European Commission Proposes VAT Overhaul
On October 4, 2017, the European Commission published a set of proposals aimed at simplifying and modernizing the current VAT system. The “cornerstone” principles of the Commission’s approach are:
- Combating VAT fraud and reducing the €150 billion VAT Gap
- Establishing a “One Stop Shop” for cross-border trade
- Consistently applying the “destination principle” for VAT
- Simplifying invoicing rules for businesses making cross-border supplies
In the short-term, the Commission has proposed four “Quick Fixes” aimed at shoring up the current system which would take effect January 1, 2019 if approved by the European Parliament and Council of Ministers:
- conditioning the zero-rating of intra-Community supplies on receipt of an acquirer’s VAT Identification number and correct filing of the recapitulative statement. (In the long-term, recapitulative statements will become less critical and will eventually be phased out, simplifying the compliance burden on businesses).
- a simplified arrangement for call-off stock, available only to CTPs;
- a simplified arrangement for chain transactions, available only to CTPs; and
- new formal conditions for proof of cross-border delivery of goods for transactions involving CTPs.
In the long-term, the Commission also proposes a system where all cross-border trade will be taxed at the rate of the Member State of destination, but where VAT will be remitted to a single online portal (the “One Stop Shop”) available in the language and format of any supplier’s home country. The current treatment of cross-border trade, involving the zero-rating of intra-Community supplies with self-assessment by the purchaser, will only be allowed if the supplier or acquirer is a “certified taxable person” (CTP) who can verify reliability and solvency. The Commission intends to release detailed implementation regulations for this proposal in 2018, with the ultimate intent of establishing a robust single VAT area by 2022.
OECD Issues New Advice on VAT Administration
On Oct 24, the Organization for Economic Co-operation and Development (OECD), released guidance on how countries can implement effective VAT collection systems for cross-border trade, particularly concerning digital/electronic supplies. The guidance, which is entitled, Mechanisms for the Effective Collection of VAT/GST, relates mostly to design options for effective VAT collection mechanisms and registration systems.
This new advice falls closely on the heels of the release of their final report on the Action Plan for Base Erosion and Profit Shifting, including Action #1 which provided advice on the effective application of VAT to cross-border digital supplies. Businesses should take note, as Action #1, directly or indirectly, resulted in changes to the taxation of B2C electronic commerce in multiple countries across the globe.
For more information, read our blog, “How to Capture VAT from Offshore Sellers: New Guidance for Governments.”
Catalonia Votes for Independence
On October 1, 2017, the Catalonian region of Spain held a referendum on independence. While the Spanish Supreme Court declared the vote unconstitutional and Spain does not recognize the result as legally binding, the vote was held and the results were that an overwhelming majority of Catalan voters expressed a clear desire to become an independent republic, separate from Spain.
Following the referendum, the “Govern de la Generalitat” (local name for the Catalonian regional government) announced that they will declare the independence of Catalonia from Spain. While no one expects Spain to immediately accept succession, it’s interesting to spend a moment considering some of the VAT and compliance ramifications of such a move:
Catalonia would become a country outside of the European Union – Catalonia would need to petition for membership if they so chose.
- The VAT of Spain would not apply – and a new local VAT would likely be enacted.
- The newly enacted Immediate Supply of Information (SII) regime would no longer apply
Spain Reports on SII Success
The Spain Ministry of Finance released the first report detailing business compliance with the new SII mandate. According to the report, the compliance rate is in excess of 90%, meaning that approximately 50,000 businesses are meeting the requirement of providing transactional details to the government on a near-real-time basis. In the last three months, more than 700,000,000 invoices have been transmitted representing EUR 630,000,000,000 in value. Interestingly, the report indicates that the Ministry has found an 84% correlation between reported transactions and the corresponding VAT filings. Companies currently have the ability to review what is referred to as the contraste, which is a report that comparing their submittals to SII against what their customers and vendors are filing.
In sum, the initial report views SII as a success as evaluated against both adoption rates and the resulting level of VAT filing compliance. In recognition of this success, the Ministry plans on accelerating the time it currently takes to obtain VAT refunds. At the same time, we likely can expect Spain to roll out SII to remaining businesses not currently required to participate in the program, possibly as early as 2019. Spain is also talking about the possibility of using SII data to produce proposed VAT returns for taxpayers to review and submit, rather than waiting for taxpayers to produce their own.
The full report can be found at the following link: http://www.minhafp.gob.es/Documentacion/Publico/GabineteMinistro/Notas%20Prensa/2017/AEAT/20-10-17%20NP%20SII.pdf
Italian Ministry of Economy and Finance Provides Update on Split Payment System
On September 14, 2017 the Italian Ministry of Economy and Finance published the updated lists of companies that qualify for the revised split payment system. The updated lists cover changes to two categories of companies that are subject to the split payment system in Italy:
- Companies lawfully controlled by the Presidency of the Council of Ministers and the Ministries and Subsidiaries of the latter
- Regulated companies lawfully governed by the regions, provinces, metropolitan cities, municipalities, joint ventures and subsidiaries
Italy Takes Major Step Towards Adopting Comprehensive E-Invoicing Mandate
On October 16, 2017, Italy’s Council of Ministers approved the 2018 Budget Bill. The bill proposes two new electronic invoicing requirements for businesses. Starting July 1, 2018, electronic invoices would be required to be submitted through the Sistema di Interscambio for services rendered by subcontractors under a public-service contract, as well as for the sale of petrol or diesel for engines. The second item, however, would have far more sweeping impact. Specifically, starting on January 1, 2019, all business to business transactions for the supply of goods and taxable services would have to be submitted through the Sistema di Interscambio.
As adopting an e-invoicing mandate may require EU permission, this measure is simultaneously being sent to the European Commission for review while it makes its way through the Italian Parliament, where it must be acted upon by the end of the year.
Dutch Government Unveils 2018 Tax Plan
The Dutch government has released its Tax Plan for 2018, which includes three provisions relating to the VAT law. First is the abolition of the special scheme for agriculture. The government’s explanatory memo states that this plan is being abolished because the modernization of farming has led agricultural businesses to more closely resemble other businesses, thus obviating the need for the regime.
Second, the Tax Plan would amend the definition of medicines under the VAT Act. This change is a reaction to a Supreme Court ruling which had interpreted the current definition to include items such as sunblock, which the government states were never intended to benefit from the reduced rate applicable to medicines.
Finally, the tax plan would amend the provisions relating to the zero-rating of the supply of ships used on the so-called high seas for passenger transport to better conform with the EU VAT directive; the current provision is considered overly broad.
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