really 

prepared?", 25 June 2013. 

72   IFS et al., 2011. 
73   Intrastat  is  the  data  collection  system,  operational  since  1 January  1993,  for  compiling  statistics  on 

international trade between the EU Member States. See for further details on:  
http://ec.europa.eu/eurostat/statistics-explained/index.php/Glossary:Intrastat 

27 

 
                                                 
 
A recent study74 confirmed the findings of the evaluation: on average, the VAT cost of 
compliance  per  euro  of  turnover  is  11%  higher  for  intra-EU  trade  compared  with  the 
corresponding VAT compliance per euro of turnover for domestic trade. 

2.4.2. 

Introduction and VAT notions 

The next sections describe the two main drivers leading to the complexity of the current 
transitional VAT system which are (i) the additional VAT obligations associated with the 
current  transitional  VAT  system  and  (ii)  the  divergent  application  of  the  VAT  rules 
across  the  Member  States.    They  make  reference  to  particular  VAT  notions.  To  avoid 
repetition, these VAT notions are explained in box 10 in Annex 5.  

2.4.3.  Driver  1:  The  additional  VAT  obligations  associated  with  the  current 

transitional VAT system 

In  comparison  with  domestic  trade,  doing  business  across  the  EU  triggers  additional 
obligations. These  obligations are meant to ensure an "administrative" follow-up of the 
goods  traded  within  the  EU,  in  order  to  remedy  the  break  in  the  VAT  ‘audit  trail’ 
resulting from the abolition of intra-EU border controls. In this regard, some stakeholders 
consider  that  the  customs  controls  at  the  internal  borders  between  Member  States  that 
were  abolished  in  1993  have  been  replaced  by  controls  and  administrative  obligations 
shifted  onto  the  economic  operators.  Moreover,  they  are  of  the  view  that  there  is  no 
consistency between domestic and intra-EU cross-border supplies (see Annex 2). 

Further  feedback  collected  from  expert  stakeholders  and  Member  States  (see  Annex 2) 
allowed identifying the main elements triggering these additional obligations which make 
trading in the EU more complex, and therefore more onerous, than engaging in domestic 
trade  (see  list  of  main  additional  obligations  and  further  details  in  Section  7,  box 11  in 
Annex 5).  These  obligations  must  be  fulfilled  in  the  Member  State  of  establishment  of 
the  business  and  in  any  other  Member  State  where  the  business  performs  economic 
activities. This requires particular investigations and maintenance of appropriate records 
and  details,  in  addition  to  normal  commercial  documentation,  if  the  VAT  obligations 
linked to intra-EU transactions are to be fulfilled. 

2.4.4.  Driver 2: Divergent application of EU VAT rules across the Member States. 

The  complexity  of  the  current  transitional  VAT  system  is  partly  the  result  of  the 
divergent  application  of  the  EU  VAT  rules  by  the  Member  States.  According  to  the 
evaluation of the EU VAT system75, differential requirements for dealing with different 
tax  administrations  are  the  determinants  of  intra-EU  additional  transaction  costs.  The 
evaluation also pointed out that so long as the application of the EU VAT rules across the 
Member States varies, small businesses will undoubtedly continue to have considerable 
difficulties with intra-EU trade.  

This further impacts on key issues like the place of taxation, leading to potential double 
taxation  (to  the  detriment  of  businesses)  or  non-taxation  (to  the  detriment  of  Member 
States). In this regard different application of the EU VAT rules by the Member States is 
seen  by  stakeholders  as  one  of  the  most  serious  obstacles  to  benefiting  from  the  single 
market (see Sections 2, 4, 5 of Annex 2). This is also the main reason why respondents 

74   EY, 2015. 
75 

IFS et al., 2011. 

28 

 
                                                 
(see Sections 2 and 6 of Annex 2) considered the current transitional VAT system to be 
extremely complex and creating high administrative burdens.   

Such  differences  stem  firstly  from  the  numerous  derogations  and  options  in  the  VAT 
Directive, secondly from the discretion left to the Member States in their implementation 
and  application  and  thirdly  from  divergent  interpretations.  These  differences  can  affect 
the scope of the tax, the scope and number of exemptions, the chargeability of the tax, the 
structure  of  the  VAT  rates  applied,  formal  obligations  such  as  invoicing,  the  rules  on 
deduction or the organisation and efficiency of the tax authority. 

However,  the  focus  of  the  initiative  that  is  here  being  assessed,  and  of  the  in-depth 
discussions  held  with  the  Member  States  and  expert  stakeholders,  is  limited  to  the 
complexities resulting from differences that are specifically linked to the functioning of 
the current transitional VAT system.  

The main differences can be grouped in the following two categories: (i) divergences in 
obligations  and  procedures  imposed  on  businesses  by  the  different  Member  States  and 
(ii)  divergences  in  the  qualification  of  certain  transactions  and  their  VAT  treatment 
between Member States (see list  of main discrepancies and further details in  Section 8, 
boxes 12 and 13 in Annex 5). 

2.4.5.  Consequences: who is affected and how? 

  Member  States:  Ensuring  business  compliance  with  complex  rules  makes 
monitoring and audit tasks more difficult which results in higher administrative costs. 
Although national administrative practices established unilaterally by Member States 
can be held partly responsible for the complexity, a greater part is due to the rules laid 
down  in  the  VAT  Directive  aimed  to  ensure  the  follow-up  of  the  goods  circulating 
VAT-free across the EU. 

  Businesses: Businesses trading cross-border bear an extra compliance cost of 11% in 
comparison to businesses trading only domestically. Further there are additional risks 
associated with legal uncertainty for businesses engaged in cross-border trade. Those 
costs and risks can deter businesses, in particular SMEs, from trading across the EU. 
The functioning of the single market is therefore affected by the VAT rules as they 
influence where goods and services are produced, traded, bought and sold. This goes 
against  the  basic  principle  of  neutrality  governing  VAT,  according  to  which  VAT 
must be neutral regarding economic activities. 

The  evidence  collected  through  the  whole  consultation  process  (see  Annex 2) 
demonstrates  that  the  current  transitional  VAT  system  is  extremely  complicated  and 
entails costs for businesses and difficulties for Member States when it comes to ensuring 
compliance. Complexity was pointed out as leading businesses to seek specialised advice 
when  embarking  in  cross-border  activities.  The  added  cost  was  referred  to  as  high  and 
one  which  SMEs  might  not  always  have  the  resources  to  deal  with.  Moreover,  errors 
were  mentioned  as  resulting  in  substantial  and  sometimes  disproportionate  penalties76. 
Complexity was also found to make it difficult for businesses to have legal certainty with 
regards to the VAT treatment of their transactions. 

76   See for instance the ruling of the CJEU of 20 June 2013 in case C-259/12 Rodopi-M 91. 

29 

 
                                                 
2.5.

  Conclusion 

It results from the analysis of the problems that the functioning of the current transitional 
VAT system is causing disturbance to both Member States and businesses. The problems 
are interrelated since complexity creates opportunities for fraudsters and increased fraud 
leads  to  more  complexity.  These  are  problems  that  are  exacerbated  by  the  increase  in 
cross-border activity that is the result of globalisation of the economy and the extension 
of the EU VAT area (from 12 to 28 Member States) since these rules entered into force in 
1993. 

30 

 
 
2.6.

Summary of main causes/consequences to the complexity of the current transitional VAT system 

Table 2: Causes/consequences - Complexity of current transitional VAT system 

VAT 
identification 
number 

Liability 
rules for 
non-
established 
business 

Consign-
ment/call-off 
stocks 

Chain 
transactions 

Proof of 
transport 

VAT returns/ 
recapitulative 
statements/ 
audits 

Supplies of 
goods and 
services 

Input 
deduction 

Main causes to the complexity 

Divergent 
application of 
VAT rules 

Divergent 
(des-) 
attribution 
process 

Inconsistent 
application of 
reverse 
charge 

Some Member 
States apply 
simplifications and 
others do not 

No clear and 
uniform rules 

Different 
storage period 

No uniform 
rules on 
assignment of 
the transport 
to a specific 
supply in the 
chain 

Inconsistent 
qualification 

Different 
rules on 
exclusions 
and 
restrictions of 
the right to 
deduct and on 
calculation of 
deductible 
proportion 

Different 
format, 
content and 
filing 
deadlines of 
VAT returns 

Different 
requirements, 
format and 
deadlines for 
recapitulative 
statements  

Different 
audit 
procedures  

31 

 
 
 
 
Additional 
VAT obliga-
tions 

Need to 
validate 
status of 
customer 

Need to be 
registered in 
another 
Member 
State/to have 
a fiscal 
representative 

Need to be 
registered in 
another 
Member 
State in case 
no reverse 
charge is 
applicable in 
that Member 
State 

Need to be 
registered in 
another Member 
State 

Need to be 
registered in 
another 
Member State 
in case no 
simplification 
applies 

Maintenance 
of appropriate 
records and 
details 

Additional 
investigations 

Need to 
submit VAT 
returns in 
other Member 
States 

Need to 
investigate the 
treatment given 
in each 
Member State  

Need for 
recourse to 
the refund 
procedure 

Need to add 
special 
mention in the 
VAT return 

Need to 
present 
recapitulative 
statements 

Subject to 
other Member 
States’ audits 
and need to 
have a fiscal 
representative 

Main consequences to the complexity (costs/risks) 

Risk of being 
denied the 
exemption 
thus having to 
pay VAT 
without being 

Risk for 
customers to 
be held 
jointly and 
severally 

Risk of penalties if 
business applies 
simplification in a 
Member State 
which does not 

Risk of 
penalties if 
business 
applies 
simplification 
in a Member 

Risk of being 
denied the 
exemption 
thus having to 
pay VAT 
without being 

Risk of 
penalties if 
obligations 
not correctly 
fulfilled 

Risk of double 
taxation or 
non-taxation 

Administrative/ 

Refunds 
postponed 
(cash flow 
disadvantage)  

32 

 
 
responsible  

allow it 

able to pass it 
on to 
customer 

Costs linked 
to multiple 
VAT 
registrations 

State which 
does not 
allow it 

able to pass it 
on to 
customer  

No common 
IT process 
possible 

judicial claims 

Need for 
recourse to tax 
experts 

33 

 
 
 
2.7.

  Evolution of the problem without action at EU level (dynamic baseline) 

2.7.1. 

Intra-EU cross-border VAT fraud perspective 

For  the  time  being,  Member  States  and  the  Commission  have  joined  efforts  to  combat 
MTIC  fraud  through  the  so-called  "conventional  measures"77,  i.e.  by  improving 
administrative cooperation between the Member States.  Amongst these measures are the 
set-up of the EUROFISC platform and the recourse to multilateral controls (i.e. controls 
involving tax administrations of more than one Member State). 

In  order  to  improve  their  fight  against  intra-EU  cross-border  VAT  fraud,  it  is  expected 
that  Member  States  will  continue  reinforcing  their  cooperation  in  order  to  speed  the 
exchange  of  quality  information  between  them.  The  following  upcoming  proposals  will 
soon be tabled by the Commission: 

  A  set  of  20  measures78  by  which  urgent  action  will  be  taken  on  the  following 

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

fronts: 
- 
-  Moving towards more efficient tax administrations. 
- 
Improving voluntary compliance and tax collection. 

  Directive on the fight against fraud to the Union's financial interests by means of 

criminal law79. 

  Regulation on the establishment of a European Public Prosecutor's Office80. 

These  measures  are  expected  to  help  improve  the  fight  against  fraud  in  general. 
Improvements to the quality of information exchanged  between the Member States and 
the speed of such  an  exchange through the use  of electronic  means will be particularly 
helpful in fighting against cross-border fraud. However, these measures alone would not 
be sufficient to radically reduce the level of cross-border fraud as they are not targeted at 
putting an end to the endemic weakness of the current transitional VAT system leading to 
the specificity of MTIC fraud. 

2.7.2.  Complexity perspective 

Regarding  the  main  issues  linked  to  the  complexity  problem  (need  for  certain 
transactions to be VAT registered/liable, need to comply with specific rules in Member 
States  other  than  the  Member  State  of  establishment,  proof  of  transport),  any 
improvement would require a change in the EU rules. 

Concerning  the  complexity  linked  to  the  VAT  treatment/qualification  of  certain 
transactions,  Member  States  might  continue  trying  to  agree  common  guidelines  in  the 
VAT  Committee.  However,  this  would  be  based  on  a  case-by-case  basis  and  further 
guidelines  issued  by  the  VAT  Committee  are  merely  views  of  an  advisory  committee. 

77   Conventional  measures  focus  on  increasing  the  audit  and  enforcement  capacity  of  the  tax 
administration  e.g.  by  improving  (de-)registration  process  for  taxable  persons,  by  increasing  the 
number of audits, via enhanced use of electronic data, by applying existing legal possibilities such as 
'joint and several liability', etc. 

78   https://ec.europa.eu/taxation_customs/sites/taxation/files/docs/body/2016-03_20_measures_en.pdf 
79   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(2012) 363).  

80   Proposal  for  a  Council  Regulation  on  the  establishment  of  the  European  Public  Prosecutor's  Office 

(COM(2013) 534).  

34 

 
 
                                                 
They do not bind either the European Commission or the Member States who are free not 
to follow them. 

Regarding  the  input  tax  deduction,  improvements  to  the  cross-border  intra-EU  refund 
procedure have been introduced in 2010 (an electronic procedure for submission of the 
refund  applications  via  a  web  portal  only  in  the  Member  State  where  the  business  is 
established and not in all Member States where VAT has been incurred as under the old 
rules)81.  While  certain  improvements  could  still  be  made  by  the  Member  States  at 
national  level  (e.g.  speeding-up  the  processing  of  applications,  facilitating  access  to 
information and guidance as regards national implementing rules) there is no solution to 
overcome the cash flow disadvantage intrinsic to such a refund procedure. 

2.7.3.  Limits to the effectiveness of the current transitional VAT system 

The  current  transitional  VAT  system  was  designed  to  provide  a  one-off  solution  to  the 
abolition  of  the  fiscal  frontiers  in  1993  and  was  a  short-term  practical  system  meant 
originally  for  four  years.  This  system  quickly  showed  its  shortcomings82  which  the 
Member States tried to address each in their own way. This has led to a fragmented VAT 
system,  making  intra-EU  cross-border transactions  difficult  and risky  for  businesses,  in 
particular  SMEs.  The  consequence  is  that  the  VAT  rules  have  the  potential  to  see 
businesses refrain from trading across borders.   

The  development  in  recent  years  of  e-governance  has  provided  Member  States'  tax 
administrations  new  tools  to  improve  their  tax  collection  systems  through  better 
efficiency  in  collecting,  processing,  controlling  and  exchanging  information.  However, 
the  pace  of  development  but  also  the  type  of  Information  and  Communication 
Technology (ICT) used differ from one Member State to another. This entails challenges 
for  the  cooperation  between  Member  States'  tax  administrations  not  only  in  terms  of 
technological factors but also from an administrative, legal and institutional perspective. 
If  no  fundamental  solution  is  found  at  EU  level,  this  might  in  turn  entail  that  Member 
States focus on the development of own specific measures which deviate from the normal 
functioning of the VAT system. 

The recent history of the VAT Directive83 shows the spill-over effect linked to the use of 
the  reverse  charge  mechanism  in  an  effort  to  combat  MTIC  fraud.  Requests  for 
derogating measures in order to introduce new methods for the collection of the VAT are 
also likely to continue. The solutions sought by the Member States are not only likely to 
increase fragmentation of the VAT system, but they can also lead to disproportionate or 
even legally doubtful measures. All this means a high risk that businesses will be faced 
with individual rules specific to each one of the Member States although the problem to 
solve  is  common  to  all  of  them.    For  these  reasons,  in  the REFIT  Platform,  businesses 
called for a common solution84.     

81   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 (OJ L 44, 20.2.2008, p. 23). 

82   See COM(94) 515 final of 23 November 1994; COM(2000) 348 final of 7 June 2000; COM(2003) 614 

final of 20 October 2003. 

83   The VAT Directive was several times modified to extent the scope of the reverse charge mechanism: 
introduction  of  Article  199a  in  2010  and  of  Article  199b  in  2013  and  proposal  for  a  Generalised 
Reverse Charge Mechanism (GRCM) in 2016, see COM/2016/811.  

84  Submission vXVIII3.a the Danish Business Forum 

35 

 
                                                 
As  long  as  an  EU-wide  systemic  solution  is  not  put  in  place  to  counter  the  problems 
created  by  the  current  transitional  VAT  system,  fraudsters  and  Member  States  will 
continue  the  endless  loop  of  efforts  in  which  the  former  will  develop  more  aggressive 
fraud  schemes  while  the  latter  will  need  to  implement  new  control  measures  that  will 
increase costs for both businesses and Member States. 

Without action at EU level, the endemic weakness of the current transitional VAT system 
will continue to be exploited by fraudsters. Fraud levels might be stabilise but this will be 
to the detriment of compliant businesses that will pay the price through high compliance 
costs (already 11% higher than for domestic trade) or even increasing compliance costs.  

The  complexity  of  the  current  transitional  VAT  system  will  continue  to  negatively 
impact the functioning of the internal market by failing to capture new business models, 
new markets and technologies, which translates into losses of competitiveness of honest 
EU businesses and losses in efficiency of tax administrations.  

3.  WHY SHOULD THE EU ACT?  

According  to  the  principle  of  subsidiarity,  as  set  out  in  Article 5(3)  of  the  Treaty  on 
European  Union  (TEU),  action  at  EU  level  may  only  be  taken  if  the  envisaged  aims 
cannot be achieved sufficiently by the Member States alone and can therefore, by reason 
of the scale or effects of the proposed actions, be better achieved by the EU. 

VAT rules for cross-border EU trade can, by their nature, not be decided by individual 
Member  States  since,  inevitably,  more  than  one  Member  State  is  involved.  Moreover, 
VAT is a tax harmonised at EU level. The problems identified in Section 2 of this impact 
assessment are embedded in the rules of the VAT Directive. Therefore any initiative to 
change the current transitional VAT system into a definitive system as regards intra-EU 
trade  requires  amending  the  current  VAT  Directive.  This  entails  a  proposal  from  the 
Commission  and  its adoption by the Council, acting unanimously in  accordance with  a 
special  legislative  procedure,  and  after  consulting  the  European  Parliament  and  the 
Economic and Social Committee. 

The legal basis for the present initiative is Article 113 of the TFEU according to which: 
"The  Council  shall,  acting  unanimously  in  accordance  with  a  special  legislative 
procedure  and after  consulting the European Parliament and the Economic and Social 
Committee,  adopt  provisions  for  the  harmonisation  of  legislation  concerning  turnover 
taxes,  excise  duties  and  other  forms  of  indirect  taxation  to  the  extent  that  such 
harmonisation  is  necessary  to  ensure  the  establishment  and  the  functioning  of  the 
internal market and to avoid distortion of competition". 

Given  the  need  to  modify  the  VAT  Directive,  the  objectives  sought  by  the  present 
initiative cannot be achieved by the Member States themselves. Therefore, it is necessary 
for the Commission, which has responsibility for ensuring the smooth functioning of the 
internal market and for promoting the general interest of the European Union, to propose 
action to alter and improve the situation. 

As regards the provisions to harmonise and simplify rules within the current transitional 
VAT system (the "quick fixes"), they have unanimously been requested by the Member 
States  which  demonstrates  that  action  at  Union  level  is  likely  to  be  more  effective  as 
action at national level has proven not to be sufficiently successful. 

36 

 
Furthermore,  the  2011  retrospective  evaluation  (see  annex  6)  already  referred  to  the 
"piecemeal" approach by Member States as an unsatisfactory way to solve the problems 
of the transitional arrangements. 

4.  WHAT SHOULD BE ACHIEVED? 

4.1.

  General objectives 

The general objectives of the initiative are: 

  To contribute to fiscal consolidation within the EU – by ensuring that taxes due 

are collected to feed national and EU budgets. 

  The  smooth  functioning  of  the  internal  market  –  by  reducing  obstacles  to 

intra-EU cross-border trade. 

  To  ensure  fair  taxation  –  so  that  all  businesses  are  treated  equally  in  order  to 

avoid distortions of competition. 

4.2.

Specific objectives 

The specific objectives of the initiative are: 

  To  make  the  EU  VAT  system  more  robust  –  by  addressing  the  endemic 
weakness  of  the  current  transitional  VAT  system  linked  to  the  break  in  the 
fractional collection of VAT. 

  To make the EU VAT system simpler – by addressing the complexities of the 
current  transitional  VAT  system  and  by  providing  a  level  playing  field  for 
businesses whether engaged in domestic or cross-border transactions85. 

4.3.

  Linking the objectives to the problem 

Table 3: Links objectives-problems-solutions 

Specific objectives 

Link  to  the  problems  and  criteria  for  reaching  a 
solution 

To  make  the  EU  VAT 
system  more  robust  –  by 
endemic 
addressing 
weakness  of 
the  current 
transitional VAT system  

the 

Addresses  the  problem  of  intra-EU  cross-border 
VAT fraud 

Meets the following general objectives: 

  To  contribute  to  fiscal  consolidation  within  the 

EU 

  To ensure fair taxation 

The  assessment  of  possible  solutions  is  based  on  the 

85   No specific objective is targeting SMEs as their particular needs will be addressed by the upcoming 

SME VAT package proposal (see Section 1.1).  

37 

 
 
 
 
 
 
 
 
                                                 
– 

To  make  the  EU  VAT 
system 
by 
simpler 
addressing  the  complexities 
of  the  current  transitional 
VAT system and by providing 
a 
for 
businesses  whether  engaged 
in  domestic  or  cross-border 
transactions  

level  playing 

field 

following qualitative criteria*: 

  Budgetary impact 
  Prevention of fraud and abuse 

Addresses  the  problem  of  complexity  of  the  current 
transitional VAT system 

Meets the following general objectives: 

  The smooth functioning of the internal market 
  To ensure fair taxation 

The  assessment  of  possible  solutions  is  based  on  the 
following qualitative criteria: 

  Equality and simplicity;  
  Ease of administration and cost of collection;  

*Qualitative assessment criteria: 

  Equality and simplicity – Domestic and intra-EU transactions should be treated 
the  same  so  that  doing  business  across  the  EU  becomes  as  simple  (reducing 
compliance costs) and as safe (providing legal certainty) as engaging in purely 
domestic activities. Rules should not be an obstacle to the proper functioning of 
the single market.  

  Budgetary impact – VAT revenues should be allocated to the Member State of 
the  final  consumption  of  the  goods  in  accordance  with  its  conditions  in 
particular  its  VAT  rates.  The  impact  on  the  cash-flow  of  business  should  be 
similar to that for domestic transactions to ensure a genuine level playing field. 

  Ease of administration and cost of collection – An increase in costs for the tax 
administrations and business should be avoided in order to allow that the cost of 
collecting tax revenues is similar to that for domestic transactions. 

  Prevention  of  fraud  and  abuse  –  Breaks  in  the  VAT  chain  within  the  single 
market should be avoided to the extent possible to ensure that the VAT system 
remains robust and fraud-proof. 

4.4.

  Consistency  with  other  EU  policies  and  with  the  Charter  for  fundamental 

rights 

The  creation  of  a  simple,  modern  and  fraud-proof  VAT  system  is  one  of  the  fiscal 
priorities  set  out  by  the  Commission  for  2017  (Annual  Growth  Survey  201786)  which 
should contribute to deepening the single market and making national markets bigger. 

86 

ttps://ec.europa.eu/info/publications/2017-european-semester-annual-growth-survey_en 

38 

 
 
 
 
 
 
 
 
 
 
 
 
                                                 
The main objectives  of the initiative of reducing cross-border VAT fraud and lowering 
compliances costs for businesses trading across the EU by using new technologies are in 
line with this priority. The initiative would prompt Member States to put in place modern 
tax  systems  that  can  support  growth  and  fairness  between  businesses  and  bring  a  new 
level of cooperation between Member States and between Member States and businesses 
to improve tax collection. 

MTIC fraud is also one of the nine EMPACT87 priorities, the European Union’s priority 
crime areas, under the 2014-2017 EU Policy Cycle of Europol. 

Reducing  administrative  burdens,  particularly  for  SMEs,  is  also  an  important  objective 
highlighted in the EU’s growth strategy for the coming decade (Europe 2020 – A strategy 
for smart, sustainable and inclusive growth88). 

The proposed initiative and its objectives would be consistent with the EU SME policy as 
set out by the Small Business Act (SBA)89, in particular principle VII on helping SMEs 
to  benefit  more  from  the  opportunities  offered  by  the  Single  Market.  It  would  be 
consistent  with  the  Single  Market  Strategy  (SMS)90  which  referred  to  the  single 
European VAT area mentioned in the Action Plan. It would also be consistent with the 
EU objectives under REFIT91. 

The objectives envisaged do not affect fundamental rights. 

5.  WHAT ARE THE VARIOUS OPTIONS TO ACHIEVE THE OBJECTIVES?  

5.1.

Selection of options 

When looking at possible options to tax B2B transactions at destination, two fundamental 
issues have to be considered, namely: 

 

 

the place of taxation (whether it will be based on the physical flow of the goods 
or not); and 
the person liable for payment of VAT (whether the supplier charges the VAT of 
the Member State of destination and pays the VAT via the One Stop Shop or if 
instead the customer accounts for the VAT through the reverse charge). 

The  following  qualitative  assessment  criteria  were  suggested  and  agreed  by  both  the 
GFV  and  the  VEG:  (i)  equality  and  simplicity;  (ii)  budgetary  impact;  (iii)  ease  of 
administration and cost of collection; and (iv) prevention of fraud and abuse (see Section 
4.3 above).  

87   European Multidisciplinary Platform Against Criminal Threats (EMPACT). See  
https://www.europol.europa.eu/crime-areas-and-trends/eu-policy-cycle-empact 

88   http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2010:2020:FIN:EN:PDF 
89   http://ec.europa.eu/growth/smes/business-friendly-environment/small-business-act_en 
90   http://ec.europa.eu/growth/single-market/strategy_en 
91   Regulatory Fitness and Performance programme:  

http://ec.europa.eu/info/law/law-making-process/overview-law-making-process/evaluating-and-
improving-existing-laws/reducing-burdens-and-simplifying-law/refit-making-eu-law-simpler-and-less-
costly_en 

39 

 
 
 
                                                 
 
On the basis of the outcome of a series of technical discussions in the GFV and the VEG 
on the possible options92  , in  addition to the Baseline,  the five options discussed  in the 
next  section  were  selected  (out  of  thirteen  different  options  initially  identified  in  close 
collaboration with stakeholders in the VEG and representatives of Member States in the 
GFV) to be assessed in-depth in an external study. 

5.2.

  Baseline  

The  baseline  option  assumes  that  no  legislative  action  will  be  taken  at  EU  level  as 
regards the VAT treatment of cross-border transactions and that the current transitional 
VAT  system  will  continue  to  apply.  The  functioning  of  the  current  transitional  VAT 
system  as  such  is  described  in  Section 1.4  Functioning  of  the  common  system  of  value 
added tax and Box 2: Transitional VAT system since 1993. 

The  baseline  takes  into  account  the  current  applicable  rules  and  not  those  which  are 
contained in proposals currently discussed in Council or which might be adopted by the 
Commission  in  the  future.  However,  it  seems  appropriate  to  dwell  on  the  impact  that 
those proposals might likely have in case they would be adopted.  

A  reference  is  needed,  in  the  first  place,  to  the  VAT  proposals  on  e-commerce,  on  a 
Generalised Reverse Charge Mechanism (GRCM - see footnote 83) and on reduced VAT 
rates  on  e-publications  that  are  currently  under  discussion  in  the  Council.  While  once 
adopted  the  e-commerce  proposal  should  have  positive  effects  on  the  baseline  as  it  is 
expected  to  raise  Member  States'  VAT  revenues  and  decrease  compliance  costs  to 
businesses,  the  effect  of  the  adoption  of  the  other  proposals  is  uncertain,  especially 
concerning  the  GRCM93  which  might  pending  its  final  design  result  in  further 
fragmentation  of  the  VAT  system  and  have  negative  impact  on  compliance  costs  of 
business.   

Finally,  it  is  appropriate  to  make  a  reference  to  the  impact  that  in  the  baseline  might 
entail  the  adoption  of  the  three  other  VAT  legislative  proposals  (rates,  SMEs  and 
administrative  cooperation)94  which,  according  to  the  VAT  Action  Plan,  should  be 
adopted by the Commission in the near future. 

The  VAT  rates  proposal  could  be  adopted  even  in  the  absence  of  an  adoption  of  the 
initiative on the definitive VAT system. The current transitional VAT system is indeed 
de facto based on the destination principle which limits the distortions of competition due 
to  the  differentiation  of  VAT  rates  between  the  Member  States95.  As  the  current 
transitional  VAT  system  would  continue  to  apply,  the  business  customer  will  also 

92   See Section 9 of Annex 5 for more details in relation to the selection of the options and the inventory 

of all the thirteen options identified and discussed in the GFV and the VEG. 

93   See impact assessment:  

https://ec.europa.eu/taxation_customs/sites/taxation/files/swd_2016_457_en.pdf 

94   The assumption is that the initiative on the definitive VAT system that is here being assessed is not 

adopted while the other three are adopted. 

95   The "origin principle" enshrined in Article 402 of the VAT Directive would however be at odds with 
the  change  in  the  VAT  rates  rules  but  these  rules  will  be  in  line  with  the  current  transitional  VAT 
system which remains unchanged.    

40 

 
                                                 
continue  to self-assess  the  VAT  due  on  his  cross-border purchases in  his  own Member 
State96. 

The proposals on the SME VAT Package and on administrative cooperation could also 
be  adopted  even  in  the  absence  of  an  adoption  of  the  initiative  on  the  definitive  VAT 
system. Only the specific parts of these proposals linked to the initiative on the definitive 
VAT system would need to be adapted. Both proposals should on their own have positive 
impacts  on  administrative  and  compliance  costs  once  adopted.  Further  the  proposal  on 
administrative cooperation should also have a positive impact regarding the problem of 
cross-border VAT fraud. 

The baseline option will serve as the benchmark against which the other options will be 
assessed. 

5.3.

  Option 1: Limited improvement of current rules 

Option 1  consists  in  improving  the  current  rules  for  intra-EU  B2B  supplies  of  goods 
without  modifying  them  fundamentally.  This  means  that  the  underlying  principles  and 
functioning of the transitional VAT system for intra-EU supplies of goods would remain 
unchanged (see also Diagram 1 in Section 10 of Annex 5 for its functioning). 

The improvements that would be made to the current system under this option cover very 
specific  set  of  rules  that  have  been  identified  by  national  tax  administrations  and 
stakeholders,  in  particular  during  the  consultation  process,  the  discussions  in  the  GFV, 
the  VEG  and  by  way  of  feedback  from  the  REFIT  platform,  as  the  main  areas  of  the 
existing legislation where legal clarity and certainty need to be enhanced. As requested 
by  the  Council  in  its  conclusions  on  "Improvements  to  the  current  EU  VAT  rules  for 
cross-border  transactions"  adopted  on  8 November  2016,  the  following  four  issues  will 
be addressed97: 

1)  The legal value of the VAT identification number of the customer as regards the 
exemption for the intra-EU supplies of goods in the Member State of departure 
of the goods 

Providing  a  valid  VAT  identification  number  of  the  purchaser  would  become  a 
substantive condition (and not merely a formal condition, as stated by the CJEU with 
regards to the current VAT rules) for applying the exemption of intra-EU supplies of 
goods.  This  modification  would  be  proposed  in  reply  to  the  demand  made  by 
Member  States  to  amend  the  current  VAT  Directive  in  order  to  allow  for  better 
monitoring  of  the  flow  of  goods  using  the  recapitulative  statements  and  the  VIES 
system. 

96   Therefore the implementation of a OSS as provided for in the initiative on the definitive VAT system 
is not a necessity. Note also that each Member States is responsible for providing accurate information 
on the applicable rules and therefore the VAT rates to its taxable persons. The absence of a web-portal 
as provided for by the initiative on the definitive VAT system should also not cause problems to the 
suppliers  in  other  Member  States  (as  they  will  not  be  liable  to  pay  the  VAT  due),  except  for  very 
specific transactions where the supplier could be liable to pay the VAT due (mainly B2C transactions 
outside the scope of this initiative).  

97   See EY study 2015 Implementing the ‘destination principle’ to intra-EU B2B supplies of goods. In the 
EY study of 2015 additional simplifications were examined as part of the possible improvements to the 
current  system  but  after  consultation  with  expert  stakeholders  and  Member  States  some  had  to  be 
excluded due to lack of agreement on the steps forward. 

41 

 
                                                 
2)  The VAT treatment applied to call-off stock arrangements 

Call-off stock refers to the situation where a supplier moves stock to a Member State 
where  he  is  not  established,  in  order  to  sell  it  at  a  later  stage  to  an  already  known 
buyer.  Currently  this  gives  rise  to  (i)  a  (deemed)  intra-EU  supply  made  by  the 
transferor,  (ii)  a  deemed  intra-EU  acquisition  in  the  Member  State  of  arrival  of  the 
goods made by the transferor (who has to register there), (iii) a domestic supply. The 
proposed  amendment  under  Option  1  would  consist  in  treating  the  cross-border 
transfer of goods and subsequent domestic sale as a single exempt intra-EU supply, 
with  an  intra-EU  acquisition  of  goods  made  by  the  buyer  (thus  avoiding  any 
obligations for the transferor in the Member State of arrival of the goods). 

3)  The VAT treatment applied to chain transactions 

Chain  transactions  refer  to  cases  where  multiple  parties  are  involved  in  one 
commercial transaction: company A sells to B, who sells to C, who sells to D and the 
goods  are  transported  directly  from  company A  to  D,  so  B  and  C  are  simply 
intermediaries. Under the current VAT rules it is difficult to determine which supply 
involves the intra-EU movement of goods (which will be the only exempt supply in 
the chain). The proposed amendment under Option 1 would consist in establishing a 
legal  presumption  in  this  regard,  which  would  bring  legal  certainty  to  tax 
administrations and businesses. 

4)  The rules on the proof of transport or dispatch of goods sold cross-border 

That proof is necessary in order to justify, before the tax authorities of the Member 
State of departure of the goods, the application of the VAT exemption of the intra-EU 
supply of goods. 

A legal presumption would be proposed establishing that when the supplier holds a 
certain number of non-contradictory commercial documents to certify the transport or 
dispatch made to another Member State, the goods will be presumed to have left the 
Member  State  where  the  supplier  has  declared  an  exempt  intra-EU  supply.  This 
presumption will be rebuttable by national tax administrations providing evidence to 
the contrary. 

The  benefit  of  the  last  three  simplification  measures  (call-off  stock,  chain  transactions 
and  proof  of  transport)  would  be  limited  only  to  Certified  Taxable  Persons  (see  box 4 
below). 

Box 4: Certified Taxable Person (CTP) 

The concept of Certified Taxable Person does not currently exist in EU VAT legislation 
but would be introduced as part of the definitive VAT system. It would be relevant for all 
options  (except  Option  3)  examined  in  this  impact  assessment  with  however  different 
practical implications.  

This new concept would apply only to taxable persons trusted by the tax administration 
and  not  to  final  consumers.  It  would  create  a  new  category  of  taxable  persons  (CTPs) 
who would benefit from certain simplifications.  

Under  Option  1,  it  will  allow  CTP  suppliers  to  benefit  from  simplifications  as  regards 
their call off stocks and chain transactions and the proof of their intra-EU supplies, with 

42 

 
 
 
 
a reduction of administrative burdens related to these supplies. The cost of compliance 
will therefore be reduced. 

Under Option 2 and Option 5, it will allow CTP customers to continue purchasing goods 
free of VAT in other Member States and applying the reverse charge on these supplies. 
For  the  Member  States,  the  introduction  of  the  CTP  status  will  reduce  the  amounts  of 
VAT  channelling  through  the  OSS  (since  liability  will  take  place  through  reverse 
charge), while at the same time ensuring that the application of the reverse charge does 
not give rise to fraud, given that only reliable traders are allowed to apply the reverse 
charge. 

Under Option 4, a simplification measure would be introduced whereby supplies to CTP 
customers would not require a recapitulative statement.  

Taxable persons would be certified at their request by the Member State where they are 
established and this status would be recognised by all other Member States. In order to 
obtain  the  status  of  CTP,  a  taxable  person  would  need  to  meet  a  set  of  common, 
objective, harmonised at EU level, criteria (see description below). 

Not  all  the  categories  of  businesses  would  become  eligible  to  apply  for  this  status,  but 
only those which meet certain criteria since the objective is to ensure that only reliable 
taxpayers  are  certified.  Further  the  certification  would  not  be  granted  to  non-taxable 
persons, flat-rate farmers, exempt SMEs, other exempt taxable persons without the right 
to deduct and occasional taxable persons since they do not have the obligation to declare 
VAT (or that obligation is purely occasional). 

The  criteria  to  grant  the  status  would  be  similar  to  those  used  to  certify  traders  for 
customs purposes (Authorized Economic Operator or AEO98), i.e.: 

-  the  absence  of  any  infringement  or  repeated  infringements  of  taxation  rules  and 
customs legislation, as well as of any record of serious criminal offences relating to the 
economic activity of the applicant; 

- the demonstration by the applicant of a high level of control of his operations and of the 
flow  of  goods,  either  by  means  of  a  system  managing  commercial  and,  where 
appropriate, transport records, which allows appropriate  tax  controls, or by means of a 
reliable or certified internal audit trail ; 

-  evidence  of  financial  solvency  of  the  applicant,  which  shall  be  deemed  to  be  proven 
either  where  the  applicant  has  good  financial  standing,  which  enables  him  to  fulfil  his 
commitments,  with  due  regard  to  the  characteristics  of  the  type  of  business  activity 
concerned,  or  through  the  production  of  guarantees  provided  by  insurance  or  other 
financial institutions or by other economically reliable third parties. 

