Members of the European Parliament (MEPs) voted on a report by Werner Langen, German MEP and member of the Group of the European People's Party (Christian Democrats), who was responsible for steering the rules through parliament.

On November 24, 489 MEPs voted in favour of the report, while 87 MEPs rejected it, with 74 abstentions. The vote followed a debate on the VAT action plan the day before.

The report was prepared and submitted to parliament after parliamentary committees for budgets, budgetary control, and civil liberties, justice and home affairs, gave their opinion on the Commission’s proposals. Parliament’s vote paves the way for the EC to move forward with its VAT action plan and prepare draft legislation in 2017.

Langen’s report welcomed a number of measures proposed by the EC in its action plan and agreed that a future VAT system should be based on the destination principle via an extended one-stop-shop, where VAT is charged in the member state of the consumer, rather than of the supplier.

The report also stated that the most efficient way to tackle fraud is to have a simple VAT system with a rate that is as low as possible, and fewer exemptions. The Commission’s proposals do not include a specific rate, but instead suggest more freedoms for member states on rates policies, compared to the rules set out in the VAT Directive.

The EU's VAT system was first introduced in 1993 and was only intended to be a transitional system lasting for a few years. The need for all EU member states to agree unanimously on changes to tax law has hampered progress, allowing cracks in the system to build over the last two decades. The Commission released the proposed VAT Action Plan on April 7, which was approved by the European Economic and Financial Affairs Council (ECOFIN) on May 26.

Langen said there are two main goals for VAT reform: “The first is finding a definitive VAT system, because for the last 23 years we've only had a transitional system. The second and more important goal is fighting VAT fraud which happens on a substantial scale”.

In the report’s concluding statement, Langen also suggested the creation of a permanent VAT system by extending reverse charging to all business-to-business transactions Europe-wide. “The entire procedure for prior charges and refunds would become redundant under such a model. Where no money is changing hands there is no scope for fraud. There would thus be considerably less distortion of competition.”

“A comprehensive reverse charging procedure would, moreover, make for simplification and standardisation, as current arrangements for the coexistence of normal charging, charging on the basis of actual earnings and reverse charging would be largely curtailed. Cross-border traffic, currently subject to varying rules with regard to simplification and registration requirements, would also be facilitated. The Commission’s reluctance to back the comprehensive application of such a system is incomprehensible. It has already proved highly successful in sectors particularly vulnerable to fraud in a number of member states. The case has not been made that it is unworkable on a broader scale,” the report said.

Langen added that the Commission needs to carefully study the consequences of a system that would make the customer rather than the supplier responsible for paying VAT, and whether this approach would reduce VAT fraud and simplify the situation for small and medium-sized enterprises.

European Commissioner for Jobs, Growth, Investment and Competitiveness Jyrki Katainen said he welcomed the report and its backing of several measures proposed by the Commission in its action plan. “We are very glad for your guidance and that we share the same views on many of these issues,” he said.

However, he told MEPs that the Commission cannot accept recommendations from the ECOFIN council or from Langen’s report to introduce a reverse charge system. “Options like the general reverse charge mechanism, which the ECON report recommends, do not offer the same potential [as the destination principle].”

“Actually, by replacing the VAT [with] a sort of sales tax could significantly increase fraud and administrative burdens for businesses. This in our view is not the right approach,” Katainen said, through a translator. Nevertheless, he said the Commission will give “full consideration” to the European Parliament’s guidance when preparing its legislative proposals next year.

By of end of this year, the Commission would have already addressed some of the recommendations in Langen’s report in a “series of ambitious legislative proposals”.

With regards to SMEs and e-commerce, Katainen said the Commission’s upcoming proposals will include a threshold and other simplifications targeted at small and micro businesses, including an extended and enhanced one-stop-shop mechanism. “This proposal will also address current distortions putting businesses EU at a significant disadvantage compared to non-EU businesses, which can legally supply small consignments VAT-free into the EU annually and [can] frequently omit to pay the VAT they should.”

Regarding the VAT rate on e-publications, he said the Commission’s upcoming proposal will give member states the option to align the VAT treatment of items such as e-books and e-newspapers with equivalent hard copy printed publications.