Flexibility, equality, modernity and harmonisation are key to delivering a compromise solution on EU VAT rates rules, writes Olivier Chastel

EU Member States must ensure right balance and avoid eroding the tax base when using the new reduced VAT rates, says Parliament’s rapporteur on reducing EU VAT gap
Enis72 / Alamy Stock Photo

By Olivier Chastel

Olivier Chastel (BE, RE) is the European Parliament’s rapporteur on reducing EU VAT gap

03 Jan 2022

Regarding my INI report on the implementation of the sixth VAT Directive, my objective - on the eve of the December ECOFIN Council - was to send a strong message to EU ministers to finally adopt the proposal that will introduce detailed technical measures for the definitive VAT system for intra-EU business-to-business trade in goods and put an end to the so-called "transitional" VAT system. By blocking this directive, adopted by Parliament in 2019, Member States are allowing the continuation of loopholes that allow the VAT gap to grow.

Apart from the positive result of the ECON Committee vote, MEPs can be proud of the way they have handled the discussions, asking key questions on this particularly sensitive issue, which not only affects the policies of Member States but also the efficiency of the EU’s internal market, the digital and environmental transition and the well-being of citizens.

My report brings together several related VAT issues including the fight against fraud, including carousel fraud and VAT evasion, the need to provide clear rules to businesses, especially SMEs that want to do business across the Internal Market, and the need to phase out reduced VAT rates for high polluting goods and services by 2030, to help the EU achieve its Green Deal objectives. With the latter, I wanted to ensure that all EU households including low-income households can become fully-fledged players in the green transition and are not left behind, by providing for social compensation measures and reduced VAT rates on basic necessities.

While the VAT gap in the EU (the difference between the amount of VAT actually collected and the total VAT due paid) fell to 10 percent in 2019 from 20 percent in 2009, it varies considerably from one EU Member State to another, from one percent to more than 34 percent. Today, the VAT gap is still a staggering €134bn; a figure that significantly harms national and EU budgets, honest businesses and European citizens.

"Today, the VAT gap is still a staggering €134bn; a figure that significantly harms national and EU budgets, honest businesses and European citizens" Olivier Chastel

We must not forget that we have 27 different VAT systems within the Union. Not only are there different standard VAT rates between Member States, which can be justified by different national economic systems, but also a significant number of reduced or super-reduced VAT rates and exemptions on different goods and services. This complexity is a source of opacity, compliance costs and errors as well as potential fraud. It also severely limits the consistency and interoperability of the VAT system. It is therefore urgent that we take political action to improve the VAT system, strengthen the fight against fraud and simplify the system for businesses, particularly SMEs.

The VAT gap depends on a combination of factors (legislative loopholes, lack of resources and digital efficiency in tax administrations, the ineffectiveness of enforcement and control measures, particularly those against tax fraud) and there will unlikely be a single magical solution to resolve all this. In light of this I propose to first identify a series of good practices existing at national level, extract them and apply them where possible on a European-wide basis. The European Commission would act as a platform to exchange such good practices.

Second, there is a need for a careful review of reduced and special rates in order to modernise and simplify the tax system, make it more transparent and consistent, and reduce compliance costs. While my report advocates a rationalisation of VAT rates, we also accept that in certain exceptional circumstances reduced rates could, to some extent, benefit consumers, especially low-income households.

We believe that an extensive analysis regarding to what extent reduced VAT-rates are passed through to the consumer should be the subject of a future study. Reducing VAT rates on goods and services does not always have the expected or desired results and the final impact will depend on several factors, such as the flexibility of consumer demand, the nature of the reduction (temporary or permanent), the size of reduction, etc. Reduced VAT rates and exemptions should therefore be used with caution.

We must also take advantage of the COVID-19 pandemic, which has catalysed the digitalisation of businesses models and commercial transactions to using digital tools to ensure simplicity, transparency, accountability and automated reporting, which are essential for a definitive, simplified and future-proof VAT regime. In this context, the Commission should support our SMEs by acquiring these latest technologies and making the know-how available. Beyond that, our businesses urgently need to see improvements to the EU’s ‘Taxes in Europe’ database through rapid, up-to-date and accurate access to relevant information about the implementation of the VAT system in Member States and, in particular, on all VAT rates used in each country on different goods and services.

Finally, in support of the climate transition the report proposes to gradually remove highly polluting goods and services from the list of allowed standard-rate derogations, by 2030. Supporting this phase out was an important political signal to citizens ahead of the ECOFIN Council, and in line with the spirit of the decisions taken in COP 26 in Glasgow.

"With this report, we aim to prove that the European Parliament can tackle a particularly difficult, multi-faceted issue, by proposing improvements to the VAT system, which is, after all, both an important source of revenue - about €1 trillion per year across the EU and about a fifth of all tax revenue - and a complex tool for companies when doing business within the EU" Olivier Chastel

So, with this report, we aim to prove that the European Parliament can tackle a particularly difficult, multi-faceted issue, by proposing improvements to the VAT system, which is, after all, both an important source of revenue - about €1 trillion per year across the EU and about a fifth of all tax revenue - and a complex tool for companies when doing business within the EU.

Earlier this month EU Economy and Finance ministers did approve reforms to the VAT Directive, relating to VAT rates. This clearly frames the role of reduced and super-reduced rates and modernises the list of goods and services where reduced rates would be allowed.

However, it is regrettable that the only protection foreseen against the proliferation of lower rates is a limitation of reduced rates to a maximum 24 sectors and super reduced rates to maximum seven sectors, focusing on essential goods, health, transport, security and culture.

This leads me to comment on the fact that Member States are not immune from an erosion of the tax base. This reform also provides for an acceleration of digitisation while acknowledging the situation of lower income households, as underlined by Parliament in its importance for phasing out fossil fuels and products harmful to the environment.

But I deeply regret that the cornerstones of a definitive regime and of a certified taxable person remain blocked in Council. Given this state of affairs, we might well wonder about the Council’s willingness to reform, and if we can still call a system that’s been in place for more than 30 years “transitory”

Parliament will be consulted again on this long-awaited reform on VAT rates with an opinion due in March. Flexibility, equality, modernity and harmonisation of the rules for applying VAT rates in Member States are the key here. The compromise solution, agreed in Council, marks their desire for a more united Europe, in step with the green and digital transition, but Member States must maintain the right balance between national socio-economic policy objectives and avoiding a significant erosion of the tax base when using the new reduced VAT rates.

Categories

Industry & Finance
Share this page