On May 25th 2018, the European Commission published a proposal for a directive on the detailed technical measures for the operation of the definitive VAT system for the taxation of trade between Member States (the “Proposal”). The Proposal aims at amending the currently applicable VAT rules, laid down in the Council Directive 2006/112/EC of November 28th 2006 on the common system of value added tax (the “VAT Directive”) and is one of the cornerstones of the Commission’s action plan on the definitive EU VAT system.
The initial goal of the VAT Directive was to reflect the fundamental principle of taxation in the country of destination, which applies to indirect taxes on consumption. For political and technical reasons, transitional VAT arrangements had been adopted, notably for the cross-border sale of goods, and finally stayed in place for more than 20 years. Besides their complexity, the transitional rules proved however vulnerable to fraud, which led the Commission to propose an overhaul of the system to make it more fraud-resilient.
In the system currently applied in the EU, cross-border movements of goods between businesses are split into two different transactions: an exempt supply in the Member State of departure and a taxed intra-Community acquisition in the Member State of destination. In the future, cross-border trades of goods will be seen as a single taxable supply, subject to VAT in the Member State of destination. As a matter of principle, the seller will be responsible for the collection of VAT. Only where the customer is a so-called certified taxable person (i.e., a reliable taxpayer, recognized as such by the tax administration) will the acquirer of the goods be liable for VAT.
In order to mitigate the administrative burden arising from VAT obligations in different jurisdictions, the change in regime comes along with a simplified solution helping businesses to declare their VAT, namely the creation of a so-called “one stop shop”. The one stop shop consists in a centralised online portal allowing businesses to fulfil their VAT obligations (i.e. declare and pay VAT) in respect of all their supplies in each and every Member State. Luxembourg and the other EU Member States have already successfully implemented a similar online platform for businesses providing electronically supplied services after the changes to the rules governing the place of supply of those services in 2015 (please refer to our May 2014 Newsletter).