98  See  further  information  on  the  AEO  here:  http://ec.europa.eu/taxation_customs/general-information-
customs/customs-security/authorised-economic-operator-aeo_en.  The  proportion  of  AEO  businesses 
has been used as a proxy of the CTP simplification to evaluate the cash flow impact of two options, 
namely Option 2 and Option 5. The cost/benefit of the CTP simplification for businesses and Member 
States has been assessed as a component of compliance costs/administrative costs of the options (see 
methodology in Annex 4). 

43 

 
 
 
 
 
 
 
 
 
 
                                                 
Except for the categories specifically excluded, the certification would thus be open to all 
businesses.  The  implementation  of  the  criteria  by  the  Member  States  would  need  to  be 
proportionate so as to be capable of encompassing smaller businesses99. 

Therefore, compliant businesses could apply for such certification and obtain it after due 
control by the national tax authorities.  

5.4.

  Option 2: Taxation following the flow of goods 

Option 2  consists  in  modifying  the  current  rules  whilst  still  following  the  flow  of  the 
goods (see also Diagrams 2 and 3 in Section 10 of Annex 5 for its functioning).  

When  the  goods  sold  are  transported  cross-border,  VAT  is  due  in  the  Member  State 
where the goods arrive at the end of the transport or dispatch (i.e. the place of supply for 
VAT purposes is in the Member State of destination of the goods). If the goods are not 
transported or dispatched, the place of supply is in the Member State where the goods are 
located when the supply takes place. 

The person liable for collecting the VAT due in the Member State of destination is, by 
default, the supplier of the goods. When the supplier is not established for VAT purposes 
in the Member State of taxation, VAT on that particular supply would be accounted for 
using  a  OSS  in  the  Member  State  of  establishment.  The  OSS  would  allow  offsetting 
output VAT due on supplies made against input VAT incurred on purchases made within 
the EU. 

Owing  to  the  use  of  the  OSS  under  this  option  and  contrary  to  the  rules  of  the  current 
VAT system, a single VAT registration in the Member State of establishment would be 
sufficient for the supplier to report and account for all VAT due on sales made within the 
EU. Thus the supplier would no longer need to be registered in all Member States where 
he sells goods. 

However,  certain  cross-border  supplies  of  goods  would  continue  to  be  subject  to  the 
reverse charge. This means that the place of taxation would still remain in the Member 
State of arrival of the goods but the person liable for collecting the VAT due would be 
the business customer rather than the supplier as explained above under the default rule. 
This  would  be  possible  only  when  the  customer  has  requested  and  obtained  the  CTP 
status (see box 4 above). If the certified customer is not established in the Member State 
of  arrival  of  the  goods,  VAT  due  on  this  transaction  will  then  have  to  be  reported  and 
accounted  for  by  the  customer  using  the  OSS  in  the  Member  State  where  he  is 
established. 

In this option, the supplier will not have to submit a periodical recapitulative statement. 
However, in order to combat fraud, the customer will be required to report his purchases 
from  suppliers  established  in  Member  States  other  than  that  where  he  is  established 
(except those for which the reverse charge is applied) and to mention the supplier's VAT 
identification number. When the transport of the goods is not organised by or on behalf 
of  the  supplier,  the  customer  will  have  to  provide  the  supplier  with  the  name  of  the 
Member  State  of  arrival  of  the  goods  within  ten  working  days  following  the  month  in 
which the supply took place. 

99   Those that are not exempt – See further explanation in Annex 3, Section 1.4. 

44 

 
 
 
                                                 
For this option to apply in a simpler and more consistent manner across the EU, it would 
be  desirable  to  standardise  the  definitions  of  products  eligible  for  reduced  rates100  and 
provide such information via a central web portal. 

Box 5: One Stop Shop (OSS) 

A Mini One Stop Shop (MOSS) has been operating since 1st January 2015 for a limited 
number  of  services  and  only  with  regard  to  business-to-consumer  (B2C)  transactions. 
The MOSS is an optional scheme allowing taxable persons to account for the VAT due on 
those  supplies  via  a  web-portal  in  the  Member State  in  which  they  are identified.  Such 
B2C supplies are taxable in the Member State of the consumer. 

This possibility has been introduced as a simplification measure following the change to 
the  VAT  place  of  supply  rules101  for  telecommunications,  television  and  radio 
broadcasting,  and  electronically  supplied  services.  This  scheme  allows  businesses 
supplying  such  services  to  final  consumers  in  Member  States  where  they  are  not 
established  to  avoid  having  to  register  for  VAT  purposes  in  each  Member  State  of 
consumption. 

The  MOSS  that  already  exists  for  telecommunication,  broadcasting  and  electronic 
services is due to be extended to all e-commerce B2C transactions102. 

Some  of  the  policy  options  examined  in  this  impact  assessment  rely  on  a  OSS  scheme 
which  would  build  upon  the  existing  MOSS  and  extend  its  use  to  supplies  of  goods  in 
business-to-business (B2B) operations.  

This  could  simplify  the  obligations  of  business  operators  who  would  then  not  need  to 
register  in  all  the  Member  States  where  they  sell  goods  to  other  businesses  but  could 
instead use a single registration point in the Member State where they are established to 
report, pay and deduct VAT. This would also allow them to be subject to home country 
audits and have as a main contact point the tax administration of that Member State.  

5.5.

  Option 3: Reverse charge following the flow of goods 

Option 3 consists in adapting the current rules whilst still following the flow of the goods 
and  applying  the  reverse  charge  for  the  collection  of  the  VAT  (see  also  Diagram  4  in 
Section 10 of Annex 5 for its functioning). 

100   Note  that  although  the  application  of  standard  rates  by  all  Member  States  could  be  seen,  from  a 
conceptual point of view, as an interesting approach (notably in terms of simplicity for businesses) it is 
not a realistic one. Options referring to a uniform rate for intra-EU supplies, such as VIVAT, CIVAT 
and SEVA (see explanation in Section 9 of Annex 5) were discarded at an early stage because Member 
States opposed to it. In addition, the mandatory application of standard rates would not be in line with 
the  favourable  views  expressed  by  the  Member  States  in  Council  (Council  conclusions  of  25  May 
2016 on the Commission 2016 Action Plan on VAT) on the intention of the Commission to present a 
proposal for increased flexibility concerning the VAT rates setting by the Member States. It is worth 
noting in this respect that Member States that so wish would nevertheless continue to be free to impose 
the standard rate to all supplies (or parts thereof) since the application of reduced rates is always an 
option and not an obligation for Member States. 

101   Since  1 January  2015  the  supply  takes  place  in  the  Member  State  of  the  customer,  and  not  in  the 

Member State of the supplier as it used to be the case previously. 

102   See e-Commerce proposal (COM(2016) 757 final). 

45 

 
 
  
 
 
 
 
                                                 
The current transitional VAT system splits every cross-border transaction into an exempt 
intra-EU  supply  and  a  taxable  intra-EU  acquisition.  Under  Option  3,  the  two  separate 
concepts of intra-EU supply and intra-EU acquisition are abolished and replaced by one 
single transaction, the intra-EU supply, taxable in the Member State of destination. This 
means that from a practical point of view there will be no significant changes compared 
to the current system: goods sold and transported to another Member State will continue 
to cross borders free of VAT but from a conceptual and legal point of view, there will be 
only one rather than two intra-EU transactions. 

When goods are dispatched or transported from one Member State to another the place of 
taxation  will  be  in  the  Member  State  of  arrival  of  the  goods.  If  the  goods  are  not 
transported or dispatched, the place of supply is in the Member State where the goods are 
located when the supply takes place. 

Since  this  option  involves  a  collection  method  based  on  the  reverse  charge,  the  person 
responsible for accounting for and collecting the VAT due will be the customer receiving 
the  goods  supplied  rather  than  the  supplier  of  the  goods.  The  customer  will  therefore 
declare  and  deduct  simultaneously  the  VAT  relating  to  the  cross-border  supply  in  his 
domestic VAT return. 

This option does not make use of a OSS for the reporting and collection of the VAT due. 
In  any  event,  the  customer  will  be  obliged  to  provide  the  supplier  with  his  VAT 
identification  number  attributed  by  the  Member  State  of  taxation.  Further  information 
would be exchanged via the recapitulative statement to be submitted by the supplier. 

5.6.

  Option 4: Alignment with the place of supply of services 

Option  4  consists  in  aligning  the  place-of-supply  rules  for  goods  with  those  governing 
the  place  of  supply  of  services  and  using  the  reverse  charge  for  the  collection  of  the 
VAT. There will be only one taxable transaction – the supply of goods – meaning that the 
concept of intra-EU acquisition of goods will be abolished (see also Diagrams 5 and 6 in 
Section 10 of Annex 5 for its functioning). 

Irrespective  of  whether  or  not  goods  are  dispatched  or  transported,  the  place  of  supply 
will be where the customer has  his main place of business and VAT will accrue to the 
Member State where that main place of business is located. This is also valid if the goods 
are transported to a Member State where the customer has no presence at all (neither in 
the  form  of  his  main  place  of  business  nor  in  the  form  of  a  fixed  establishment)  –  the 
VAT due on that supply will still be due in the Member State where the main place of 
business of the customer is located.  

However,  where  the  goods  are  provided  to  a  fixed  establishment  of  the  business 
customer, and this is in a Member State other than that where he has his main place of 
business,  the  place  of  supply  will  be  where  the  fixed  establishment  is  located.  If  the 
taxable  person  has  neither  a  place  of  establishment  nor  a  fixed  establishment,  then  his 
permanent address or usual residence will serve as the place of supply. 

In  any  event,  to  be  subject  to  VAT  the  goods  must  be  located  within  the  EU.  If  a 
transaction involves goods located outside the EU, the transaction will not be taxable. On 
the other hand, if goods are in the EU, VAT will always be due, even if the customer is 
not established in the EU.  

46 

 
This option does not allow to completely disregarding the physical flows of the goods. In 
cases  where  the  goods  are  provided  to  a  fixed  establishment  of  the  business  customer, 
and this is in a Member State other than that where he has his main place of business, the 
actual destination of the goods will remain the essential element to take into account. 

When the supplier is not established in the Member State of taxation, the customer will 
be liable for the payment of VAT by applying the reverse charge. 

The customer will be obliged to provide the supplier with his VAT identification number 
attributed by the Member State of taxation. In order to combat fraud, the location of the 
goods will need to be mentioned on the invoice/recapitulative statement and information 
would be exchanged via the recapitulative statement to be submitted by the supplier. 

A  simplification  measure  would  be  introduced  whereby  supplies  to  CTPs  (see  box  4 
above) would not require a recapitulative statement. Given that the reverse charge will be 
applicable  in  all  cases  where  the  goods  are  supplied  to  a  customer  established  in  a 
Member State other than that of the supplier and that in those cases the supplier will not 
have to charge VAT, a fully extended OSS is not required under this option. A limited 
OSS  would  however  be  needed  for  goods  supplied  to  a  non-EU  customer  where  those 
goods are located within the EU. 

5.7.

  Option 5: Taxation following the contractual flow 

Option 5  consists  in  aligning  the  place-of-supply  rules  for  goods  with  the  contractual 
flow and having the supplier charge the VAT of his customer (see also Diagrams 7 and 8 
in Section 10 of Annex 5 for its functioning). 

This  means  that  the  supplier  will  have  to  charge  the  VAT  of  the  Member  State  of 
establishment of the customer which has contracted the supply of the goods, irrespective 
of whether or not the goods are transported cross-border.  

If the supplier is not established in the Member State of taxation, he will report the VAT 
due using the OSS. 

If  the  contracting  party  reallocates  the  cost  to  another  establishment  of  the  contracting 
party, that will be treated as a deemed supply and this entity will be required to account 
for  and  report  the  VAT  due,  once  again  using  the  OSS  if  the  entity  is  not  already 
registered for VAT in the Member State of taxation. 

In  any  event,  to  be  subject  to  VAT  the  goods  must  be  located  within  the  EU.  If  a 
transaction involves goods located outside the EU, the transaction will not be taxable. On 
the other hand, if goods are in the EU, the VAT will always be due, even if the customer 
is  not  established  in  the  EU.  In  this  last  case,  the  place  of  supply  will  be  the  Member 
State  where  the  supplier  is  established,  or  the  customer  will  have  the  obligation  to 
register in a Member State of the EU and all the supplies made to him will be located in 
this Member State.  

A simplification measure will allow supplies made to CTPs to be subject to the reverse 
charge with the customer accounting for and paying the VAT.  

47 

 
For this option to apply in a simpler and more consistent manner across the EU, it would 
be desirable to standardise the definitions of products eligible for reduced rates103. 

In order to combat fraud the customer will be required to report all purchases from non-
established businesses (except those for which the reverse charge is applied). 

5.8.

Summary: main features of the options 

5.8.1.  Place of taxation 

In  addition  to  the  baseline,  the  five  alternative  policy  options  ensure  taxation  at 
destination of cross-border B2B supplies of goods. However, they differ as to the actual 
place  of  taxation  (see  Table  4  below).  Similar  to  the  baseline,  Option 1,  Option 2  and 
Option 3  deem  the  place  of  taxation  to  be  the  Member  State  of  arrival  of  the  goods 
(follow the flow of goods), whilst Option 4 and Option 5 deem the place of taxation to be 
where  the  customer  is  established  (follow  the  contractual  flow).  This  distinction  is 
important from a Member State's audit perspective (e.g. impact on administrative costs, 
efficiency of VAT collection) as following the flow of goods means that the movement 
of  goods  is  monitored  by  the  Member  States.  Such  control  instrument  does  not  exist 
when taxation follows the contractual flow. 

5.8.2.  Person liable for the payment of VAT 

When considering the way VAT would be collected, the options can be further classified 
in two main models (see Table 4 below): the "taxation model" (Option 2 and Option 5) 
and the "reverse charge model" (baseline, Option 1, Option 3 and Option 4). The taxation 
model,  with  the  supplier  charging  the  VAT  to  his  customer,  is  based  on  fractionated 
payments.  It  ensures  the  self-policing  character  of  the  VAT  system104  and  is  also  the 
system that applies in domestic trade. The reverse charge model, with the customer self-
assessing the VAT due, suspends the collection of VAT until the final consumption stage 
(it allows VAT-free purchases by businesses) and therefore differs from domestic trade 
treatment.  This  is  an  important  element  as  regards  equal  treatment  but  also  more 
particularly with regard to MTIC fraud. 

Table 4: Classification of the options 

Taxation model 

Reverse charge model 

Flow of goods 

Option 2 
"Taxation following the flow of 
goods" 

Baseline 

Option 1 
"Limited improvement of current 
rules" 

Option 3 
"Reverse charge following the flow 
of goods" 

Contractual flow 

Option 5 

Option 4 

103   See also footnote 100 on the discarding of standard rates. 
104   See Section 1.4 above. 

48 

 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
"Taxation following the contractual 
flow" 

"Alignment with the place of supply 
of services" 

5.8.3.  Technological dimension 

Option 2, Option 4 and Option 5 build on the existing MOSS (in excess of EUR 3 billion 
was collected through the MOSS in 2015. This is estimated to account for 70% of total 
cross-border  B2C  sales  of  electronic  services).  These  options  would  extend  the  use  of 
such  system  which  has  shown  to  be  successful  in  collecting  VAT  as  a  central  point  of 
contact.   

Option  1  builds  on  the  existing  VIES  system.  Through  the  introduction  of  the  CTP 
concept and the mandatory reference of the VAT identification number of the customer, 
it is expected to improve the quality of data exchanged between Member States.  

5.8.4.  Summary table 

As  can  be  seen  from  the  summary  Table  5  below,  the  five  options  have  a  number  of 
similarities and differences. The summary table shows the scope of the obligations under 
each  option  and  the  applicable  rules.  It  further  outlines  whether  specific  legislative 
issues105  identified  with  the  current  transitional  VAT  system  are  addressed  under  each 
option.  

105   See Section 2.4 above: treatment of call-off stock and chain transactions, as well as the means of proof 

of intra-EU transport of goods. 

49 

 
 
 
 
 
                                                 
Table 5: Main features of the options106 

Criteria 

Option 1 

Option 2 

Option 3 

Option 4 

Option 5 

Implementation of 
Destination Principle 

Utilises existing  
reverse charge model 

Supplier in Member 
State 1 does not 
charge VAT 

Customer self-
accounts for VAT in 
Member State 2 
(where goods are 
located at the time 
when transportation 
ends ) using the 
reverse charge  

Supplier in Member 
State 1charges VAT of 
Member State 2 (where 
goods are located at the 
time when transportation 
ends) 

If customer is a CTP he 
will account for VAT via 
the reverse charge  

Supplier in Member 
State 1 does not charge 
VAT 

Supplier in Member 
State 1 does not charge 
VAT 

Customer self-accounts 
for VAT in Member 
State 2 (where goods 
are located at the time 
when transportation 
ends ) using the reverse 
charge  

Customer self-accounts 
for VAT in Member State 
2 (place of establishment) 
using the reverse charge  

Supplier in Member 
State 1 charges VAT of 
Member State 2 (place of 
establishment of the 
customer) 

If customer is a CTP he 
will account for VAT via 
the reverse charge  

Equal treatment with 
domestic supplies 

No 

Yes 

No 

No  

Yes 

Place of supply 

Mechanism used to 
account for VAT 

Follows actual flow 
of goods – where the 
goods are located at 
the time when 
transportation ends 
(Member State 2) 

Customer's VAT 
return in Member 
State 2 – acquisition 
tax 

Follows actual flow of 
goods – where the goods 
are located at the time when 
transportation ends 
(Member State 2) 

Follows actual flow of 
goods – where the 
goods are located at the 
time when 
transportation ends 
(Member State 2) 

Follows customer's place 
of establishment (Member 
State 2) 

Follows where the 
contracting party 
(customer) is established 
(Member State 2) 

Supplier's One Stop Shop 
return in Member State 1  

Customer's VAT return 
in Member State 2 – 
reverse charge  

Customer's VAT return in 
Member State 2 – reverse 
charge  

Supplier's One Stop Shop 
return in Member State 1 

106   Table 4 based on the outcome of EY study 2015 Implementing the ‘destination principle’ to intra-EU B2B supplies of goods 

50 

 
 
 
 
 
 
                                                 
Criteria 

Option 1 

Option 2 

Option 3 

Option 4 

Option 5 

Input VAT for each 
Member State of taxation 
offset via deduction on 
VAT return in Member 
State 1 

Reporting 

Existing VAT return 

One Stop Shop return 

Existing VAT return – 
If not already 
registered, customer 
will have an obligation 
to register for VAT in 
the Member State of 
taxation  

Recapitulative statements   Required 

Obligation to submit is 
removed 

Required 

Additional reporting 
obligations 

N/A  

N/A 

Customer required to report 
purchases from non-
established businesses 
(except if the customer is a 
CTP and reverse charge is 
applied). 

When transport of goods is 
not organised by or on 
behalf of the supplier, the 
customer shall provide the 
supplier with the name of 
the Member State of arrival 
of the goods within ten 
working days. 

Input VAT for each 
Member State of taxation 
offset via a deduction on 
VAT return in Member 
State 1 

Existing VAT return 

One Stop Shop return 

Required (unless the 
customer is a Certified 
Taxable Person) 

Location of goods to be 
mentioned on 
invoice/recapitulative 
statement 

Obligation to submit is 
removed 

Customer required to 
report all purchases from 
non-established businesses 
(except if the customer is 
a CTP and reverse charge 
is applied). 

Simplification measures 
relating to main legislative 

VAT identification 
number of the 

Rates simplification: 

N/A 

Introduction of a limited 
One Stop Shop for goods 

Rates simplification: 

51 

 
 
Criteria 

Option 1 

Option 2 

Option 3 

Option 4 

Option 5 

issues  and additional 
considerations 

Definitions of products 
eligible for a reduced rate 
would be standardised and 
provided via a web portal  

Reverse charge for supplies 
to Certified Taxable 
Persons. 

acquirer made 
compulsory for the 
exemption of the 
intra-EU supply of 
goods. 

Harmonisation of the 
call-off stock, the 
treatment of chain 
transactions across 
EU and the means of 
proof of intra-EU 
transport of the 
goods107. 

supplied to a non-EU 
customer but staying 
within the EU. 

Definitions of products 
eligible for a reduced rate 
would be standardised and 
provided via a web portal  

Reverse charge for 
supplies to Certified 
Taxable Persons. 

107   Note that under Option 2, Option 4 and Option 5 the problem of complexity linked to the VAT treatment of call-off stocks and chain transactions across EU and the means of proof 
of intra-EU transport of the goods is intrinsically solved by the change in the system provided under each of these options. In other words, the problem of complexity is solved 
independently from the implementation of Option 1.  

52 

 
 
 
 
 
                                                 
5.9.

  Discarded option: Option 3 

The  changes  proposed  under  Option 3  are  of  a  technical  legislative  nature.  Instead  of 
having  two  transactions  (exempt  intra-EU  supply  and  taxed  intra-EU  acquisition), 
Option 3 provides for one single transaction, the intra-EU supply taxable in the Member 
State of destination. There is no significant difference between this option and the current 
transitional VAT system. In both situations, the place of taxation is the Member State of 
arrival of the goods and it is the customer that pays the VAT. 

Even if the legislative changes are minor, their implementation is expected to have some 
impacts  on  different  elements  as  compared  to  the  baseline  (see  further  details  in  box  6 
below).  However,  their  magnitude  compared  to  other  options  (in  particular  Option 2, 
Option 4  and  Option 5)  is  negligible.  Although,  when  compared  to  Option 1,  it  might 
seem to have slightly more positive impacts (mainly due to compliance costs reduction 
for large businesses), it does not address any of the legislative issues raised by the current 
transitional VAT system108. Moreover, it does  not  address MTIC fraud.   Therefore this 
option has been discarded as an alternative option for future policy reform.  

Box 6: Main impacts of Option 3 compared to the baseline 

MTIC fraud - No changes expected to the scale of VAT fraud 

This  option  is  unlikely  to  materially  affect  the  occurrence  of  VAT  fraud  as  goods  will 
continue to circulate cross-border VAT free as currently the case. 

Administrative costs of Member States109 - Increase 

Member  States'  administrative  costs  would  increase  by  EUR 88 million  in  the  year  of 
implementation and by EUR 43 million annually after the year of implementation. 
Compliance costs of businesses110 - Reduction 

The average ongoing cost reduction for all businesses would be 5% although the impact 
would vary depending on the entity size and trade profile. For SME Type 1 businesses, 
the  average  ongoing  cost  reduction  would  be  3%;  for  SME  Type  2  and  for  large 
businesses  it  would  be  7%111.  In  aggregate,  this  option  is  estimated  to  result  in  a  cost 
reduction  of  EUR 318 million  and  EUR 952 million  in  the  year  of  implementation  and 
annually respectively. 

Cash flow - Neutral for businesses and Member States 

VAT  on  intra-EU  purchases  of  goods  continues  to  be  declared  and  recovered  (to  the 
extent the business is entitled to do so) by businesses in the same VAT return. 

Macroeconomic impact – Slightly positive but well below other options 

108  See Section 2.4 above: treatment of call-off stock and chain transactions, means of proof of intra-EU 

transport of goods. 

109  Two  areas  of  VAT  administration  are  expected  to  be  impacted:  VAT  return  audit  and  compliance 
checks as a result of (i) a new VAT accounting mechanism and (ii) the need to notify businesses about 
the new policy requirements. 

110  The following aspect is expected to result in a reduction in compliance costs: application of the reverse 
charge. Conversely, the following aspect is expected to have an additional cost implication: businesses 
must update the format of their invoices to state that their supplies are subject to the reverse charge. 

111  See Glossary and Annex 4 for a description of the classification of business types. 

53 

 
 
                                                 
The 3-year cumulative real EU GDP growth  is estimated to be  0.005% higher than the 
baseline112. This corresponds to a net impact of EUR 0.5 billion in EU GDP.  

6.  WHAT ARE THE IMPACTS OF THE DIFFERENT POLICY OPTIONS AND WHO  WILL BE 

AFFECTED?  

6.1.

  Methodology 

A specific study113 has been commissioned to assess the impacts of the implementation 
of each of the policy options on the MTIC/VAT fraud, the administrative costs114 and the 
cash  flow  of  Member  States,  and  on  the  compliance  costs115  and  the  cash  flow  of 
businesses. The macroeconomic impacts and in particular the effects on macroeconomic 
variables  such  as  gross  domestic  product  (GDP)  are  also  assessed.  The  impact  of  the 
policy options from an internal market perspective, in particular the overall consistency 
in the VAT treatment of domestic and cross-border supplies of goods, is also covered. 

A  range  of  methodological  tools  are  used  to  analyse  the  various  impacts.  In  particular, 
the  study  relies  on  primary  and  secondary  data  (business  survey  and  interviews,  tax 
experts'  survey,  Member  States'  survey  and  interviews)  collected  across  all  28  EU 
Member States to inform the analysis of compliance costs for businesses, administrative 
costs  of  Member  States,  cash  flow  impacts  on  businesses  and  Member  States  and  the 
economic  impacts.  The  data  collected  has  been  used  to  develop  useful  qualitative 
(technical,  legislative,  etc.)  and  quantitative  insights,  and  inform  also  the  assumptions 
and the parameters in the macro econometric Vector Autoregressive (VAR) model used 
for analysing the economic impacts.  

The findings are therefore sensitive to the opinions of a sample of business respondents, 
tax officials and tax experts  on questions  that do not  cover every possible  element that 
might  be  required  in  order  to  fully  assess  the  implications  of  the  current  and  proposed 
policy options. 

A detailed description of the overall methodology, the variety of data collection tools, the 
VAR  model  used,  the  key  assumptions,  and  the  limitations  and  caveats  of  the  study  is 
presented in Annex 4. 

Finally, the environmental and social impacts of all policy options should be negligible 
or even zero and are not therefore covered in the below analysis. 

6.2.

  Analysis of the impacts of each of the options 

6.2.1.  Baseline 

Section 2  outlines  in  detail  the  problems  and  the  problem  drivers  of  the  baseline.  In 
summary, the situation is as follows. 

112  See Section 6.2.1 Baseline below - baseline forecasts based on a 3-year period (2014-2016). 
113  EY, 2015 
114  See Glossary for definition. 
115  See Glossary for definition. For a description of the classification of the business types (Type 1 SME, 
Type 2 SME and Large businesses) for which the assessment is carried out, see Glossary and Annex 4. 

54 

 
                                                 
1.  MTIC fraud - Ranges from EUR 45 billion to EUR 53 billion annually116. 

2.  Administrative costs of Member States117 - The monetary value of the labour costs 
associated with VAT administration is estimated at approximately EUR 1 730 million 
in  the  EU.  In  addition,  Member  States'  non-labour  costs  associated  with  the 
administration of VAT (including external consultancy, IT systems and staff training 
costs) are on average EUR 27 million per Member State or EUR 745 million for the 
EU. 

3.  Cash flow of Member States118 - Neutral as VAT on intra-EU purchases of goods 
continues to be declared and recovered (to the extent the business is entitled to do so) 
by businesses in the same VAT return. 

4.  Compliance costs of business - The intra-EU VAT compliance cost of businesses is 
estimated to be 0.62% of turnover from intra-EU trade119. On average, the VAT cost 
of  compliance  per  Euro  of  turnover  is  11%  higher  for  intra-EU  trade  as  compared 
with the corresponding VAT compliance per Euro of turnover for domestic trade.  

5.  Cash  flow  of  businesses120  -  Neutral  as  VAT  on  intra-EU  purchases  of  goods 
continues to be declared and recovered (to the extent the business is entitled to do so) 
by businesses in the same VAT return. 

6.  Internal  market  perspective  -  Non-equal treatment  domestic/cross-border  supplies 

of goods.  

7.  Macroeconomic forecast – The EU-28 per capita real EU GDP is estimated to grow 
at a cumulative rate of 4.465% over an estimated 3-year period121. In absolute terms, 
the baseline real EU GDP at 2005 prices in 2013 was EUR 11 768 billion. 

Box 7: Cash flow impacts of the different options 

Impact on business cash flow 

Cash flow implications are likely to occur under some of the policy options.  

Under  Option  1,  the  implementation  of  the  call-off  stock  simplification  across  all 
Member States may result in a positive cash flow impact for some businesses. This is due 
to  businesses  no  longer  being  required  to  account  for  VAT  on  the  deemed  intra-EU 
acquisition and subsequent domestic sale to their customer. Instead, when the goods are 
moved, the customer in the other Member State will self-assess the VAT on their local 

116   Diversion  fraud  has  not  been  quantified  because,  as  such,  it  is  not  the  focus  of  the  present  impact 
assessment (see footnote 66). However, the impact on diversion fraud of the alternative options to the 
baseline has been taken into account because some of these policy options would have implications on 
this type of fraud. 

117  See further explanation of labour and non-labour administrative costs in Annex 4.  
118  See further explanations on cash flow impact in box 7 below. 
119  Business survey data, EY, 2015. 
120  See further explanations on cash flow impact in box 7 below. 
121  EY, 2015. The baseline has been calculated for a 3-year period (2014-2016) and the forecast is based 
on  the  VAR  model.  The  estimated  baseline  forecast  of  GDP  growth  (4.465%)  is  not  substantially 
different from the EC’s spring 2015 forecast which indicates a cumulative growth of 5.3% during the 
2014-2016 periods. 

55 

 
 
 
 
 
 
                                                 
VAT return. Under Option 4, a similar impact is expected. However, this particular cash 
flow  effect  will  only  impact  a  small  population  of  businesses  since  at  most  13%  of 
businesses engage in call-off stock transactions. As a result, the overall effect of the cash 
flow implications under Option 1 and Option 4 is assumed to be negligible. 

Cash flow implications are however expected under Option 2 and Option 5 as these two 
options will affect all intra-EU sales of B2B goods (under these two options the supplier 
will charge the VAT to his customer), and not just specific transaction types such as call-
off stock. 

Impact on Member States cash flow 

The baseline scenario for Member States is cash flow neutral, on the basis that the self-
assessed  VAT  on  intra-EU  purchases  of  goods  can  be  declared  and  recovered  (to  the 
extent the business is entitled to do so) in the same VAT return. This is also the case for 
Option 1 and Option 4. 

However, as a result of the clearing system to be implemented as part of the OSS system 
under Option 2 and Option 5, cash flow has been identified as either a particular cost or 
benefit for Member States. 

56 

 
 
 
 
 
 
 
6.2.2.  Option 1: Limited improvement of current rules 

Summary 

Member States 

1.  No significant changes to the scale of MTIC fraud 
2.  Limited administrative costs increase in all Member States (around EUR 35 million) 
3.  No cash flow implications  

Businesses 

4.  Compliance costs decrease for all businesses (around EUR 0.5 billion annually) 
5.  No cash flow impact 
6.  Non-equal treatment domestic/cross-border supplies of goods 
7.  Net increase of EUR 0.4 billion in EU GDP over a 3-year period 

1. MTIC fraud and other fraud aspects 

No significant changes are expected to the scale of MTIC fraud. 

Providing evidence of transport for an intra-EU supply of goods is not designed to combat MTIC 
fraud122    and  therefore  the  proposed  legislative  changes  should  not  materially  positively  or 
negatively impact the current level of fraud carried out through MTIC or diversion123.  

2. Administrative costs 

In  monetary  terms,  an  increase  of  administrative  costs  by  EUR 79 million  in  the  year  of 
implementation  and  by  EUR 35 million  annually  post  implementation  is  expected  across  all 
Member States.  

This increase is mainly driven by increased non-labour costs both in the year of implementation 
(increase  by  EUR 26 million)  and  annually  in  the  years  post  implementation  (increase  by 
EUR 12 million) associated with IT systems124.  

3. Cash Flow of Member States 

Cash flow neutral125. 

4. Compliance costs 

The impact of the changes on compliance costs varies depending on  the entity size and  trade 
profile of businesses. 

122  Although this evidence may have some implications for the perpetrators of diversion fraud - see box 9 

in Annex 5, Section 5. 

123   Although diversion fraud as such is not the focus of the present impact assessment and as therefore not 
been quantified (see footnotes 66 and 116), the likely impact of the different options on this type of 
fraud has also be taken into account. 

124  More  detailed  figures  on  the  changes  of  administrative  costs  are  available  in  the  specific  study  EY, 

2015 (see in particular table 21 on page 99 of the study). 

125  See box 7 above. 

57 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
SME Type 1: the average annual ongoing cost reduction would be 5%. 

SME Type 2: the average annual ongoing cost reduction would be 29%. 

Large business: it could result in an average annual cost reduction of up to 37%. 

Although  large  VAT  compliance  costs  savings  are  expected,  these  will  only  impact  a  limited 
number  of  businesses;  an  estimate  of  the  maximum  percentage  of  businesses  positively 
impacted is 13%. In addition, it may result in reduced benefits in those Member States that have 
already  implemented  elements  of  this  option.  Therefore,  for  all  businesses,  the  monetary 
impact of the implementation is estimated to reduce  business  costs by EUR 571 million in the 
year of implementation and by EUR 522 million annually after the year of implementation126. 

5. Cash flow of businesses 

Negligible127. 

6. Internal market perspective 

Domestic vs cross-border transactions 

No equal treatment between domestic and cross-border supplies of goods as domestic supplies 
follow the taxation model while cross-border supplies follow the reverse charge model. 

Overall consistency in the VAT treatment of transactions 

Divergent place of supply rules for supplies of goods and supplies of services (less simple) but 
cross-border supplies of goods follow the same reverse charge model as cross-border supplies 
of services.   

7. Macroeconomic impact 

The 3-year cumulative real EU GDP growth is estimated to be 0.004% higher than the baseline. 
This corresponds to a net impact of EUR 0.4 billion in EU GDP.  

126  More  detailed  figures  on  anticipated  net  percentage  and  monetary  costs  changes  expected  for  each 
business type as well as an “all business” aggregate are available in the specific study EY, 2015 (see in 
particular table 14 on page 82 of the study). 

127  See box 7 above. 

58 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
6.2.3.  Option 2: Taxation following the flow of goods 

Summary 

Member States 

1.  Reduction of MTIC fraud by EUR 41 billion 
2.  Administrative costs increase in all Member States 
3.  Cash flow benefit for the majority of Member States 

Businesses 

4.  Compliance costs decrease for all businesses (close to EUR 1 billion), except for SME type 1 
5.  Either a cash flow benefit or a cash flow cost depending on trade pattern and filing 

deadlines/remittance timeframes  

6.  Equal treatment domestic/cross-border supplies of goods  
7.  Net increase of EUR 18.5 billion in EU GDP over a 3-year period 

1. MTIC fraud and other fraud aspects 

Although  there  will  still  be  an  opportunity  for  MTIC  fraud  to  be  perpetrated,  it  will  be 
significantly  reduced  in  scale.  This  is  because  a  fraudster  who  is  intent  on  perpetrating  MTIC 
fraud  will  only  be  able  to  abscond  with  the  VAT  on  the  mark-up  (mark-up  is  the  difference 
between the cost of a good and its selling price) on the purchase price of the goods rather than 
the VAT on the entire sales value of the goods as is currently possible with the VAT free cross-
border  purchases.  This  has  the  effect  of  significantly  reducing  the  scale  of  VAT  fraud  per 
transaction. 

According to estimates128 and assuming a uniform mark-up on cross-border goods by businesses 
across  the  EU,  the  MTIC  gap  (which  ranges  from  EUR 44.5 billion  to  EUR 53.2 billion129)  will 
shrink to an estimated EUR 8.2 billion, a reduction of EUR 41 billion (83%). This is equivalent to 
4.5% of the total VAT revenues and 0.31% of the GDP in the EU. 

These  estimated  reductions  in  MTIC  fraud  are  deemed  conservative  because  they  do  not 
consider  the  further  reduction  in  VAT  fraud  that  a  less  attractive  VAT  fraud  value  per  unit  of 
transaction creates130. 

2. Administrative costs 

In  monetary  terms,  an  increase  of  administrative  costs  by  EUR 239 million  in  the  year  of 
implementation  and  by  EUR 182 million  annually  post  implementation  is  expected  across  all 
Member States.  

This  increase  is  mainly  driven  by  increased  labour  costs  both  in  the  year  of  implementation 
(increase  by  EUR 101 million)  and  annually  in  the  years  post  implementation  (increase  by 
EUR 121 million).  

128  EY, 2015. 
129  See estimates under Section 2.3.1 above. 
130  More detailed figures on the VAT gap for each Member State and the impact that Option 2 will have 
on the scale of the reported magnitudes of MTIC fraud are available in the specific study EY, 2015 
(see in particular table 33 on page 118 of the study). 

59 

 
 
 
 
 
 
 
 
 
 
 
                                                 
Increase in non-labour costs is mainly driven by IT system cost increases, especially in the year 
of implementation131. 

In addition to these costs, where Member States would be asked to standardize the definitions 
of products eligible for reduced VAT rate and to establish a central web portal, an increase of 
administrative costs  by  EUR 146 million in  the year  of  implementation  and  by  EUR 129 million 
annually post implementation is expected across all EU Member States. 

This increase would be mainly driven by increases in labour costs in the year of implementation 
and  annually  in  the  years  post  implementation,  while  the  IT  system  is  estimated  to  have  the 
biggest non-labour costs impact in the year of implementation132. 

