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Drastic reform of EU VAT system on the way

EU VAT system

By Bert Laman, Global Indirect Tax Group, Mazars 

On 4 October 2017, the European Commission proposed a drastic reform of the VAT system of the European Union1

The main change is that in the case of cross-border transactions within the EU, the supplier must charge the VAT to his customer at the rate of the Member State of destination of the goods. The VAT must then be declared and paid in the Member State where the supplier is established via a one-stop-shop mechanism. 

Another important change is the introduction of the Certified Taxable Person (CTP), for which simplified procedures will apply. 

The aim is to introduce the new system in 2022, but first the Member States of the European Union must agree on it.

In the short term, the European Commission has also proposed several ’quick fixes’ to improve the VAT system. 

Current EU VAT rules

The current VAT rules for transactions within the Member States of the European Union were introduced in 1993 as ‘transitional arrangements’. 

The initial intention was that cross-border transactions within the EU would be taxed with VAT in the country from which the supply is made (country-of-origin principle). A business established in the Netherlands, for example, would then have had to charge Dutch VAT when supplying goods to a German customer. The Member States would compensate the VAT payments with each other via a clearing system. However, insufficient trust between the Member States meant that this was never achieved. 

Instead of this, domestic transactions and cross-border transactions have for many years been subject to two completely different VAT systems: domestic supplies are usually taxed with VAT; in the case of cross-border transactions between businesses (B2B), the supply by the seller is exempt and the buyer pays VAT on the acquisition. 

Despite various attempts, the transitional arrangements have still not been converted into definitive arrangements. Rather, changes have regularly been made to the transitional arrangements, so that over the years a complex system has developed, leading to a high administrative burden for businesses and considerable loss of revenue for Member States.

European Commission’s reform plans

The European Commission’s reform plans announced in October 2017 were prompted by the wish to modernise the VAT system to make it simpler and more business-friendly, for the benefit of both Member States and businesses. The most important motive, however, appears to be the wish to reduce the annual loss of VAT revenue, estimated to be more than EUR 150 billion. A large proportion of this loss is said to be due to cross-border VAT fraud.

The plans, intended for introduction in 2022, can be summarised as follows:

  • For cross-border supplies of goods within the European Union, the supplier will have to charge VAT, and this must be VAT at the rate of the Member State of destination of the goods. For example, a Dutch business that supplies goods to a customer in Germany will have to charge German VAT on the invoice.
  • A one-stop-shop (OSS) mechanism will be introduced, so that the VAT payable on supplies of goods to other Member States can be declared by suppliers in the Member State where they are established. This mechanism also makes it possible to offset the VAT payable on supplies against the input VAT on acquisitions made in the EU.
  • The concept of the Certified Taxable Person (CTP) is introduced. This concept allows for an attestation that a particular business can globally be considered to be a reliable taxpayer, and is modelled on the existing concept of authorised economic operator (AEO) in the field of customs.
  • For Certified Taxable Persons, the current rules will remain in force. This means that supplies to a CTP will result in VAT being levied (via reverse charge) in the country of the customer. 

Quick fixes

The European Commission also introduced several ‘quick fixes’, which are intended to come into effect as soon as 2019. 

These ‘quick fixes’ are :

  • Simplification and harmonisation of rules regarding ‘call-off stock’, i.e. stock that a supplier holds in a Member State where it is not established, so that it can be quickly sold to local customers on a call-off basis. Some countries have a simplification arrangement for this, which avoids compulsory registration in the country where the stock is held; other countries do not have an arrangement of this kind. A simplification arrangement to avoid registration is now proposed for all countries, but only for Certified Taxable Persons (see above).
  • For intra-Community supplies of goods to be exempted from VAT, it will be compulsory to have the customer’s VAT identification number. Based on case law, this number is currently not a substantive condition, but this will consequently be changed. 
  • There will be simplification of determining which transaction in a chain transaction or triangular transaction is defined as the cross-border supply. This simplification will only apply for CTPs.
  • Rules will be introduced making it easier for businesses to prove that goods have been transported from one Member State to another, which is a condition for exemption from VAT. These rules will also only apply for CTPs.


The European Commission’s reform plans are far-reaching and will require businesses to engage in numerous activities. For instance, many businesses will want to obtain CTP status, which – as we already know from the AEO procedures – may lead to a time-consuming self-assessment and intensive communication with the tax authorities. In addition, businesses will need to change their administrative systems: examples here include the many different foreign VAT rates (therefore many additional VAT codes etc.), the invoices that will now look different, and the VAT return that will include many new boxes.

The question, for me, is whether the system will indeed be simpler and more business-friendly. This may be the case for the ‘quick fixes’: there will anyway be more legal certainty in some situations. However, the system that is intended to be definitive will, just like the current system, have several subsystems alongside each other: one for domestic transactions, one for cross-border transactions with customers that are not CTPs, and one for customers that are CTPs. 

Moreover, I wonder whether the reform plans will in fact, as intended, eliminate the widespread VAT fraud that currently takes place.

I agree with the European Commission that it will be much more difficult to commit fraud after the introduction of the reform plans: in the case of carousel fraud, the fraud usually takes place at the link in the chain immediately after the cross-border supply. The buyer receives an invoice without VAT and must declare VAT on the acquisition himself in his own country, which can then be offset/deducted on the VAT return. However, if the buyer does none of this and simply sells on the goods, charging his customers VAT and not paying this VAT to the tax authorities, it can take them a while to realise what has happened. After the reform plans have been introduced, the fraudulent buyer will be charged VAT and – after paying this – he will have to offset/deduct it, before a fraudulent ‘gain’ (read: invoicing VAT and not paying it to the tax authorities) can perhaps be obtained at the next link in the chain.

On the other hand, VAT fraud never takes place in the cross-border supply itself, but always in the aforesaid local supply after (or perhaps also before) the cross-border supply: VAT is charged on that supply, but the supplier does not pay the VAT to the tax authorities; however, the VAT is offset/deducted by the customer. The reform plans make no changes at all to domestic supplies.

In this context, I am also not convinced by the introduction of the concept of Certified Taxable Person. The European Commission intends to allow the current system of VAT-exempt cross-border transactions to continue for CTPs. It will then be precisely this group that will start to become a high-risk group, especially since checking of this group of businesses will take place less intensively.

The most important question now is whether anyone will actually comply with the European Commission’s plans, while this was not the case in the years before 1993. Trust is needed on both sides for a VAT clearing system between the Member States. It will be interesting to follow what happens over the next few years in VAT land.

1Member States of the European Union: Austria, Belgium, Bulgaria, Croatia, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, the Slovak Republic, Slovenia, Spain, Sweden and the United Kingdom.