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EU definitive VAT system lives?

New German government rekindles interest in VAT regime reforms shifting the place of taxation on B2B intra-community supplies of goods to destination-based taxation

The new German coalition government has committed to supporting a stranded EU VAT regime reform which would shift the obligation to charge and collect Value Added Tax on B2B goods to the country of destination. This would aim to reduce VAT fraud – carousel and missing trader fraud – by ending the VAT zero-rated on intra-community supplies. This is heavily exploited by criminal gangs who report a nil-rated supply whilst actually selling the goods domestically with VAT and then not forwarding the collected taxes. The German coalition has also backed German e-invoicing ‘as soon-as-possible’.

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

Grand plan gone quiet as ‘VAT in the Digital Age’ reforms progress

The plan to switch from an origin to destination-based VAT on cross-border B2B transaction has no chance of meeting the original 2022 launch date, and EU member states have lodged a number reasons to push it out for further consultation. There is ongoing review around technical questions and solutions to the concerns for some member states – this could include using the OSS return and split payments on cross-border transactions were VAT would become due.

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). Also, a single EU VAT registration proposal to widen the use of the new One-Stop Shop pan-EU VAT return. This originated from the 2020 EU Tax Action Plan  measures for a fairer and more efficient EU tax regime.

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 a few 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, and the customer then reporting the transaction under the reverse charge. 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 the 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 a wider tax action plan of VAT reforms.

VAT Calc’s tax engine, ‘VAT Calculator’, has been built to provide seamless shift from place-of-origin taxation to destination taxation without any VAT reintegration and customs code changes. This means no extra costs, planning or demands on ERP teams and reliance on external advisors.

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 could 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) was originally proposed.  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. Although the success of the 2015 MOSS and more recent 2021 OSS regimes will have gone a long way to quell this doubt.

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 – including domestic reverse charge and e-invoicing – and look to other joint projects like transaction-based reporting.

In 2020, many states raised misgivings about the definitive VAT system – VAT becoming cash chargeable on cross-border transactions via an extension of the OSS or MOSS single returns. The latest update is looking at shared liabilities, so restricted the customer’s right to deduct if the supplier does not pay the VAT charged. To limit the risks for the customer, a split payments system could be introduced with live transaction reporting on the payments

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 (DRR), e-invoicing and live transaction reporting Implementation of VAT in the Digital Age?
2023 DAC 7 - marketplace reporting obligations on sellers' activities 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 Member states not agreed on format
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 Q3 2022 detailed proposal
Single EU VAT registration - extension of OSS for B2B and B2C On track for Q3 2022 detailed proposal
Proposal for VAT treatment of the platform economy On track for Q3 2022 detailed proposal
VAT Gap Initiative Q3 2022
2021 One-Stop-Shop (OSS) single EU VAT return In effect
Ending €22 import VAT exemption; new IOSS return In effect
Marketplace deemed supplier EU VAT reforms In effect
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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