International Tax Review: How are plans progressing for simpler, more robust and more efficient VAT system?
Algirdas Semeta: The Communication on the future of VAT which I presented last December sets out the priority actions needed to create a simpler, more efficient and more robust VAT system in the EU. I am pleased to say that all priority actions which were due for 2012 have already been realised.
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. This VAT expert group will allow 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 addition, in July, an EU VAT forum was set up where business 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. 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. 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.
Finally, a proposal for a Quick Reaction Mechanism (QRM), that would enable member states to respond more swiftly and efficiently to VAT fraud, was presented by the Commission on July 31. Under the QRM, member states would be able to apply a reverse charge mechanism within the space of a month, which they are not able to do under EU VAT rules. 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. The QRM should greatly improve member states' chances of effectively tackling problems such as carrousel fraud and preventing huge financial losses.
Besides these concrete actions, preparatory work on a number of substantial topics, like the review of the VAT rates, a standardised VAT return and VAT rules on intra-EU transactions is on-going and should result in further new initiatives in 2013-2014.
ITR: How would you respond to legitimate taxpayers who are concerned that anti-fraud measures such as the QRM increases their compliance burden?
AS: First of all, when massive VAT fraud suddenly occurs in a specific economic sector, it distorts competition as well as stealing revenue. It is therefore in the interest of legitimate traders that this VAT fraud 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. This created uncertainty for the taxpayers.
The purpose of the QRM proposal is therefore to include a procedure in the VAT Directive which would provide a legal base for member states to take immediate measures in specific situations. The type of measures that can be taken will have been defined beforehand and known by stakeholders. So there will be greater legal certainty and clarity for all.
ITR: Is there anything you would have liked to reform in the VAT system that you were unable to get on the table?
AS: No. Our Communication on the future of VAT was very ambitious, while also remaining achievable, and I'm happy with the progress we are making in this area. 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. 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. Our strategy for the reform of the VAT system takes a measured approach, to avoid any risk to national revenues or sudden upheavals for businesses. 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.
ITR: What progress is being made on FTT?
AS: 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.
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 scope and objectives of what they want to do through enhanced cooperation. From discussions in the ECOFIN, and with individual member states, I believe 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 we 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.
However, if this is not possible, enhanced cooperation on 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.
ITR: Do you have any other significant indirect tax projects on the horizon?
AS: The VAT reform is certainly the most important project for the near future, and will be the focus of much of our energy and resources. We will be bringing forward a number of substantial initiatives on this in 2013 and 2014.
Meanwhile, major work is on-going on the mini one stop shop for telecommunication, broadcasting and electronic services, which should enter into force in 2015. Throughout 2012, we have 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. I believe that this one stop shop will be a milestone initiative for the EU VAT system. By allowing businesses to declare and pay the VAT in the member state where they are established, rather than where the customer is located, it will greatly simplify life for businesses and should help to improve tax compliance. The success of this mini one stop shop will also determine whether we can broaden out the concept to cover other transactions. 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.
Another important project for the Commission is to closely follow the implementation of the new VAT invoicing Directive by member states. This enters into force on January 1 2013. The VAT invoicing Directive is expected to lead to €18 billion ($22.6 billion) in savings across the EU, due to simpler rules for businesses and more effect controls against fraud.
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