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Profile: Commissioner Semeta’s EU indirect tax reforms

03 September 2012

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Salman Shaheen talks to Algirdas Semeta, European Commissioner for Taxation, Customs Union, Audit and Anti-Fraud about his big indirect tax reforms.

It is said that politicians are either gamekeepers or gardeners, maintaining the status quo or pursuing the path of reform. Since he became European Commissioner for taxation, customs union, audit and anti-fraud in 2010, Algirdas Semeta has definitely proved himself to be the latter, embarking on an ambitious and politically fraught campaign of wide-ranging reform from the common consolidated corporate tax base (CCCTB) to the financial transaction tax (FTT).

Getting the EU's 27 member states to unanimously agree on anything is a challenge, let alone when it comes to the contentious area of indirect tax policy. But Semeta remains committed to far-reaching reform and perhaps few policies are further reaching than the Commission's plans for the future of VAT.

VAT reform

In December last year, Semeta presented a Communication on the future of VAT, setting out the actions needed to create a simpler, more robust and more efficient VAT system in the EU, and the Commissioner reports things have progressed well since.

"I am pleased to say that all priority actions which were due for 2012 have already been realised," Semeta says. "In particular, progress has been made in ensuring greater involvement and more transparency in establishing and interpreting EU VAT law. This responds to a major request of stakeholders during the consultation phase leading up to our Communication."

In June, the Commission set up a formal expert group on VAT, which will consist of up to 40 persons appointed either in their personal capacity or on behalf of business, consumer and tax practitioner organisations. Semeta sees this expert group allowing for an organised and structured exchange of views between the Commission and stakeholders when preparing legislative initiatives in the context of the VAT reform.

In July, an EU VAT forum was established where businesses and tax authorities strive to improve the way VAT works in practice. The forum will be made up of one representative from each member state and representatives from up to 15 stakeholder organisations.

"While both these groups will deal with VAT, their focus is substantially different," says Semeta. "The VAT expert group will enable better dialogue between the Commission and stakeholders in the process of preparing legislative proposals. The EU VAT forum creates a platform where business and national tax authorities' experts can informally discuss cross-border tax administration issues related to VAT."

"The common link that the groups have is that they should help us move towards a VAT system which better meets the needs of all involved," he adds. "We have also published all the guidelines agreed by the VAT Committee since it was set up in 1977, as a further measure to make information on EU VAT law available and accessible to the public."

Besides these concrete actions, the Commission is doing preparatory work on a number of substantial topics including a review of VAT rates, a standardised VAT return and VAT rules on intra-EU transactions and Semeta expects these to result in new initiatives in 2013-2014.

Given the difficulty of coming up with proposals that are sufficiently far-reaching to address the problems of Europe's ageing VAT system, while still being acceptable to all 27 member states, it is surprising that there is nothing Semeta would have liked to have reformed that he was unable to get on the table.

"Given the importance of VAT receipts for the national budgets, it is understandable that member states are only prepared to consider changing the EU VAT rules if they are convinced of the potential benefits of such a change," says Semeta. "The same applies to stakeholders: changes to VAT law often require them to adapt their IT systems, so the cost of this must be worth it."

Semeta believes the Commission's strategy for VAT reform takes a measured approach to avoid any risk to national revenues or sudden upheavals for businesses. He says that the changes "which will lead to a better functioning, better protected VAT system" will therefore be done in a steady and gradual way, in full consultation with all interested parties.

Fighting fraud

Taxpayers have largely welcomed the Commission's proposals to make the EU's VAT system simpler and more efficient. Where it has met with more resistance, however, is the third pillar of its reform programme: tackling fraud.

Semeta recently proposed a Quick Reaction Mechanism (QRM), that would enable member states to respond more swiftly and efficiently to VAT fraud. Under the QRM, member states would be able to apply a reverse charge mechanism within the space of a month, which current EU VAT rules do not allow.

"We have also, in this proposal, taken on board the fact the new fraud schemes may appear in the future, in which case other anti-fraud measures could also be authorised," says Semeta. "The QRM should greatly improve member states' chances of effectively tackling problems such as carrousel fraud and preventing huge financial losses."

Legitimate taxpayers have said they share the Commission's concern with tackling fraud, but they are worried that measures such as the QRM will increase their compliance burden. Semeta, however, believes that because massive VAT fraud distorts competition as well as stealing revenue, it is in the interests of legitimate traders that it is stopped as quickly as possible.

"When such situations arose in the past, member states have sometimes been tempted to take immediate measures without an appropriate legal basis in the EU legislation," says Semeta. "This created uncertainty for the taxpayers."

The purpose of the QRM proposal is to include a procedure in the VAT Directive which would provide a legal base for member states to take immediate measures in specific situations. Semeta says that because the type of measures that can be taken will have been defined beforehand and known by taxpayers and authorities, there will be greater legal certainty and clarity for all.

Financial transaction tax

The other big reform in the Commission's sights is the FTT. France and Hungary have already pulled ahead of the pack with their own versions of the tax, but Semeta has much broader hopes for it. Nevertheless, the FTT remains one of the most controversial areas of his plans and, while it enjoys strong support from many member states looking to ensure the financial sector pays for its role in the economic collapse and resulting bailouts, it has met with stiff opposition from a number of countries including the UK, which fears it will hit the City of London.

"It has now been confirmed by finance ministers that, although unanimity cannot be reached on the FTT, there is a strong number of member states which still want to push ahead with it at EU level," says Semeta. "Therefore, the ball is now in member states' court to make an official request for enhanced cooperation."

The member states in question must send a formal request to Commission, setting out the scope and objectives of what they want to do through enhanced cooperation. From discussions in the ECOFIN, and with individual member states, Semeta believes that the Commission's proposal is seen as the right basis to proceed, even if it is decided to take a more gradual approach than it had initially foreseen.

"I was always a strong advocate of an FTT for all 27 member states, as I am convinced that this is the best way to achieve its objectives and to respond to the calls of citizens right across Europe," says Semeta. "However, if this is not possible, enhanced cooperation on the FTT is definitely the next-best solution. The Commission is ready to respond quickly to any request for enhanced cooperation, and support all efforts to make an EU FTT a reality."

On the horizon

The Commission is doing a lot of work on the mini one–stop-shop (OSS) for telecommunications, broadcasting and electronic services, which should enter into force in 2015. Semeta says that throughout 2012, the Commission has been putting together implementing rules to ensure legal certainty when the time comes to apply this new scheme.

"For example, we have made a proposal on how to design the IT systems which will be used for information exchange between tax authorities," says Semeta. "I believe that this OSS will be a milestone initiative for the EU VAT system.

By allowing businesses to declare and pay VAT in the member state where they are established, rather than where the customer is located, Semeta envisages the OSS greatly simplifying life for businesses and says it should help to improve tax compliance.

"The success of this mini OSS will also determine whether we can broaden out the concept to cover other transactions," he says. "The Commission is therefore putting a lot of effort into ensuring that it can be up and running smoothly in 2015, and I would expect similar effort from the member states on this."

There will be plenty of work ahead before Semeta's indirect tax plans are realised and life is unlikely to get any less busy any time soon. But if he is successful, the garden of Europe's indirect tax system may prove to be that much better tended.

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