After more than four years of deadlock, European finance ministers have adopted new rules on the way value-added tax is collected on services provided between member states. Revenues will now be reaped by the country in which the consumer is located rather than the one in which the company providing the service is established.
The aim of the reform is to minimise the administrative burden for companies engaged in cross-border operations and prevent distortions of competition between countries operating different VAT rates.
It does this by shifting the place – and thus also the rate – of taxation from the service provider’s country of establishment to that of the consumer. In this way, all customers are charged the same VAT rate regardless of their supplier’s location.
The reform had been long delayed due to Luxembourg’s vetoing of the plans, which it claimed could cause it to lose out on VAT revenues worth around €200 million per year. The main concern related to earnings generated by large electronic service companies, such as Amazon.com, Skype or PayPal, which have all settled in Luxembourg, attracted by its business-friendly VAT rate of 15% – the lowest allowed within the EU.
However, under a compromise agreed last December (EURACTIV 4/12/07), the small country obtained a delay in the introduction of the new VAT system for electronic, telecoms and broadcasting services, which will be phased in from 2015 rather than implemented directly as of 2010.
Under the deal, countries that are home to telecom and electronic service businesses will be allowed to keep their hands on 30% of the VAT revenues collected after 2015, with only 70% going to the country of consumption. This share would be cut progressively to 15% after 2017 and zero as of 2019, in order to ensure a “smooth transition”.
The reform package also introduces the possibility for businesses to fulfill all their EU-wide VAT obligations in the country of their establishment, thanks to the creation of “one-stop shops”. A new, fully-electronic procedure for the reimbursement of VAT incurred by companies in member states where they are not established will also be set up, in order to ensure a faster refund for claimants. Member states will be required to pay interest if they are late making the refunds.
EU Taxation Commissioner László Kovács welcomed the Council’s adoption of the new rules, saying they would help to ensure a more even playing field for businesses supplying services throughout the Community and ensure a fairer distribution of VAT revenues. “This is particularly true of services which can be supplied at a distance where, as a result of current rules, businesses have been locating in countries with lower VAT rates. As a result, member states have seen their revenues eroded,” he said.
Small and medium-sized enterprises, represented by UEAPME, added that the one-stop-shop system would “dramatically diminish bureaucracy” and put an end to “years of uncertainties in which SMEs were potentially confronted with 27 different administrative systems and collection formulas, triggering unbearable compliance costs and acting as a barrier to cross-border trade in the EU”.