European Commission Presents Measures to Modernise VAT in the EU

On 7 April 2016, the European Commission presented an Action Plan containing strategies on how to develop the current Value Added Tax (“VAT”) system in the EU.

Hong Kong traders may like to know that the VAT system holds an important role in Europe’s Single Market, and was initially established to remove turnover taxes which distorted competition and hindered the free movement of goods.

The Action Plan covers:

• key principles for a future single European VAT system;

• short term measures to tackle VAT fraud;

• options to modernise the EU framework for Member States setting VAT rates;

• plans to simplify VAT rules for e-commerce in the context of the Digital Single Market (“DSM”) Strategy; and

• a comprehensive VAT package intended to make it easier for SMEs.

The current rules on the VAT system are believed by lawmakers to be in need of an overhaul in order to support the Single Market, facilitate cross-border trade and keep pace with the current digital and mobile economy. Moreover, the system creates significant administrative burdens for businesses that wish to expand beyond the Member State in which they are established. In particular, this affects small businesses due to higher cross-border trade costs.

As proposed in the Action Plan, the VAT will be charged under the rules of the EU Member State on sales that are made to another country in the EU, at the rate applicable in the country of consumption. The VAT on a cross-border sale of both goods and services would be collected by the tax authority of the originating country, and transferred to the country where the goods are consumed.

Hong Kong exporters may like to know that their import-related businesses that trade within the EU will be able to sort out their VAT more easily through an online web portal. Otherwise, cross-border traders have to register for VAT, file returns and make payments in every EU country where they operate. The online system will also make it possible for VAT to be collected by the EU country where the sale is made, and transferred to the EU country where the goods are consumed.

The Commission’s goal is to present a proposal in 2017 on definitive rules for a single European VAT area. Under the new rules, cross-border transactions would continue to be taxed at rates of the Member States importing certain products, as it is today. However, the way taxes are collected would be gradually changed towards a more fraud-proof system.

The Commission wishes to start a debate among the Member States, and receive political guidance from the European Parliament and the Council, on the options put forward in the Action Plan.

According to the Commission, it should become easier for online companies to trade within the EU. At the moment it is costly for businesses to comply with cross-border VAT obligations: a company selling goods or services pays around €8,000 per year in VAT compliance costs for each EU Member State where it makes its sales. For this reason online companies mention VAT obligations as one of the biggest barriers to cross-border e-commerce.

The current VAT system for cross-border e-commerce is complex and costly for Member States and businesses. Companies within the EU are at a competitive disadvantage, because of the fact that non-EU traders can import VAT-free goods to the EU. By the end of 2016, the Commission will make legislative proposals with the purpose of modernising and simplifying VAT for cross-border e-commerce. The proposals will aim to:

• Extend the current single web portal concept, through which a seller is able to declare and pay all VAT for both domestic and EU sales in its own Member State. The tax authority transfers VAT revenues to other Member States where the VAT is due. This service does not exist for goods sold on the internet, for which sellers currently have to register for VAT in each Member State where they have clients;

• introduce a VAT-free threshold to help start-ups and microbusinesses;

• ensure that businesses are audited only by the tax administration of their home Member State;

• remove the VAT exemption that applies for the import of small consignments from suppliers in third countries. This will of course impact on consignments sent to the EU from Hong Kong.

The VAT Action Plan is part of the Commission’s REFIT programme, which aims to make EU regulations simpler and reduce regulatory costs, with a view to contributing to a clear, stable and predictable regulatory framework.

Please click on the following link for the Action Plan.