VAT: Commission proposes options for Member States to derogate from the current EU system, under certain conditions

The Commission has today put forward a proposal which, if adopted, would enable EU Member States to apply a different VAT system to the rules currently in force across the EU. In order to protect the Internal Market, this derogation would be available only under certain strict conditions. Currently, all businesses in the production and supply chain of goods are partly responsible for the collection of VAT. Today’s proposal for an optional General Reverse Charge Mechanism (‘reverse charge’) means that EU countries would be able to apply temporarily a system which derogates from the current fractionated payment of VAT. Sales between businesses of more than €10,000 could be invoiced free of VAT, with only the final consumer being liable for the full VAT costs. This proposal comes at the request of certain Member States who argue that such a mechanism would help to put an end to a specific type of cross-border tax fraud known as carousel fraud which involves goods being sold back and forth between businesses in different countries. While VAT is charged on some of the transactions, the revenue does not find its way to the national authorities. Following the adoption, Commissioner for Economic and Financial Affairs, Taxation and Customs Union, Pierre Moscovici said: “Some Member States have expressed the wish to use an optional general reverse charge mechanism for VAT on their domestic market. Today, we are fulfilling our promise to deliver on this proposal, while setting out principles to ensure the integrity of the internal market. The first priority for this Commission is to put in place a definitive VAT system for the EU based on the destination principle. Once again, I call on Member States to support our ongoing efforts to modernise the EU’s VAT system and to create a robust and fraud-proof single European VAT area. This is the only long-term viable solution for the internal market when national treasuries are losing €160 billion in VAT revenues every year.” The full proposal takes the form of an amendment to the so-called ‘VAT Directive’ and would require unanimous agreement by all Member States to become law.