3. Cash flow of Member States133 

Cash flow arising from acquisitions 
Where a Member State has a filing period that is less than 40 days134, it will suffer from a cash 
flow cost. This is due to businesses that incur VAT on intra EU purchases netting off this amount 
on  their  domestic  return  prior  to  the  Member  State  receiving  this  VAT  from  the  OSS  clearing 
system135. 

Where  a  Member  State  has  a  filing  period  that  is  more  than  40 days,  it  will  have  a  cash  flow 
benefit.  This  is  due  to  the  Member  State  receiving  the  VAT  due  to  them  from  the  clearing 
system prior to the businesses in their Member State accounting for this on their domestic VAT 
return. 

Cash flow arising from supplies 
As  Member  States  will  be  holding  VAT  that  they  would  not  under  the  current  rules,  this  will 
always result in a cash flow benefit. 

Overall impact on Member States 

The  majority  of  Member  States  will  have  an  overall  cash  flow  benefit.  As  there  is  limited 
asymmetry  between  countries  based  on  trade  patterns  within  the  EU,  the  overall  cash  flow 
benefit for Member States arises as a result of either having a filing period that is greater than 
40 days (Member State is in a positive cash flow position in relation to acquisitions) or the fact 
that  the  cash  flow  benefit  on  dispatches  (Member  States  are  always  in  a  positive  cash  flow 
position in relation to dispatches) outweighs the cash flow cost incurred on acquisitions.  

4. Compliance costs 

131  More  detailed  figures  on  the  changes  of  administrative  costs  are  available  in  the  specific  study  EY, 

2015 (see in particular table 30 on page 100 of the study). 

132  More  detailed  figures  are  available  in  the  specific  study  EY,  2015  (see  in  particular  table  24  on 

page 102 of the study). 

133  More detailed figures on the individual and aggregate cash flow impact for each Member State based 
on their trade levels with every other Member State are available in the specific study EY, 2015 (see in 
particular table 31 on page 111 of the study). 

134  Refers  to  the  VAT  return  filing  deadline  which  can  vary,  depending  on  the  Member  State,  from 

10 days to 54 days following the reporting month. 

135  The supplier has 20 days from the end of the period to remit the VAT to its Tax Authorities who will 
hold  the  VAT  for  20 days  before  remitting  it  to  the  Tax  Authorities  of  the  Member  State  of 
consumption  (i.e.,  a  total  of  40 days).  See  EY,  2015  (p. 107  to  112)  for  further  details  on  the 
calculation. 

60 

 
 
 
 
 
 
 
 
 
 
 
                                                 
The impact of the changes on compliance costs varies depending on the entity size and  trade 
profile of businesses. 

SME Type 1: the average annual ongoing cost increase would be 6%. 

SME Type 2: it could result in an average annual cost reduction of up to 17%. 

Large business: it could result in an average annual cost reduction of up to 11%. 

For all businesses, the monetary impact of the implementation is estimated to increase business 
costs by EUR 457 million in the year of implementation, but results in a net business decrease of 
costs by EUR 938 million annually after the year of implementation136. 

5. Cash flow of businesses 

Cash flow implications are expected due to the requirement for businesses to levy and collect 
VAT on transactions where previously no cash may have been received or paid. Impact would 
depend  on  whether  a  business  is  in  a  net  payment  or  a  net  repayment  position  in  its  OSS 
return137. 

Net payment position on OSS 
Where  a  business  is  in  a  net  payment  position  on  its  OSS  return  (it  receives  more  VAT  on  its 
sales  of  goods  to  other  Member  States  than  it  incurs  VAT  on  purchases  of  goods  in  those 
Member States), and it has received payment from its customer, it will benefit from a positive 
cash  flow  due  to  receiving  VAT  from  its  customers  and  holding  this  VAT  until  the  OSS  filing 
deadline. 

Net repayment position on OSS 
Where  a  business  is  in  a  net  repayment  position  on  its  OSS  return  (it  incurs  more  VAT  on 
purchases  of  goods  in  other  Member  States  than  it  receives  from  sales  of  its  goods  in  other 
Member States), the business will experience a negative cash flow position due to having  paid 
VAT  to  its  supplier  and  not  being  able  to  benefit  from  an  immediate  repayment  of  this  VAT 
(repayment will take place after OSS filing deadline). 

Overall impact on businesses 

Businesses are likely to either have a cash flow benefit or cash flow cost. This will depend on the 
trade  profile  of  businesses,  filing  deadlines  and,  in  the  case  of  net  repayment  traders, 
remittance timeframes. 

6. Internal market perspective 

Domestic vs cross-border transactions 

Equal  treatment  between  domestic  and  cross-border  supplies  of  goods  as  both  domestic  and 
cross-border supplies of goods follow the taxation model. 

136  More detailed figures on the anticipated net percentage and monetary costs changes expected for each 
business type as well as an “all business” aggregate are available in the specific study EY, 2015 (see in 
particular table 15 on page 84 of the study). 

137  See EY, 2015 (p. 90 to 93) for further details on calculation. 

61 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
Overall consistency in the VAT treatment of transactions 

Divergent place of supply rules for supplies of goods and supplies of services (less  simple) and 
cross-border supplies of goods follow the taxation model while cross-border supplies of services 
follow the reverse charge model138. 

7. Macroeconomic impact 

The 3-year cumulative real EU GDP growth is estimated to be 0.157% higher than the baseline. 
This corresponds to a net impact of EUR 18.5 billion in EU GDP. It is estimated that EUR 2 billion 
of this impact is due to compliance cost reduction, while EUR 16.5 billion is due to the reduction 
in VAT fraud.  

138  However,  this  model  dissimilarity  would  only  be  temporary  as  the  taxation  model  would  further 

extend to cross-border supplies of services – see Action Plan. 

62 

 
 
 
 
 
 
 
 
 
                                                 
6.2.4.  Option 4: Alignment with the place of supply of services 

Summary 

Member States 

1.  No significant changes to the scale of MTIC fraud with risk of new types of fraud 
2.  (Limited) administrative costs increase in all Member States (around EUR 35 million) 
3.  No cash flow implications  

Business 

4.  Compliance costs decrease for all businesses (close to EUR 2.7 billion) 
5.  No cash flow impact 
6.  Non-equal treatment domestic/cross-border supplies of goods  
7.  Net increase of EUR 2 billion in EU GDP over a 3-year period 

1. MTIC fraud and other fraud aspects 

An increase in the level of fraudulent activity could occur since in addition to the possibility to 
commit MTIC fraud as under current rules (under Option 4, the customer is still in a position to 
buy goods cross-border VAT free), new fraudulent schemes are made possible. That is because 
the VAT could be self-assessed in a Member State (payment and immediate deduction of VAT 
there) while the goods are effectively used in another Member States (possibly for private use 
although  VAT  has  been  deducted  as  if  it  were  for  business  purposes).  Also,  diversion  fraud  is 
facilitated due to the fact that taxation of the supply is disconnected from the movement of the 
goods. 

The anti-fraud measures proposed consisting in reporting obligations (obligation to mention the 
location  of  the  goods  on  the  invoice  and  the  recapitulative  statement)  would  help  to  counter 
these  forms  of  fraud  but  only  to  the  extent  that  Member  States  would  exchange  the 
information from recapitulative statements submitted by the supplier on a real time basis and 
have the capacity to effectively utilise the data to identify incidences or potential incidences of 
fraud. 

Therefore,  Member  States  have  a  reduced  ability  to  identify  and  reduce  the  occurrence  of 
fraud. 

2. Administrative costs 

In  monetary  terms,  an  increase  of  administrative  costs  by  EUR 154 million  in  the  year  of 
implementation  and  by  EUR 82 million  annually  post  implementation  is  expected  across  all 
Member States.  

This increase is equally driven by increased labour costs and  non-labour costs associated to IT 
systems in the year of implementation (increase by EUR 50 million). Increase of administrative 
costs  in  the  years  post  implementation  is  mainly  driven  first  by  labour  costs  (increase  by 
EUR 32 million)  and  then  non-labour  costs  associated  with 
IT  systems  (increase  by 
EUR 34 million)139.  

139  More detailed figures on the changes of administrative costs are available in specific study EY, 2015 

(see in particular table 21 on page 99 of the study). 

63 

 
 
 
 
 
 
 
 
 
 
 
                                                 
3. Cash flow of Member States 

Neutral140. 

4. Compliance costs 

The impact of the changes on compliance costs varies depending on the entity size and  trade 
profile of businesses. 

SME Type 1: the average annual ongoing cost reduction would be 5%. 

SME Type 2: the average annual ongoing cost reduction would be 20%. 

Large business: it could result in an average annual cost reduction of up to 23%. 

For all businesses, the monetary impact of the implementation is estimated to reduce business 
costs  by  EUR 2 620 million  in  the  year  of  implementation  and  by  EUR 2 690 million  annually 
after the year of year of implementation141. 

5. Cash flow of businesses142 

Negligible. 

6. Internal market perspective 

Domestic vs cross-border transactions 

No equal treatment between domestic and cross-border supplies of goods as domestic supplies 
follow  the  taxation  model  while  cross-border  supplies  of  goods  follow  the  reverse  charge 
model. 

Overall consistency in the VAT treatment of transactions 

The place of supply rules for supplies of goods and for supplies of services are aligned (simpler 
as  both  are  at  the  place  of  the  customer)  and  both  cross-border  supplies  of  goods  and  cross-
border supplies of services follow the same reverse charge model.   

7. Macroeconomic impact 

The 3-year cumulative real EU GDP growth is estimated to be 0.017% higher than the baseline. 
This corresponds to a net impact of EUR 2 billion in EU GDP.  

140  See box 7 above. 
141  More detailed figures on the anticipated net percentage and monetary costs changes expected for each 
business type as well as an “all business” aggregate are available in the specific study EY, 2015 (see in 
particular table 17 on page 86 of the study). 

142  See box 7 above. 

64 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
6.2.5.  Option 5: Taxation following the contractual flow 

Summary 

Member States 

1.  Reduction of MTIC fraud by EUR 41 billion with some risk of new types of fraud  
2.  Administrative costs increase in all Member States 
3.  Cash flow benefit for the majority of Member States  

Business 

4.  Compliance costs decrease for all businesses (above EUR 1 billion) , except for SME type 1 
5.  Either a cash flow benefit or a cash flow cost depending on trade pattern and filing 

deadlines/remittance timeframes  

6.  Equal treatment domestic/cross-border supplies of goods 
7.  Net increase of EUR 18.5 billion in EU GDP over a 3-year period. 

1. MTIC fraud and other fraud aspects 

Similar  impacts  to  those  of  Option 2  are  expected  concerning  MTIC  fraud.  However,  Option 5 
may be susceptible to a different type of fraud similar to that under Option 4.  Under Option 5 
(like  under  Option 4)  the  VAT  is  chargeable  in  the  Member  State  where  the  customer  is 
established. This could increase fraud on the basis that the goods can be shipped to a different 
Member State than that where the customer is established. Therefore, as under Option 4, the 
customer may use the goods for exempt or private/non-business purposes in another Member 
State and incorrectly recover in its Member State of establishment the VAT incurred. 

The  anti-fraud  measures  proposed  consisting  in  reporting  obligations  (obligations  for  the 
customer to report all purchases from non-established businesses, except those for which the 
reverse  charge  is  applied)  would  help  to  counter  these  forms  of  fraud  but  only  to  the  extent 
that  Member  States  would  exchange  the  information  on  real  time  and  have  the  capacity  to 
effectively utilise the data to identify incidences or potential incidences of fraud. 

2. Administrative costs 

In  monetary  terms,  an  increase  of  administrative  costs  by  EUR 230 million  in  the  year  of 
implementation and by EUR 236 million annually post implementation is expected across all EM 
Member States.  

This increase is mainly driven by increased labour costs in the year of implementation (increase 
by  EUR 92 million)  but  also  annually 
implementation  (increase  by 
EUR 173 million).  

in  the  years  post 

Increase in non-labour costs is mainly driven by IT system cost increases, especially in the year 
of implementation143. 

In addition to these costs, where Member States would be asked to standardize the definitions 
of products eligible for a reduced VAT rate and to establish a central web portal, an increase of 

143  More detailed figures on the changes of administrative costs are available in specific study EY, 2015 

(see in particular table 27 on page 105 of the study). 

65 

 
 
 
 
 
 
 
 
 
 
 
 
                                                 
administrative costs  by  EUR 158 million in  the year  of  implementation  and  by  EUR 141 million 
annually post implementation is expected across all EU Member States. 

This increase would be mainly driven by increases in labour costs in the year of implementation 
and  annually  in  the  years  post  implementation,  while  the  IT  system  is  estimated  to  have  the 
biggest non-labour costs impact in the year of implementation144. 

3. Cash flow of Member States 

Similar impacts to those of Option 2. 

4. Compliance costs 

The impact of the changes on compliance costs varies depending on the entity size and  trade 
profile of businesses. 

SME Type 1: the average annual ongoing cost increase would be 5%. 

SME Type 2: it could result in an average annual cost reduction of up to 17%. 

Large business: it could result in an average annual cost reduction of up to 11%. 

For all businesses, the monetary impact of the implementation is estimated to increase business 
costs by EUR 460 million in the year of implementation, but results in a net business decrease of 
costs by EUR 1 008 million annually after the year of implementation145. 

5. Cash flow of businesses 

Similar impacts to those of Option 2. 

6. Internal market perspective 

Domestic vs cross-border transactions 

Equal  treatment  between  domestic  and  cross-border  supplies  of  goods  as  both  domestic  and 
cross-border supplies of goods follow the taxation model. 

Overall consistency in the VAT treatment of transactions 

The place of supply rules for supplies of goods and for supplies of services are aligned (simpler 
as both are at the place of the customer) but cross-border supplies of goods follow the taxation 
model while cross-border supplies of services follow the reverse charge model146. 

7. Macroeconomic impact 

144  More detailed figures are available in specific study EY, 2015 (see in particular table 29 on page 107 

of the study). 

145  More detailed figures on the anticipated net percentage and monetary costs changes expected for each 
business type as well as an “all business” aggregate are available in the specific study EY, 2015 (see in 
particular table 18 on page 88 of the study). 

146  However, this model dissimilarity would only be temporary as the taxation model would further extent 

to cross-border supplies of services – see Action Plan. 

66 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
The 3-year cumulative real EU GDP growth is estimated to be 0.158% higher than the baseline. 
This corresponds to a net impact of EUR 18.5 billion in EU GDP. It is estimated that EUR 2 billion 
of this impact is due to compliance cost reduction, while EUR 16.5 billion is due to the reduction 
in VAT fraud.  

67 

 
 
 
 
 
 
7.  HOW DO THE OPTIONS COMPARE?  

7.1.

Summary assessment of the impacts 

A summary assessment of the options against the baseline is presented below. 

The  Table 6  below  gives  a  summary  of  the  net  impacts  on  Member  States  and  the 
impacts on MTIC fraud, administrative costs (in the year 1 of implementation and annual 
ongoing post implementation) and cash flow under each policy option. 

Table 6:   Summary  impacts  on  Member  States  in  net  monetary  terms  (EUR 

millions)147 

Policy Options 
Impact on MTIC fraud 
Impact on Administrative costs 

Year 1 Implementation 
Annual ongoing 
Impact on cash flow 
Net Impact148 
Source: Based on EY, 2015. 

Option 1 
- 

Option 2 
41,130 

Option 4 
- 

Option 5 
41,130 

-79 
-35 
- 
-35 

-385 
-311 
2,397 
43,216 

-154 
-82 
- 
-82 

-388 
-377 
2,397 
43,150 

7.1.1. 

Impact on MTIC fraud and on other fraud aspects  

Under Option 1, the proposed legislative changes should not impact the current level of 
fraud carried out through MTIC or diversion. Under Option 4, a new exposure to fraud 
may arise. This is due to the fact that the Member State of destination of the goods may 
be  different  to  the  Member  State  where  the  VAT  is  required  to  be  reported.  As  such, 
Member  States  have  a  reduced  ability  to  identify  and  reduce  the  occurrence  of  fraud. 
Although under Option 2 and Option 5 there will still be an opportunity for MTIC fraud 
to  be  perpetrated,  it  will  be  significantly  reduced  in  scale.  The  magnitude  of  this 
reduction will be influenced by the level of the mark-up applied by businesses on their 
purchases. A notable observation under Option 5 is that since the VAT is chargeable in 
the  Member  State  where  the  customer  is  established,  this  could  (similarly  to  Option 4) 
increase fraud on the basis that the goods could be shipped to a different Member State 
from where the customer is established. 

In the public consultation149, almost all tax advisors and academics (94%) expressed the 
opinion  that  taxation  of  B2B  intra-EU  supplies150  would  improve  fighting  fraud,  while 
businesses  seem  to  be  less  persuaded  as  only  43%  of  SMEs151  and  39%  of  large 
businesses  agreed  with  this  view.  This  important  difference  could  be  explained  by  the 
fact  that  academics  and  tax  advisors  have  usually  more  global  approach  and  a  wider 
understanding  of  the  key  elements  of  the  VAT  system  as  such.  In  the  context  of  the 
proposal on the definitive VAT system the understanding of the importance of the self-

147  A negative figure provided in this table refers to a cost increase. 
148  The  net  impact  only  considers  annual  ongoing  administrative  costs  hence  excludes  the  year  of 

implementation administrative costs. 

149   More detailed information collected during the public consultation on responses provided by identified 
groups  of  stakeholders  on  fraud  aspects  can  be  found  in  Annex  2  and  part  11  of  Annex  5  (replies 
relevant are under questions 20, 21, 22 and 37). 

150  This refers to the taxation models under Option 2 and Option 5 – see Table 4 above. 
151   SMEs are businesses with turnover of 50 million or less, employing less than 250 people. 

68 

 
 
 
 
 
 
 
 
                                                 
policing  character  of  fractioned  payments  is  very  relevant  for  the  assessment  of  the 
proposed options. On the other hand it should be pointed out that businesses are open to 
changes  but  at  the  same  time  they  are  more  cautious  in  respect  of  possible  additional 
costs that could be generated in this respect. 

Further  it  is  worth  to  note  that  over  74%152  of  the  respondents  agreed  that  the  current 
system is not sufficiently resistant to VAT fraud within the EU. 

In addition, the reverse charge mechanism as applied currently was recognised by 67% of 
all  the  stakeholders  (within  the  group  this  position  was  held  by  64%  of  SMEs  and  by 
68% of larger business) as an effective, but rather costly measure to fight fraud. 

7.1.2. 

Impact on administrative costs 

Option 1 has the lowest cost impact from a VAT administration perspective in the year of 
implementation and annually post implementation. This may be due to the fact that some 
Member States have already implemented elements of this option. With regards to labour 
costs,  under  Option 2, Option 4  and  Option 5, some  additional  FTE153  requirements  are 
expected in the year of implementation. However, only Option 5 would require notable 
additional FTEs in the years post implementation. With regards to non-labour costs, the 
implementation  of  IT  systems  is  associated  with  the  most  significant  cost  increase 
expectations under Option 2, Option 4 and Option 5154. 

7.1.3. 

Impact on cash flow of Member States 

For Option 1 and Option 4 there should be no material impact on cash flow of Member 
States. Option 2 and Option 5 will result in the majority of Member States having a cash 
flow  benefit.  This  is  due  to  Member  States  receiving  and  holding  VAT  for  a  period  of 
time  before  businesses  in  their  local  Member  State  seek  to  recover  the  VAT  on  their 
domestic VAT return. 

7.1.4. 

Impact on compliance costs 

Table 7  below  presents  a  summary  of  the  impacts  on  compliance  costs  of  businesses 
(both as percentage change and as change in monetary terms, in comparison to baseline) 
under each policy option for each type of business (SME Type 1, SME Type 2 and Large 
Business) as well as for an 'all businesses' aggregate. 

Table 7: Summary impacts on compliance costs of businesses155 

Summary 
Net cost 

SME Type 1 
Year 1  Ongoing 

SME Type 2 

Year 1 

Ongoing 

Large Business 
Year 1 

Ongoing 

All Businesses156 
Ongoing 
Year 1 

152   Replies  "strongly  agree  or  agree"  to  Question  "do  you  agree  that  the  current  taxation  system  is  not 
sufficiently resistant to VAT fraud within the EU": 67% – the whole business, 79% – SMEs, 64% – 
large  businesses  ,  68%  –  business  associations,  tax  advisors  and  academics  –  94%,  members  of  the 
public – 100% and 100% – public authority. 

153  See Glossary. 
154   Information  received  come  from  the  EY  study.  Feedback  received  via  the  public  consultation  is  not 

sufficiently representative. 

155  A negative figure provided in this table refers to a cost reduction. 
156  The overall business impact is calculated as weighted average of SME Type 1 (39.8%), SME Type 2 
(18.3%)  and  Large  Business (41.9%)  in  the  EU  in  2013.  The  percentage  of  businesses  in  the  EU  in 
terms of gross value added (GVA) is reported in brackets. Source: Eurostat, Enterprise and Industry. 

69 

 
                                                 
impact 
Option 1157 
-4% 
15% 
Option 2 
-4% 
Option 4 
Option 5 
14% 
Monetary impact (million EUR) 

-5% 
6% 
-5% 
5% 

Option 1158 
Option 2 
Option 4 
Option 5 
Source: EY, 2015. 

-36 
1,051 
-280 
981 

-46 
420 
-350 
350 

-36% 
-7% 
-20% 
-7% 

-151 
-225 
-644 
-225 

-29% 
-17% 
-20% 
-17% 

-121 
-548 
-644 
-548 

-40% 
-5% 
-23% 
-4% 

-37% 
-11% 
-23% 
-11% 

-25% 
3% 
-15% 
3% 

-23% 
-5% 
-15% 
-6% 

-383 
-369 
-1,696 
-295 

-355 
-811 
-1,696 
-811 

-571 
457 
-2,620 
460 

-522 
-938 
-2,690 
-1,008 

As the above Table 7 shows, Option 1 is estimated to result, in percentage terms, in the 
largest  VAT  compliance  cost  savings  for  all  types  of  businesses  analysed  and  for  all 
businesses.  However,  this  option  will  only  impact  a  limited  number  of  businesses: 
approximately 13% of the business community would benefit which is also likely to be 
an  over  representation159.  Therefore,  the  positive  monetary  impact  of  this  option  is 
significantly  less  than  the  other  options.  Option 4  is  estimated  to  generate  in  monetary 
terms  the  highest  compliance  cost  reductions  for  all  types  of  businesses  analysed.  A 
notable observation is that the implementation of the OSS under Option 2 and Option 5 
could result in cost increases for SME Type 1 businesses in the year of implementation 
and  annually  post  implementation.  However,  with  respect  to  SME  Type 2  and  large 
businesses  cost  reductions  are  expected  in  the year  of  implementation  as  well  as  on  an 
ongoing basis. 

Feedback from the open public consultation160 showed that for 47% of the stakeholders 
the  change  that  would  introduce  only  one  taxed  transaction161  would  reduce  business 
compliance costs whereas for 16% such costs would increase. Others believed that they 
will  not  be  affected  (17%)  or  had  no  opinion  on  this  question  (19%).  The  above 
information should be read together with the reply indicating that more than 89% of the 
respondents  confirmed  that  businesses  are  confronted  with  some  or  many  additional 
compliance  costs  linked  with  the  application  of  the  current  VAT  rules  to  intra-EU 
supplies  of  goods  in  comparison  with  the  domestic  supplies.  None  of  the  respondents 
replied that there are no additional compliance costs for the current situation. It is worth 
to  note  that  more  than  79%  of  the  stakeholders  believe  that  because  of  the  additional 
compliance costs linked with VAT rules small companies do not engage in cross-border 
supplies. 

157  The implementation of this option would only affect approximately 13% of businesses across EU. The 

estimates in the table are not adjusted for this. 

158  The  cost  impact  reported  in  the  table  reflects  the  fact  that  only  13%  of  businesses  benefit  from  the 

implementation of this option. 

159  The  percentage  of  businesses  operating  as  Non-Resident  Traders  (NRTs)  has  been  used  as  a 
reasonable  proxy  to  use  as  an  indicator  of  the  percentage  of  businesses  that  undertake  call-off, 
consignment or chain transactions. This is on the basis that NRTs may be operating in another Member 
State  because  of  such  transactions.  Analysis  of  NRT  data  produces  a  proxy  estimate  of  13%  of 
businesses  engaged  in  these  transaction  types  within  the  EU.  However,  this  is  likely  to  be  an  over 
estimate as there are likely to be a number of other reasons as to why an NRT is operating in other 
Member States. 

160   More detailed information collected during the public consultation on responses provided by identified 
groups of stakeholders on business's compliance costs can be found in Annex 2 and part 11 of Annex 5 
(replies relevant are under questions 17, 19, 35, 39, 43 and 44). 

161   This concerns all options except Option 1. 

70 

 
 
                                                 
80%  of  the  stakeholders  supported  the  extension  of  the  OSS  which  would  remove  the 
obligation from the business to register in Member States in which it is not established 
and in this way reducing the compliance costs. 

31%  of  the  stakeholders  believed  that  the  introduction  of  the  CTP  would  reduce  the 
compliance costs of the suppliers while 45% indicated their potential increase. 

Further it is important to note that the final assessment of the level of compliance costs 
linked with the CTP measure highly depend on whether the criteria to apply it would not 
be too  burdensome162. 44%  of the stakeholders would wish to request for such  a status 
only  if  its  application  would  not  be  too  burdensome  in  practice.  Only  8%  would  apply 
regardless of the level of difficulty linked with the requirements. 

The  feedback  received  from  some  business  stakeholders  via  the  REFIT  Platform  (see 
Annex 2), shows nevertheless support to measures for a correct VAT collection based on 
the  concept  of  CTP  (provided  that  the  criteria  used  to  define  a  CTP  are  easy  and  that 
information  on  CTPs  is  accessible  to  businesses  on-line)  and  an  extended  OSS,  as 
provided for under Option 2. 

7.1.5. 

Impact on cash flow of businesses 

There should be no significant impact upon cash flow of businesses under Option 1 and 
Option 4. Under Option 2 and Option 5, businesses are likely to either have a cash flow 
benefit  or  a  cash  flow  cost.  This  will  depend  on  the  trade  profile  of  businesses,  filing 
deadlines and, in the case of net repayment traders, remittance timeframes. Where there 
is a cash flow cost, it is expected that this will be offset by the compliance cost savings 
the business would enjoy as a result of the implementation of these options. 

In  respect  of  the  possible  impacts  on  the  cash  flow,  the  stakeholders  in  the  public 
consultation163  had  a  visible  preference  for  the  customer  being  liable  for  VAT  56%  in 
comparison  with  the  supplier  –  25%.  Further,  in  the  context  of  the  cash  flow  the 
stakeholders had a strong preference – 88% - for including in the OSS the possibility to 
deduct the input VAT. 

7.1.6. 

Internal market perspective 

For over 50% of the respondents of the public consultation164 the fact that domestic and 
intra-EU  supplies  of  goods  are  currently  treated  differently  for  VAT  purposes  can  be 

162   It  is  however  important  to  note  that  the  granting  by  the  Member  States  of  the  CTP  status  to  their 
businesses  overall  equates  in  maintaining  the  current  reverse  charge  in  place,  therefore  limiting  the 
amounts of VAT being collected by other Member States. This means that the CTP status should in 
practice  only  be  denied  in  very  limited  cases,  i.e.  when  there  is  a  risk  that  their  businesses  would 
commit fraud or be involved in a fraudulent scheme. The certification would be open to all businesses 
(except those specifically excluded) and the implementation of the criteria for its granting would need 
to be proportionate to also encompass smaller businesses. The process of certification remains optional 
for businesses. 

163   More detailed information collected during the public consultation on responses provided by identified 
groups of stakeholders on cash flow of business costs can be found in Annex 2 and part 11 of Annex 5 
(replies relevant are under questions 34 and 40). 

164   More detailed information collected during the public consultation on responses provided by identified 
groups of stakeholders on internal market perspective can be found in Annex 2 and part 11 of Annex 5 
(replies relevant are under question 15). 

71 

 
                                                 
discouraging  when  making  a  decision  about  cross-border  supplies  which  hampers  the 
functioning of the internal market. 

Although  the  specific  legislative  issues  identified  for  the  current  transitional  VAT 
system165 are adequately addressed by Option 1166, Option 2, Option 4 and Option 5, only 
Option 2 and Option 5 would ensure equal treatment between domestic and cross-border 
supplies  of  goods.  In  addition,  under  these  two  options,  the  single  VAT  registration 
through the OSS allows simplification for businesses as they would only have to comply 
with  the  VAT  obligations  (reporting,  payment  and  deduction  of  VAT,  including  VAT 
due  and  incurred  in  other  Member  States)  in  the  Member  State  in  which  they  are 
established. This means that the tax administration of that Member State will also be their 
main contact point for practical issues (seeking information, etc.) and for audit purposes.   

7.1.7.  Macroeconomic impact 

Figure 3 below represents a summary of the estimated net impact of each policy option 
on  the  3-year  cumulative  real  GDP  growth,  distinguishing  between  impact  due  to  the 
effect of the compliance costs reduction and the effect of fraud reduction. 

Figure 3: Differences of the EU 3-year cumulative per capita real GDP growth from 
the baseline under each policy option 

Source: EY, 2015. 

As  illustrated  in  Figure 3  above,  on  the  basis  that  Option 1  and  Option 4  would  reduce 
compliance costs but that there will be no material reduction in the level of MTIC fraud, 
the economic analysis shows that these options would have a relatively small but positive 
effect on the EU economy. On the basis that Option 2 and Option 5 assume a reduction in 
VAT  fraud  in  addition  to  businesses’  compliance  cost  savings,  the  economic  analysis 
shows that these options would create a further boost to the EU economy. Either of these 
two options is expected to increase EU GDP by EUR 18.5 billion over a 3-year period, 
compared to the current situation. 

165  VAT  identification  number  (legal  value  for  intra-EU  exemption,  multiple  VAT  registrations),  VAT 
treatment  of  consignment/call-off  stock  arrangements  and  chain  transactions,  evidence  of  transport 
required to exempt B2B intra-EU supplies of goods. 

166  See footnote 97 (some additional simplifications envisaged initially could not be proposed due to the 

lack of consensus of expert stakeholders and Member States). 

72 

 
 
                                                 
However, it must be emphasised that the favourable economic forecasts of Option 2 and 
Option 5 are primarily due to the assumption that the expected additional VAT revenues 
from a reduction in the scale of VAT fraud are used to fund a VAT rate reduction. When 
the implication of the fraud reduction on the economic outcome is disregarded, Option 2, 
Option 4 and Option 5 are estimated to generate similar impacts on real EU GDP (about 
EUR 2 billion)167. 

7.2.

  Overall feedback of stakeholders on the options 

Taking  together  the  feedback  received  from  stakeholders  through  the  different 
channels168, Option 1 appears to be the preferred option of both businesses and Member 
States.  The  reason  is  that  Option  1  does  not  imply  fundamental  changes  to  the  current 
transitional  VAT  system  and  as  such  is  considered  by  both  as  a  reasonable  means  to 
settle, at  least  in  the short term, the most "easy" problems (reason why it is  referred to 
these improvements as "quick fixes"). However, apart from Option 1, and as a more far-
reaching option, Option 4 is the preferred option of businesses because it is more close to 
the  treatment  of  services.  However,  Option  4  is  not  acceptable  for  the  Member  States 
because it does not solve the MTIC fraud problem and because the physical flow of the 
goods is not followed anymore. Option 2 is, among those which solve the fraud problem 
(Option 2 and Option 5) the preferred one of Member States because it allows following 
the flow of the goods and therefore ensures better control of the transactions. 

7.3.

  Comparison of options 

The  following  comparison  assesses  the  options  against  the  following  criteria  - 
effectiveness, efficiency and coherence - as defined below. 

Options are compared to the baseline (0) by rating them as neutral/no significant change 
(0), slightly positive (+), positive (++), very positive (+++), slightly negative (-), negative 
(--) and very negative (---). 

7.3.1.  Comparison of effectiveness 

As far as effectiveness is concerned, Table 8 below assesses how the options achieve the 
two objectives. 

1)  Making  the  EU  VAT  system  more  robust.  The  rating  takes  into  account 
whether and to what extent current MTIC fraud can be reduced. It also takes into 
account whether occurrence of a new type of fraud is likely to happen under each 
option and to what extent additional anti-fraud measures could eventually counter 
such new types of fraud. 

2)  Making the EU VAT system simpler. The rating looks at whether and to what 
extent current burden of obligations is reduced and to what extent new obligations 
are likely to contribute to further reducing compliance costs for businesses while 

167  To  note  that  the  economic  impact  estimated  is  considered  to  be  conservative  as  compliance  cost 
savings  and  the  reduction  in  VAT  fraud  could  well  be  higher;  this  is  because  the  compliance  cost 
estimates  do  not  consider  further  cost  savings  that  may  occur  in  subsequent  years  due  to  increased 
compliance efficiencies while the VAT fraud reduction estimates do not include reduction in diversion 
fraud. 

168   Open  public  consultation,  REFIT  Platform,  spontaneous  contributions,  work  in  the  VEG  and  GFV, 

Fiscalis seminar, business and Member States surveys, Council (see Annex 2).   

73 

 
 
                                                 
maintaining  administrative  costs  for  Member  States  at  an  acceptable  level.  The 
rating  also  takes  into  account  the  simplicity  and  level  of  harmonisation  of  EU 
rules with the aim to ensure better compliance by business and legal certainty to 
the benefit of both businesses and Member States. Moreover, it takes into account 
whether  and  to  what  extent  the  VAT  treatment  of  domestic  and  cross-border 
transactions in goods are aligned. 

7.3.2.  Comparison of efficiency 

As far as efficiency is concerned, Table 8 below assesses the costs and benefits to both 
Member  States  and  businesses.  It  takes  into  account  the  implementation  costs  of  the 
policy  options  and  their  on-going  costs  expected  for  Member  States  and  businesses.  It 
looks  in  particular  to  the  benefits  in  terms  of  VAT  receipts  for  the  Member  States 
(including cash flow) and how the variation in compliance costs for businesses and the 
variation  of  VAT  revenues  for  Member  States  (including  administrative  costs)  would 
translate into the economy. 

7.3.3.  Comparison of coherence 

As  far  as  coherence  is  concerned,  Table 8  below  assesses  how  the  options  fit  with  the 
previous  legislative  proposal  on  e-commerce169  and  with  future  legislative  proposals 
announced in the VAT Action Plan as  regards VAT rates, the VAT package  for SMEs 
and administrative cooperation. 

1)  As  regard  previous  legislative  proposals,  for  the  record,  the  recent  e-commerce 
proposal  includes  simplifications  such  as  the  extension  of  the  use  of  the  MOSS 
(introduced  in  2015  to  deal  with  B2C  transactions  on  cross-border  electronic 
services)  to  all  cross-border  B2C  e-commerce  supplies.    While  the  e-commerce 
proposal  focusses  on  B2C  transactions,  the  rating  takes  into  account  whether  the 
options  for  reforming  cross-border  B2B  transactions  are  coherent  with  and  to  what 
extend build on the existing simplification provided under the MOSS. 

2)  As  regards  future  legislative  proposals,  the  rating  takes  into  account  the  following 

considerations:  

  Rates:  whether  the  option  for  reform  is  compatible  with  more  flexibility  to  be 
given to the Member States  in setting their VAT rates. It takes into  account the 
impact that such flexibility might have on compliance to business and the extent 
to  which  simplification  measures  (e.g.  VAT  due  by  the  CTP  customer, 
standardisation of definitions of VAT rates rules) would facilitate the application 
of possible more divergent VAT rates rules; 

  SMEs  package:  whether  some  aspects  of  the  option  could  negatively  impact 
cross-border trade for SMEs and to what extend this can/would be addressed by 
the targeted proposal on SMEs; 

  Administrative  cooperation:  how  each  option  is  capable  of  taking  stock  of 
improvements  envisaged  at  the  level  of  exchange  of  information  (quality  and 
speed of exchange of information) and cooperation between the Member States.  

169  COM(2016) 757 final.  

74 

 
 
 
 
 
 
                                                 
To  what  extent  technological  developments  (OSS,  CTP  concept)  under  certain 
options would build on current MOSS and VIES systems.  

75 

 
 
 
Table 8: Summary analysis of impacts 

Baseline  Option 1 

0 
0 

0 

0 

0 

0 

0 

0 

0 

0 

0 
0 

0 

++ 
0 

++ 

+ 

0 

- 

0 

+ 

0 

+ 

0 
0 

0 

Option 2 
++++++ 
+++ 

Option 4 
+ 
-- 

Option 5 
++++++ 
++ 

+++170 

+++ 

++++171 

++++++++ 

+++ 

-- 

+++ 

+ 

-- 

- 

0 

++++++++ 

+++ 

-- 

+++ 

++ 

+++ 

++ 

+ or - 

++ 

0 

+ 

++++++ 
+++ 

+++++ 
+++ 

+ or - 

++  

+++++ 
+++ 

+++ 

++ 

++ 

Key impacts 
1- Effectiveness 
Making the EU VAT 
system more robust 

Making the EU VAT 
system simpler 

2- Efficiency 
Impact on Member 
States 
MTIC fraud/fraud  
reduction 

Administrative costs 

Cash flow 

Impact on businesses 

Compliance costs 

Cash flow 

Macroeconomic 
impact 
C- Coherence 
E-commerce proposal 

Future initiatives 
(rates, SMEs, 
Administrative 
cooperation) 

7.4.

