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EU 2022 definitive VAT system in trouble?

Grand plan may now fall to side as VAT in the Digital Age reforms progress

The proposed grand solution to tackle over €50billion in EU VAT fraud, the Definitive VAT System, is in trouble.  The plan to switch from an origin to destination-based VAT on cross-border B2B transaction has zero chance of meeting the 2022 launch date, and EU member states are queuing-up to lodge reasons to kick it into the long grass.

In October 2021, the EU Parliament estimated a €6 billion definitive VAT system gain if implemented.

The focus may well now have already switched to EU VAT in the Digital Age proposals which includes a strand around harmonised Digital Reporting Requirements (DRR)  across the member states, including Continuous Transaction Control (CTC). This originated from the 2020 Tax Action Plan measures for a fairer and more efficient EU tax regime. Also, a single EU VAT registration proposal to widen the use of the new One-Stop Shop pan-EU VAT return.

Keep up-to-date will all the European Union’s completed and planned reforms via VAT Calc’s EU VAT reform tracker.

The 1993 ‘temporary fix’ that costs €50billion in lost VAT fraud

The proposed reforms aimed to end the current temporary (put in place in 1993 for just three years!!) fix of origin-based VAT on B2B goods being sold across border within the EU.  This includes zero-VAT rating on the sale of the goods as intra-community supplies. This fix meant businesses didn’t need lots of foreign VAT registration when selling into other EU member states, and didn’t have to charge and collect VAT.

However, criminal gangs have exploited this zero-rating in a complex fraud scam known as ‘missing trader’ or ‘carousel’ fraud. The criminals claim they are selling goods intra-community with no VAT, but actually sell them in the same country and charge local VAT – which they then pocket. The EU estimates missing trader fraud costs member states about €50 billion in lost VAT each year.

Shifting the place of supply to the destination

The European Commission has made numerous attempts to find agreement between the member states on how to flip from the fraud-prone origin principle to and origin-based regime. This would mean charging and collecting VAT in the country of the customer – one of the very basic rules of VAT regimes. The Definitive VAT System proposal was put forward in 2016 as part of an action package of VAT reforms.

Avoiding multiple VAT registration and compliance headaches.

Under the system, B2B taxable person suppliers in one country would have to charge and collect the VAT of their EU customer if they are resident in a different EU member state. The System would include an extension of the single One-Stop Shop VAT return, introduced in July 2021 for B2C transactions. The seller could include their cross-border B2B sales in their OSS each quarter, and so avoid multiple VAT registrations. The supplier would remit the foreign VAT collected with their OSS to their home tax authorities, who in turn would distribute the taxes the appropriate states on behalf of the supplier.

Certified Taxable Person escapes the reforms

To help reduce the number of business having to comply with this new regime, a special designation of “Certified Taxable Person” (CTP).  These trusted taxpayers would be certified by their home tax authority as having a sound tax compliance record, and therefore exempted from the above. A firm would be considered a reliable taxpayer if it complies with a certain number of requirements mentioned in Article 13a and can obtain CTP status. Authorised Economic Operators (AEO) for customs purposes are considered to meet the CTP requirement and may apply for and obtain CTP status. However, CTP firms will not automatically satisfy AEO requirements (AEO status has further requirements with respect to compliance with technical standards).

Member state objections to the Definitive VAT System

Since the 2016 launch of the proposal, there has been wholesale criticism, particular on the financial risks of asking businesses to charge foreign VAT and then have tax authorities redistribute it.  Aside from the treasury and bureaucracy burden, the tax authorities simply have limited trust in each other’s ability of motivation to run the new system.

Nearly all of the member states have spoken out against the Certified Taxable Person scheme as complex and likely to hurt smaller start-up companies.

At the latest discussions, member states agreed on further analysis. But what is likely now is that countries continue with their unilateral anti-fraud measures and look to other joint projects like transaction-based reporting.

EU VAT reforms

Reform (click for details) Update
2025 VAT registration thresholds equivalence foreign businesses On track
Virtual events VAT rule changes Agreed
2024 Payment providers' seller transaction reporting and bookkeeping obligations On track
Digital Reporting Requirements including EU e-invoicing harmonisation Implementation of VAT in the Digital Age?
2023 DAC 7 - marketplace reporting harmonisation On track
Financial Services VAT exemption reform proposals Consultation complete; proposal 2023
Tour operator margin scheme VAT reforms EC undertaking fresh review
2022 EU definitive VAT system On hold
EU reduced VAT rate freedoms Enter into force 6 April 2022
IOSS reforms to prevent double taxation Proposals early 2022
VAT in the Digital Age proposals On track for 16 Nov 2022 publication
Single VAT Registration in the EU - extension of OSS On track for 16 Nov 2022 publication
Proposal for VAT treatment of the platform economy On track for 16 Nov 2022 publication
VAT Gap Initiative Q3 2022
2021 One-Stop-Shop (OSS) single EU VAT return In effect since 1 July 2021
Ending €22 import VAT exemption; new IOSS return In effect since 1 July 2021
Marketplace deemed supplier EU VAT reforms In effect since 1 July 2021
2020 EU four Quick Fixes for VAT In effect
Tax authorities anti-VAT fraud cooperation In effect
Tax Action Plan - 25 VAT and other tax reforms roadmap See 'VAT in the Digital Age' and others
2019 Simplification of e-services VAT compliance and thresholds In effect
Single and multi-use vouchers In effect
2018 Lower e-book and publications VAT rates In effect, although not all EU states have adopted the option
EU Generalised Domestic Reverse Charge VAT Mechanism In effect, although no country has adopted this voluntary option
2015 B2C electronic services VAT reforms - MOSS return In effect

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