Trading Cross-Border Using Outdated VAT Simplification Rules

Despite all the efforts of the European Commission to combat VAT fraud, widely applied outdated national fraud-sensitive simplification rules for cross-border trade have remained untouched until today. Jan Sanders and Kevin Korevaar of PKF Netherlands open up the debate on the existence of the simplification rules and discuss what businesses currently considering or applying the simplification rules should do.

Every year the EU member states lose billions of euros in value-added tax (VAT) revenues because of fraud and failing collection systems. According to recent estimates the “VAT Gap”, which is the difference between expected VAT revenues and VAT actually collected, for 2020 could potentially be as high as 164 billion euros ($191 billion).

 

The European Commission has been looking for years to reshape the EU VAT system. Its latest attempt in a long series of initiatives is the launch of a new Tax Action Plan with multiple actions on VAT mainly addressing widespread VAT fraud as well as the impact of the economic downturn due to the pandemic crisis.

 

Single EU VAT Registration

In the Tax Action Plan that was launched by the European Commission this summer there is one action that stands out: the single EU VAT registration. The action is not worked out in detail but does seem attractive at first sight, as it promises to save businesses compliance costs. It is however not clear how a single VAT registration can be implemented without giving up on the temporary regime for cross-border trade within the EU, which was adopted back in 1993 when the single market was established. Supposed it would work without abolishing the temporary regime, a system of national sub-VAT numbers or other local identification mechanisms would be a prerequisite for the single EU VAT registration to operate within the contemporary VAT system.

One of the European Commission’s long-held goals is to abolish this temporary regime, which is, with the use of exemptions for cross-border trade, very fraud-sensitive. After all these years, this regime is still in place as EU member states until today have not been able to agree on a definitive system due to concerns that—ironically—VAT will not be collected in full.

 

Exempted cross-border supplies in the temporary regime are said to be a key factor in VAT fraud but fraudsters see opportunities to loot taxpayers’ money in other circumstances as well. Another area of fraud, for instance, concerns undeclared online sales. According to estimates, online sales in the EU are worth 550 billion euros a year, 96 billion euros of which are cross-border. In order to combat VAT fraud here the E-commerce package was introduced.

 

Initially the implementation of the package was planned for 2020. It then was delayed by a year until 2021. Earlier this year it was delayed for another six months, this time due to the pandemic crisis. Several EU member states are now even pushing for a further postponement as they need more time to prepare. Implementing new EU legislation is complex, even when it is agreed.

These developments undoubtedly are a precedent for the implementation of the single EU VAT registration proposed by the European Commission for the coming years (2022–23). Combined with the proposed extension of the VAT One Stop Shop (OSS) to all business-to-consumer (B2C) transactions that are no part of the current OSS, enormous challenges for local tax administrations are on the horizon. Trust and cooperation between the EU member states and between the tax administrations will be key and the lack of a sufficient level of trust has been a blocker for further harmonization.

 

Another remarkable VAT action from the Tax Action Plan is a new attempt to modernize the VAT rules for financial services. An earlier proposal—dating from 2007—to update these rules ended in the bin. The new attempt demonstrates the European Commission’s persistence, which is hopeful. It is however unclear why the European Commission puts so much focus on the impactful changes to the architecture of the VAT system requiring lengthy negotiations, while the easy-to-complete actions seem not to be looked at (yet).

 

Fraud-Sensitive Local Legislation

As an example, since the introduction of the single market various EU member states allow, locally, the application of other VAT treatments for cross-border trade within the EU than prescribed by law. This is in order to facilitate trade in border-regions. Such legislation allows certain supplies of goods to other EU member states to be considered an intra-Community transfer of a supplier’s own goods for VAT purposes, which helps to reduce the compliance burden on both the supplier and its customer(s).

 

The legislation from the various EU member states, designed as always for bona fide use, actually provides opportunity for fraudsters. It is for this reason Germany has withdrawn the rule that was known locally as the Pommes Erlass, referring to the suppliers of French fries that were selling cross-border, and over the years had become a metaphor for equivalent rules. Other EU member states, such as the Netherlands, still have similar rules in place: in the Netherlands it is known as Mededeling 1, referring to the first VAT issue addressed when Europe’s internal borders were removed.

 

In practice, the approvals have been widely used by (often larger multinational) businesses to accommodate the supply chain structures they operate in from a VAT perspective. It is not clear why the European Commission is not taking action towards the EU member states facilitating the alternative reporting with such simplification rules that in today’s context are outdated. It seems, at least, an easier to complete task than agreeing on such far-reaching measures as replacing the temporary regime for cross-border trade within the EU.

 

To the extent the approvals have been maintained by the EU member states businesses can make use of these as long as they carefully carry out the necessary due diligence on the partners in the supply chain (in order to protect themselves from being an unwitting party to VAT fraud as consequences can have severe impact) and liaise with the tax authorities of the relevant EU member states.

 

Planning Points

Businesses that currently make use of local legislation allowing alternative VAT reporting are recommended to:

  • assess the reasons why the approval provided by the local legislation is needed;
  • check whether the necessary approvals from the tax authorities from the relevant EU member states are in place and whether these are still valid; and
  • draw up an action plan to retire the use of the local legislation.

 

Businesses considering the use of local legislation allowing alternative VAT reporting for cross-border trade are recommended to:

  • assess the reasons why the approval provided by the local legislation is needed;
  • explore the alternatives preventing from the use of the approval;
  • if for the time being no alternative is available: obtain the necessary approvals from the tax authorities from the relevant EU member states; and
  • look for a permanent solution, taking into account potential VAT actions from the European Commission.

Jan Sanders is a VAT Partner and Kevin Korevaar is a VAT Adviser at PKF Netherlands.

 

Bron: 6 October, 2020. Bloomberg Tax: https://news.bloombergtax.com/daily-tax-report-international/trading-cross-border-using-outdated-vat-simplification-rules

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