Identification of the preferred option: Option 2 (combined with Option 1) 

7.4.1.  Option 2 and final target 

The  analysis  above  indicates  that  Option 2  and  Option 5  are  the  options  that  can  best 
address altogether the specific objectives of making the EU VAT system more robust and 
simpler. By re-establishing the fractionated payments system in cross-border supplies of 
goods, their collection model based on the "taxation model" remedies the great flaw of 
the transitional arrangements that leads to MTIC fraud172 and to complexity173. In doing 

170  An extra point is given for providing a level playing field for businesses 
171  An extra point is given for providing a level playing field for businesses 
172  Because they allow VAT-free cross-border purchases. 

76 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
so they also fulfil the key objective of providing a level playing field for businesses as 
both Option 2 and Option 5 ensure that cross-border supplies of goods are taxed within 
the EU in the same way as domestic supplies. In addition, they could both further extend 
the  taxation  model  to  all  cross-border  B2B  supplies  in  goods  (and  therefore  extend  to 
B2B supplies of goods made to CTPs) and cross-border supplies of services. This would 
then make the VAT system for intra-EU transactions fully coherent. 

Option 2  and  Option 5  would  broadly  provide  comparable  effects.  However,  Option 2 
appears to score slightly better in terms of administrative costs for the Member States and 
with  respect  to  making  the  VAT  system  more  robust  (conversely,  Option 5  appears  to 
score  slightly  better  in  terms  of  compliance  costs  for  business  but  includes  a  risk  of 
developing new types of fraud) as it allows continuing to follow the flow of the goods. 
As such an approach is prioritised by most Member States174, Option 2 has been retained 
as the preferred option for reform.  

Option 2 allows for a gradual implementation175 of the taxation model to all supplies of 
goods and services, being it domestic or cross-border.  By providing, as a first legislative 
step,  that  the  taxation  model  would  only  apply  to  cross-border  B2B  supplies  of  goods 
made to non-CTPs, it ensures a smooth transition for businesses and Member States. It 
would allow testing the functioning of the OSS before its further extension. Only where 
all necessary conditions would be met (i.e. Member States and businesses are legally and 
technically ready for it) would the second legislative step extend the taxation model to all 
businesses and to supplies of services so that the definitive system is fully implemented. 
It is to note that the changes envisaged under the second legislative step are not covered 
by Option 2 as described and analysed in this impact assessment.  

7.4.2.  A staggered and balanced implementation: combining Option 1 and Option 2 

The implementation by the Member States of a proposal based on Option 2, including its 
negotiation  in  Council,  is  expected  to  require  several  years.  Therefore,  it  would  make 
sense  to  meet  the  request  of  Member  States  and  businesses  by  also  including  in  that 
proposal  swift  improvements  to  the  current  system  ("quick  fixes")  as  a  short  term 
measure.  The  right  balance  would  therefore  consist  in  combining  in  one  proposal  the 
benefits of two options: 

  Option 2 as the preferred option for implementing the definitive VAT system (of 

which the entry into force of the different elements would be gradual); 

 

 Option  1  allowing  in  the  short  term  swift  and  limited  improvements  to  the 
current transitional VAT system.   

Improvements  such  as  those  contained  under  Option 1  are  realistic  as  the  concrete 
solutions it includes result from long discussions with the stakeholders176, are in line with 
the  contributions  received  through  the  REFIT  platform  (particularly  relevant  in  this 
respect  are  submissions  XVIII.2.a,  and  XVIII.7.a)177,  and  should  therefore  easily  get 
consensus. The entry into force of these improvements at an earlier date would already be 

173  Because of additional and divergent obligations imposed on businesses trading cross-border. 
174  See  Section  4  of  Annex  1  on  the  selection  of  options  and  Vienna  Fiscalis  results  and  Section  9  of 

Annex 5. 

175  The VAT Action Plan announced a gradual two-step reform of the current transitional VAT system. 
176  See Section 4 of Annex 1 for the work carried out by the GFV, the VEG and on-purpose sub-groups.   
177  See Section 5 of Annex 2 

77 

 
 
                                                                                                                                                 
beneficial  for  both  Member  States  and  business  in  the  meantime  the  first  step  of  the 
definitive  VAT  system  is  put  in  place.  With  limited  administrative  costs178,  Member 
States would gain legal certainty as regards the VAT treatment of intra-EU transactions 
in goods. Although Option 1 is not expected to have a significant impact on tax revenues, 
as  it  does  not  address  the  endemic  weakness  of  the  current  transitional  VAT  system 
leading  to  MTIC  fraud,  it  would  however  contribute  to  enhancing  the  quality  of 
information exchanged between the Member States. Further, it is expected to bring some 
simplifications which should reduce compliance costs at least for some businesses.  

The implementation of Option 1 should further not be seen as an additional layer but as 
complementary to Option 2. Indeed, the simplifications envisaged under Option 1 would 
be  based  on  the  new  concept  of  CTP.  The  introduction  of  this  concept  and  the 
simplifications  linked  to  it  are  in  line  with  the  request  formulated  by  stakeholders  (see  
Sections  2  and  6  of  Annex 2  and  the  REFIT  initiatives  reported  in  the  same  annex 
Section  5)  to  limit  burden  on  compliant  businesses.  It  would  further  allow  testing  the 
process  of  certification  by  the  Member  States  and  also  its  practical  functioning  and 
scope. On this basis adjustments might still be done if needed before the implementation 
of Option 2.      

In order to ensure a smooth transition for business and allow all Member States to reach 
higher  levels  of  cooperation  and  administrative  capacity,  a  staggered  implementation 
(divided  into  two  sub-steps)  of  the  first  legislative  step179  is  therefore  envisaged  as 
follows.  

The sub-step 1 will consist of a first Directive and two Regulations. In the Directive the 
legal cornerstones of the definitive VAT system (cornerstones of the preferred Option 2) 
are introduced together with the short-term improvements to the current transitional VAT 
system  ("quick  fixes")  requested  by  the  Member  States  (Option 1).  This  first  Directive 
therefore comprises the following elements:  

Cornerstones of Option 2: 

  Modification  of  Articles 402  to  404  of  the  VAT  Directive180.  The  new  wording  of 
these  articles  would  state,  in  connection  with  the  definitive  VAT  system,  the 
following: 

(i)  the definitive VAT system will be based on the principle of taxation of the intra-

EU supplies in the Member State of destination; 

(ii) the supplier will be liable to VAT unless the customer is a CTP, since in this later 

case the customer would be liable to VAT; 

(iii)where  the supplier  is not  established in the Member State of destination he  will 

declare the VAT through the OSS; 

(iv) the  OSS  will  allow  not  only  declaration-payment  of  the  VAT  due  but  also 

deduction of input VAT.  

178  As previously mentioned, Option 1 is reported to have the lowest costs of administration, as this has 

the lowest cost of implementation. 

179   See Section 1.1. 

180   Article  402  currently  states  that  the  definitive  VAT  arrangements  will  be  based  in  the  principle  of 

taxation in the Member State of origin. 

78 

 
 
 
                                                 
Option 1:  

  Legal value of the VAT identification number of the customer; 
  Concept of Certified taxable person (CTP); 
  Special scheme for call-off stocks arrangements between CTPs; 
  Harmonisation  and  simplification  of  the  rules  as  regards  ‘chain  transactions’  where 

CTPs are involved; 

  Simplification where CTPs are involved of the rules as regards the evidence to prove 

the transport of goods to another Member State. 

The sub-step 2 will consist of a second Directive (which will be likely accompanied by 
an  Implementing  Regulation),  currently  scheduled  for  adoption  by  the  Commission  in 
2018  but  with  a  later  entry  into  force  (2022).  There  the  detailed  implementing  rules 
related to the following issues would be addressed (remaining elements of Option 2): 

  Place of taxation  in  the Member State of arrival and  single supply (abolition  of the 

intra-EU acquisition concept); 

  Taxation of intra-EU supplies (with reverse charge if the customer is a CTP); 
  Technical  functioning  of  the  OSS  and  extension  of  the  OSS  for  non-established 

taxable persons; 

  Abolition of recapitulative statements. 

7.5.

Subsidiarity of the preferred option 

The preferred Option 2 is considered to be consistent with the principle of subsidiarity as 
the  main  problems  which  have  been  identified  (MTIC  fraud  leading  to  lost  VAT 
revenues, complexity leading to high compliance costs) are triggered by the rules of the 
existing  VAT  Directive.  Given  that  VAT  is  an  EU-harmonised  tax,  Member  States  are 
currently  not  allowed  by  themselves  to  set  different  rules  and  therefore  any  further 
improvements  require  a  proposal  by  the  Commission  to  amend  the  VAT  Directive. 
Therefore  Option 2  will  clearly  offer  value  over  and  above  what  can  be  achieved  at 
Member State level. 

The  same  is  valid  for  the  combined  implementation  with  Option 1.  Although  some 
improvements could already be introduced by the Member States by themselves without 
a need for an EU action the fact is that even where this has been done in some Member 
States,  the  measures  differ  from  one  Member  State  to  another.  Without  mandatory  and 
uniform improvements (contrary to what would be the case with the implementation of 
Option 1) complexity and legal uncertainty would not be solved. 

7.6.

  Proportionality of the preferred option 

The preferred Option 2 is considered to be consistent with the principle of proportionality 
i.e.  it  does  not  go  beyond  what  is  necessary  to  meet  the  objectives  of  the  Treaties,  in 
particular the smooth functioning of the internal market. 

1.  There is an overall positive impact on the revenues for EU Member States through a 
reduction in the VAT fraud and a positive cash flow impact which together more than 
compensate administrative costs changes. 

79 

 
 
 
 
 
 
2.  There  is  equal  treatment  between  domestic  transactions  in  goods  and  intra-EU 
transactions in goods (in a second legislative step, there will be also equal treatment 
with transactions in services). 

3.  The  main  legislative  issues  leading  to  complexity  of  the  current  transitional  VAT 

system are addressed. 

4.  There is an overall reduction in compliance costs to businesses181. 
5.  The CTP status  will  be open to  all businesses (including the  smallest ones,  start-up 
businesses182)  but  will  remain  optional  for  them.  The  certification  would  allow 
businesses to maintain existing arrangements until the implementation of the second 
step  of  the  definitive  VAT  system.  In  the  short  term,  it  provides  simplification  for 
businesses  (see  Option 1  below).  Once  granted  by  a  Member  State,  the  CTP  status 
will be valid in all EU Member States.  

6.  The  OSS  would  build  upon  the  existing  MOSS183  and  therefore  will  be  integrated 

into the web portal of each business' tax administration. 

Prior implementation of Option 1 is also consistent with the principle of subsidiarity as it 
provides  Member  States  and  business  with  limited  but  nevertheless  quick  solutions  for 
the  most  straightforward  problems.  It  maps  out  the  way  to  the  implementation  of 
Option 2  as  simplification  rules  would  be  linked  to  the  new  concept  of  CTP,  a 
cornerstone under Option 2. 

1.  Member  States  have  more  legal  certainty  with  respect  to  the  current  exemption  of 
intra-EU supplies of goods. Exchange of information between Member States about 
goods circulating across the EU is improved.  

2.  Certain  businesses  will  benefit  from  simplification  measures  once  they  will  be 
recognised as CTP. Such certification could already be requested by all business (and 
be  granted  by  Member  States)  so  that  they  would  be  ready  when  Option 2  is 
implemented. 

3.  Administrative  costs  for  Member  States  are  relatively  small  due  to  low  cost  of 
implementation  and  compliance  costs  reduction  is  expected  for  all  businesses 
(although it will only be of benefit of a maximum of 13% of the business population 
due to the limited scope of the simplification envisaged). 

As outlined in Section 2.7, a soft law approach, such as a Member State volunteering to 
introduce new anti-fraud measures or further simplification rules, is either not feasible or 
would lead to an even more fragmented VAT system. 

As with the subsidiarity test, it is not possible for Member States to address the problems 
and problem drivers without a proposal to amend the VAT Directive. 

7.7.

Impact on SMEs 

The  initiative  is  not  specifically  targeted  to  SMEs  as  it  does  not  foresee  a  preferential 
VAT  treatment  for  SMEs.  It  addresses  the  problems  of  fraud  and  complexity  of  the 
current  transitional  VAT  system  and  related  compliance  costs  for  all  businesses. 

181  See however next Section 7.7 on SMEs.  
182  To  note  that  businesses  that  are  exempt  from  charging  VAT  (e.g.  charities,  financial  institutions), 
businesses that have opted for certain special VAT schemes (e.g. farmers, small enterprises) and non-
taxable  legal  persons  (e.g.  public  bodies  acting  as  such)  are  excluded  because  they  do  not  have  the 
obligation to declare VAT. 

183  MOSS  is  soon  expected  to  be  further  extended  (see  proposal  COM(2016)  757  final  currently  in 

negations in Council). 

80 

 
 
 
 
                                                 
Simplifications  such  as  the  use  of  the  OSS  or  those  linked  to  the  granting  of  the  CTP 
status, including the granting of such status, would also be available to SMEs.  

In this context, it is however important to underline that SMEs, which currently benefit 
from the VAT exemption scheme for small enterprises (see Chapter I of Title XII of the 
VAT  Directive  which  encompasses  Articles 282  to  294  of  the  VAT  Directive)  will 
continue to be exempt. Concerning their intra-EU acquisitions of goods, they would no 
longer have to report them as their suppliers  would instead charge and be liable for the 
payment  of  VAT  in  the  Member  State  of  arrival  of  the  goods  (see  more  details  in 
Annex 3).  As  for  their  intra-EU  supplies  of  goods  the  new  rules  would  theoretically 
imply the need for SMEs to charge to their customers the VAT in the Member State of 
destination184. However, the Commission will in parallel come forward with a proposal 
in the form of a comprehensive VAT simplification package for small enterprises which, 
inter alia, will address this problem185.  

The impact of the various options on smaller businesses has nevertheless been taken into 
account through the definition of two specific categories, to take account of differences 
in the extent to which SMEs engage already in intra-EU trade and have to deal with VAT 
obligations in other Member States: SME Type 1 and SME Type 2186. 

The benefits/costs of the preferred Option 2 to both types of SMEs can be summarized as 
follows: 

1.  The  extended  use  of  the  OSS  could  result  in  cost  increases  for  SME  Type 1  in  the 
year of implementation and annually post implementation. However, with respect to 
SME Type 2, costs saving are expected in the year of implementation as well as on an 
ongoing basis. 

2.  The main legislative issues linked to the complexity of the current transitional VAT 

system are addressed and would benefit to both categories of business. 

As  regards  Option  1,  the  reduction  in  compliance  costs  is  expected  to  benefit  all 
businesses,  thus  including  SME  Type 1  and  SME  Type 2  as  confirmed  by  the  study187. 
However,  as  already  mentioned,  the  maximum  percentage  of  businesses  positively 
impacted would be 13%. 

8.  HOW WOULD ACTUAL IMPACTS BE MONITORED AND EVALUATED?  

8.1.

Indicators for monitoring and evaluation 

In  line  with  the  VAT  Action  Plan  and  following,  inter  alia,  the  views  of  stakeholders 
from  the  VEG,  the  definitive  VAT  system  for  intra-EU  trade  is  to  be  introduced 

184  See further explanation in Annex 3.  
185  See Section 1.1 above. 
186  Both SME Type 1 and Type 2 are businesses with a turnover of less than EUR 50 million and having 
less than 250 employees. From a cross-border trade perspective, whilst SME Type 1 has a single 
VAT registration only in its Member State of establishment, engages predominantly in domestic trade 
and  has  begun  trading  outside  its  Member  State,  SME  Type  2  has  VAT  registrations  in  up  to  6 
Member  States  and  is  engaged  in  both  domestic  and  intra-EU  trade.  See  Section 2  in  Annex  4  for 
further explanation on the definition of these business categories.  

187  See information reported in Section 3 of Annex 2. 

81 

 
 
 
                                                 
progressively via two main legislative steps188. It is recalled that the initiative that is here 
being assessed only covers the first legislative step. 

The results of the monitoring  will be used as a basis for deciding on the feasibility and 
timing of the second legislative step which would imply the extension of the system to all 
B2B supplies in goods (no distinction any more between CTP and non-CTP customers) 
as well as to supplies of services. 

Table 9 below gives an overview of the main policy objectives, the indicators to measure 
whether  they  will  be  achieved,  the  tool  for  measuring  these  and  the  operational 
objectives.  A  specific  indicator  meant  to  evaluate  the  pace  of  implementation  and  the 
readiness for the second legislative step is provided. 

Table 9: Monitoring and evaluation framework 

Objectives  

Indicator  

Measurement tool  

To make the EU VAT 
system more robust 

MTIC fraud 
VAT gap 

EU VAT gap study and 
possibly other studies  

Administrative 
costs for tax 
administrations 

Data provided by the 
Member States 

To make the EU VAT 
system simpler 

Compliance costs 
for businesses 

Study to estimate the 
compliance costs 

Data and feedback 
provided by the business 
(VEG) 

To provide a level 
playing field for 
businesses  

Compliance costs 
for businesses 

Study to estimate the 
compliance costs 

Data and feedback 
provided by the business 
(VEG) 

Implementation process 

Operational 
objectives  
Very substantial decrease  
of MTIC fraud 
Target: 80% decrease at 
EU level 

Positive trend in VAT 
gap 
Target: EU average 
lower than 14% 

Stabilisation of increase 
in administrative costs 
through improved 
efficiency in monitoring 
VAT compliance 
Target: At least EUR 
40 billion net positive 
impact on EU VAT 
revenues  
 Reduction of 
compliance costs in 
cross-border trade 
Target: Reduction by 5% 
(all businesses189) 

Substantial reduction of 
compliance costs in 
cross-border trade 
Target: Compliance costs 
gap domestic/cross-
border below 11% and 
gradually close to zero.     

188  See Section 7.4 on identification of the preferred option. 
189  For  SMEs,  compliance  costs  reduction  will  be  monitored  in  the  framework  of  the  structures  and 
according to the criteria to be put in place in the upcoming SMEs VAT package proposal (see Section 
1.1 above).  

82 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
The flow of VAT 
revenues through 
the OSS 

The number of 
taxable persons 
recognised as CTP 

Real time reports in OSS 

Correct re-distribution of 
VAT revenues between 
Member States 

Data provided by the 
Member States 

8.2.

  Monitoring structures 

The VAT Committee, an advisory committee on VAT issues in which representatives of 
all  Member  States  participate  and  which  is  chaired  by  Commission  officials  from 
DG TAXUD, will monitor the implementation of the definitive VAT system for intra-EU 
trade  and  discuss  and  clarify  possible  interpretation  issues  between  Member  States 
regarding  the  new  legislation.  It  is  also  envisaged  that  the  Standing  Committee  on 
Administrative  Cooperation  (SCAC)  will  deal  with  all  possible  issues  regarding 
administrative co-operation between Member States resulting from the new rules on the 
taxation of intra-EU trade. In  case new legislative developments are required,  the GFV 
and the VEG might be further consulted. 

8.3.

  Evaluation 

Member  States  and  the  Commission  shall  examine  and  evaluate  the  functioning  of  the 
definitive  VAT  system  provided  for  in  the  new  legislation.  To  that  purpose,  Member 
States  shall  communicate  to  the  Commission  any  relevant  information  as  regards  the 
level and the evolution of the administrative costs, MTIC fraud and number of businesses 
recognised  as  CTPs  necessary  for  the  evaluation  of  the  effectiveness,  efficiency, 
coherence  with  other  interventions  with  similar  objectives,  and  continued  relevance  of 
the  new  legislation.  The  evaluation  should  also  seek  to  collect  input  from  all  relevant 
business stakeholders as regards the level and the evolution of their compliance costs. The 
Commission  will  prepare  a  retrospective  evaluation  of  the  functioning  of  the  new 
legislation five years after its entry into force. 

83 

 
 
 
 
 
 
 
 
 
 
 
 
ANNEX 1: PROCEDURAL INFORMATION   

1. 

Agenda planning and Work Programme References 

The proposal for a definitive VAT system is linked to the VAT Action Plan. 

TAXUD  is  the  lead  DG  for  this  initiative.  The  Agenda  Planning  Reference  is 
[2017/TAXUD/006]. The Inception Impact Assessment was published on 22 December 
2016190. 

2. 

Inter-Service Steering Group (ISSG) 

The meetings of the Inter-Service Steering Group have taken place on 5 December 2016, 
6 April 2017, 14 June 2017 and 27 July 2017. The following Directorates-Generals (DG) 
and services were part of the group: Secretariat-General, Legal Service, DG Agriculture 
and Rural Development, DG Budget, DG Competition, DG Communications Networks, 
Content and Technology, DG Environment, DG Energy, DG Justice and Consumers, DG 
Financial Stability, Financial Services and Capital Markets Union,  DG Internal Market, 
Industry,  Entrepreneurship  and  SMEs,  and  European  Anti-Fraud  Office.  The  feedback 
received  from  these  directorates  and  services  has  been  taken  into  account  in  the  final 
public consultation document. 

It  has  to  be  noted  that  the  ISSG  as  such  had  been  set-up  back  in  2010  and  had  been 
consulted on all the main issues relating to the reform of the VAT system (Green Paper 
on the future of VAT, EY study (2015) on implementing the destination principle, Action 
Plan). 

3. 

Consultation of the Regulatory Scrutiny Board (RSB) 

The  Regulatory  Scrutiny  Board  was  consulted  on  12  July  2017.  On  14  July  2017,  the 
Board gave a positive opinion on the report. The recommendations made by the Board to 
further improve the report were taken into account. The main changes introduced concern 
the following aspects: 

  Under  the  policy  context  (Section  1),  clarification  on  the  two-step  approach  to  the 
initiative  and  its  rationale  is  provided.  The  interrelations  and  sequencing  of  the 
initiative  with  recent  proposals  and  upcoming  VAT  proposals  on  rates,  SMEs  and 
administrative cooperation is explained. 

  Expected  evolution  of  the  baseline  as  well  as  risks  are  further  described  under  the 
"dynamic  baseline"  (Section  2.7).  Under  the  options  section  (Section  5),  the 
components  of  the  baseline  are  further  explained,  with  specific  clarification  on  its 
scope  in  relation  to  recent  and  upcoming  proposals.  Options  are  streamlined  and 
differences between them are better described and illustrated (Section 5 and Annex 5, 
Section 10). 

  The concept of Certified Taxable Person and its application in practice is explained in 
more details (Box 4). Clarification is given on the eligibility of this concept under the 
various policy options. 

  The  REFIT  dimension  of  the  analysis  is  strengthened  by  making  more  explicit 
reference  to  the  feedback  received  from  stakeholders  under  the  problem  definition, 

190  http://ec.europa.eu/smart-regulation/roadmaps/docs/2017_taxud_006_taxud_definitive_vat_en.pdf 

84 

 
                                                 
the  selection  of  options  and  the  impacts  sections.  Annex  2  on  stakeholders 
consultation is further strengthened with detailed analysis of feedback received from 
the REFIT Platform. 

Other  specific  changes  were  also  made  in  the  report  in  order  to  take  account  of  more 
technical recommendations made by the Board.  

4. 

The Group on the Future of VAT (GFV) and the VAT expert Group (VEG)  

Following  the  publication  of  the  2011  Communication  on  the  Future  of  VAT,  the 
Commission  started  in-depth  technical  discussions  with  Member  States  in  the  GFV191 
and stakeholders in the VEG192. A total of 12 meetings of the GFV and 14 meetings of 
the VEG took place to discuss different issues related to the possible ways to implement 
the  destination  principle  in  intra-EU  trade  of  goods,  in  particular  in  the  process  of 
identifying  the  possible  options  and  the  criteria  for  their  qualitative  assessment, 
examining  how  they  work,  their  pros  and  cons.  Both  groups  had  several  occasions  to 
comment  on  the  findings  of  the  various  studies  discussed  and  presented  to  the  groups 
which served to feed the debate on possible options (see Section 6.2 of Annex 6).  

A Fiscalis seminar was organised in June 2015 in Vienna which brought together both 
the  GFV  and  VEG  to  discuss  the  results  of  the  EY's  study  on  implementing  the 
destination principle to intra-EU B2B supplies of goods. In addition, both the GFV and 
the VEG had already an opportunity, earlier in the process, to express their views on the 
draft terms of reference for the study on the selected options. 

Moreover,  both  GFV  and  the  VEG  discussed  in-depth  during  several  meetings  the 
shortcomings  of  the  current  VAT  system  and  identified  the  priority  areas  in  which 
improvements  to  the  current  rules  could  be  undertaken.  In  this  respect,  following  the 
request of many delegates in GFV and VEG, the Commission services created two sub-
groups,  composed  of  members  from  the  VEG  and  the  GFV,  to  examine  the  VAT 
treatment of consignment stocks and chain transactions193. As regards the burden of proof 
to  exempt  intra-EU  supplies,  a  third  mixed  sub-group194  was  established  in  the 
framework  of  the  EU  VAT  Forum195.  Each  sub-group  had  to  examine  the  precise 
problems  faced  by  business  and  tax  administrations,  look  at  practical  examples  and 

191  See Glossary. 
192  See Glossary. 
193  The sub-group on chain transactions was made up of 4 individuals, 6 organisations and 7 Member 
States (AT, BG, DE, HU, LU, NL and UK). The sub-group on consignment stock was made up of 
3 individuals,  6  organisations  and  3  Member  States  (BE,  FI  and  IT).  Each  sub-group  held  five 
meetings in Commission premises with their first meeting taking place respectively on 18 and 19 June 
2013.  In  both  groups  a  rapporteur  from  the  Member  States  and  another  from  the  stakeholders  were 
nominated by consensus. The membership list of the sub-groups is available as annex to GFV No 42 
and  VEG  No 26  B2B  supplies  of  goods  –  Taxation  at  destination  -  Sub-Groups  –  Overview  of  the 
outcome.  

194  The sub-group on the proof of exemption of intra-EU supplies was made up of 9 organisations and 
15 Member States (AT, BE, BG, DE, DK, ES, EE, IE, HU, IT, LT, PL, PT, NL and SK) members of 
the EU VAT Forum. The sub-group held three meetings with the first meeting taking place on 31 July 
2013. The report was presented by two rapporteurs (one from the tax administrations and one from the 
business members) in a plenary meeting of the EU VAT forum on 3 December 2013. The report was 
then finalised and sent to the GFV chair. The membership list of the sub-group is available as annex to 
GFV No 42 and VEG No 26 B2B supplies of goods – Taxation at destination - Sub-Groups – Overview 
of the outcome. 

195  See Glossary. 

85 

 
                                                 
identify  possible  ways  to  address  these  problems.  All  three  sub-groups  reported  back 
with their recommendations to both the VEG and GFV196.  

During  two  rounds  of  discussions  in  2016  both  the  GFV  and  the  VEG  were  given 
opportunity  to  examine  and  express  their  views  on  the  main  features  of  the  definitive 
VAT  system  as  well  as  to  identify  and  analyse  the  issues  which  would  arise  and  to 
develop the ways to tackle them with a view of preparing the legislative proposal to be 
tabled  in  2017.  Among  others  the  concept  of  Certified  Taxable  Person  (CTP)  was 
examined197.  

Finally,  in  January  2017,  the  GFV  and  the  VEG  met  to  discuss  a  series  of  questions 
prepared  by  the  Commission  services198  which  dealt  with  the  issues  of  the  VAT 
identification number, chain transactions, call-off stock and proof of intra-EU supplies, in 
respect of which in its conclusions of 8 November 2016 the ECOFIN Council199 invited 
the  Commission  to  present  a  legislative  proposal  on  improvements  to  the  current  EU 
VAT  rules  for  cross-border  transactions.  Both  groups  were  once  more  also  asked  to 
provide feedback on the suggested list of conditions for granting the status of Certified 
Taxable Person (CTP). 

196   All these documents are publically available in CIRCABC, see 

GFV N° 041 and VEG N° 027 Sub-Groups report - Proof of intra-EU supplies 
GFV N° 039 and VEG N° 028 Sub-Groups report - Consignment stocks 
GFV N° 040and VEG N° 029 Sub-Groups report - Chain transactions 

197  See GFV N° 054 and VEG No 057 Definitive VAT regime for intra-EU trade – First step – Issues to be 

examined. 

198  See GFV No 56 and Veg No 60 Elements for the 2017 proposal – Definitive VAT regime for intra-EU 

trade. 

199   http://data.consilium.europa.eu/doc/document/ST-14257-2016-INIT/en/pdf  

86 

 
 
 
 
                                                 
ANNEX 2: STAKEHOLDER CONSULTATION 

1. 

Introduction 

The consultation with stakeholders on the best possible solutions for the definitive VAT 
system included several different elements and started as early as 2010. It was organised 
around several main axes: 

1)  Open public consultation on the Green Paper on the future of VAT (2010) which 
took  place  between  1 December  2010  and  21 May  2011  and  resulted  in  around 
1 700 contributions providing a detailed view of problems linked with the application 
of VAT in Member States; 

2)  An  in-depth,  targeted  and  on-going  consultation  process  with  key  stakeholders 
(from  2012  until  2017)  via  the  GFV  (representing  Member  States  –  12  meetings)  
and  the  VEG  (representing  business,  academics  and  accounting  professions  –  14 
meetings); 

3)  Consultations  with  stakeholders  (businesses,  tax  professionals  and  Member  States) 
through  online  surveys  and  direct  interviews  undertaken  by  an  independent 
consultant (EY) as part of the study on ‘Implementing the ‘destination principle’ to 
intra-EU B2B supplies of goods’ (2015); 

4)  Contributions received via the REFIT platform and as a spontaneous feedback from 

business; 

5)  Open  public  consultation  which  took  place  between  21 December  2016  and 

20 March 2017. 

The consultation strategy had two main purposes. The first was to identify the problems 
of  the  current  transitional  VAT  system  and  the  possible  ways  of  solving  them.  The 
second  was  to  get  the  views  of  the  stakeholders  on  how  to  shape  the  definitive  VAT 
system. 

This  approach,  developed  in  line  with  the  Better  Regulation  Guidelines,  allowed  the 
public to give valuable input at all stages of the preparatory work of the initiative over an 
extended period of time (from 2010 until 2017). Stakeholders were given the opportunity 
to provide feedback on all key elements, including the problems experienced, the design 
of regulatory alternatives and possible impacts. Thanks to the various instruments used, 
all stakeholder groups (Member States, general public, businesses and tax experts) were 
consulted in the process and the outcome of the whole consultation process was of high 
quality. Further it provided a valuable input for the proposal. 

Tables 10 and 11 – Overview of the consultation strategy 

Table 10: Stakeholders consulted 

Stakeholders 
consulted 

Assessment  of 
the 
current VAT system 

Businesses 

 

Assessment  of 
the 
possible  elements  of 
the 
policy 
options 

future 

of 

Assessment 
possible 
improvements 
to 
current VAT system 

the 
quick 
the 

 

87 

 

 
Business Associations 

Practitioners 
advisors) 

(tax 

Academics 

Members 
public  

of 

the 

Member 
(administration) 

States 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table 11: Consultation activities 

Consultation activities 

Assessment of 
the current 
VAT system 

Open public consultation on 
the  Green  Paper 
(2010-
2011) 

The conference in Milan on 
the Green Paper in (2011) 

The GFV (2012-2017) 

The VEG (2012-2017) 

EY 

study 

on 
The 
the 
‘Implementing 
‘destination  principle’ 
to 
intra-EU  B2B  supplies  of 
goods’ (2015) 

The  Fiscalis  seminar 
in 
Vienna (for GFV and VEG) 
-  the  results  of  the  EY's 
study  discussed  (2015)  and 
the way forward 

The  REFIT  platform  and 
spontaneous contributions 

The 
open 
consultation (2016-2017) 

public 

 

 

 

 

 

 

 

 

Assessment of the 
possible elements of 
the future policy 
options 
 

Assessment of the 
possible quick 
improvements to the 
current VAT system 

 

 

 

 

 

 

 

 

 

 

 

 

 

88 

 
 
 
 
 
2. 

Open public consultation: the Green Paper on the future of VAT 

robust 

The  open  public  consultation  on  the  'Green  Paper  on  the  future  of  VAT'  –  Towards  a 
simpler,  more 
around 
1 700 contributions.  On  6 May  2011,  the  European  Commission  organised  a  one  day 
conference in Milan on the Green Paper which brought together policy makers, experts, 
businesses  and  other  stakeholders  and  the  general  public  from  all  over  Europe,  and 
beyond. 

efficient  VAT 

system"200 

resulted 

and 

in 

The  results  of  the  public  consultation  were  endorsed  by  the  Commission  in  the 
Communication  on  the  future  of  VAT201  adopted  on  6 December  2011.  The  main 
problems identified in the document could be summarized under two key headings: 

1) The VAT fraud, and  
2) The complexity of the VAT system. 

1) VAT fraud 

VAT fraud has negative effects on: (i) the tax collected by each Member State, (ii) the 
EU own resources and (iii) the protection of the rights of taxpayers (the honest traders). 

The stakeholders consulted noted that carousel fraud and other fraudulent schemes must 
be  tackled  by  specific  remedies  addressed  only  to  fraudulent  taxpayers,  rather  than 
measures  that  could  involve  indirectly  compliant  taxpayers  creating  a  disadvantage  for 
them. The vast majority of the respondents commented that antifraud measures should be 
harmonised to be effective. 

Improving the administrative cooperation between tax authorities and a faster exchange 
of information were mentioned as the first step towards a fraud proof system. This should 
be combined with the improved efficiency of VIES in order to protect bona fide traders. 
A  few  respondents  suggested,  as  possible  measures  to  combat  fraud,  the  generalised 
(domestic) reverse charge on individual transactions exceeding specific value thresholds, 
the targeted reverse charge or the exemption of B2B transactions. 

Destination principle and One Stop Shop 

A  considerable  group  of  respondents  stressed  that  the  destination  principle  should  be 
applied together with One-Stop-Shop arrangements (OSS) as an alternative to the reverse 
charge mechanism. Some stressed that an OSS mechanism like the one introduced for the 
e-commerce sector in 2015 would be a significant improvement. The establishment of a 
comprehensive  OSS  system  (especially  one  including  the  possibility  of  cross-border 
deductions)  would  allow  the  fulfilment  of  all  VAT  obligations  in  the  Member  State  of 
establishment. However, several respondents were worried that the Member States would 
not be ready to cope with a major change in the system for the collection of VAT given 
the limited amount of public finance available for further technological advancement. 

200  COM(2010) 695 final 
201  COM(2011) 851 final 

89 

 
 
 
                                                 
Certified Taxable Person 

Some respondents thought the model of certification of taxable persons is promising as a 
tax collection method. It would be the easiest system in the short term and would require 
the  lowest  initial  investment  as  there  are  no  real  changes  to  the  collection  system. 
However amongst all the proposals recorded, this would seem to be the least efficient in 
preventing  carousel  fraud.  To  be  truly  attractive  to  businesses,  it  should  provide  the 
certified  business  with  incentives  e.g.  the  possibility  of  benefitting  of  reduced 
obligations, fewer audit queries, reduction of penalties, faster refunds of tax credits and 
greater legal security and reliability. Some respondents insisted that the conditions of the 
certification process should be the same and recognised in all Member States. 

2) Complexity of the system 

The complexity of the system leads to high administrative costs both for taxable persons 
(which  have  to  understand  and  to  comply  with  the  individual  requirements  of  up  to  28 
different  VAT  systems)  and  for  tax  administrations.  It  further  leads  to  a  lack  of  legal 
certainty. 

With regards to this issue the main areas of concern are: (a) the evidence needed for the 
exemption  of  intra-EU  supplies;  (b)  the  rules  on  chain  transactions;  (c)  the  rules  on 
consignment  stocks;  (d)  certain  rules  on  tax  compliance  that  create  administrative 
burdens. 

a) The evidence needed for the exemption of intra-EU supplies 

There are no clear and uniform rules about the evidence to be provided by the supplier to 
prove that the conditions for the exemption for intra-EU supplies of goods are met. Many 
issues are related to the proof of cross-border transport. The main problems derive from 
the mismatches between national forms or documentation in different languages and the 
different procedures in force in each Member State. 

For  that  reason  the  majority  of  respondents  requested  EU-wide  harmonised  forms  of 
proof. Some respondents mentioned the need to introduce also supporting or alternative 
means of proof in cases where the main proof is unavailable. 

b) The rules on chain transactions 

The  VAT  Directive  provides  a  simplification  for  triangular  transactions  but  this  is  not 
applied in a uniform way by Member States and it is the only simplification provided by 
the current rules. There are no common guidelines on the treatment of chain transactions. 

c) The rules on consignment stocks 

Rules for consignment stocks are not applied uniformly. Some Member States allow for 
certain simplifications (not provided for in the current rules) while others do not. 

d) The rules for tax compliance that create administrative burdens 

Rules  for  VAT  registration  should  be  standardised  with  the  aim  to  clarify  and  make 
uniform the requirements in each Member State in respect of non-established businesses. 
Further  a  standardisation  of  the  recapitulative  statements  and  Intrastat  reporting 
obligations  is  needed.  Some  respondents  requested  the  abolition  of  the  recapitulative 
statements. 

90 

 
3. 

Targeted consultation with key stakeholders (GFV and VEG) 

The Commission has organised an in-depth, targeted, technical and on-going consultation 
with  key  stakeholders:  businesses,  academics,  accounting  professions  and  Member 
States. It started in 2012 and lasted until the beginning of 2017. 

It took the form of regular meetings of the two groups. One composed of representatives 
of national tax administrations (GFV) and the other composed of businesses, academics 
and tax practitioners (VEG). 

Both groups discussed on several occasions the shortcomings of the current transitional 
VAT  system  and  the  possible  ways  to  implement  the  destination  principle  in  intra-EU 
trade  of  goods.  In  parallel,  they  also  discussed  in-depth  the  priority  areas  in  which 
improvements to the current VAT rules could be undertaken. 

