VAT overhaul accused of being contrary to EU treaties

Article 113 of the TFEU provides that the VAT has to be harmonised at European level, a de-harmonisation would therefore be contraty to the treaties. [eamesBot/Shutterstock]

The de-harmonisation of VAT rates put forward by the Commission has been flagged as unconstitutional. Moreover, the proposal to completely overhaul the primary European tax faces much criticism. EURACTIV.fr reports.

The future European budget is currently at the top of the European agenda, but the tax on added value, which yields 7% of GDP to states in the EU is rarely mentioned. However, according to the chair of the European Parliament’s committee on economic affairs, the VAT reform is another economic priority.

“On the one hand, the current VAT system is supposedly temporary, but the EU loses €150 billion per year and the Commission is convinced that its proposal will reduce losses,” Italian MEP Roberto Gualtieri told a hearing with experts on the future VAT held at the European Parliament on 24 April. Italy is the country where VAT fraud, the tax’s principal drawback, is the most prevalent,

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Member states’ unwillingness to cooperate laves them wide open to VAT fraud, the European Court of Auditors said on Thursday (3 March). This weakness costs the EU as much as €168 billion per year. EURACTIV France reports.

The main problem is that the Commission’s proposal to reshape the current VAT arrangements, presented in December, does not convince everyone, including experts on the subject.

The complex proposal for the tax, which remains the main source of revenue for European states, can be summed up in two key measures:  A new tax scheme based on the product’s end-destination and not its origin; and  certification of operators involved in international trade in the EU.

For Maria Elena Scoppio, head of indirect taxes at the European Commission, this second measure is “ a fundamental shift” in the way VAT is applied, as it would trigger a major change in how its implementation is thought through.

This new certification procedure creates a new economic barrier for some, which could result in the exclusion of smaller actors from international trade.

More importantly, the conditions of implementation will determine whether or not this certification is a pledge of good faith.

Nonetheless, Professor Rita de la Feria, an expert on tax law at the University of Leeds is worried about the issue of VAT rates rather than these two elements.

“This proposal gives rise to significant risks. We have been trying to harmonise VAT rates since the 1960s. But this proposal constitutes a fundamental change on rates: this would lead to de-harmonisation,” she said.

Pressure to reduce VAT

Indeed, under the framework of the reform, the Commission plans to give member states more flexibility when fixing VAT rates. “Who are we to tell Poland not to apply reduced VAT rates on nappies?” said Maria Elena Scoppio.

According to Rita de la Feria, this freedom could then result in pressure to lower VAT rates which would end up in a ferocious tax competition among member states, as is the case for corporate tax, which, unlike the VAT, has not been subject to harmonisation.

However, reducing VAT rates raises two problems: on the one hand, it is economically ineffective as the richest benefit the most as the largest consumers. On the other, it is often not reflected in the prices as suppliers take advantage to improve their margins.

“This would lead to less funding for states, for public services, and less funding to protect the most vulnerable,” warned de la Feria, who is worried that the average 12% VAT rate imposed by the Commission would not stop an erosion of funding.

De la Feria even calls the proposal unconstitutional.  Article 113 of the TFEU provides that the VAT has to be harmonised at European level. “The EU should not water down treaties but instead should respect the will of the founding fathers and not foster the mistrust of the population on the future of the EU,” she said.

If the tax seems unfair at first, as it applied to the whole population, VAT is the most painless tax of all: actually the richest pay the largest part, and it allows the state to fill its coffers in secret by asking companies to retrieve it for them.

An ineffective tool against fraud

According to Ine Lejeune of the Law Square firm, the biggest mistake of the reform proposal is that it does not necessarily tackle fraud. The company certification procedure could on the contrary incite fraudsters to greater creativity, as seen in the past.

The lawyer also points out that “only certified companies will have the right to the simplified VAT scheme”. “I believe it’s not worth it, if you are an authorised economic operator, it will involve an intrinsic cost that could give rise to barriers to trade especially for micro-enterprises.”

This view is also shared by BusinessEurope, which is worried about the additional costs and the potential administrative burden. Kristian Koktvedgaard, chair of the VAT policy group at BusinnesEurope, also insists on the trust issue among member states, which needs to be resolved for a better cooperation in fraud prevention.

“€1,000 billion worth of VAT was collected in Europe in 2017, 7% of GDP. The slightest change could have huge economic consequences,” he warned.

To avoid mistakes, Ine Lejeune suggested creating a new levy for every exchange, to “revise the company registration system with electronic ID. This would constitute a quality label to exclude fraudsters, just like a driver’s licence, which enables to drive on all roads, or on none whatsoever in the event of mistakes”.

The new VAT arrangements, which should see the light of day in 2022, are still low on the political agenda, and this leaves the door open for fraudsters.

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