EU committee backs VAT reverse charge
The EU committee on economic and monetary affairs has voted in favour of a proposed amendment to the EU VAT directive, allowing member states struggling with fraud to temporarily change the way it is recovered
4 Dec 2018
The generalised reverse charge mechanism (GRCM) would allow EU member states that are severely affected by VAT fraud to temporarily apply exemptions from existing VAT rules, switching the payment obligation from the vendor to the buyer. This mechanism is designed to combat carousel fraud, where the way that VAT is treated when the movement of goods between jurisdictions can be exploited by organised criminals for profit.
The existing directive permits member states that fulfil specific criteria regarding their current levels of fraud - including 25% of the VAT gap being due to carousel fraud - to employ a GRCM. However, the amendment stipulates that such countries ‘should be required to establish that estimated gains in tax compliance and collection expected as a result of the introduction of the GRCM’ exceed the possible compliance cost to businesses and the administration of tax, and that ‘businesses and tax administrations will not incur costs that are higher than those incurred as a result of the application of other control measures’.
In order to assess this, it is proposed that member states be required to provide evidence ‘that the estimated gains in tax compliance and collection expected as a result of the introduction of the GRCM outweigh the expected overall additional burdens on businesses and tax administrations by at least 25%’.
A further amendment would require EU member states that apply the GCRM to exchange information, subject to the requirements of the General Data Protection Regulation (GDPR), ‘in order to be able to assess whether the introduction of the GRCM in one member state results in fraud shifting towards other member states and to be able to assess the degree of possible disturbances to the functioning of the internal market’.
An additional reporting requirement would mean that member states that apply the GRCM would also need to ‘establish appropriate and effective electronic reporting obligations on all taxable persons’ who may receive or supply VAT-liable goods and services ‘to ensure the effective functioning and monitoring of the application of the GRCM.’
This reporting would involve providing, in electronic format, the names of all persons who have been subject to administrative or criminal proceedings for VAT fraud in the twelve months prior to the application of the GRCM, as well as the names of all persons whose VAT registration was terminated on or after the date of its introduction, and those who fail to submit a VAT return for two consecutive tax periods after its introduction.
The proposed amendments were generally well-received, with a final vote by committee members accepting them with 24 votes in favour and seven opposed. However, 16 representatives abstained. The proposal will now have to be ratified by EU member states in 2019 before it becomes law.
Report by James Bunney