In June 2015, a Fiscalis seminar was organised in Vienna which brought together both 
the GFV and VEG in order to discuss the outcome of the EY study on "Implementing the 
'destination  principle'  to  intra-EU  B2B  supplies  of  goods".  The  discussion  showed  that 
views diverge as regards the five possible options to implement the destination principle. 
For  almost  all  Member  States  following  the  physical  flow  of  goods  remained 
fundamental. Therefore, options which do not follow the goods appeared not acceptable 
(options 4  and  5).  Among  those  Member  States’  representatives  that  share  this  view, 
there was a preference for option 2, given its potential to combat MTIC VAT fraud. Very 
few delegations advocated for option 3. Mitigation measures, such as the certified taxable 
person (CTP), were considered very important to alleviate the negative cash flow impact 
on businesses for options under which the supplier charges the VAT of the Member State 
of destination. It was concluded that a phased entry into force of the definitive regime is 
needed. 

At the same time, members of both groups underlined the need of introducing short term 
improvements  of  the  current  VAT  system  (“quick  fixes”),  namely:  chain  transactions, 
call-off  stock  and  proof  of  transport  of  intra-EU  supplies.  Additionally  Member  States 
requested that the role of the VAT identification number for the exemption for intra-EU 
supplies be also addressed in the scope of the “quick fixes”. 

4. 

EY  study  on  ‘Implementing  the  ‘destination  principle’  to  intra-EU  B2B 
supplies  of  goods’  (2015)  –  Consultations  of  stakeholders  (businesses  and 
Member States) online surveys and direct interviews – relevant elements 

The  EY  study  focused  on  the  assessment  of  the  current  VAT  environment  and  the 
possible impacts of the analysed options to change the existing VAT system. As part of 
the analysis businesses, Member States and tax experts were consulted. 

In  respect  of  the  stakeholder  consultation  the  following  instruments  were  used:  (1)  a 
business survey addressed to stakeholders in 28 Member States on compliance costs and 
monetary  and  non-monetary  impacts  of  the  presented  VAT  policy  options;  (2)  a  tax 
experts'  survey  addressed  to  tax  experts  in  28  Member  States  on  compliance  costs  and 
technical  information  on  the  proposed  policy  options;  (3)  a  Member  States'  survey 

91 

 
addressed  to  tax  authorities  in  the  28  Member  States  on  administration  costs  and  the 
VAT Gap problem in the context of the policy options202. 

The  feedback  received  through  the  consultation,  performed  within  the  scope  of  the  EY 
study, concerned: (i) compliance costs203 (identified as a fundamental issue for business); 
(ii)  impact  on  VAT  fraud  (identified  as  a  fundamental  issue  for  Member  States);  (iii) 
legal certainty; (iv) administrative costs204; (v) cash flow implications. 

The current VAT situation 

The businesses' perspective 

Business representatives were asked about: (1) the structure and the scope of their current 
trade  activities;  (2)  the  way  in  which  they  deal  with  fulfilling  VAT  obligations, 
separately  in  the  domestic  and  intra-EU  supplies  contexts;  (3)  the  estimation  of  the 
detailed costs (increase, decrease, no change) under the proposed changes. 

Based on the data collected from the business survey it was estimated that on average for 
the current VAT system, the VAT cost of compliance per Euro of turnover is 11% higher 
for  intra-EU  trade  as  compared  with  the  corresponding  VAT  compliance  per  Euro  of 
turnover for domestic trade. 

The Member States' perspective 

In order to assess the current state of administrative labour and non-labour costs, Member 
States  were  asked  to  provide  an  average  cost  per  hour  for  employees  responsible  for 
dealing  with VAT.  Based on the survey results, the monetary value of the labour  costs 
associated with VAT administration was estimated at approximately EUR 1 730 million 
in  the  EU.  In  addition,  Member  States’  non-labour  costs  associated  with  the 
administration  of  VAT  were  also  considered.  These  included  external  consultancy,  IT 
systems and staff training costs.  

Assessment of the possible VAT options 

Different taxation policy options were analysed with a view to reducing compliance costs 
(making EU cross-border trade as simple and safe as domestic trade); reducing the VAT 
fraud and assessing the possible shift in burdens with which tax administrations could be 
confronted. Detailed description of the impacts of the options and on how they compare 
is included in Sections 6 and 7 of the Impact Assessment. 

5. 

Contributions received via the REFIT platform 

Stakeholders disclosed their position also through the Refit Platform where it is possible 
to participate actively in the law making process by providing an overview with the aim 
to evaluate and improve existing laws. Some stakeholders submitted their contributions 
along  2014,  2015  and  2016  regarding  specific  issues  they  are  facing  and  the  way  to 

202   25 Member States replied to the survey. 
203   See Glossary for definition. 
204   See Glossary for definition. 

92 

 
                                                 
overtake them. All the submissions on taxation provided up to date can be found under 
the following link205. 

VAT registration – CTP1status 

One of the contributors (DIHK) provided some proposals to improve the VAT system, in 
particular  on  the  simplification  of  chain  transactions  by  the  extension  of  the  rules  on 
triangulation, avoiding the registration of the intermediate businesses in the transactions. 
Further  input  was  related  to  the  extension  of  the  MOSS  to  avoid  multiple  registrations 
which are expensive for businesses, and for improving the cross border refund process. 

In  2015  Business  Europe  complained  about  the  negative  effects  of  unjustified  geo-
blocking due to excessive administrative burdens related to VAT on companies involved 
in  cross  border  trade.  The  same  association  with  its  position  paper  on  the  VAT  Action 
Plan  stated  that  the  current  system  –  exempting  cross-border  supply  and  taxing  cross-
border  acquisition  -  should  be  changed  and  simplified.  Amongst  the  detailed  measures 
for  a  correct  VAT  collection,  providing  a  single  online  service  was  mentioned  which 
could be used by businesses to easily determine if their customer is a Certified Taxable 
Person,  and  ensuring  that  the  criteria  used  to  define  a  Certified  Taxable  Person  do  not 
increase  current  administrative  burdens  on  business.  Further,  there  must  be  equal 
treatment of both domestic and cross-border suppliers and of goods and services as this 
supports 
its 
implementation via improvement of the MOSS.  

the  supply  chain.  They  supported 

the  destination  principle  and 

Fraud – Reverse charge mechanism  

The  Ministry  of  business  and  growth  in  Denmark  with  the  Danish  business  forum 
mentioned that the problem of VAT fraud should be addressed with long term solutions 
limiting  the  use  of  the  reverse  liability  (the  reverse  charge  mechanism)  which  requires 
changing  sales  and  accounting  systems  thus  increasing  administrative  burdens  for 
businesses. Another contributor clearly expressed the need for EU support with respect to 
honest businesses, avoiding the increase of administrative burdens. They are affected in 
particular by the increased burden of proof related to cross-border supplies which hinders 
the development of the single market. Effective tools against VAT fraud should be used 
in combination with simplification measures, like the possibility for small business to use 
a VAT reporting threshold on B2C sales across EU. 

In  2016  Confcommercio  in  its  contribution  stated  that  VAT  fraud  generates  unfair 
competition. At the same time VAT obligations should be reduced, amending the current 
rules  without  introducing  new  systems  like  the  Generalised  Reverse  Charge  that  will 
entail very heavy reporting obligations. The OSS should be used in order to reduce the 
burdens  for  companies.  It  has  to  be  noted  that  such  a  system  would  be  affordable  for 
middle and big companies but the charges would be still high for small businesses. 

Stakeholders presented in the Refit Platform1 their position regarding the application of 
the  reverse charge  mechanism  applicable  to  all  the  domestic  transactions.  The  message 
from the economic operators reported by one business forum is that it would be worth to 
"replace that measure with a simpler and more basic VAT regime in the EU".  

205   https://ec.europa.eu/info/sites/info/files/taxation_and_customs_union.pdf 

93 

 
                                                 
In fact, according to operators the reverse liability has as a disadvantage since it obliges 
businesses  to  "operate  different  sales  and  accounting  systems  for  different  business 
transactions",  notably  increasing  the  administrative  burdens.  In  their  opinion  the  same 
results could be achieved by enhancing the administrative cooperation between Member 
States and businesses. 

In the same context another group stressed that the reverse charge is very important when 
it  comes  to  combating  VAT  fraud  at  cross  border  level.  Also  the  application  of  that 
measure in certain sectors has given satisfactory results. 

Reference should also be made to the opinions adopted by business federations as well as 
to  input  received  from  academics  in  scientific  publications.  All  these  contributions  are 
mentioned  in  detail  in  the  impact  assessment  related  to  the  General  Reverse  Charge 
Mechanism proposal1. 

6. 

Contributions received as spontaneous feedback from businesses 

The  Commission  also  received  spontaneous  contributions  from  experts,  academics, 
members of the VEG and delegates of Member States. 

Regarding the current system, it was pointed out that the exemption for intra-EU supplies 
should be conditional only upon the possession of a valid VAT number by the acquirer. 
At  the  same  time  the  identification  procedure  and  the  control  of  registered  taxpayers 
should  be  harmonised  at  EU  level  to  be  reliable.  Recapitulative  statements  should  be 
considered only as an additional piece of evidence. 

Regarding  the  CTP  status,  it  could  be  used  to  improve  the  current  rules  during  the 
passage to the definitive regime but the criteria to provide the status should be common 
for all Member States, like the AEO certification for customs. However the CTP should 
not be a condition for the application of the rules on burden of proof in order to ensure 
legal  certainty  for  all  the  businesses,  not  only  for  the  certified.  Further  the  CTP  status 
could  be  a  useful  tool  for  the  simplification  of  complex  transactions  like  chain 
transactions. 

Academics  expressed  their  position  that  the  VAT  identification  number  is  totally 
inadequate to ensure effectiveness of the VAT regime for intra-EU trade. Regarding the 
CTP they believe that this status can be defined as effective only if the requirements and 
the procedures are harmonized. 

The simplification of the VAT system and the introduction of some quick measures (for 
chain transactions, call-off stock and use of the VAT number) were deemed necessary. It 
is believed that new measures should not be more burdensome than existing ones. 

With regard to the extension of the OSS it is necessary to balance the need of simplicity 
for stakeholders and the duty of the tax authorities to ensure revenues. It is questionable 
whether  a  system  designed  as  a  “pay  only”  scheme  is  capable  of  adaptation  to 
incorporate refunds of VAT or deductions. 

7. 

Open public consultation 

The  open  public  consultation  for  the  initiative  was  held  for  13  weeks  between 
21 December  2016  and  20 March  2017  using  the  EU  survey  tool.  The  Commission 
received 121 submissions therefore the results of this open public consultation should be 

94 

 
 
read taking into account this rather limited  number of responses. Nevertheless business 
community was much better represented than Member States (only two replies). This is 
especially true having in mind that 37 business associations provided their input to this 
consultation.  All  public  submissions  are  available  on  the  DG  TAXUD  website  under 
following 
[https://ec.europa.eu/taxation_customs/consultations-get-involved/tax-
consultations_en]. 

link 

The profile of the participants is presented below: 

Answers  Ratio 
a Business 
48 
a Business Association  37 
13 
a Tax advisor 
2 
a Public authority 
an Academic 
4 
a Member of the public  5 
Other 

39.67% 
30.58% 
10.74% 
1.65% 
3.31% 
4.13% 
9.92% 

12 

In terms of the Member States where the contributors indicated where they were based 
most  replies  came  from  Germany  (almost  30%),  Belgium  (almost  15%),  United 
Kingdom  (10%),  Sweden  (6.6%),  Netherlands  (5.8),  Italy  (almost  5).  No  reply  was 
received from 10 countries206. 

The purpose of the consultation was to seek feedback on the following issues: 

(i) the problems linked to the current transitional VAT system; 
(ii) the main elements constituting different options: 

-  option 1 – 'quick fix measures to the current system;  
-  options 2-5  based  on  the  combination  of  2  factors:  the  place  of  supply  (the 
destination principle following the flow of goods or the contractual arrangements) 
and  the  person  liable  to  account  for  VAT  (the  supplier  or  the  customer), 
accompanied by the concepts such as OSS + CTP. 

The current transitional VAT system 

Complexity/costs 

The current transitional VAT system is burdensome because of its complexity and costs 
incurred.  Almost  90%  of  the  contributors207  confirmed  that  there  are  additional  costs 
linked  with  intra-EU  supplies  of  goods  in  comparison  with  domestic  ones.  79%208 
indicated that small businesses are deterred from cross-border supplies for those reasons. 

Fraud – Reverse charge 

Over  74%209  agreed  that  the  current  system  is  not  sufficiently  resistant  to  VAT  fraud. 
More than 67%210 believed that the reverse charge mechanism is an effective measure to 

206   Bulgaria, Croatia, Cyprus, Estonia, Finland, Greece, Lithuania, Malta, Romania and Slovenia. 
207   The whole business – 95%, SMEs – 85.5%, large businesses – 100%, business associations – 89%, tax 

advisors and academics – 100%, members of the public – 100%, Member States – 100% 

208   The  whole  business  –  71%,  SMEs  –  71%,  large  businesses  –71%,  business  associations  –  78%,  tax 

advisors and academics – 94%, members of the public – 80%, Member States – 100% 

209   The whole business – 67%, SMEs – 79%, large businesses – 64%, business associations – 68%, tax 

advisors and academics – 94%, members of the public – 100%, Member States – 100% 

95 

 
 
 
 
 
 
                                                 
combat  fraud.  But  at  the  same  time  54%211  admitted  that  the current  application  of  the 
reverse charge increased the compliance costs. 30%212 of respondents were of the view 
that these costs decreased. 

Quick fix measures – Option 1 

Over 90%213 confirmed that a VAT identification number is a reliable proof of the status 
of the customer regarding intra-EU supplies. But only 55%214 believed that the lack of a 
VAT number of the customer should deprive the supplier from the possibility to exempt 
intra-EU supplies. 

There  was  strong  support  for  the  need  to  improve  the  rules  on  chain  transactions 
(83%215),  proof  required  to  demonstrate  that  the  goods  were  moved  from  one  Member 
State to another (almost 80%216) and simplification of call-off stock situations (75%217). 

Elements of the possible future options – Options 2 to 5 

More than 68%218 of the respondents stated that there should be only one taxed intra-EU 
transaction as it is currently the case for the domestic supplies. However, 19%219 of the 
respondents disagreed. 

Compliance and administrative costs 

For  47%220  of  the  stakeholders  the  change  to  only  one  taxed  transaction  will  reduce 
compliance  costs.  25%221  of  the  respondents  believed  that  administrative  costs  for 
Member States will be reduced but 51%222 did not have opinion on that. 

210   The whole business – 60%, SMEs – 64%, large businesses – 68%, business associations – 70%, tax 

advisors and academics – 88%, members of the public – 60%, Member States – 100% 

211   The whole business – 60%, SMEs – 50%, large businesses – 61%, business associations – 51%, tax 

advisors and academics – 53%, members of the public – 20%, Member States – 50% 

212   The whole business – 21%, SMEs – 14%, large businesses – 29%, business associations – 38%, tax 

advisors and academics – 24%, members of the public – 60%, Member States – 50% 

213   The whole business – 92%, SMEs – 87%, large businesses – 93%, business associations – 95%, tax 

advisors and academics – 94%, members of the public – 80%, Member States – 100% 

214   The whole business – 63%, SMEs – 86%, large businesses – 54%, business associations – 32%, tax 

advisors and academics – 76%, members of the public – 80%, Member States - 50% 

215   The whole business – 90%, SMEs – 79%, large businesses – 93%, business associations – 68%, tax 

advisors and academics – 88%, members of the public – 80%, Member States - 100% 

216   The whole business – 90%, SMEs – 79%, large businesses – 93%, business associations – 68%, tax 

advisors and academics – 82%, members of the public –  80%, Member States – 50% 

217   The whole business – 88%, SMEs – 71%, large businesses – 93%, business associations – 54%, tax 

advisors and academics – 82%, members of the public – 40%, Member States – 100% 

218   The whole business – 69%, SMEs – 64%, large businesses – 68%, business associations – 62%, tax 

advisors and academics – 94%, members of the public – 80%, Member States – 50% 

219   The whole business – 23%, SMEs – 21%, large businesses – 25%, business associations – 24%, tax 

advisors and academics – 6%, members of the public – 20%, Member States – 0% 

220   The whole business – 44%, SMEs – 64%, large businesses – 32%, business associations – 30%, tax 

advisors and academics – 94%, members of the public – 40%, Member States – 50% 

221   The whole business – 19%, SMEs – 21%, large businesses – 21%, business associations – 14%, tax 

advisors and academics – 59%, members of the public – 40%, Member States – 0% 

222   The whole business – 48%, SMEs – 50%, large businesses – 54%, business associations – 73%, tax 

advisors and academics – 29%, members of the public – 20%, Member States – 100% 

96 

 
                                                                                                                                                 
Place of taxation (the flow of goods or the contractual arrangements)  

As for the place where goods should be taxed, 53%223 believed that it should be the place 
where  the  goods  arrive  and  48%224  that  it  should  be  the  place  where  the  customer  is 
located. 

Liability rules (the supplier or the customer) 

In  relation  to  the  question  of  the  liability  for  VAT  due  on  B2B  intra-EU  supplies  of 
goods 56%225 indicated the customer and 25%226 the supplier. 

OSS 

80%227  supported  the  extension  of  the  OSS  to  taxable  intra-EU  B2B  supplies  of  goods 
seeing  it  as  a  simplification  measure  eliminating  the  need  for  multiple  registrations. 
88%228  of  the  respondents  agreed  that  the  OSS  system  should  also  allow  for  the 
deduction of input VAT. 

CTP status 

There was no clear cut  majority  in  relation  to  the  introduction  of the Certified Taxable 
Person (CTP). Almost 44%229 of the respondents indicated that they would be interested 
to  apply  for  CTP  if  the  criteria  were  not  too  burdensome.  8%230  were  ready  to  apply 
regardless  of  the  difficulty.  14%231  informed  that  they  are  not  interested  in  using  this 
measure  and  more  than  33%  did  not  provide  any  answer  on  this  issue.  However  there 
was  clear  support  for  the  idea  that  the  criteria  for  obtaining  the  CTP  status  should  be 
harmonised at EU level (79% of the support232). 

223   The whole business – 46%, SMEs – 64%, large businesses – 36%, business associations – 54%, tax 

advisors and academics – 76%, members of the public – 60%, Member States – 50% 

224   The whole business – 62%, SMEs – 57%, large businesses – 68%, business associations – 32%, tax 

advisors and academics – 35%, members of the public – 40%, Member States – 50% 

225   The whole business – 69%, SMEs – 50%, large businesses – 79%, business associations – 54%, tax 

advisors and academics – 41%, members of the public – 60%, Member States – 50% 

226   The whole business – 25%, SMEs – 43%, large businesses – 14%, business associations – 11%, tax 

advisors and academics – 53%, members of the public – 40%, Member States – 50% 

227   The whole business – 81%, SMEs – 64%, large businesses – 89%, business associations – 70%, tax 

advisors and academics – 88%, members of the public – 60%, Member States – 100% 

228   The whole business – 94%, SMEs – 79%, large businesses – 100%, business associations – 84%, tax 

advisors and academics – 82%, members of the public – 80%, Member States – 50% 

229   The whole business –79%, SMEs – 71%, large businesses – 86%, business associations – No answer 

68%, tax advisors and academics – 35%, members of the public – 20%, Member States – 0% 

230   The whole business – 13%, SMEs – 7%, large businesses – 11%, business associations – No answer 

68%, tax advisors and academics – 12%, members of the public – 0%, Member States – 0% 

231   The  whole  business  –  8%,  SMEs  –  21%,  large  businesses  –  4%,  business  associations  –  No  answer 

68%, tax advisors and academics – 24%, members of the public – 40%, Member States – 50% 

232   The whole business – 94%, SMEs – 93%, large businesses – 93%, business associations – 68%, tax 

advisors and academics – 76%, members of the public – 100%, Member States – 100% 

97 

 
                                                 
Fraud – taxation options/reverse charge  

In  relation  to  improved  fraud  fighting  thanks  to  taxation  of  B2B  intra-EU  supplies, 
50%233  of  respondents  believed  it  would  be  helpful  and  24%234  were  of  the  opposite 
opinion. 

On the optional application by Member States of a generalised reverse charge mechanism 
on domestic transactions 40%235 agreed that such a  measure would help fighting fraud, 
while  42%236  were  of  the  opposite  opinion.  More  than  58%237  of  the  contributors 
indicated that such a solution would increase compliance costs. 

233   The  whole  business  –38%,  SMEs  –  43%,  large  businesses  –  39%,  business  associations  –  43%,  tax 

advisors and academics – 94%, members of the public – 80%, Member States – 50% 

234   The whole business – 33%, SMEs – 21%, large businesses – 36%, business associations – 24%, tax 

advisors and academics – 6%, members of the public – 0%, Member States – 50% 

235   The whole business – 50%, SMEs –64 %, large businesses – 43%, business associations – 24%, tax 

advisors and academics – 41%, members of the public – 40%, Member States – 0% 

236   The whole business – 38%, SMEs – 21%, large businesses – 46%, business associations – 41%, tax 

advisors and academics – 59%, members of the public – 40%, Member States – 100% 

237   The whole business – 67%, SMEs –43 %, large businesses – 75%, business associations – 54%, tax 

advisors and academics – 53%, members of the public – 60%, Member States – 100% 

98 

 
 
 
                                                 
ANNEX 3: WHO IS AFFECTED BY THE INITIATIVE AND HOW 

The initiative will directly impact businesses and Member States. Businesses in the way 
they comply with their VAT obligations and Member States in the implementation of the 
new rules and the audit of their application by businesses. Citizens should not be affected 
by the changes. They will continue to purchase goods and services with payment of VAT 
in  exactly  the  same  way  as  is  currently  the  case.  They  might  be  indirectly  impacted 
through lower consumer prices although these are not expected to be substantially altered 
by the initiative.  

1. 

Businesses 

The  scope  of  the  initiative  is  limited  to  intra-EU  transactions  in  goods  that  take  place 
between  businesses238.  Therefore  it  will  only  affect  businesses  that  sell  or  buy  goods 
cross-border within the EU. Businesses carrying out only domestic transactions (i.e. only 
in the Member State in which they have established their business) will not be affected. 

No  distinction  is  made  between  types  of  businesses  trading  cross-border  since  the 
changes proposed are of a general nature. They consist in a change in the VAT collection 
principle  which  will  be  applicable  to  all  businesses  (see  however  below  exception  for 
CTP businesses and special scheme for SMEs). 

The  quantitative  impacts  on  businesses  have  been  measured  in  terms  of  changes  in 
compliances costs and cash flow in the year of implementation of the initiative and in the 
years  after  (for  more  details  on  such  quantification  see  Section  6  of  this  impact 
assessment).   

1.1.  CTP 

Businesses that are granted the CTP status will continue to purchase goods cross-border 
in  the  same  manner,  i.e.  they  will  buy  without  the  payment  of  the  VAT  due  and  will 
instead self-account for the VAT in their VAT return via the reverse charge.  

When  they  supply  goods  cross-border,  they  will  benefit  from  VAT  obligation 
simplifications  in  respect  of  certain  transactions  (call-off  stocks,  proof  of  transport). 
Further  when  acting  either  as  a  buyer  or  as  a  purchaser  simplifications  regarding chain 
transactions will also be applied to them. 

The certification would be open to  all businesses239. The implementation of the criteria 
for its granting would need to be proportionate  to encompass small businesses but also 
start-ups.  

The  process  of  certification  will  require  some  administrative  procedures  but  remains 
optional for businesses. 

238   In VAT terms, the wording "business" refers to a taxable person or a non-taxable legal person acting as 
such  and  identified  for  VAT  purposes.  It  therefore  does  not  include  businesses  that  only  carry  out 
exempt transactions or SMEs that benefit from the special exemption scheme. 

239   To note that since the CTP certification entails VAT reporting and payment obligations, non-taxable 
persons  will  not  be  eligible.  For  the  same  reason,  the  proposal  excludes  flat-rate  farmers,  exempt 
SMEs and exempt taxable persons from the possibility of obtaining the CTP status. 

99 

 
                                                 
1.2.  OSS 

Instead  of  having  to  register  in  multiple  Member  States  and  resort  to  different  tax 
administrations,  businesses  trading  cross-border  will  use  a  single  point  of  registration 
(the one that currently have in their Member State of establishment) to comply with their 
cross-border VAT obligations.  

Technical changes in the accountancy systems (e.g. invoices, listings, VAT returns) are 
expected.  

1.3. 

VAT identification number  

The proposed change in the VAT Directive makes the mentioning in the invoice of the 
valid  VAT  identification  number  of  the  customer  compulsory  for  the  supplier  to  be 
allowed to exempt his intra-EU supplies. This means that businesses will need to check 
in the VIES system the validity of the "taxable" status of their customers. For businesses 
having  a great number of transactions combined with  a large number of customers this 
can be cumbersome. 

Although the change might appear as important, it is however not a new issue. Indeed, 
under  the  current  rules,  the  mentioning  in  the  invoice  of  such  a  valid  identification 
number  is  already  required  (penalties  can  be  imposed  on  the  supplier  if  such  an 
obligation is not fulfilled). The difference with the proposed change is that the exemption 
for the intra-EU supply that today cannot be questioned on grounds that the VAT number 
of the customer is lacking (according to the CJEU) will in future be refused where this is 
the  case.  Compliant  businesses  trading  with  other  compliant  businesses  should  not  be 
affected at all by the changes. Compliant suppliers may however not be aware that they 
are trading with customers that do not possess a valid identification number (to note that 
the reason might be due to the fact that the VAT identification process of the customer is 
not  yet  completed  or  that  information/updates  put  by  tax  administrations  in  the  VIES 
system are delayed). Therefore, the functioning of the VIES system needs to be improved 
(this will be the purpose of another legislative proposal on administrative cooperation  - 
see Introduction  in Section 1.1 and Action Plan) so that it can provide easy access to up-
to-date information. 

1.4. 

SMEs 

Under  certain  conditions  and  optionally,  SMEs  may  currently  benefit  from  the  special 
exemption  scheme  for  small  enterprises  (see  Section 2  of  Chapter I  of  Title XII  of  the 
VAT Directive which encompasses Articles 282 to 294). When they are covered by such 
special scheme, SMEs are relieved from practically all the VAT obligations imposed on 
businesses. In particular they should not charge VAT to their customers on their supplies 
and are, as a consequence, also not able to deduct their input VAT. In this respect, they 
are not much different from private individuals who sell personal goods.  

SMEs that currently benefit from the VAT exemption scheme for small enterprises will 
continue to be exempt. However, according to the current rules (Article 283(1)(b) of the 
VAT  Directive),  the  exemption  scheme  only  applies  to  supplies  made  in  the  Member 
State where the SME is established. Given that under the current rules, intra-EU supplies 
are  technically  located  at  the  Member  State  of  origin  the  exemption  for  SMEs  also 
applies to their intra-EU supplies of goods, so that SMEs are currently not charging any 
VAT on such supplies. Once the move to the destination principle takes place, the fact 
that intra-EU supplies will be located at the Member State of destination would mean that 

100 

 
SMEs  would  have  to  charge  the  VAT  due  in  that  Member  State  of  destination  to  their 
customers. In theory the situation would be as follows: 

-  Concerning  their  domestic  supplies,  they  will  continue  supplying  their  goods 

without having to charge the VAT. 

-  Concerning their intra-EU purchases of goods, their suppliers will charge and be 
liable for the payment of VAT (through the OSS) in the Member State of arrival 
of the goods. 

-  Concerning  their  intra-EU  supplies  of  goods  the  new  rules  would  theoretically 
imply  the  need  for  SMEs  to  charge  to  their  customers  the  VAT  in  the  Member 
State  of  destination.  However,  the  Commission  will  in  parallel  to  the  current 
initiative  come  forward  with  a  proposal  in  the  form  of  a  comprehensive  VAT 
simplification  package  for  small  enterprises  which,  inter  alia,  will  address  this 
issue240. 

2. 

Member States 

All  Member  States  will  be  impacted  by  the  changes  proposed.  They  will  need  to 
implement  the  new  rules  and  ensure  their  correct  application  by  the  businesses.  In 
particular,  they  will  need  to  introduce  and  control  the  new  concept  of  CTP  and  make 
changes in their IT systems (provide for an OSS, adapt the current VIES system). 

The quantitative impacts on Member States have been measured in terms of changes in 
administrative  costs,  cash  flow  and  tax  revenues  in  the  year  of  implementation  of  the 
initiative and in the years after (for more details on such quantification see Section 6 of 
this impact assessment) . 

240  See Section 1.1 above. 

101 

 
 
 
 
                                                 
ANNEX 4: ANALYTICAL MODELS USED IN PREPARING THE IMPACT ASSESSMENT 

1. 

Overview of the methodology 

A specific study241 has been commissioned to assess the impacts on Member States and 
on businesses that would result from the implementation of each of the policy options for 
reforming the EU VAT rules applicable to cross-border supplies of goods. 

In  particular  the  impacts  on  the  MTIC/VAT  fraud,  the  labour  and  non-labour 
administrative costs242 and the cash flow of Member States, as well as on the compliance 
costs243 and the cash flow of businesses have been examined. 

The  macroeconomic  impacts  and  in  particular  the  effects  on  macroeconomic  variables 
such as gross domestic product (GDP) have also been covered. 

The assessment is carried out in comparison with what is currently applicable under the 
current tax rules (baseline), from both a qualitative and a quantitative perspective. 

The  methodology  described  here  underpins  the  approach  to  estimating  the  impacts  of 
each policy option and is based on the following steps: 

  Primary  and  secondary  data  collection  across  all  EU  Member  States 
(businesses, tax experts244 and EU Member States' tax authorities) to inform the 
technical, legislative, compliance cost, administration cost and economic analysis; 
and 

  Analysis  of  data  collected  to  develop  useful  qualitative  (technical,  legislative, 
etc.) and quantitative insights and inform the assumptions and the parameters in 
the  macro  econometric  Vector  Autoregressive  (VAR)  model  used  for  the 
economic analysis. 

The above approach has been selected in view of the nature of the information available 
and the appropriate analysis techniques. It has been developed specifically for the study 
and  tailored  accordingly  to  ensure  that  each  element  of  the  analysis  is  suitable  for  the 
particular study objectives. 

Full  details  on  the  methodology  are  available  in  the  various  annexes  of  the  above-
mentioned  study.  These  are  specifically  referred  to,  where  relevant,  in  the  various 
sections that follow below. 

2. 

Data collection tools for the analysis of the impacts 

2.1. 

Primary data collection 

As  part  of  the  specific  study,  a  set  of  primary  data245  have  been  collected  from 
businesses,  tax  experts  and  Member  States'  tax  authorities  across  the  28  EU  Member 

241  EY, 2015 
242  See Glossary for definition. Further explanation about labour and non-labour costs is available under 

section 2.4 below. 

243  See Glossary for definition. 
244  This is a network of EY indirect tax experts in the EU Member States which provide tax compliance 
and tax advice services to hundreds of small, medium and large businesses and which participated in 
the EU indirect tax experts' survey.  

245  A survey is an example of primary data collected by a researcher. 

102 

 
 
                                                 
States  to  carry  out  the  assessment  and  also  inform  variables  and  assumptions  in  the 
economic model.  

The  objective  has  been  to  gather  information  from  businesses  and  tax  experts  on  VAT 
compliance  costs  and  from  Member  States  on  administrative  costs  and  on  the  size  of 
MTIC  fraud  (and  the  share  of  the  MTIC  fraud  gap)  associated  with  the  B2B  trade  of 
goods  across  the  EU  under  the  baseline,  as  well  as  the  expected  likely  changes  under 
each reform policy option. 

Table 12 below presents a summary of the primary data instruments used as well as their 
purpose. 

Table 12: Primary data collection instruments  

Data collection instrument 

Description 

Issued to businesses across all 28 Member States to determine the 
cost of compliance relating to the baseline scenario, as well as the 
monetary and non-monetary impact of the various policy options. 

Issued  to  tax  experts  across  all  28  Member  States  to  obtain 
technical  and  compliance  cost  information  as  it  applies  to  the 
policy options. 

Issued to Tax Authorities in all 28 Member States to understand 
potential impact of the policy options on costs of administration 
and  certain  activities,  as  well  as  understand  the  make-up  of  the 
VAT Gap. 

Issued to tax experts across all 28 Member States with the aim of 
illustrating 
treatment  of  a  selection  of  goods 
transactions  under  the  current  rules  and  under  the  proposed 
policy options. 

the  VAT 

Business Survey 

Tax experts' survey 

Member State Survey 

"As Is"/"To Be" Legislative Matrix 

Source: EY, 2015 

2.2. 

Business Survey  

A  survey  of  businesses  across  all  28  Member  States  has  been  conducted  in  order  to 
establish  the  compliance  obligations  and  costs  of  businesses  regarding  the  baseline,  as 
well  as  how  these  obligations  and  costs  would  change  under  each  policy  option.  The 
survey has also provided data used for the calculation of the potential cash flow impact 
on businesses under some of the options246. 

The  survey  has  been  published  through  the  online  survey  tool  Survey  Monkey.  It 
consisted of a total of 32 questions247 which were categorised as follows: 

  Section 1: Trade related information. This section involved basic questions about 
the  business  profile  of  the  respondent  and  certain  specific  questions  about  the 
VAT  profile  with  regard  to  the  sales  and  purchases,  as  well  as  trading  partner 
information.  The  information  was  required  and  used  to  calculate  the  cash  flow 
impact on businesses under some of the options. 

246  Cash  flow  implications  are  likely  to  occur  under  Option 2  and  Option 5  due  to  the  requirement  for 

businesses to levy and collect VAT on intra-EU transactions.  
247  The survey template is available in Annex B of the 2015 EY Study. 

103 

 
 
 
                                                 
  Section 2: VAT information. This section requested information in relation to the 
costs  businesses  incur  in  order  to  comply  with  the  VAT  legislation.  The 
information was required to gain an understanding of how the business managed 
its VAT compliance obligations and the associated current compliance costs both 
as regards domestic and intra-EU B2B trade. 

  Section 3: Estimation of detailed cost information. This section sought to obtain 
information  in  relation  to  how  certain  VAT  compliance  costs  for  businesses 
might change under the different policy options. 

The Business Survey responses cover both implementation and ongoing annual intra-EU 
B2B compliance costs. The focus is on four categories of costs in relation to the policy 
options,  namely  (i)  employee  costs;  (ii)  training  and  retraining  costs;  (iii)  system 
(software) related costs; and (iv) consultancy fees. 

Against this background, the elements of the cost changes that the five proposed policy 
options  may  create  through  more  compliance  requirements248  have  been  analysed.  This 
analysis sets out a number of statistical measures to further underline the impact of policy 
options to businesses. These measures include: 

  A frequency distribution of cost estimates to identify the compliance cost change 

ranges that were most or least prevalent amongst business respondents; 

  The  mean  and  median  cost  differences  outlined  by  the  survey  respondents  with 
respect to how costs will change under each of the alternative policy options. 

As  part  of  the  process  of  verifying  the  data  received  from  the  survey,  additional 
information  via  direct  interviews  has  been  collected  from  businesses  which  had 
completed  the  business  survey.  Interviews  were  held  with  seven  different  businesses: 
three  based  in  the  UK,  one  based  in  Germany,  two  based  in  Poland  and  one  based  in 
Sweden. 

The purpose of the interviews was to discuss in detail the expected benefits and costs of 
each policy option. The business representatives were asked to comment on whether they 
associated each option with an overall cost or benefit and, where possible, to quantify the 
value  of  these  costs  or  benefits.  They  were  also  asked  to  provide  comments  on  any 
further costs/benefits that they foresaw under each option249.  

Due to the low response rate overall to the survey itself (146 responses) and to limited or 
no  responses  in  some  Member  States,  reliance  placed  on  the  results  was  limited  to 
understanding the current compliance costs for businesses250. 

Cash flow 

Cash flow implications are expected under Option 2 and Option 5 for which the supplier 
will charge the VAT to his customer. The extent of these cash flow implications, whether 

248  Such  requirements  include:  additional  documentation  to  prove  transport  of  goods,  business  cost 
increases  related  to  the  establishment  of  the  One-Stop  Shop,  the  additional  requirement  of  obtaining 
the  name  of  the  Member  State  on  arrival  of  the  goods  within  ten  working  days,  and  the  associated 
additional cost related to the charge of VAT in the Member State of contracting party establishment. 

249  Details are available in Annex D of the 2015 EY Study. 
250  The detailed results, analysis and findings of the Business Survey are available in Annex D of the 2015 

EY Study. 

104 

 
 
 
 
                                                 
positive or negative, depends on a number of factors, such as (i) the average remittance 
time  for  payments  to  businesses  from  their  local  Tax  Authority;  (ii)  applicable  VAT 
rates;  (iii)  the  value  of  VAT  payable  to  other  Member  States  by  the  business;  and  (iv) 
interest rates applicable to businesses on saving/borrowing. In calculating the cash flow 
cost or benefit, a number of assumptions were made as regards the above factors251. To 
quantify the cash flow implications for businesses, the study has examined three different 
examples, based on different trade profiles of three businesses, assuming a set value of 
EUR 100 000  of  VAT  per  return.  To  estimate  what  impact  the  concept  of  CTP  would 
have on the overall cash flow, a proxy was used, namely the proportion of businesses that 
have  applied  for  'Authorised  Economic  Operator'  (AEO)252  status  compared  with  the 
number  of  businesses  that  have  an  'Economic  Operator  Registration  and  Identification' 
(EORI)253 number used in the area of customs. It is anticipated that if a business registers 
for  CTP  status,  the  business  would  benefit  from  simplifications  in  relation  to  the 
purchase  and  sales  of  goods  within  the  EU.  Applying  the  AEO  proxy,  approximately 
0.3% of businesses within the EU would potentially register for CTP status254. Therefore, 
whilst this would reduce any cash flow benefit or cost, it is likely to be limited. 

The analysis identified that where a business is in a net payment position on its One-Stop 
Shop  (OSS)  return,  and  it  has  received  payment  from  its  customer,  then  it  will  benefit 
from a positive cash flow due to receiving VAT from its EU customers and holding this 
VAT until the One-Stop Shop filing deadline. On the other hand, where a business is in a 
net  repayment  on  its  OSS  return,  the  business  will  experience  a  negative  cash  flow 
position  under  this  option;  this  is  due  to  paying  VAT  to  its  EU  supplier  and  not  being 
able to benefit from an immediate right of deduction. 

2.3. 

Tax experts' survey 

Further to the business survey, to quantify how compliance costs for businesses will be 
impacted as a result of the implementation of the proposed policy options, a tax experts' 
survey has been carried out across all 28 EU Member States255. These tax experts provide 
tax  compliance  and  tax  advice  services  to  hundreds  of  small,  medium  and  large 
businesses. 

To  ensure  representation  of  all  business  sizes,  the  assessment  covered  three  distinct 
business  types256:  Type  1  SME,  Type  2  SME  and  Large  Businesses.  The  criteria  for 
defining the three business types are outlined in Table 13 below.  

Table 13: Criteria for defining business types 

Criteria 

Type 1 SME 

Type 2 SME 

Large Businesses 

1. Annual Turnover  Less than EUR 50 million 

Less than EUR 50 million 

251  For full details, see section 6.3 Cash flow analysis of the EY Study. 
252  http://ec.europa.eu/taxation_customs/general-information-customs/customs-security/authorised-

economic-operator-aeo_en 

253  http://ec.europa.eu/taxation_customs/business/customs-procedures/general-overview/economic-

operators-registration-identification-number-eori_en 

254  This figure is based on the proportion of businesses that have been issued certificates to verify their 
AEO  status  (15 034  as  of  15 January  2015)  to  the  number  of  businesses  currently  registered  in  the 
EORI scheme (4 486 452). Source: European Commission. 

255  Full details of the survey template are available in Annex B of 2015 EY Study. 
256  Defining typical businesses for analysis and survey purposes is a reliable approach that had been used 
in several reports in the past such as the "Paying Taxes" report published for several years by PwC and 
the World Bank Group. 

105 

 
 
 
 
                                                 
2. Employees 

Less than 250 employees 

Less than 250 employees 

3. Establishment 

Only 1 EU Member State 

Only 1 EU Member State 

More than EUR 50  
million 

More than 250 
employees 

Numerous EU Member 
States 

4. VAT Registration 

Single VAT registration in 
Member State of 
establishment 

VAT registration in more 
than 1 (but less than 6) 
Member States 

VAT registration in 6 or 
more Member States 

5. Trade 

6. Invoices 

Predominantly domestic 
trade and has begun trading 
outside its Member State 

Domestic and intra-EU 
trade 

Domestic and intra-EU 
trade 

Less than 50 Accounts 
Payable and Accounts 
Receivable invoices per 
month for each VAT 
registration 

Less than 50 Accounts 
Payable and Accounts 
Receivable invoices per 
month for each VAT 
registration 

More than 50 Accounts 
Payable and Accounts 
Receivable invoices per 
month for each VAT 
registration 

Source: EY, 2015 

These business types have been identified by the survey respondents as being the three 
company  types  to  consider  in  determining  the  scale  of  any  cost  changes  under  each 
policy option. In addition, these company types are also likely to be the ones engaged in 
cross-border trade and thus impacted by the proposed policy options. Micro businesses257 
have  been  excluded  given  that  they  are  unlikely  to  engage  in  cross-border  trade  hence 
rendering them irrelevant for the purposes of the analysis. 

Specific  areas  which  will  have  implications  for  businesses'  compliance  costs  were 
identified. The tax experts' survey assessed, on average, how each of the business types 
would  be  impacted  by  the  policy  options  from  a  compliance  cost  perspective.  The  tax 
experts were asked to provide an estimate of the percentage change in the annual number 
of hours spent dealing with VAT compliance of these areas. They were asked to provide 
this  percentage  for  both  the  initial  year  of  implementation  ('Year  1')  and  for  the  years 
after that ('Ongoing') for each of the three types of business.  

In  estimating  compliance  costs  impact,  the  study  adopted  the  arithmetic  average  of  the 
estimates  provided  by  the  respondents  to  the  tax  experts'  survey  in  order  not  to  assign 
weights to the views of respondents.  

For the analysis of the collected data the following statistical measures have been used: 

  A frequency distribution of the compliance cost estimates to identify the range of 

cost estimates that were most or least prevalent amongst respondents; and 

  The median258 compliance cost estimates outlined by the survey respondents with 

respect to how costs will change under each of the policy options. 

257  SMEs are defined in the EU recommendation 2003/361. A micro-business is defined as one which has 
fewer than ten employees and a turnover or balance sheet total of less than EUR 2 million. The study 
has made the assumption that these micro businesses do not engage in cross-border trade. 

258  Median  is  the  number  separating  the  higher  half  of  a  data  sample,  a  population,  or  a  probability 

distribution, from the lower half. 

106 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
The tax experts' survey was also used to collect technical and legislative information in 
relation  to  the  'As  Is'/  'To  Be'259  Legislative  Matrix.  This  matrix  was  prepared  with  the 
aim of illustrating the VAT treatment of a selection of common types of transactions in 
goods both under the current VAT rules ("As Is" analysis), and from the perspective of 
the five policy options ("To Be" analysis)260.  

2.4.  Member State survey 

A  Member  State  survey,  distributed  to  all  28  Member  States'  tax  authorities  across  the 
EU,  has  been  carried  out  to  collect  data  on  the  current  VAT  administrative  costs  of 
Member  States  and  how  these  costs  would  change  under  each  of  the  proposed  policy 
options261. In addition, Member States had been asked to provide estimates of the share 
of VAT fraud in the VAT gap, the share of MTIC fraud in the VAT fraud gap, etc. These 
estimates have been used to assess the impacts of the policy options on MTIC fraud. 

Prior  to  the  design  and  circulation  of  the  Member  State  survey,  interviews  were 
conducted with tax authority representatives from six Member States (Belgium, France, 
Italy, Poland, Sweden and the UK). The purpose of these interviews was to gain a clearer 
understanding of what data could be expected to be received in relation to questions on 
VAT administration activities, VAT administrative costs and potential impact of changes 
to VAT legislation on certain activities of the Member States. 

The Member State survey consisted of a set of 34 questions in relation to: 

 
 

the current VAT fraud gap that arises from intra-EU B2B trade; 
the current labour and non-labour262 administrative costs associated with intra-EU 
B2B VAT administration; 
 
 how administrative costs are expected to change under each policy option; and 
  how each Member State intends to resource any additional labour requirements. 

Survey responses were received from 25 EU Member States Tax Authorities.  

Labour and non-labour administrative costs 

The  scale  of  administrative  costs  depends  on  a  wide  range  of  factors,  including  the 
number of businesses registered for VAT, the complexity of the tax, the structure of tax 
rates, the frequency of reform and the efficiency of the tax authority. In order to estimate 
the  impact  the  policy  options  will  have  on  the  magnitude  of  Member  States' 
administrative costs, the current and expected levels of the costs were assessed.  

To assess the current level (baseline) of labour costs, the Member States' tax authorities 
were asked to provide: 

  an estimate  of the  Full  Time Equivalents (FTEs)263 currently employed  in all  of 
their tax offices and the number of FTEs employed dealing specifically with VAT 

'Baseline' / 'Reform policy options' 

259 
260  The  types  of  transactions  analyses  include  domestic  supply  of  goods,  intra-EU  supply  of  goods, 
transfer of own goods between Member States, call-off stock and consignment stock, triangular supply 
of goods and chain transaction involving four or more parties in the supply of goods. 

261  The survey template is available in Annex B of 2015 EY Study. 
262  Non-labour costs refer to consultancy costs, IT systems, staff training and other costs. 
263  See Glossary for definition. 

107 

 
 
 
                                                 
administration,  including  a  percentage  breakdown  of  the  number  of  FTEs 
employed who deal with domestic, intra-EU and other VAT administration; 

  an  average  cost  per  hour  (compensation)  for  employees  responsible  for  dealing 
with  VAT.  In  the  context  of  this  study,  average  cost  is  the  aggregate  of  the 
average wage cost and other employee benefits excluding training costs.  

To  assess  the  current  level  of  non-labour  costs  associated  with  the  administration  of 
VAT,  the  Member  States'  tax  authorities  were  asked  to  provide  the  annual  total  non-
labour  costs,  including  a  percentage  breakdown  of  the  total  costs  as  per  external 
consultancy, IT systems, staff training costs and other costs.  

To assess the impact of each proposed policy option, the Member States' Tax Authorities 
were asked to report estimates of changes (in %) in administrative labour and non-labour 
costs  under  each  policy  option  for  both  the  implementation  phase  (Year  1)  and  the 
subsequent  ongoing  annual  administration.  The  responses  were  then  grouped  in  the 
following ranges: 

  No change - 0% impact 
 
 
 
 
 

Increase 1%-5% 
Increase 6%-20% 
Increase 21%-35% 
Increase 35%-100% 
Increase of more than 100%. 

MTIC Fraud 

The impact of the policy options on MTIC fraud has been estimated using primary data 
from  the  Member  States'  survey  results.  Nine  Member  States'  Tax  Authorities264  were 
able to provide the level of detail required. On average, according to the Tax Authorities 
36%  of  the  VAT  gap  is  due  to  VAT  fraud.  Three  Member  States'  Tax  Authorities 
explained that the fraud portion of the VAT gap is entirely driven by MTIC fraud, while 
the  other  six  respondents  considered  that  only  a  proportion  of  the  VAT  gap  is  due  to 
MTIC  fraud.  On  average,  20%  of  the  overall  VAT  gap  was  considered  to  be  due  to 
MTIC  fraud,  while  the  estimated  weighted  average  (based  on  overall  VAT  gap 
proportion)  is  24%265.  For  countries  where  no  data  was  available,  MTIC  fraud  was 
estimated using 3 different approaches:  

  arithmetic average of the data provided (20%); 
  weighted average of the data provided (24%); 
  using proxies based on similarities of size of VAT gap. 

Cash flow 

Cash flow has been identified as either a particular cost or benefit for Member States due 
to the clearing system to be implemented as part of the OSS system under Option 2 and 
Option 5. This is due to Member States receiving and holding VAT for a period of time 

264  Austria, Bulgaria, Czech Republic, Cyprus, Finland, France, Slovakia, Slovenia and United Kingdom. 
265    These  estimates  are  based  on  eight  responses,  as  one  Tax  Authority  did  not  provide  a  MTIC  fraud 

specific estimate. 

108 

 
 
 
 
                                                 
before businesses in their local Member State seek to recover the VAT on their domestic 
VAT return.  

In order to calculate the net cash flow position of Member States, Eurostat data for the 
calendar  year  2013  on  the  value  of  intra-EU  supplies  and  acquisitions  have  been  used. 
Based on the 2013 trading levels between each Member State, it was identified that the 
majority  of  Member  States  will  have  an  overall  cash  flow  benefit  under  Option 2  and 
Option 5266. There is limited asymmetry between Member States based on trade patterns 
within the EU. Instead, the overall cash flow benefit for Member States arises as a result 
of either having a filing period that is greater than 40 days or the fact that the cash flow 
benefit on its dispatches outweighs the cash flow cost incurred on its acquisitions. 

Finally, the same assumptions as regards (i) the average remittance time for payments to 
businesses  from  their  local  Tax  Authority;  (ii)  applicable  VAT  rates;  (iii)  the  value  of 
VAT payable to other Member States by the business; and (iv) interest rates applicable to 
businesses on saving/borrowing applied for calculating the cash flow impact on business 
hold here as well267. 

2.5. 

Limitations and assumptions in relation to the primary data collection  

There are a number of difficulties associated with the collection of detailed compliance 
costs  information  for  businesses  and  administrative  costs  of  Member  States'  Tax 
Authorities  in  general.  Such  methodological  issues  have  become  apparent  in  previous 
studies  on  compliance  costs268.  As  such,  there  are  inherent  limitations  in  gathering  this 
information. 

Similarly, for the purposes of the 2015 EU study, there are a number of limitations that it 
is  pertinent  to  draw  the  attention  to  as  these  may  impact  the  results  and  conclusions. 
These limitations include: 

 

 

 

 

the  findings  are  highly  sensitive  to  the  opinions  of  a  sample  of  business 
respondents,  tax  officials  and  tax  experts  on  questions  that  do  not  cover  every 
possible  detail  and  element  that  might  be  required  in  order  to  fully  assess  the 
implications of the current rules and the proposed reform policy options; 
the implementation of Options 2a and 5a is considered to have similar impacts in 
terms  of  compliance  costs  of  businesses  and  administrative  costs  of  Member 
States' Tax Authorities and therefore any differences between  these  two options 
may be due to a perception bias; 
technical  and  legislative  implications  of  the  proposed  policy  options  have  been 
identified  based  on  the  literature  provided  in  relation  to  the  details  and 
mechanisms for each proposed option. Any legislative implications arising from 
factors not explicitly stated in the narrative for each option are not considered; 
the  study  focuses  predominantly  on  the  economic  impact  of  each  of  the  policy 

266  See Table 31 of the 2015 EY Study for details of the individual and aggregate cash flow impact for 

each Member State based on their trade levels with every other Member State. 

267  For a full description, see section 7.2 Impact on Tax Authorities cash flow of the 2015 EY Study. 
268  The  European  Commission's  publication  'Compliance  costs  related  to  cross-border  activity'  (2014) 
sought  to  quantify  compliance  costs  related  to  tax  on  individual  cross-border  activities.  Local  tax 
experts  were  surveyed  in  order  to  obtain  this  information.  Another  European  Commission's 
publication,  'A  review  and  evaluation  of  methodologies  to  calculate  tax  compliance  costs'  (2013), 
reviewed  and  analysed  a  variety  of  methodologies  used  to  measure  tax  compliance  costs  borne  by 
businesses and individuals within the EU. 

109 

 
 
                                                 
options.  Political  implications  of  implementing  the  options  in  different  Member 
States are not considered; 
legislative  conditions  beyond  those  of  the  immediate  tax  legislation  affected  by 
the alternative policy options are not considered; 

 

  certain  aspects  of  the  policy  options  may  shift  the  legal,  political  or  economic 
patterns within the EU in a manner which goes beyond the specific scope of the 
study; 

  data  provided  by  Eurostat  in  relation  to  intra-EU  trade  statistics  is  subject  to 
specific  limitations,  namely  that  the  calculation  and  reporting  method  used  by 
Member States to report figures may differ throughout the EU. 

3. 

Secondary data collection and literature review 

3.1. 

Secondary data collection269 

The  specific  2015  EY  study  undertook  a  comprehensive  review  of  relevant  publicly 
available  economic  and  business  data  which  was  used  to  complement  the  primary  data 
collection exercise. 

The  relevant  economic  data  on  the  EU  has  been  collected  primarily  from  Eurostat, 
covering the period 2000-2013. For data not available on Eurostat, alternative resources, 
such as the World Bank, OECD, UNECE, National Statistics Office Databases as well as 
Bloomberg were explored. 

In addition to the results from the primary data collection which inform the policy inputs, 
the  macroeconomic  analysis  relies  on  secondary  data  about  the  historical  levels  of 
macroeconomic  indicators.  The  macroeconomic  variables  on  which  the  impact  of  the 
policy  options  have  been  analysed  are  per  capita  real  GDP  growth,  per  capita  real 
consumption  growth,  per  capita  real  exports  growth  and  employment  growth.  The 
econometric  method,  as  detailed  in the  next  section, requires  quarter-on-quarter  growth 
rate  of  these  variables  as  input.  Also,  two  intermediary  variables  through  which  the 
policy  inputs  affect  macroeconomic  indicators,  namely,  aggregate  inflation  (GDP 
deflator inflation) and the export price inflation were needed. 

The quarterly data was collected over the 2000-2013 period from Eurostat. Reliable EU-
28  data  on  employment  for  periods  earlier  than  2000  was  imprecise  as  some  Member 
States have not been EU members long enough to provide data or data was not collected 
at  the  required  frequency.  Deseasonalised  data  on  GDP,  exports  and  consumption  for 
period beyond 2013 for a number of Member States, hence EU 28 in aggregate, was not 
yet available. 

3.2. 

Literature review 

A literature review was conducted which encompassed: (i) a review of literature screened 
by  the  Commission  services;  and  (ii)  a  desk  top  literature  research  exercise  to  identify 
any  additional  studies/reports  which  will  help  to  complement  the  approach  adopted  in 
this study. 

269  Secondary  data  is  data  collected  by  someone  other  than  the  user  (for  example  data  published  by 

Eurostat). 

110 

 
 
                                                 
Based  on  a  literature  review  and  after  considering  the  specific  objectives  of  the  study, 
two econometric modelling approaches were identified. 

  Structural/General equilibrium models 

General equilibrium models fully specify the structure of the economy, and hence reduce 
the need for lengthy time series data. These models are adequate for evaluating structural 
changes to the economy, as they make use of more detailed data and relate to different 
economic sectors. 

However,  within  the  context  of  the  specific  EY  study,  these  models  do  not  allow  the 
gains  arising  from  the  policy  options  to  be  linked  onto  a  single  activity  within  the 
economy.  This  is  because,  within  the  general  equilibrium  framework,  the  government 
and  firms  in  the  economy  dynamically  decide  on  how  to  allocate  these  savings  across 
different activities. 

  Reduced form/Vector Autoregression (VAR) models 

Vector Autoregression (VAR)  models  do not  attempt  to  specify a  detailed  structure  for 
the  economy,  which  makes  them  less  prone  to  the  risk  of  imprecise  structural 
assumptions regarding the economy. 

VAR  models  aim  to  capture  the  dependencies  between  current  and  past  levels  of 
macroeconomic  indicators  using  simple  linear  forms.  Although  these  models  do  not 
allow  structural interpretation  of  results,  using  appropriate  additional  assumptions,  they 
can  be  used  to  assess  the  response  of  the  macroeconomic  indicators  to  a  shock  that 
affects one or more of them. 

4. 

Econometric modelling in relation to the macroeconomic analysis 

The  econometric  modelling  methodology  followed  in  the  2015  EY  study  focuses  on 
modelling the dynamic macroeconomic impact of VAT fraud and VAT compliance costs 
on  macroeconomic  variables  such  as  real  GDP  growth,  consumption  growth,  export 
growth and employment growth. The impact is modelled for each of the policy options 
and has been obtained as the difference between the 'Baseline' and the 'To Be' forecasts 
for  each  policy  option  of  the  selected  macroeconomic  variables.  These  forecasts  have 
been estimated using a Vector Autoregression (VAR) model. 

The  VAR  modelling  approach  relies  on  the  assumption  that  the  current  levels  of  the 
macroeconomic  variables  can  be  predicted  using  the  past  history  of  these  variables. 
Based  on  this  approach,  the  movements  in  the  variables  can  be  explained  by  the  past 
growth rates as well as the changes in the aggregate consumption price and export price 
levels.  The  current  level  of  the  macroeconomic  variables  is  assumed,  in  the  2015  EY 
study, to be dependent on the magnitude of these indicators from the past four quarters. 
The  choice  has  been  influenced  by  the  quarterly  frequency  of  the  data  and  validated 
using statistical measures270.  

As regards the changes in the consumption price and export price levels, the results of the 
primary data analysis were used as the input.  

270  See Annex E of the 2015 EY Study for more details. 

111 

 
 
 
                                                 
In  particular,  the  link  between  the  policy  options  and  the  macroeconomic  variables  is 
translated into the econometric model via: 

 
 

the effect of the compliance cost savings on the export prices, and 
the effect of the VAT fraud reduction on the VAT rate. 

In this respect, it is assumed that: 

 

 

the savings made by business from the reduction in the intra-EU B2B compliance 
costs  due  to  the  implementation  of  the  policy  options  will  improve  the 
competitiveness  of  the  suppliers  and  would  be  passed  on  to  the  intra-EU  B2B 
exports as price reductions; and  
the  additional  VAT  collected  resulting  from  the  reduction  of  the  scale  of  VAT 
fraud will be returned to the consumers in the form of a tax rate cut, decreasing 
therefore the overall price levels in the future. 

The  above  two  assumptions  provide  one  of  a  number  of  plausible  scenarios  for  how 
governments  and  businesses  will  react  to  increased  VAT  revenues  and  reduced 
compliance costs respectively. 

In  this  respect,  a  VAR  model,  unlike  a  general  equilibrium  model,  allows  the  savings 
from the VAT compliance costs to be passed solely onto intra-EU trade activities and the 
proceeds  from  the  fraud  reduction  to  be  used  to  fund  a  VAT  rate  reduction.  For  these 
reasons, the VAR modelling approach has been adopted. The model adopted in the study 
has also been designed to compare the different policy options.  

The  econometric  modelling  approach  consisted  of  three  stages.  A  brief  summary 
overview of the process is presented below271. 

In order to estimate the likely impact of the proposed policy options, several economic 
variables are forecast using the VAR model to outline a baseline scenario. The baseline 
forecasts  are  calculated  for  a  3-year  period  (2014-2016)  and  indicate  the  cumulative 
growth  of the  macroeconomic indicators. Subsequently,  new scenarios are run  for each 
policy  option  which  produces  forecasts  of  the  same  variables.  Finally,  a  comparison  is 
made  of  the  scenarios  for  each  proposed  policy  option  with  the  baseline,  which 
establishes  the  magnitude  of  the  impact  of  these  policy  options  on  the  selected 
macroeconomic variables over 12 quarters. 

Table 14 below shows the estimated forecasts for the macroeconomic variables under the 
baseline.  Table  15  shows  by  how  much  the  3-year  cumulative  growth  of  the 
macroeconomic variables under each of the five policy options differ from the baseline. 
According to the VAR forecasts, the EU 28 per capita real GDP is estimated to grow at a 
cumulative  rate  of  4.465%  over  the  3-year  period.  This  estimate  is  higher  than  the 
estimated  growth  of  real  consumption  in  the  same  period  (3.5%),  but  lower  than  the 
estimated real exports growth at 13.4%. In absolute terms, the baseline real EU GDP at 
2005 prices in 2013 was EUR 11 768 billion272. It is worth mentioning that the baseline 
forecast  of  GDP  growth  4.465%  produced  by  the  VAR  model  is  not  substantially 

271  Full details are available in Annex E of the 2015 EY Study. 
272  Eurostat. 

112 

 
 
 
                                                 
different from the European Commission's spring 2015 forecasts which indicates a 
cumulative growth of 5.3% during the 2014-2016 periods273. 

Table 14:  Forecasts  of  the  macroeconomic  variables  under  the  baseline  (3-year 

cumulative growth) 

Macroeconomic variables 
Per capita real GDP 
Per capita real consumption 
Per capita real exports 
Employment rate 

Source: EY, 2015. 

Baseline 
4.465% 
3.536% 
13.455% 
1.897% 

Table 15:  Difference in % of the 3-year cumulative growth of the macroeconomic 

variables under each of the five policy options differ from the baseline 

.

 Macroeconomic variables 

Option 1 

Option 2 

Option 3 

Option 4 

Option 5 

Real GDP growth 
Real consumption growth 
Real exports growth 
Real employment growth 

Source: EY, 2015. 

0.004% 
0.003% 
0.000% 
0.002% 

0.157% 
0.130% 
0.010% 
0.101% 

0.005% 
0.004% 
0.000% 
0.003% 

0.017% 
0.014% 
0.001% 
0.011% 

0.158% 
0.130% 
0.010% 
0.101% 

Macroeconomic data and approach to addressing data issues 

In addition to the results from the primary data analysis which inform the policy inputs, 
the analysis relies on the secondary data about the historical levels of the macroeconomic 
variables  (per  capita  real  GDP  growth,  per  capita  real  consumption  growth,  per  capita 
real exports growth and employment growth). The econometric method requires quarter-
on-quarter  growth  rate  of  these  variables  as  input.  Also,  two  intermediary  variables 
through  which  the  policy  inputs  affect  macroeconomic  indicators,  namely,  aggregate 
inflation (GDP deflator inflation) and the export price inflation were needed. 

The quarterly data was collected over the 2000-2013 period from Eurostat. Reliable EU-
28  data  on  employment  for  periods  earlier  than  2000  was  imprecise  as  some  Member 
States have not been EU members long enough to provide data or data was not collected 
at  the  required  frequency.  Deseasonalised  data  on  GDP,  exports  and  consumption  for 
period beyond 2013 for a number of Member States, hence EU 28 in aggregate, was not 
yet  available.  Due  to  the  limited  number  of  data  points  for  several  Member  States,  the 
economic  analysis  has not  been  carried  out  for individual Member  States  as  the results 
may  have  been  influenced  by  these data  limitations.  However,  based  on  the  hypothesis 
that  the  effect  of  aggregation  is  likely  to  overcome  these  challenges,  the  economic 
analysis was carried out for the EU 28 as a single entity274.  

The  complete  list  of  the  data  used  in  the economic  analysis,  along  with  Eurostat  codes 
and descriptions, is given in Table 49 in Annex E of the 2015 EY Study. 

273  http://ec.europa.eu/economy_finance/eu/forecasts/2015_spring/eu.html  
274  See Annex E of the 2015 EY Study for further details on the modelling approach. 

113 

 
 
 
 
 
 
                                                 
The dataset used in the study covers the 2008-2009 period, during which the economic 
indicators showed significant drops. In particular, the interval between 2008 Q3 and 2009 
Q2 constitutes the period during which the growth rates deviated most significantly from 
their  long  term  averages  (0.4%,  0.1%  and  0.1%  for  GDP  deflator  inflation,  real  GDP 
growth rate and the real consumption rate respectively). To prevent bias in the estimates 
due to outliers, it has been assumed that during this period pre-2008 Q3 trend continued 
to  hold.  Thus,  the  growth  rates  for  the  4  quarters  from  2008  Q3  to  2009  Q2  were 
obtained  by  extrapolating  the  data  from  pre-2008  Q3  period,  using  the  same  VAR 
methodology.  

Modelling strategy: Compliance costs reduction 

During  the  primary  data  analysis  stage,  a  reduction  of  business  VAT  compliance  costs 
related to intra-EU B2B trade has been identified as one of the two main impacts of the 
proposed policy options.  

The assumption made in this respect is that any savings made by businesses on intra-EU 
VAT  compliance  would  be  passed  on  to  export  price  reductions. It  is  assumed  that  the 
discount over intra-EU B2B export prices driven by a compliance cost reduction comes 
into  effect  gradually.  The  pass-  through  occurs  initially  at  a  rate  of  25%  in  the  first 
quarter  (which  was  assumed  to  occur  at  the  end  of  2013  Q4,  the  last  period  in  the 
historical data sample) to 100% in the Q4 and beyond. 

The modified data facilitated an analysis of the impact of the resulting competitiveness 
gain  on  macroeconomic  indicators.  The  export  price  index is  a  composite  of  intra- and 
extra-EU exports. In order to evaluate the effect of the proposed policy options, only the 
intra-EU proportion of the index was adjusted. This was done using the share of intra-EU 
VAT compliance costs within aggregate export prices as the scaling factor. Then, using 
Member  States'  2013  real  GDP  as  weights,  a  weighted  average  of  the  index  was 
calculated to represent the competitiveness gain for the EU 28. 

To  determine  the  percentage  change  in  ongoing  costs  of  businesses  in  response  to  the 
policy  option  changes,  a  combination  of  the  responses  from  the  Business  Survey  and 
Eurostat data was used to calculate the change in the export price deflator. 

Step 1: The proportion of net sales of the surveyed businesses that were related to B2B 
intra-EU trade for each Member State was calculated. 

Step 2: The VAT labour and non-labour costs that related to intra-EU B2B compliance 
within the business sample were calculated. Average hours spent on VAT activities per 
year, average hourly wage rate, the business split of B2B and B2C activities, the business 
split of domestic and intra-EU activities and third party costs were used. Third party costs 
were assumed to be attributed to wage costs elsewhere in the economy. 

Step  3:  The  proportion  of  intra-EU  B2B  VAT  compliance  costs  to  intra-EU  B2B  net 
sales of the businesses 

was  calculated  for  each  respondent  business.  The  number  of  respondents  was  not 
sufficient  to  calculate  this  number  individually  for  each  Member  State.  Therefore,  the 

114 

 
 
responses  were  collated  across  the  EU  28.  Within  the  sample  of  EU-wide  aggregate 
responses  that  was  received,  the  intra-EU  VAT  compliance  cost  for  businesses  is 
calculated to be 0.62% of intra-EU trade. 

Step  4:  The  percentage  reductions  in  compliance  costs  were  obtained  from  the  tax 
experts' survey for each business type (SME Type 1, SME Type 2 and Large Business), 
for each policy option and each Member State. The aggregate costs reduction percentage 
implied by each policy option for each Member State was then calculated as the weighted 
average of the percentage costs reductions of each business type, using the Gross Value 
Added of the business types as weights. 

Step 5: The percentage cost reduction obtained in step 4 were translated into percentage 
export price changes for each Member State and policy option by multiplying them with 
the factor obtained in step 3. 

Step  6:  The  percentage  export  price  change  from  step  5  was  averaged  across  Member 
States using the real GDP from 2013 of each Member State as weights. This is done for 
each policy option. 

Step  7:  Finally,  for  each  policy  option  the  export  price  changes  were  downscaled  to 
reflect the share of intra-EU exports within total exports of the Member States. 

Modelling Strategy: VAT Fraud Gap 

The  other  model  component  that  would  be  impacted  under  two  of  the  proposed  policy 
options (option 2 and option 5) is the VAT fraud gap. The impact of these options on the 
magnitude of VAT fraud in the EU was analysed. 

The assumption is that the government is revenue neutral. Thus, the increase in the VAT 
collection arising from reducing the VAT gap is compensated by a proportional reduction 
of the VAT levied on consumers. The reduction in the VAT rate is the consumer prices, 
leading to an overall decrease in the consumer price deflator (inflation). 

The approach that was adopted can be summarised in the following steps: 

Step  1:  The  change  in  the  magnitude  of  VAT  fraud  in  intra-EU  B2B  transactions  is 
calculated for each policy option. It is assumed that the size of intra-EU B2B transactions 
is equivalent to the level of intra-EU exports. 

% decrease in VAT gap = % Share of VAT gap within VTTL (VAT Total 

Liability) x 

% Share of MTIC fraud gap within VAT gap x % Decrease in Fraud  

Step 2: The approach was based on the VAT baseline gap estimates from the EC study 
"2012  Update  Report  to  the  Study  to  quantify  and  analyse  the  VAT  Gap  in  the  EU-27 
Member  States"  and  the  standard  VAT  rates  from  each  Member  State  as  at  the  end  of 
2013. The revenue neutrality assumption implies that: 

(1- % VAT baseline gap) * Pre — policy Standard VAT rate 
= (1 — % VAT post — policy gap) * Post — policy standard VAT rate 

115 

 
 
 
Step  3:  A  weighted  average  post-policy  VAT  rate  is  calculated  by  applying  2013  real 
GDP for each Member State as weights. 

Step 4: Lastly, the consumer price deflator (inflation) trend identified was modified from 
the VAR (4) analysis at the rate of change implied by the new tax rate. 

New deflator = Old deflator * -------------------------------- ----------------- 

Post — policy Standard VAT rate 

Pre — policy Standard VAT rate 

It is assumed that this impact is felt gradually, that is at a rate of 25% in the first quarter 
following implementation to 100% in the 4th quarter and beyond. 

Finally, it has to be noted that a caveat to the results is that the compliance cost savings 
and the reduction in VAT fraud could well be higher; this is because the compliance cost 
estimates do not consider further cost savings that may occur in subsequent years due to 
increased  compliance  efficiencies  while  the  VAT  fraud  reduction  estimates  do  not 
include reduction in diversion fraud. As a result, the economic impact is estimated to 
be conservative. 

116 

 
 
 
ANNEX 5: BACKGROUND INFORMATION ON VAT 

1. 

VAT treatment of intra-EU supplies of goods before 1993 

Box 8: VAT system before 1993 

Before  1993,  intra-EU  cross-border  transactions  in  goods  were  subject  to  customs 
procedures and controls meaning that the payment of the VAT due was controlled at the 
time of import  of the goods. Intra-EU cross-border supplies  of  goods (in the figure the 
transaction  between  C  and  D)  were  exempt  (in  Member  State  1,  which  is  the  Member 
State  of  origin)  because  they  gave  rise  to  an  export.  The  introduction  of  the  goods  (in 
Member State 2 that is the Member State of destination) gave rise to an import and was 
taxed  (either  at  the  border  or  via  deferred  payment  in  the  VAT  return).  Preceding 
supplies  (A-B  and  B-C)  and  subsequent  supplies  (D-E)  were  taxed  with  VAT.  Both  the 
VAT charged on the supply made by A to B, by B to C and by D to E and the VAT paid by 
D at import were as a rule deductible (as regards C through a refund since there would 
be no output VAT on the supply made by C against which the deductible VAT of 30 could 
be offset). To prove import/export, customs documentation was required and checked by 
the customs administration. 

2. 

Destination-based versus origin-based VAT system 

A "destination-based" VAT system means that goods traded across borders are taxed in 
the country where they are consumed (the destination country) rather than where they are 
produced (the origin country), and at the destination country’s tax rate. This is consistent 
with  VAT  being  conceived  of  as  a  tax  on  consumption,  rather  than  on  production.  It 
helps  ensuring  that  households  and  firms  face  the  same  tax  rate  on  their  purchases 
regardless of where  they  buy the goods, and therefore should  not distort  trade patterns. 
But applying the destination principle can be problematic, leading to distortions in trade 
(e.g.  because  of  deduction  limitations  in  the  country  of  origin)  and  potentially  higher 
compliance costs. An "origin-based" system is in principle more in line with a common 
market functioning as a domestic market. 

117 

 
 
 
3. 

Historical  background  of  the  reform:  from  the  Green  Paper  to  the  Action 
Plan 

Since  the  basic  requirements  for  an  origin-based  system  proved  not  to  be  achievable, 
despite  several  attempts,  the  Commission  decided  in  2010  to  focus  on  this  issue  in  the 
framework  of  its  broad  public  consultation  based  on  the  "Green  Paper  on  the  future  of 
VAT275" (hereinafter "2010 Green Paper"). 

This  consultation276  showed  that  many  businesses  consider  that  the  complexity, 
additional  compliance  costs  and  legal  uncertainty  generated  by  the  current  VAT  rules 
governing cross-border intra-EU supplies of goods often prevent them from engaging in 
cross-border  activities  and  reaping  the  benefits  of  the  single  market.  Stakeholders  also 
expressed  the  need  for  MTIC  fraud  to  be  tackled  through  specific  remedies  targeting 
fraudulent  taxpayers  rather  than  measures  that  could  affect  indirectly  compliant 
taxpayers, creating a disadvantage to them.  

The  European  Parliament277,  the  European  Economic  and  Social  Committee278  and 
stakeholders  such  as  businesses,  tax  practitioners  and  academics  also  recognised  the 
deadlock279. They therefore favoured a new system based on the principle of taxation at 
destination as a realistic solution. On this basis, the Commission adopted on 6 December 
2011  a  communication  "On  the  future  of  VAT  –  Towards  a  simpler,  more  robust  and 
efficient  VAT  system 
(hereinafter  "2011 
Communication").  

the  single  market280" 

tailored 

to 

Discussions with Member States confirmed that the objective to implement a definitive 
VAT regime for intra-EU trade in goods based on the principle of taxation in the Member 
State of origin was still politically unachievable given in particular the approximation of 
rates it would require. This was confirmed by the Council in May 2012281. 

275   COM(2010) 695, Commission Staff Working Document, SEC(2010) 1455, 1.12.2010 
276   To  note  that  the  Commission  received  1,726  replies  from  businesses,  academics,  citizens  and  tax 

authorities, a record response to a tax consultation (see for more information in Annex 2). 

277   European  Parliament  Resolution  of  13  October  2011  on  the  future  of  VAT  (P7_TA(2011)0436): 
http://www.europarl.europa.eu/sides/getDoc.do?type=TA&language=EN&reference=P7-TA-2011-
0436  

278   European Economic and Social Committee Opinion of 14 July 2011 on the ‘Green Paper on the future 

of VAT – Towards a simpler, more robust and efficient VAT system’:  
http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:52011AE1168 

279   On  6  May  2011,  the  European  Commission  (Directorate  General  for  Taxation  and  Customs  Union) 
organised  a  one  day  conference  in  Milan  on  the  Green  Paper  on  the  future  of  VAT  -  Towards  a 
simpler, more robust and efficient VAT system (see Annex 2). This conference was an important part 
of the consultation process associated with the 2010 Green Paper. It brought together policy makers, 
experts, businesses and other stakeholders and the general public from all over Europe, and beyond. 
See for more information on:    
https://ec.europa.eu/taxation_customs/business/vat/action-plan-vat/communication-future-vat/green-
paper_en 

280   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 (COM(2011) 851, 6.12.2011): 
http://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/taxation/vat/key_docum
ents/communications/com_2011_851_en.pdf 

281   Council conclusions on the future of VAT - 3167th Economic and Financial affairs Council meeting, 

Brussels, 15 May 2012 (see in particular point B 4): 
http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/130257.pdf 

118 

 
                                                 
 
 
 
After the adoption of the 2011 Communication, the Commission services entered into a 
broad-based  and  transparent  dialogue  with  Member  States  and  with  stakeholders  to 
examine in detail different possible ways of implementing the destination principle. This 
took place in particular via the GFV and the VEG. 

Following intense and in-depth analytical work282 five options, each one with their own 
merits and shortcomings, have been identified283 (further details on the selection of these 
options  are  available  in  Section 9  "Selection  of  options"  below).  In  order  to  assess  the 
impact of each of those five options in comparison with the current situation, a study was 
commissioned and finalised by mid-2015284. The results of this study were discussed in a 
Fiscalis seminar285 which brought together both the GFV and the VEG. 

On 7 April 2016, the Commission adopted the Action Plan which sets out the measures 
envisaged  in  order  to  modernise  the  EU  VAT  system.  In  this  context,  the  Commission 
announced its intention to adopt in 2017 four VAT-related proposals: 

  a definitive VAT regime for intra-EU cross-border trade based on the principle of 
taxation  in  the  Member  State  of  destination  of  the  goods  in  order  to  create  a 
robust single European VAT area; 

  a modernised VAT rates policy so as to allow Member States greater autonomy 

on setting the VAT rates; 

  a comprehensive simplification VAT package for SMEs; 
  a proposal to enhance VAT administrative cooperation and EUROFISC. 

4. 

Sources attesting to the existence of the problems 

4.1. 

The 2010 Green Paper 

The contributions received from stakeholders during the public consultation on the 2010 
Green Paper allowed a first identification of the shortcomings of the current transitional 
VAT system (see Annex 2). Stakeholders mentioned problems such as disproportionate 
compliance  costs,  legal  uncertainty,  cash  flow  disadvantages  and  distortions  of 
competition.  

The causes of the shortcomings were found to be the lack of harmonisation of the VAT 
rules  in  the  EU,  the  complexity  of  the  rules  applicable  to  intra-EU  activities  and  the 
additional VAT administrative obligations and risks associated with intra-EU activities. 
Stakeholders pointed out that these shortcomings can constitute an obstacle, in particular 
for  small  businesses,  preventing  them  from  engaging  in  intra-EU  trade.  They  further 
underlined that the current transitional VAT system is not suitable for the single market 

282   See details in Annex 1. 
283   Commission staff working document on the implementation of the definitive VAT regime for intra-EU 

trade (SWD2014) 338, 29.10.2014):  
http://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/taxation/vat/swd_2014_
338.pdf  

284   Implementing the ‘destination principle’ to intra-EU B2B supplies of goods - Feasibility and economic 

evaluation study – Final report – 30 June 2015:    
http://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/common/publications/st
udies/ey_study_destination_principle.pdf  

285   Organised in June 2015 in Vienna (see for further details in Annex 1). 

119 

 
 
                                                 
 
and prevents them from fully benefiting from its advantages. For these reasons most of 
them were against the idea of making the current rules the definitive VAT system286. 

4.2. 

The work in the GFV and in the VEG 

On  the  basis  of  this  first  analysis  of  the  shortcomings  of  the  current  transitional  VAT 
system and their causes, the Commission services engaged into in-depth discussions with 
the  Member  States287  and  expert  stakeholders288  in  order  to  identify  more  precisely  the 
problems caused by the current transitional VAT system.  

At the VEG the expert stakeholders widely agreed that the list of shortcomings and their 
causes  outlined  by  the  Commission  was  complete  and  correctly  reflected  the  problems 
faced by businesses. They emphasised that problems are linked both to legal uncertainty 
(in particular regarding the means of proof of the intra-EU transport of the goods to be 
provided in order for the supplier to justify the exemption of an intra-EU supply) and to 
compliance costs due notably to the complexity of the current rules, the fact that the rules 
are not adapted to all current business models and the divergent application of the rules 
by the Member States. 

At  the  GFV  the  Member  States  also  generally  confirmed  the  list  of  shortcomings  and 
their  causes  as  described  by  the  Commission.  Most  Member  States  generally  reiterated 
the need for greater harmonisation and simplification of the existing rules and some also 
stressed the importance of the problems related to fraud and tax evasion. 

4.3. 

The evaluation of the current system 

A comprehensive retrospective evaluation of the EU VAT system289 has been carried out. 
That evaluation made it possible to conclude that the current transitional VAT system is 
too complex. This results in higher compliance costs for businesses trading across the EU 
as compared with those operating only at domestic level and in legal uncertainty for both 
businesses  and  tax  administrations.  As  a  consequence,  intra-EU  cross-border  trade  and 
the  functioning  of  the  internal  market  as  a  whole  are  disrupted.  Further,  the  evaluation 
also mentioned that the current transitional VAT system has generated a significant level 
of cross-border fraud that hampers the functioning of the internal market. 

5. 

VAT fraud schemes 

Box 9: Basic schemes 

MTIC fraud example involving two Member States 

The  customer  of  a  cross-border  transaction  purchases  goods  VAT-free  and  in  the 
subsequent  domestic  sale  charges  VAT  to  his  customer  without  remitting  it  to  the 

286   The  contributions  are  available  together  with  a  report  summarising  their  main  elements  at 

http://ec.europa.eu/taxation_customs/common/consultations/tax/2010_11_future_vat_en.htm.  
More detailed information can be found in Annex 2.  

287   As of the 5th meeting of the GFV which took place on 29 November 2012. See further information in 

Annex 1. 

288   As  of  the  1st  meeting  of  the  VEG  which  took  place on 24 October 2012.  See  further  information  in 

Annex 1. 

289   IFS et al., 2011. The key elements of this evaluation have been integrated into the different parts of 

this impact assessment. 

120 

 
                                                 
Treasury.  The  rules  applicable  to  intra-EU  supplies  are  not  abused  but  allow  the 
acquirer (the "missing trader") to commit MTIC fraud in the subsequent domestic supply. 

In this case, the acquirer in Member State 1 purchases goods VAT-free from a supplier in 
Member State 2 and charges VAT to his customer in Member State 1 without remitting it 
to the Treasury. Before the tax administration is able to audit the acquirer he would have 
disappeared. The customer might not be aware of this fraud and when he is a business he 
might also be able to deduct the VAT charged to him (as he received a valid invoice he 
remains in principle entitled to a tax deduction).     

Diversion fraud example involving a single Member State 

The  supplier  pretends  to  have  transported  the  goods  to  another  Member  State  but  the 
goods  are  in  fact  consumed  locally  (goods  are  diverted  from  cross-border  to  domestic 
trade). The rules applicable to intra-EU supplies are abused by the supplier. 

In this case, the supplier in Member State 1 charges and collects VAT from his customer 
in  Member  State  1  but  reports  this  supply  in  his  VAT  return  as  an  exempt  intra-EU 
supply of goods and therefore does not transfer the VAT collected to the Treasury. Before 
the  tax  administration  can  hold  up information  received  from  the  tax  administration  of 
the  Member  State  where  the  goods  are  supposed  to  have  been  transported  to  with 
information  obtained  during  an  audit  of  the  supplier,  this  supplier  would  have 
disappeared. The customer might not be aware of this fraud and when he is a business he 
might also be able to deduct the VAT charged to him by the supplier (as he received a 
valid invoice he remains in principle entitled to a tax deduction).     

6. 

VAT notions 

Box 10: VAT notions 

VAT identification number 

The  VAT  identification  number  serves  several  purposes,  both  with  regard  to  the 
declaration/payment of VAT and for audit/statistical reasons.   

Declaration/payment 

As a rule, businesses making taxable transactions within the EU must register for VAT 
purposes and be allocated a VAT identification number in each Member State in which 
they are liable to pay the VAT. Thus: 

-  when  making  supplies  of  goods  taxable  in  a  particular  Member  State,  the  supplier  is 
liable to VAT in that Member State and must register and pay the VAT there; 

- when acquiring goods from another Member State, the acquirer is liable to pay the VAT 
due on the intra-EU acquisition to the tax authorities of the Member State in which the 
goods are acquired and must obtain a VAT identification number there.   

Through  this  VAT  registration,  businesses  will  comply  with  all  their  VAT  obligations 
(e.g. the VAT identification number will have to be mentioned in the invoices issued, in 
the  VAT  returns  submitted  to  declare  VAT,  as  well  as  in  the  recapitulative  statements 
submitted – see details below).   

121 

 
 
Businesses  might  need  to  be  registered  not  only  in  the  Member  State  where  they  are 
established  (and  where  they  carry  out  habitually  their  activities)  but  also  in  any  other 
Member States where they are liable to VAT even without having a fixed establishment 
there.  

Audit/statistical reasons: proof of the status of the acquirer to whom an intra-EU supply 
of goods is made 

In case of an intra-EU supply of goods, the supplier must provide sufficient evidence that 
the  goods  have  been  supplied  to  a  "taxable  person  acting  as  such  in  a  Member  State 
other than that in which transport of the goods began"290 in order to justify, before the 
tax authorities of the Member State of origin, the VAT exemption and therefore the fact 
that  he  did  not  charge  VAT  on  such  supply.  This  is  because  only  where  the  intra-EU 
supply is made to an acquirer having that status the intra-EU supply will be exempt; in 
any other case the supply will be taxed and the supplier will have to charge the VAT of 
the Member State of origin to the acquirer. 

In order for the intra-EU supplier to determine whether his customer is a business or a 
final consumer (only in the first case the exemption will apply and the business customer 
will  be  liable  to  pay  the  VAT  due  on  the  intra-EU  acquisition  of  goods)  he  needs  to 
obtain the customer's VAT registration details and check the status in the VIES system291. 

Further in the recapitulative statements (see below) an intra-EU supplier should mention 
the  VAT  identification  number  of  his  intra-EU  acquirer.  By  cross-checking  the 
information contained in these listings, Member States are informed of goods circulating 
(VAT free, since the intra-EU supply is exempt from the tax) from one Member State to 
another. This allows for the administrative follow-up of the goods necessary in order to 
ensure that VAT is paid in the Member State of destination of the goods.   

Liability rules for non-established businesses292 

As a rule, suppliers of goods are liable to pay VAT to the tax authorities of the Member 
State  where  the  tax  is  due.  However,  when  they  make  supplies  of  goods  in  a  Member 
State in which they are not established, there are cases in which the person liable for the 
payment  of  VAT  will  be  the  customer293  (reverse  charge  for  supplies  made  by  non-
established businesses).  

Consignment and call-off stocks 

Consignment  stock  refers  to  the  situation  where  a  trader  transfers  business  goods  to  a 
Member State where he is not established, in order to sell them there at a later stage and 
in any case after arrival. Call-off stock is a specific category within the general notion of 
consignment stock and refers to the situation where at the time the goods are transferred 

290   Article 138 of the VAT Directive. 
291   VIES (the VAT Information Exchange System) is an electronic mean of validating VAT-identification 
numbers  of  economic  operators  registered  in  the  European  Union  for  cross-border  transactions  on 
goods or services. See more info on: http://ec.europa.eu/taxation_customs/vies/ 

292  A  non-established  business  refers  to  a  "non-resident"  business  with  regard  to  a  particular  Member 
State, thus a business established in one Member State which trades with another Member State where 
it does not have any fixed establishment will be considered to be a "non-established business" in this 
later Member State.  
 See Article 194 of the VAT Directive. 

293 

122 

 
                                                 
the  trader  already  knows  the  identity  of  the  buyer  to  whom  the  goods  will  later  be 
supplied. 

According to EU rules, the transfer of the goods entails 

(i)  a  deemed  intra-EU  supply  of  goods  in  the  Member  State  of  origin  made  by  the 
transferor; 

(ii) a deemed intra-EU acquisition of goods made in the Member State of destination also 
by the transferor, who will have to get registered for VAT purposes and declare the intra-
EU acquisition there; 

(iii)  a  subsequent  domestic  supply  made  in  the  Member  State  of  destination  by  the 
transferor to his customer. 

To be exempt from VAT, the deemed supply of goods needs to fulfil the conditions of any 
intra-EU supply of goods in the Member State of origin. The transferor will have to be 
registered and declare the transfer in the VAT return submitted in the Member State of 
origin and will further have to furnish the proof of the intra-EU transport of the goods to 
the tax authorities of that Member State. 

In the Member State of destination, the deemed intra-EU acquisition of goods entails a 
number  of  obligations  on  the  transferor  (e.g.  registration,  declaration  of  the  intra-EU 
acquisition).  Further  obligations  will  be  imposed  on  him  on  account  of  the  subsequent 
domestic supply (e.g. declaration and payment of VAT unless reverse charge applies).    

Cross-border chain transactions 

This refers to the case where multiple parties are involved in successive sales of the same 
goods which are the object of a single transport: A sells to B, who sells to C, who sells to 
D  and  the  goods  are  transported  directly  from  A  to  D,  so  B  and  C  are  just 
intermediaries. 

When  this  situation  happens,  according  to  the  case-law  of  the  CJEU294,  the  intra-EU 
movement of the goods can only be ascribed to one of the supplies, and only that supply 
will  benefit  from  the  VAT  exemption  provided  for  an  intra-EU  supply.  All  the  other 
supplies in the chain will be domestic supplies, taxed and not exempt. 

Proof of transport of intra-EU supplies of goods 

In case of an intra-EU supply of goods, the supplier must provide sufficient evidence that 
the  goods  have  been  transported  from  one  Member  State  (Member  State  of  origin)  to 
another (Member State of destination) in order to justify, before the tax authorities of the 
Member State of origin, the VAT exemption and therefore the fact that he did not charge 
VAT on that supply.  

VAT returns 

294   Judgment of the CJEU of 6 April 2006 in case C-245/04, Emag Handel. 

123 

 
                                                 
Businesses  registered  for  VAT  purposes  must  periodically295  submit  VAT  returns  to 
declare  the  value  of  their  transactions  and  the  corresponding  VAT  due.  Through  this 
VAT  return  businesses  also  exercise  their  right  to  deduct  the  VAT  due  on  their 
acquisitions (see below). 

Businesses might need to submit VAT returns in more than one Member State, meaning 
having  to  comply  with  rules  of  Member  States  other  than  that  in  which  they  have 
established their business. 

Recapitulative statements  

This  refers  to  an  obligation  specifically  linked  to  intra-EU  cross-border  trade  that 
requires businesses to report periodically296 the value of their intra-EU supplies and the 
identity of their intra-EU customers. 

Businesses  supplying  goods 
to  other  Member  States  must  submit  periodical 
recapitulative  statements  (and  add  a  special  mention  in  their  VAT  return)  of  their 
exempted  intra-EU  supplies  of  goods.  Those  supplies  will  in  the  Member  State  of 
destination give rise to taxable intra-EU acquisitions of goods for which the customer is 
the person liable to VAT. 

Further  the  VAT  Directive  gives  the  option  to  the  Member  States  to  also  require  a 
recapitulative statement for intra-EU acquisitions of goods made by businesses on their 
territory. 

Dealing with VAT audits 

Businesses registered for VAT purposes or liable to pay the VAT due in Member States 
other than the Member State in which they are established are also subject to VAT audits 
in these Member States. 

VAT treatment/qualification of certain transactions 

The  VAT  Directive  makes  a  distinction  between  supplies  of  goods297  and  supplies  of 
services298.  The  VAT  treatment  of  intra-EU  supplies  of  goods  and  intra-EU  supplies  of 
services  is  different  and  therefore  the  delimitation  between  both  concepts  is  crucial  to 
avoid double or non-taxation.  

Input tax deduction 

295  EU rules allow for time frames (tax period and deadline for submission of the VAT return) to be set by 
the Member States. Tax periods may be set at one month to a maximum of one year and deadline may 
not  be  more  than  two  months  after  the  end  of  each  tax  period.  Member  States  have  implemented 
different  rules.  Most  require  monthly  returns  although  for  some  it  is  quarterly  reporting.  Nearly  all 
Member States allow micro enterprises to file at longer periods than monthly (quarterly, half-yearly or 
yearly). In most Member States the VAT return should be submitted with a deadline of the end of the 
month following the tax period. See PWC, 2013. 

296  EU rules allow for time frames to be set by the Member States at one month or a quarter. Periodicity 

depends in each Member States upon a certain amount of intra-EU supplies. 

297   According to Article 14 of the VAT Directive ‘Supply of goods’ shall mean the transfer of the right to 

dispose of tangible property as owner.  

298   According to Article 24 of the VAT Directive ‘Supply of services’ shall mean any transaction which 

does not constitute a supply of goods. 

124 

 
                                                 
As  a  rule299,  a  business  carrying  out  VAT  taxable  transactions  has  the  right,  in  the 
Member  State  in  which  it  carries  out  these  transactions,  to  deduct  the  VAT  which  it  is 
liable to pay  upon its purchases  of goods  and services. This is done by subtracting the 
deductible  amount  from  the  VAT  due  (the  VAT  collected  from  his  customer)  in  the 
regular VAT return submitted to the tax authorities. 

However, when a business acquires goods and services in a Member State in which it is 
neither established nor registered, the right of deduction has to be exercised, not through 
compensation with any VAT due by the business but through a refund procedure. To this 
end the refund request will have to be submitted to the Member State of acquisition of the 
goods and services300. Such refund procedure has a cash flow impact on businesses since 
VAT will only be refundable after several months301.  

7. 

The additional VAT obligations associated with the current transitional VAT 
system (driver 1) 

Box 11: Additional VAT obligations  

Depending on whether a business acts as a supplier or as an acquirer and depending on 
the  supply  chain  (transaction  involving  one,  two  or  more  parties),  it  might  have  to 
comply with the following main additional obligations when trading in another Member 
State. 

VAT identification number 

To ensure that his intra-EU supply of goods is exempt from VAT, the supplier needs to 
validate the status of his customer. This means checking in the VIES system that the VAT 
identification  number  is  valid  and  collecting  information  about  the  customer's 
compliance.  Businesses have  to  prove  that they  have  acted in  good  faith  and  exercised 
due diligence (because of the ‘knowledge test’302). They must keep written records to this 
end. 

299   See Articles 168 of the VAT Directive. 
300   See  Articles 170-171  of  the  VAT  Directive  and  Directives  2008/9/EC  (refund  to  EU  traders)  and 

86/560/EEC (refund to non-EU traders). Further details on 
http://ec.europa.eu/taxation_customs/business/vat/eu-vat-rules-topic/vat-refunds_en 

301   According to Directive 2008/9/EC, refunds of the approved amount shall be paid by the Member State 
of refund at the latest within ten working days of the expiry of the deadline for refund (either within 
four months of receipt of the refund application by that Member State where no additional information 
is  requested,  or  within  six  months  where  additional  information  is  requested,  but  in  any  case  at  the 
latest within eight months from receiving the refund application). In 2015 for EU-25 (as information is 
not  available  for  three  Member  States),  an  average  of  65%  (about  EUR  2  billion)  of  total  handled 
cross-border  refund  applications  were  refunded  within  the  four  month  deadline,  an  average  of  18% 
(about EUR 663 million) of total handled cross-border refund applications were queried and refunded 
within six or eight months; and an average of 3% (about EUR 139 million) were refunded after more 
than 8 months (the remaining 14% are rejected applications). It has to be noted though, that the above 
figures are average figures and differences exist between Member States, with a number of Member 
States  refunding  more  that  90%  of  all  applications  within  4  months,  whilst  others  refund  more  than 
50% of the total applications within 6 or 8 months,  

302   The  "knowledge  test"  refers  to  the  reiterated  criterion  of  the  CJEU  according  to  which,  if  the  tax 
administration can prove that a taxable person 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 VAT or the 
right  to  exempt  from  VAT  an  intra-Community  supply,  to  that  taxable  person.  See  for  instance  the 
judgment of the CJEU in case C-439/04, Axel Kittel. 

125 

 
                                                 
 
When  trading  in  other  Member  States  businesses  acting  either  as  suppliers  or  as 
customers  might  be  required  to  ask  for  a  VAT  identification  number  to  report  their 
transactions and possibly pay the VAT due. This  could mean obtaining additional  VAT 
registrations in Member States in which these businesses are not established. 

There is an obligation to be registered in a Member State for exports, domestic supplies, 
intra-EU  supplies  or  transfers  of  own  goods  even  if  the  supply  is  exempted  there. 
Registration  is  required  although  in  those  cases  there  is  no  VAT  to  be  paid  to  the  tax 
authorities. 

Liability rules for non-established businesses 

In case a Member State does not provide for a reverse charge (i.e. the customer is liable 
for  payment  of  the  VAT  due)  for  supplies  made  by  non-established  businesses303  these 
businesses  might  be  obliged  to  charge  VAT  to  their  customers  and  pay  it  to  the  tax 
authorities of the Member State where they are not established. 

Consignment and call-off stocks 

Businesses transferring own goods from one Member State to another might have to fulfil 
specific declaration obligations in the Member State of arrival of the goods even if those 
goods are call-off or consignment stocks (i.e. later on giving rise to a taxable supply). A 
VAT registration and related reporting obligations in the Member State of arrival of the 
goods might be required.     

Cross-border chain transactions 

The VAT Directive provides a simplification for triangular transactions but this does not 
cater for all chain transactions, in particular not for situations involving more than three 
parties or non-EU intermediaries.  

The absence of simplification measures leads to the need for multiple VAT registrations 
of non-established businesses and related reporting obligations. 

Proof of transport of intra-EU supplies of goods 

To be able to prove the transport of goods to another Member State, the supplier must, in 
addition to normal commercial documentation, keep appropriate records and details on 
the transport.  

In  particular  for  businesses  which  are  not  directly  responsible  for  the  transport, 
additional investigations would be needed and permanent resources allocated to obtain 
sufficient proof of transport from transporters and/or customers. 

VAT returns 

When  acting  either  as  the  supplier  or  as  a  customer,  businesses  might  be  required  to 
report  their  transactions  in  a  VAT  return  and  pay  the  VAT  due  in  Member  States  in 
which they are  not  established.  This will be in  addition to  the VAT return they have to 
submit periodically in their Member State of establishment. 

303   Article 194 of the VAT Directive provides for an option for Member States to apply reverse charge to 

supplies made in their territory by non-established taxable persons. 

126 

 
                                                 
In  some  cases  (transfers  of  own  goods  across  the  EU)  there  is  a  need  to  report 
movements  of  goods  although  similar  domestic  transfers  are  not  reported.  Further  for 
statistical  purposes304,  businesses  might  also  be  required  to  add  a  special  mention  in 
their  VAT  return  concerning  the  intra-EU  movement  of  goods  (either when  supplied  to 
another Member State or, in some Member States, when acquired from another Member 
State). This means having to complete a box with the value of these supplies/acquisitions. 

Recapitulative statements 

For intra-EU supplies of goods 

Businesses  supplying  goods 
to  other  Member  States  must  submit  periodical 
recapitulative statements of their exempted intra-EU supplies of goods (which will give 
rise to a taxable intra-EU acquisition of goods in the Member State of destination). 

For intra-EU acquisitions of goods in some Member States 
In  some  Member  States,  businesses  acquiring  goods  from  other  Member  States  must 
submit  periodical  recapitulative  statements  of  their  intra-EU  acquisitions  of  goods. 
Filling  in  those  statements  does  not  fit  well  with  normal  commercial  and  accounting 
practices as reporting only covers certain transactions, that is intra-EU acquisitions. 

Dealing with VAT audits 

Businesses registered or liable to pay the VAT due in a Member State other than that in 
which they are established are subject to tax audits also in any such Member State. This 
might  necessitate  the  appointment  of  a  fiscal  representative  who  knows  the  procedure 
and language of the Member State. 

VAT treatment/qualification of certain transactions 

In case of different interpretation of one and the same transaction by different Member 
States, businesses might face double taxation. This can result in administrative (or even 
judicial) claims against the business.  

Input tax deduction 

Businesses incurring input VAT in a Member State in which they are neither established 
nor  registered  can  only  exercise  their  right  to  deduct  that  VAT  by  means  of  a  refund 
request  to  be  submitted  to  this  Member  State.  To  this  end,  they  must  make  use  of  a 
specific electronic refund procedure.  

8. 

Divergent application of EU VAT rules across the Member States (driver 2) 

Box 12: Divergences in obligations and procedures 

VAT identification number 

The process for attributing VAT identification numbers, the amount of information that 
operators  must  make  available  to  the  tax  authorities  in  order  to  have  such  a  number 
assigned,  the  reasons  for  which  a  tax  authority  may  refuse  to  register or  decide to  de-

304  Intrastat requirement statistics. 

127 

 
 
 
 
                                                 
register a business and the date from which registration or de-registration will produce 
effect are all matters which vary across the EU. 

Liability rules for non-established businesses 

There is no consistent application of the option under which Member States may provide 
for  special  liability  rules  for  non-established  businesses.  Therefore,  depending  on  the 
Member State, reverse charge or registration apply for businesses making supplies in a 
Member  State  in  which  they  are  not  established  with  considerable  divergences  on  how 
the rules are applied across the EU. This has an impact on how deduction of input VAT 
can be exercised: in some Member States (where registration applies) VAT is recovered 
through local VAT returns yet in others (which apply reverse charge) VAT can only be 
recovered through a claim under the refund procedure. The latter has the potential to put 
the  non-established  supplier  at  a  competitive  disadvantage  compared  to  domestic 
suppliers305. 

Proof of transport of intra-EU supplies of goods 

There  are  no  clear  and  uniform  rules  regarding  the  evidence  to  be  provided  by  the 
supplier  to  justify  the  exemption  of  the  intra-EU  supply  of  goods.  Documentation 
requirements instead depend on and vary within each Member State. The requirement for 
the  supplier  to  provide  proof  where  an  intra-EU  supply  of  goods  is  made  under  Ex-
Works  delivery  terms306,  or  where  no  third-party  transport  carrier  is  involved,  can  be 
particularly problematic. 

The  period  throughout  which  businesses  must  ensure  the  storage  of  the  VAT 
documentation  attesting  the  transport  also  depends  on  each  Member  State  which  adds 
extra complexity.   

VAT returns 

The format, content and level of data to be included in the VAT returns diverge from one 
Member  State  to  the  other.  For  audit  and/or  statistical  reasons,  some  Member  States 
require extremely detailed VAT return content307.  

There are also differences in the time frame (tax period can be set by the Member States 
from one month up to a maximum of one year) and filing deadline308. 

305   Despite  a  recent  comprehensive  reform  regarding  cross-border  VAT  refunds  for  EU  businesses 
(Directive  2008/9/EC  and  Implementing  Regulation  79/2012),  refund  procedures  are  slow  (and 
formalistic  (input  VAT  incurred  can  be  lost  when  certain  formal  requirements  are  not  met)  and  can 
trigger  audits  by  the  tax  authorities.  This  results  in  cash  flow  disadvantage  due  to  refund  situation 
when paying VAT on purchases and selling to customers in other Member States. There can also be 
problems  with  reclaiming  pre-registration  input  VAT  in  a  Member  State  where  the  business  is  not 
established.  See  for  more  information  on  https://ec.europa.eu/taxation_customs/business/vat/eu-vat-
rules-topic/vat-refunds_en 

306  Ex Works (EXW) is an international trade term that describes an agreement under which the seller is 
required to make goods ready for pickup at his or her own place of business. All other transportation 
costs and risks are assumed by the buyer. In that case the supplier is not in charge of the transport and 
to prove the transport, he therefore has to rely on items of evidence provided to him by the buyer. 
307   The proposal for a standard VAT return (COM(2013) 721, 23.10.2013) represented an important area 
for  simplification  for  businesses.  However  it  did  not  meet  unanimous  agreement  in  Council  by  the 
Member States and was therefore withdrawn by the Commission. 

308   See box 6 above. 

128 

 
                                                 
Recapitulative statements  

The  format,  procedure  and  filing  deadlines  of  these  listings  diverge  from  one  Member 
State to the other309. 

Since the obligation to also submit a recapitulative statement for intra-EU acquisitions of 
goods results from an option left by EU legislation for the Member States to apply, there 
is no uniform application across the EU.   

VAT audits 

Audit  is  a  matter  that  rest  entirely  in  the  hand  of  each  individual  Member  State.  This 
might imply the need for businesses to have a local tax representative.   

Box  13:  Divergences  in  the  qualification  of  certain  transactions  and  their  VAT 
treatment 

Consignment and call-off stocks 

Some  Member  States  provide  simplification  measures  by  which  non-established 
businesses holding a stock of goods are allowed not to register for VAT purposes and not 
to declare any intra-EU acquisition in their territory. 

This situation may give rise to problems where a trader established in a Member State 
which applies the simplification transfers goods to another Member State where no such 
simplification  is  applied.  The  trader,  thinking  in  good  faith  that  the  simplification  also 
applies in this later Member State, will neither get registered nor declare any intra-EU 
acquisition there, thus risking heavy penalties in that Member State.   

Cross-border chain transactions 

The  problem  with  cross-border  chain  transactions  is  determining  to  which  supply  the 
intra-EU transport of the goods should be attributed.  

The VAT Directive provides a simplification for certain cross-border chain transactions 
(known  as  "triangular  transactions")310  but  the  simplification  is  applied  unevenly  by 
Member States in particular in terms of assumptions made as to who is transporting the 
goods.  In  some  Member  States,  the  simplification  can  also  be  applied  when  more  than 
three  parties  are  involved.  Further  some  Member  States  allow  for  the  simplification  to 
apply where the intermediate party is already registered in the Member State of the final 
customer while others do not. 

VAT treatment/qualification of certain transactions 

Some  Member  States  treat  supplies  involving  the  installation  of  goods  as  a  supply  of 
goods,  others  as  a  supply  of  services.  Such  a  divergence  in  the  qualification  of  the 
transaction  leads  to  differences  in  VAT  treatment  as  the  rules  governing  goods  and 

309  See box 6 above. 
310   While  as  a  rule  businesses  making  taxable  transactions  in  a  Member  State  in  which  they  are  not 
established should register in this Member State and declare their transactions (and possibly pay VAT 
which could however be deducted), simplification measures aim at avoiding such registration. 

129 

 
 
                                                 
services  are  not  the  same  (e.g.  different  place  of  supply,  VAT  rates).  This  may  lead  to 
double  or  non-taxation.  In  case  of  double  taxation,  businesses  might  need  to  have 
recourse to local tax experts. 

Another  example  of  this  type  of  situation  is  leasing,  which  is  treated  by  some  Member 
States as a supply of services and by others as a supply of goods. The result is double or 
non-taxation and such inconsistent treatment can be used for tax planning purposes311. 

Input tax deduction 

Different rules on input tax deduction apply in the Member States (e.g. restrictions of the 
right  to  deduct,  calculation  of  recoverable  VAT  for  companies  engaged  both  in 
transactions opening the right to deduct input VAT and in transactions which do not). 

9. 

Selection of options 

After  the  adoption  of  the  2011  Communication,  the  Commission  services  started 
technical discussions with Member States in the GFV and with other stakeholders in the 
VEG  to  identify  possible  options  to  achieve  a  simpler  and  more  robust  VAT  system 
based on the principle of taxation at destination for B2B intra-EU supplies of goods.  

When looking at possible options to tax B2B transactions at destination, two fundamental 
issues had to be considered, namely: 

 

 

the place of taxation (whether it will be based on the physical flow of the goods 
or not); and 
the person liable for payment of VAT (whether the supplier charges the VAT of 
the Member State of destination and pays the VAT via the One-Stop-Shop or if 
instead the customer accounts for the VAT through the reverse charge). 

The  various  combinations  of  these  two  issues  would  lead  to  substantially  different 
taxation regimes for intra-EU trade. 

To  carry  out  the  work,  the  Commission  services  proposed  a  three-step  working 
methodology which was adopted by both the GFV and the VEG. In particular: 

The first step of this work was to make an inventory of the various options for taxation at 
destination,  to  identify  their  main  possible  advantages  and  disadvantages  and  to 
determine  the  criteria  for  a  future  comprehensive  assessment  of  these  options.  To  this 
end,  the  Commission  services  established  a  non-exhaustive  preliminary  list  of  eleven 
possible  options  each  with  their  main  features,  advantages  and  disadvantages312.  The 
following  qualitative  assessment  criteria  were  suggested  and  agreed:  (i)  equality  and 
simplicity; (ii) budgetary impact; (iii) ease of administration and cost of collection; and 
(iv) prevention of fraud and abuse.  

311   Judgment of the CJEU of 22 December 2010 in case C-277/09 RBS Deutschland Holding. 
312   Seven  main  options,  four  of  which  each  has  two  variants,  full  details  are  available  in  working 
documents GFV No 14 and VEG No 4 B2B supplies of goods – Taxation at destination – Identifying 
options and criteria for a qualitative assessment, available here.  

130 

 
 
                                                 
Two rounds of discussions took place in the GFV and the VEG during this phase. It was 
suggested that two other options be added to the initial list, resulting in an inventory of 
thirteen possible options313 (Table 16 below). 

313   See working documents GFV No 16 and VEG No 5 B2B supplies of goods – Taxation at destination – 
Options – Examining how they work, and their pros and cons, and GFV No 22 and VEG No 13 B2B 
supplies of goods – Taxation at destination – Additional Option –Improvement of current rules for the 
option 13 improving the current rules without modifying them fundamentally. 

131 

 
 
 
                                                 
Table 16: Inventory of possible options 

Initial options 

No 1 
No 2 

No 3 

No 4 

No 5 

No 6 

No 7 

No 8 

Maintaining the status quo 
Adapting current rules whilst still following the flow of the goods with 
the supplier charging the VAT of the Member State of destination 
Adapting current rules whilst still following the flow of the goods with 
the reverse charge mechanism 
Aligning with the rules governing B2C sales with the supplier charging 
the VAT of the Member State of destination 
Aligning  with  the  rules  governing  B2C  sales  with  the  reverse  charge 
mechanism 
Aligning with the rules governing the place of supply of services314 with 
the supplier charging the VAT of the Member State of destination  

Aligning  with  the  rules governing  the  place  of supply  of  services  with 
the reverse charge mechanism 
Aligning with the contractual flows with the supplier charging the VAT 
of the Member State of destination 
Aligning with the contractual flows with the reverse charge mechanism 
Viable Integrated VAT (VIVAT) 
Compensating VAT (CVAT) 

No 9 
No 10 
No 11 
Additional options 

No 12 
No 13 

The Single European VAT Area (SEVA) 
Improving the current rules without modifying them fundamentally 

The  second  step  of  the  working  methodology  consisted in  refining  the workings  of  the 
thirteen  options  identified  during  the  first  step  and  in  further  analysing  their  pros  and 
cons with a view to preparing a selection of some of those options which deserved further 
analysis  and  for  which  the  Commission  would  launch  an  external  study  to  provide 
sufficient material for an impact assessment. 

At the end of this phase, the Commission services asked both the GFV and the VEG to 
indicate the options which could already be put aside and the options which would merit 
further analysis. At that stage, the following first conclusions were drawn315: 

  As  regards  the  possible  place  of  taxation  at  destination:  following  the  physical 
flow of the goods remains a valid criterion to be used for determining the place of 
taxation  for  intra-EU  B2B  supplies  of  goods316.  Nevertheless,  in  both  groups 
there  was  sufficient  interest  in  further  exploring  systems  for  which  a  different 
criterion would be used;  

  As regards the person liable for the payment of VAT on intra-EU supplies: strong 
reservations were expressed about the charging of VAT by the supplier on intra-

314   As  well  as  with  the  place  of  supply  of  gas,  electricity  and  heat  or  cooling  to  a  taxable  dealer 

(Article 38). 

315   See GFV No 21 and VEG No12: B2B supplies of goods – Taxation at destination – State of play of the 

discussions on the options. 

316  The physical flow of the goods remains a determining factor with options 1, 2, 3, 4, 5, 10, 11, 12 and 
13.  With  options 6,  7,  8  and  9,  the  physical  flow  of  the  goods  is  no  longer  the  driving  force  for 
determining the place of taxation for B2B supplies of goods. 

132 

 
 
 
 
                                                 
EU  supplies.  However,  a  number  of  members  expressed  an  interest  in  further 
pursuing options including this element. The Commission services took the view 
that  it  would  be  premature  to  put  completely  aside  at  this  stage  the  idea  of  the 
supplier being the person liable for the tax given the restoration of the integrity of 
the  EU  VAT  system  and  the  consistency  between  cross-border  and  domestic 
transactions it could achieve; 

  Options 4 and 5 could be discarded as they add further complexity to the current 

rules; 

  Options 10, 11 and 12 could also be discarded317. 

During  the  third  step,  further  technical  discussions  were  held  looking  at  the  options 
where  liability  for  the  payment  of  the  VAT  would  fall  on  the  supplier,  examining  in 
particular the issues related to the functioning of a large One-Stop-Shop318 and possible 
mitigation  measures319  to  tackle  some  of  the  difficulties  which  could  occur  with  these 
options.  

In addition, the areas of priority where improvements of the current rules could be made 
were also identified, namely the (i) proof to justify the exemption of intra-EU supplies, 
(ii) the VAT treatment of chain transactions and (iii) the VAT treatment of consignment 
stocks.  Following  the  request  of  many  members  in  GFV  and  VEG,  the  Commission 
services created two sub-groups, composed of members from the VEG and the GFV, to 
examine the VAT treatment of consignment stocks and chain transactions. As regards the 
burden of proof to exempt intra-EU supplies, the EU VAT Forum320 decided to create a 
mixed  sub-group  to  examine  that  issue.  All  three  sub-groups  reported  back  with  their 
recommendations to both the VEG and GFV321. 

On the basis of the outcome of these discussions, the Commission services proposed to 
put aside options 4, 5, 10, 11 and 12. This was agreed by the members of both the GFV 
and the VEG.  

As regards the final selection of the options to be assessed in-depth in an external study, 
in  addition  to  option  1  Maintaining  the  status  quo,  the  following  five  options  were 
selected: 

317   In the GFV there was no support for options 10 and 11 mainly because (i) they require the existence of 
a  clearing  mechanism  as  the  VAT  will  be  paid  to  the  Member  State  of  origin  and  deducted  in  the 
Member State of destination and (ii) also because adjustments will be needed in the Member State of 
destination where the VIVAT/CVAT rate, which will be common for all Member States to apply to 
intra-EU  B2B  supplies  of  goods,  differs  from  the  national  rate  of  the  Member  State  of  destination. 
Option 12 was considered politically unacceptable as it will require the application of a harmonised set 
of tax rates in all 28 EU Member States. In the VEG, a large number of stakeholders took the view that 
these  options  should  not  be  further  examined,  given  that  they  are  not  politically  acceptable  for  the 
Member States. 

318   See GFV No 023 and VEG No 14: B2B supplies of goods – Taxation at destination – One-Stop-Shop – 

Functioning & Possible issues. 

319   See GFV N° 028 and VEG N° 017: B2B supplies of goods – Taxation at destination – Options based 

on VAT being charged by the supplier – Mitigation measures. 

320   See Glossary. 
321   All these documents are publically available in CIRCABC, see 

GFV N° 041 and VEG N° 027 Sub-Groups report – Proof of intra-EU supplies 
GFV N° 039 and VEG N° 028 Sub-Groups report – Consignment stocks 
GFV N° 040and VEG N° 029 Sub-Groups report – Chain transactions 

133 

 
 
                                                 
  Option 2 – Adapting current rules whilst still following the flow of the goods with 

the supplier charging the VAT of the Member State of destination 

  Option 3 – Adapting current rules whilst still following the flow of the goods with 

the reverse charge mechanism 

  Option 7 – Aligning with the rules governing the place of supply of services with 

the reverse charge mechanism 

  Option 8 – Aligning with the contractual flow with the supplier charging the VAT 

of the Member State of destination 

  Option 13 – Improving the current rules without modifying them fundamentally 

In  the  view  of  the  Commission  services,  these  options  broadly  cover  the  range  of 
combinations  resulting  from  the  two  fundamental  issues  that  need  to  be  addressed:  the 
place  of  taxation  (based  on  following  the  physical  flow  of  the  goods  or  not)  and  the 
person liable for payment of VAT (the supplier charges VAT or the customer accounts 
for it via reverse charge). 

Moreover, the chosen options reflected to the extent possible the different views of the 
members  of  the  GFV  and  the  VEG  and  the  need  to  concentrate  on  the  most  ambitious 
and promising options given the limited time and resources at hand. The requirement of 
continuing  to  follow  the  flow  of  the  goods,  an  approach  prioritised  by  most  Member 
States, was met with options 1, 2, 3 and 13. 

The possible extension of existing digital solutions (for instance by extending the current 
MOSS322) has in particular been taken into account. 

In the selection of the options, care has been taken to ensure that simplification measures 
also target SMEs.  

10.   Diagrams of the options 

322   Since 2015, a mini One Stop Shop (MOSS) allows businesses supplying telecommunication services, 
television and radio broadcasting services and electronically supplied services to non-taxable persons 
in Member States in which they do not have an establishment to account for the VAT due on those 
supplies via a web-portal in the Member State in which they are identified. See further developments 
under Box 5 of the main report. 

134 

 
                                                 
135 

 
 
 
 
136 

 
 
 
 
137 

 
 
 
 
 
 
 
 
11. 

Additional  information  on  percentages  of  replies  to  public  consultation  per 
stakeholder group 

Below  information  relates  to  the  percentage  of  replies  received  from  groups  of 
stakeholders  to  questions  from  the  public  consultation  (which  took  place  between  20 
December 2016 and 20 March 2017) that were referred to under Section 7.1 and Annex 2 
(stakeholder consultation) of the impact assessment. 

138 

 
 
 
 
Information on all replies received from the groups of stakeholders are available publicly 
https://ec.europa.eu/taxation_customs/consultations-get-
under 
involved/tax-consultations_en. 

following 

the 

Question 15: Currently, domestic and intra-EU supplies of goods are treated differently 
for  VAT  purposes.  Could  this  situation  be  discouraging/  encouraging  for  some 
businesses to supply goods cross-border?  

Replies to Question 15 "the current situation is discouraging": 43% - SMEs, 43% - large 
businesses,  46%  -  business  associations,  65%  -  tax  advisors  and  academics,  80%  - 
members of the public and 50%- public authority. 

Question  17:  Are  there  any  additional  compliance  costs  for  business  linked  with  the 
application of the VAT rules to intra-EU supplies of goods, as compared with domestic 
supplies of goods? 

Replies  "there  are  additional  costs"  to  Question  17  :  95%  -  the  whole  business,  86%  - 
SMEs,  100%  -  large  businesses,  89%  -  business  associations,  100%  -  tax  advisors  and 
academics, 100% - members of the public and 100%- public authority. 

Question 19: Are small companies deterred from doing business cross-border because of 
additional compliance costs, if any, linked with the application of the VAT rules? 

Replies  to  Question  19  confirming  that  small  companies  are  currently  deterred  from 
doing  business  cross-border:  71%  -  the  whole  business,  71%  -  SMEs,  71%  -  large 
businesses  ,  78%  -  business  associations,  94%  -  tax  advisors  and  academics,  80%  - 
members of the public and 100%- public authority. 

Question 20: Do you agree that the current taxation system is not sufficiently resistant to 
VAT fraud within the EU? 

Replies  "strongly  agree  or  agree"  to  Question  20:  67%  -  the  whole  business,  79%  - 
SMEs, 64% - large businesses , 68% - business associations, tax advisors and academics 
- 94%, members of the public – 100% and 100% - public authority. 

Question 21: Under the current system, VAT is normally charged by any taxable person 
making a taxable supply. There are, however, situations in certain sectors (or in relation 
to specific goods and services) where it is the customer who is obliged to account for and 
to  pay  the  VAT  (domestic  reverse  charge).  Has  the  application  of  a  reverse  charge  in 
certain sectors increased or reduced compliance costs for businesses operating in those 
sectors? 

Replies "costs are reduced" to Question 21: 21% - the whole business, 14% - SMEs, 29% 
- large businesses, 38% - business associations, 24% - tax advisors and academics, 60% - 
members of the public, 50% - Member States. 

Replies  "costs  are  increased"  to  Question  21:  60%  -  the  whole  business,  50%  -  SMEs, 
61% - large businesses, 51% - business associations, 53% - tax advisors and academics, 
20% - members of the public, 50% - Member States. 

Question  22:  Is  a  reverse  charge,  as  it  has  been  used  until  now  in  certain  sectors,  an 
effective measure to combat tax fraud? 

139 

 
 
Replies  "yes  it  is  at  least  to  certain  extent"  to  Question  22:  60%  -  the  whole  business, 
64%  -  SMEs,  68%  -  large  businesses,  70%  -  business  associations,  88%  -  tax  advisors 
and academics 60% - members of the public, 100% - Member States. 

Question 23: Is a VAT identification number provided by the customer in the context of 
an intra-EU supply, a reliable proof of his status as a taxable person? 

Replies  "yes  the  VAT  number  is  a  reliable  proof"  to  Question  23:  92%  -  the  whole 
business, 87% - SMEs, 93% - large businesses, 95% - business associations, 94% - tax 
advisors and academics, 80% - members of the public, 100% - Member States. 

Question 24: Do you agree that in the case of an intra-EU supply, a lack of a valid VAT 
identification number of the customer should imply that the intra-EU supply should not 
be exempt in the Member State of departure? 

Replies  "strongly  agree  or  agree"  to  Question  24:  63%,  -  the  whole  business,  86%  - 
SMEs,  54%  -  large  businesses,  32%  -  business  associations,  76%  -  tax  advisors  and 
academics, 80% - members of the public, 50% - Member States. 

Question 25: In general, the term "chain transactions" refers to the situation where the 
goods  are  supplied  via  intermediary  suppliers  and  the  goods  are  dispatched  or 
transported directly form the first supplier to the final purchaser. Should the legislative 
improvements  to  the  current  transitional  rules  address  VAT  issues  linked  with  chain 
transactions? 

Replies  "yes"  to  Question  25:  90%  -  the  whole  business,  79%  -  SMEs,  93%  -  large 
businesses, 68% - business association, 88% - tax advisors and academics, 88%, 80% - 
members of the public, 100% - Member States. 

Question  26:  Should  the  legislative  improvements  to  the  current  transitional  rules 
address issues linked with the proof required to demonstrate that the goods were moved 
from one Member State to another? 

Replies  "yes"  to  Question  26:  90%  -  the  whole  business,  79%  -  SMEs,  93%  -  large 
businesses,  68%  -  business  associations,  82%  -  tax  advisors  and  academics,  80%  - 
members of the public, 50% - Member States. 

Question  27:  In  general,  the  term  "call-off  stock"  refers  to  the  situation  where  the 
supplier moves his  own goods from one Member State to  another Member  State where 
they are kept in a warehouse from which the (already known) customer may take them 
when he needs them. Should the legislative improvements to the current transitional rules 
address issues linked with call-off stock? 

Replies  "yes"  to  Question  27:  88%  -  the  whole  business,  71%  -  SMEs,  93%  -  large 
businesses,  54%  -  business  associations,  82%  -  tax  advisors  and  academics,  40%  - 
members of the public, 100% - Member States. 

Question 28: Under the reverse charge mechanism it is the customer who is obliged to 
account for and to  pay  the VAT. Do you think that  an optional  application  by Member 
States  of  a  generalised  reverse  charge  on  domestic  transactions  above  a  certain 
threshold per invoice would help in fighting tax fraud? 

140 

 
Replies  "strongly  agree  or  agree"  to  Question  28:  50%  -  the  whole  business,  64%  - 
SMEs,  43%  -  large  businesses,  24%  -  business  associations,  41%  -  tax  advisors  and 
academics, 40% - members of the public, 0% - Member States. 

Replies "strongly disagree or disagree" to Question 28: 38% - the whole business, 21% - 
SMEs,  46%  -  large  businesses,  41%  -  business  associations,  59%  -  tax  advisors  and 
academics, 40% - members of the public, 100% - Member States. 

Question 29: Would the optional application by Member States of a generalised reverse 
charge on domestic transactions increase or reduce compliance costs to businesses? 

Replies  "costs  will  increase"  to  Question  29:  67%  -  the  whole  business,  43%  -  SMEs, 
75% - large businesses, 54% - business associations, 53% - tax advisors and academics, 
60% - members of the public, 100% - Member States. 

Question 31: Currently, under the transitional VAT arrangements, intra-EU supplies of 
goods are, as a rule, exempt and intra-EU acquisitions are taxable. Do you agree that, 
under the definitive system, there should be only one taxed transaction i.e. a taxed intra-
EU supply of goods as it is currently the case with the domestic supplies? 

Replies  "strongly  agree  or  agree"  to  Question  31:  69%  -  the  whole  business,  64%  - 
SMEs,  68%  -  large  businesses,  62%  -  business  associations,  94%  -  tax  advisors  and 
academics, 80% - members of the public, 50% - Member States. 

Replies "strongly disagree or disagree" to Question 31: 23% - the whole business, 21% - 
SMEs,  25%  -  large  businesses,  24%  -  business  associations,  6%  -  tax  advisors  and 
academics, 20% - members of the public, 0% - Member States. 

Question 32: Should the B2B intra-EU supplies of goods be taxed in the Member State 
where the goods arrive?  

Replies  "yes"  to  Question  32:  46%  -  the  whole  business,  64%  -  SMEs,  36%  -  large 
businesses,  54%  -  business  associations,  76%  -  tax  advisors  and  academics,  60%  - 
members of the public, 50% - Member States. 

Question 33: Should the B2B intra-EU supplies of goods be taxed in the Member State 
where the customer is located? 

Replies  "yes"  to  Question  33:  62%  -  the  whole  business,  57%  -  SMEs,  68%  -  large 
businesses,  32%  -  business  associations,  35%  -  tax  advisors  and  academics,  40%  - 
members of the public, 50% - Member States. 

Question  34:  Who  should  be  liable  for  the  payment  of  the  VAT  due  on  B2B  intra-EU 
supplies of goods? 

Replies  "the  supplier"  to  Question  34:  43%  -  SMEs,  14%  -  large  businesses,  11%,  - 
business associations, 53% - tax advisors and academics, 4 0% - members of the public 
and 50% - public authority. 

Replies  "the  customer"  to  Question  34:  50%  -  SMEs,  79%  -  large  businesses,  54%,  - 
business associations, 41%  - tax advisors and academics, 60%  - members of the public 
and 50% - public authority. 

141 

 
Question  35:  Currently intra-EU  supplies  of  goods  are  exempt  in  the  Member  State  of 
departure  and  intra-EU  acquisitions  are  taxable  in  the  Member  State  of  arrival.  Will 
business compliance costs increase or be reduced as a result of the replacement of these 
two (separate from a legal point of view) transactions by only one taxable supply? 

Replies  "costs  will be reduced"  to  Question 35:  64%  - SMEs, 32%  - large businesses , 
30% - business associations, 94% - tax advisors and academics, 40%  - members of the 
public and 50% - public authority. 

Replies "costs will increase" to Question 35: 21% - SMEs, 29% - large businesses , 14% 
-  business  associations,  6%  -  tax  advisors  and  academics,  0%  -  members  of  the  public 
and 50% - public authority. 

Replies "costs will not be affected" to Question 35: 14% - SMEs, 14% - large businesses 
, 24% - business associations, 0% - tax advisors and academics, 60% - members of the 
public and 0% - public authority. 

No  opinion  on  Question  35:  0%  -  SMEs,  25%  -  large  businesses  ,  32%  -  business 
associations,  0%  -  tax  advisors  and  academics,  0%  -  members  of  the  public  and  0%  - 
public authority. 

Question  36:  Currently intra-EU  supplies  of  goods  are  exempt  in  the  Member  State  of 
departure  and  intra-EU  acquisitions  are  taxable  in  the  Member  State  of  arrival.  Will 
administrative/  procedural/  budgetary  costs  (burdens)  increase  or  be  reduced  for 
Member States' tax administration as a result of taxation of intra-EU supplies? 

Replies "costs will be reduced" to Question 36: 19% - the whole business, 21% - SMEs, 
21% - large businesses, 14% - business associations, 59% - tax advisors and academics, 
40% 0 members of the public, 0% - Member States. 

No  opinion  on  Question  36:  48%  -  the  whole  business,  50%  -  SMEs,  54%  -  large 
businesses,  73%  -  business  associations,  29%  -  tax  advisors  and  academics,  20%  - 
members of the public, 100% - Member States. 

Question 37: Do you think that taxation of B2B intra-EU supplies (which are currently 
exempt in the Member State of departure of the goods) will help fighting VAT fraud? 

Replies "strongly agree or agree" to Question 37: 43% - SMEs, 39% - large businesses , 
43% - business associations, 94% - tax advisors and academics, 80%  - members of the 
public and 50% - public authority. 

Replies "strongly disagree or disagree" to Question 37: 33% - the whole business, 21% - 
SMEs,  36%  -  large  businesses,  24%  -  business  associations,  6%  -  tax  advisors  and 
academics, 0% - members of the public, 50% - Member States. 

Question  39:  Do  you  think  that  under  the  definitive  VAT  system  the  MOSS  should  be 
extended to taxable intra-EU B2B supplies of goods (and in this way become a One Stop 
Shop (OSS), thus avoiding the need for the supplier to register in Member States where 
he is not established)? 

Replies "strongly agree or agree" to Question 39: 64% - SMEs, 89% - large businesses , 
70% - business associations, 88% - tax advisors and academics, 60%  - members of the 
public and 100% - public authority. 

142 

 
Question 40: Do you think that if the OSS is extended to taxable intra-EU B2B supplies 
of  goods  it  should  allow  not  only  for  the  payment  of  output  VAT  but  also  for  the 
deduction of input VAT? 

Replies "strongly agree or agree" to Question 40: 79% - SMEs, 100% - large businesses , 
84%, - business associations, 82% - tax advisors and academics, 80% - members of the 
public and 50% - public authority. 

Question  43:  Would  the  introduction  of  the  concept  of  CTP  reduce  or  increase  the 
compliance costs of suppliers? 

Replies  "costs  will be reduced"  to  Question 43:  14%  - SMEs, 32%  - large businesses , 
27% - business associations, 53% - tax advisors and academics, 20% - members of the 
public and 0% - public authority. 

Replies "costs will increase" to Question 43: 43% - SMEs, 54% - large businesses , 51% 
- business associations, 41% - tax advisors and academics, 40% - members of the public 
and 0% - public authority. 

Question 44: Do you think that the criteria for obtaining the CTP status should be laid 
down by each Member State or harmonized at EU level? 

Replies  "harmonized  at  EU  level"  to  Question  44:  94%  -  the  whole  business,  93%  - 
SMEs,  93%  -  large  businesses,  68%  -  business  associations,  76%  -    tax  advisors  and 
academics, 100% - members of the public, 100% - Member States. 

Question  47:  If  CTP  provisions  were  adopted, would  you  be  interested in  applying for 
CTP status? 

Replies to Question 47 "I would be interested in applying for CTP status, regardless of 
the  difficulty  of  the  criteria  that  would  have  to  be  met":  7%  -  SMEs,  11%  -  large 
businesses, No answer 68%, - business associations, 12% - tax advisors and academics, 
0% - members of the public and 0% - public authority. 

Replies to Question 47"  I  would be  interested in  applying for CTP status if the criteria 
were not too burdensome": 71% - SMEs, 86% - large businesses , – No answer for 68%, 
- business associations, 35% - tax advisors and academics, 20% - members of the public 
and 0% - public authority. 

Replies to Question 47 "I would not be interested in applying for CTP status, regardless 
of the difficulty of the criteria that would have to be met": 8% - the whole business, 21% 
-  SMEs,  4%  -  large  businesses,  No  answer  68%  -  business  associations,  24%  -  tax 
advisors and academics, 40% - members of the public, 50% - Member States. 

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ANNEX 6: EVALUATION AND STUDIES TO SUPPORT THE IMPACT ASSESSMENT 

6.1 

Evaluation 

A retrospective evaluation of the key elements of the EU VAT system was conducted by 
an external consultant in 2011 and its findings have been used as a starting point for the 
examination of the current VAT system. This evaluation was a comprehensive exercise 
that  covered  all  important  aspects  for  the  design  of  an  improved  VAT  system  as 
identified  in  the  Green  Paper  that  launched  a  broad  based  consultation  process  with 
stakeholders  on  the  functioning  of  the  current  EU  VAT  system  and  how  it  should  be 
reframed in the future. The evaluation had been carried out before the Better Regulation 
Guidelines  were  put  in  place.  This  means  in  practice  that  the  structure  of  the  2011 
evaluation was not organized around the five evaluation criteria that became mandatory 
later on. Nevertheless, the evaluation provided solid analysis of the problems underlying 
the current transitional VAT system, the results of which have been confirmed by further 
consultation of stakeholders (see Annex 2) as well as recent studies (see below). It looked 
in  particular  into  the  design  and  implementation  of  the  most  important  elements  of  the 
current  VAT  system,  including  the  functioning  of  the  transitional  VAT  arrangements, 
and  assessed  their  effectiveness  and  efficiency  in  terms  of  results  (meeting  objectives 
they  were  serving)  and  impacts  (direct,  indirect,  expected  and  unexpected)  they  had 
created. It also examined their relevance and coherence with the smooth functioning of 
the  single  market  and  the  requirement  to  avoid  distortion  of  competition  specified  in 
Article 113 of the Treaty on the Functioning of the European Union. The findings of the 
evaluation are therefore still valid and relevant for use in this impact assessment. 

In  addition  to  this,  the  Commission  engaged  an  independent  consultant  to  conduct  a 
study of the five policy options designed to enable the implementation of a destination-
based VAT system across the EU which was finalised in 2015. The purpose of this study 
was  to  assess  the  impacts  of  the  five  policy  options  from  both  a  qualitative  and  a 
quantitative  perspective.  This  study  also  looked  at  the  baseline  situation  in  order  to 
facilitate  comparison  to  the  policy  options,  thus  providing  valuable  information  of  the 
existing problems with the current system. 

However, in order to facilitate the reading and understanding of the analysis of the 2011 
evaluation  report  as  well  as  the  2015  study,  this  annex  sums  up  the  main  relevant 
findings and conclusions, in accordance with the main evaluation criteria defined by the 
Better Regulation Guidelines.  

A.  Relevance 

VAT is a central plank of fiscal policy at both EU and national levels. All EU Member 
States must operate a VAT as a requirement for membership, and it raises large amounts 
of revenue in all of them.  VAT is one of the main sources of government revenue in all 
EU Member States.  

In  2009  it  raised  EUR  784  billion  annually,  6.6%  of  the  EU’s  GDP  and  17.3%  of  all 
taxes raised. Across the EU as a whole, in 2015 VAT brought in EUR 1.032 billion of 
revenue, 7% of the EU’s GDP and 17.6% of all taxes raised323. This increase alone shows 
that VAT continues to remain as relevant for the budget of EU Member States and the 
EU today as it was at the moment of the evaluation study.  

323  See Eurostat – Tax Revenue Statistics for a more detailed breakdown. 

144 

 
 
 
                                                 
Uniquely among the major taxes, the framework rules for how VAT works are set out in 
common at the EU level in Council Directive 2006/112/EC of 28 November 2006 on the 
Common  System  of  Value  Added  Tax  –  often  known  simply  as  ‘the  VAT  Directive’– 
although  some  derogations  from  the  common  rules  are  in  place  for  individual  Member 
States, and many aspects of policy are left to Member States’ discretion. 

The external  evaluators concluded that VAT has  many desirable properties  in  principle 
and  that  these  desirable  properties  are  mostly  displayed  by  the  EU  VAT  system  in 
practice as well. Despite the fact that there is much to be said in its favour, the common 
VAT system also has a number of weaknesses.  

According to the evaluators this is, in part, because the economic environment in which 
VAT operates has changed a great deal since the main features of the regime were put in 
place  (1967).  The  nature  of  business  activities  has  evolved.  International  trade  has 
expanded  dramatically  and  internal  frontiers  within  the  single  European  market  were 
abolished in January 1993. Technology has changed both how taxes can be operated and 
the nature of what is to be taxed. Over the last two decades, piecemeal policy responses 
have  sought  to  improve  the  functioning  of  the  VAT  system  in  the  face  of  these 
developments  but  have  left  many  fundamental  problems  unaddressed.  A  more  radical 
remodelling  of  the  VAT  system  could  address  the  significant  limitations  of  the  current 
system and  allow VAT to  fulfil its potential as the economically efficient tax it can, in 
principle, be. 

B.  Effectiveness 

Broadly speaking, a destination-based VAT – one in which the VAT levied on goods and 
services depends  on the country  in which they are consumed  – should not  distort trade 
patterns  within  the  single  market,  since  goods  are  taxed  at  the  same  rate  regardless  of 
their  origin.  The  original  objective  of  the  VAT  Directive  was  to  create  an  EU  VAT 
system  that  ensures  the  highest  degree  of  simplicity  and  neutrality.  The  evaluators 
analysed to what extent the objective has been met. Their conclusion was that there are 3 
reasons which limit the extent to which the current VAT system can ensure the highest 
degree of simplicity and neutrality: 

  There  are  exceptions  to  the  application  of  the  destination  principle  in  the  VAT 
system. These  are a particular problem  for B2C (business-to-consumer)  trade in 
both  goods  and  services,  where  (with  certain  exceptions  such  as  for  new  motor 
vehicles)  cross-border  shopping,  distance  selling  below  the  relevant  distance 
selling  thresholds,  and  some  B2C  services  are  taxed  in  the  supplier’s  location 
rather  than  (as  the  destination  principle  demands)  in  the  customer’s  location. 
However, such B2C trade is a relatively small part of trade, so the magnitude of 
the  problem  is  not  necessarily  that  large.  Moreover,  since  1 January  2015,  the 
place of taxation of certain B2C transactions (telecommunications, television and 
radio  broadcasting,  and  electronically  supplied  services)  has  been  moved  to  the 
Member State of the customer and a  recent  proposal by the Commission324 will 
further extend the destination principle to online supplies of goods. 

324  See  further  details  here:  https://ec.europa.eu/taxation_customs/business/vat/digital-single-market-

modernising-vat-cross-border-ecommerce_en 

145 

 
 
 
 
 
 
 
 
                                                 
  The  costs  to  firms  of  complying  with  VAT  obligations  are  higher  when  trading 
across  borders  than  when  trading  domestically,  creating  a  bias  against  cross-
border  trade.  The  evaluators'  assessment  is  that  this  is  likely  to  be  a  fairly 
significant problem, and that there could be potentially significant gains in trade 
and  GDP  if  costs  could  be  reduced,  although  research  in  this  area  is  still  at  an 
early  stage  (partly  because  estimates  of  how  compliance  costs  vary  between 
domestic and cross-border transactions are limited). As an indicative example, the 
evaluators estimated how much trade would increase if costs equivalent to 1% of 
cross-border sales were abolished: intra-EU trade would increase by 4.3%, GDP 
by  0.4%  and  consumption  by  0.3%.  They  also  estimated  how  reductions  in 
differences  in  VAT  rules  and  procedures  and  VAT  rates  would  affect  cross-
border  trade  and  GDP.  For  instance,  a  10%  reduction  in  dissimilarities  of  rules 
and  procedures  (‘obligations’)  is  estimated  to  increase  intra-EU  trade  by  3.7%, 
GDP by 0.4% and consumption by 0.3%.  

  Where  VAT paid on inputs is  not  recoverable, it will be  built into the prices  of 
traded goods, creating an incentive to source goods from one country rather than 
another 

Available  data  do  not  generally  allow  for  the  quantification  of  the  magnitude  of  these 
non-neutralities directly and reliably but the evaluators have strived to account for their 
effects  on  trade  by  estimating  directly  the  relationship  between  VAT  policy  and  trade 
patterns. 

C.  Efficiency 

The analysis of this criterion has focused on two components of the VAT architecture: on 
the one hand the administrative and compliance costs that the system of collection entails 
on tax administrations and economic operators and on the other hand the types and levels 
of fraud which such a system can give rise to.  

Administrative burden and compliance costs 

There  is  a  strong  consensus  in  the  literature  that  the  costs  to  firms  of  complying  with 
VAT obligations are higher when trading across borders than when trading domestically 
– though some of the reporting requirements associated with trade would be needed even 
in  the  absence  of  VAT  itself.  To  date  there  is  little  convincing  quantification  of  the 
compliance  costs  of  doing  business  across  borders,  though  indirect  estimates  of  their 
effects on trade were discussed above. 

The compliance costs of VAT are substantial according to most studies, but the range of 
estimates is extremely wide. Studies for the UK, Australia and New Zealand in the 1980s 
and  1990s  reported  compliance  costs  between  2  and  9  percent  of  VAT  collected; more 
recent ones, applying the Standard Cost Model methodology, ranged from the low of 0.3 
percent  reported  in  a  study  of  Denmark,  to  as  high  as  8  or  even  25  percent  of  VAT 
collected, as shown in studies of Croatia and Slovenia. According to the 2015 study, the 
cost  of  compliance  relating  to  cross  border  trade  was  11%  higher  than  the  compliance 
costs associated with domestic transactions. 

According to the 2011 report, the current arrangements for operating tax adjustments on 
transactions between Member States are more complex, and significantly different from 
VAT rules for purely internal transactions which opens up the possibility that the current 

146 

 
 
 
 
 
  
 
 
 
VAT system could act as a barrier to participation in the internal market, by smaller firms 
in particular. Differences in rules about how VAT is collected in different areas of cross-
border trade (e.g. whether the origin or destination country’s VAT rates should be used, 
and  whether  the  seller  or  buyer  should  remit  the  tax)  also  increase  complexity  and 
compliance costs, and the simplifications in this regard are therefore welcome. 

Fraud 

Most VAT fraud is domestic, but cross-border trade is associated with particular forms of 
fraud, notably Missing Trader Intra-Community (MTIC) fraud. This arises because of the 
break  in  the  VAT  ‘chain’  (the  collection  of  VAT  in  parts  from  traders  throughout  the 
supply chain) that occurs when supplies of goods from one Member State to another are 
zero-rated,  combined  with  the  abolition  of  fiscal  border  controls  at  which  VAT  was 
before  1993  levied  on  imports  and  now  just  self-assessed  by  the  customer  (without 
sufficient cooperation between revenue authorities in enforcement and audit procedures 
to substitute effectively the previous customs controls). 

The  complexity  and  variation  in  rules  and  procedures  across  Member  States  may  also 
increase  the  risk  of  infringements  or  fraud  when  trading  across  borders:  mistakes  are 
more likely to be made when firms have to deal with multiple, potentially quite different 
sets  of  procedures,  and  the  additional  compliance  costs  involved  may  encourage  non-
compliance.  The  differences  in  the  administration  of  VAT,  a  result  of  the  subsidiarity 
principle,  create  opportunities  for  skilled  evaders  and  makes  cooperation  between  tax 
authorities more difficult. 

While  there  are  estimates  of  overall  VAT  gaps  across  the  EU  (in  2014  it  amounted  to 
14,3 % or EUR 160 billion325), it is very difficult to estimate fraud associated with cross-
border trade at the EU level. According to the 2015 study, based on a limited number of 
replies  from  Member  States  Tax  Administrations,  on  average  20%  of  the  overall  VAT 
gap  was  considered  to  be  due  to  MTIC  fraud,  while  the  weighted  average  (based  on 
overall VAT gap proportion) is 24%. The rest of the VAT gap is attributed to losses of 
revenue  due  to  domestic  fraud  and  evasion,  tax  avoidance,  bankruptcies,  financial 
insolvencies, as well as miscalculations. 

D.  Coherence 

The  internal  coherence  of  the  VAT  system  is  affected  by  the  difference  of  treatment 
between that of services and that of goods. The VAT system was originally set up to deal 
with  a  traditional  model  of  trade  in  physical  goods,  for  which  the  notion  of  a  trade 
transaction  can  generally  be  defined  clearly  in  terms  of  the  physical  movement  of  the 
taxed commodities. Yet international trade in services has grown much more rapidly than 
trade  in  goods  in  recent  decades,  placing  increasing  strain  on  some  aspects  of  current 
consumption  tax  legislation  and  procedures  in  the  EU  and  elsewhere.  Many  of  the 
problems that arose in the VAT treatment of traded services were solved by a change of 
their  place  of  taxation  according  to  the  destination  principle,  i.e.  from  the  place  of  the 
supplier  to  the  place  of  consumption.  However,  the  current  taxation  model  for  goods 
remains based on the logic of an origin-based VAT system, although taxing de facto at 
destination.  

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147 

 
 
 
 
 
 
 
 
                                                 
As the VAT treatment of services is outside the scope of the current impact assessment 
report, the difference is not further addressed in the analysis.  

As  regards  the  coherence  of  the  tax  treatment  between  domestic  and  cross-border 
transactions, the 2015 study showed that  the dissimilarity between one and  the other is 
the  main  cause  of  the  higher  compliance  costs  for  businesses  trading  cross-border 
compared to businesses trading only domestically (11% higher). 

Further,  as  regards  the  coherence  between  the  EU  VAT  rules  and  national  rules, 
according to the 2015 study, the VAT experts in all 28 Member States considered that, in 
general,  there  were  no  significant  differences  between  the  EU  Directive  and  the  local 
VAT  legislation.  There  were  however  certain  areas  where  the  Tax  Authorities  have 
applied the rules differently across the EU.  

These principally relate to the following areas: 

 

 

 
 

the  documents  required  in  order  to  evidence  a  B2B  (business-to-business)  intra 
EU supply; 
the conditions that are required to be met in order for the simplified triangulation 
rule to apply; 
the treatment of chain transactions; 
the treatment of call-off and consignment stock. 

The 2015 study analysed the solutions that would address the problems that stem from a 
dissimilar  treatment  of  each  of  these  areas.  The  current  impact  assessment  report  has 
integrated the results of this analysis into its conclusions.  

E.  EU added value 

Although the EU-added value is a complex criterion to pin down, the external evaluators 
identified  3  main  features  of  the  current  VAT  system  which  have  an  impact  on  the 
efficiency,  effectiveness  and  robustness  of  the  current  method  of  collecting  VAT,  in 
comparison with conceivable alternatives: 

  neutrality  in  relation  to  business  purchasing  decisions:  with  the  main 
exception of the financial services sector, the current method of collecting VAT 
ensures that businesses are indifferent to the rate of VAT on purchased inputs. As 
a  result  rather  few  resources  are  expended  on  contesting  VAT  on  purchased 
inputs (for example through complex tax planning to minimise input VAT), and 
the VAT system does not distort business sourcing in the internal market.  

  certainty of revenue collection: the principal issues have to do with the exposure 
of different VAT systems to opportunities for fraud, evasion and other forms of 
non-compliance.  These  opportunities  will  depend  on  the  particular  VAT 
mechanism  -  so  that,  for  example,  different  arrangements  for  the  taxation  of 
transactions between Member States would be exposed to very different forms of 
fraud  -  and  in  the  absence  of  detailed  study  of  alternatives  it  is  impossible  to 
assess  the  relative  vulnerability  of  the  current  system.  One  problem  with  the 
existing system of collection is the large volume of VAT refunds: it can exceed 
40% of gross collection in many countries. The fact that firms can receive VAT 
refunds  means  that  VAT  fraud  can  lead  to  not  only  zero  revenues  from 
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transactions  on  which  taxes  are  due:  there  may  in  fact  be  negative  revenues. 
Whilst any invoice-based system of VAT will involve refunds (because there will 
always be some firms selling goods at a loss), two other features of the existing 
VAT system influence the number of refunds: the zero-rating of intra-EU supplies 
and exports and the reduced rates of VAT. This emphasises the link between the 
way  VAT  is  collected  (e.g.  with  many  refunds)  and  the  overall  structure  and 
operation of VAT: the issues are interrelated. 

  simplicity. The EU VAT system offers Member States the scope to operate with 
relatively  simple  procedures,  which  limit  the  burden  placed  on  taxpaying  firms, 
and the costs of tax administration. For example, the current system allows non-
collection from the smallest firms: issues of compliance are removed from these 
through  the  registration  threshold  which  exempts  smaller  firms,  for  which  the 
costs of operation may be out of proportion to the revenue raised. Other features 
of  collection  methods  that  simplify  compliance  for  firms  are  for  instance, 
allowing online filing and payments, and requiring less frequent returns. 

National differences in VAT regimes can affect trade in the internal market by increasing 
the costs of border-crossing trade flows relative to domestic sales, e.g. through the need 
to familiarise and comply with different procedures by country. Such costs are likely to 
bear relatively heavily on small and medium-sized businesses which may only be trading 
small volumes, creating a real market-entry barrier and anti-SME bias in intra-European 
trade. They may also distort and complicate firms’ decisions of whether to supply cross 
border  or  set  up  local  subsidiaries,  which  is  likely  to  be  a  particular  problem  for  firms 
that  organise  complex  trade  networks  in  intermediate  goods.  Finally,  VAT  regime 
differences can affect consumers’ decisions. Cross-border shopping and distance-selling 
mean  that  consumers  can  take  advantage  of  lower  rates  of  VAT  in  other  countries, 
especially in border regions. And, more generally, exemptions and variation in VAT rates 
can  affect  what  consumers  buy  by  changing  relative  prices  differently  in  different 
countries. 

VAT  policy  could  potentially  have  quite  significant  effects  on  trade  patterns  and  the 
wider  economy.  The  conclusion  of  the  external  evaluators  was  that  harmonising 
procedures  and  limiting  differences  in  VAT  rates,  and  more  generally  reducing 
compliance costs, are goals that should be aimed at.  

6.2. 

Studies 

In the impact assessment, reference is made to the above evaluation and study as follows: 

IFS et al., 2011, A retrospective evaluation of elements of the EU VAT system 

EY, 2015, Implementing the ‘destination principle’ to intra-EU B2B supplies of goods 

In  addition  to  these  two  reports,  the  impact  assessment  draws  on  the  following  studies 
which  have  provided  detailed  analysis  of  the  problems  at  stake  and  the  possible  ways 
forward. Reference is made to these studies in the impact assessment as follows: 

PWC,  2012,  Study  on  applying  the  current  principle  for  the  place  of  supply  of  B2B 
services to B2B supplies of goods, see link: 

http://ec.europa.eu/taxation_customs/business/vat/vat-reports-published_en 

149 

 
 
 
 
CPB,  2013,  Economic  study  on  charging  VAT  on  intra-EU  supplies  of  goods  and 
services, see link: 

https://circabc.europa.eu/sd/a/60e05641-2653-4ac3-aca2-3060896aa6e3/33-ANN%20-
%20Final%20report%20-%20Study%20on%20charging%20VAT%20on%20intra-
EU%20supplies%20of%20goods%20and%20services%5B1%5D.pdf 

PWC, 2013, Study on the feasibility and impact of a common EU standard VAT return  
http://ec.europa.eu/taxation_customs/publications/studies-made-commission_en 

CASE, 2013, Study to quantify and analyse the VAT Gap in the EU-27 Member States 
http://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/common/p
ublications/studies/vat-gap.pdf 

CASE, 2016, Study and Reports on the VAT Gap in the EU-28 Member States 
https://ec.europa.eu/taxation_customs/sites/taxation/files/2016-09_vat-gap-
report_final.pdf 

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