A year on from the controversy surrounding VAT collection by Amazon marketplace sellers, Accordance CEO Nicholas Hallam looks at whether any progress has been made to curb VAT leakage
Innovation creates unforeseen dilemmas and the combination of globalisation and technological progress is proving particularly tricky for hungering government treasuries. Where are sales and profits being made? Where and to whom is tax due? Tax authorities feel bamboozled by complex international supply chains; and they are terrified of losing connection with the online economy, where value appears to grow exponentially.
This is the reason for Europe’s sudden spate of proposals for fundamental reforms of VAT. In theory, VAT, being a tax on transactions, ought to be easier to collect than taxes on highly mobile corporations and individuals, who can shift jurisdiction with a keystroke.
According to the OECD, revenue collectors will focus more and more on indirect taxes, especially as global growth (and profits) remain low. Restricting indirect tax fraud is, so the thinking goes, essential to securing the integrity of the emerging new global economic paradigm.
Last spring the European Commission published an overarching VAT Action Plan with the self-declared aim of making VAT ‘simpler, more fraud-proof and business-friendly’.
The plan is designed as a blueprint for the integration of the EU into a ‘Single VAT Area’, where businesses of all types (provided they have met EU wide anti-fraud criteria) will file VAT returns via a mega ‘one-stop-shop’, with tax authorities collecting VAT due on each other’s behalf.
Earlier this month the Commission followed up with detailed proposals for the first leg of this journey to the technocratic promised land: a one-stop-shop for e-commerce ‘distance sales’ (where companies in one member state sell directly to consumers in another member state). This was followed by three VAT-related consultations.
There are questions about the politics and practicalities of the proposals; there is also the issue of whether ‘fraud prevention’ is itself masking a deeper agenda. Even according to European Commission figures, e-commerce VAT fraud costs EU treasuries ‘only’ €5bn (£4bn) a year in compliance costs.
It sounds like a vast amount, but in fact represents just 10% of EU VAT fraud as a whole. And VAT is, seen next to similar taxes (US sales tax, for instance), startlingly fraud-free: a 5% fraud rate compared to rates in the teens and above.
EU VAT harmonisation
EU member states have long resented the Commission’s lust for harmonisation (shortly before the UK EU referendum, European Council president Donald Tusk went so far as to blame the Commission’s overweening supranational ambitions for the tensions threatening the union).
The Commission’s VAT proposals matter because, if fully adopted, they would create the foundations of a single VAT authority in Europe, with national tax sovereignty eroded in the pursuit of efficiency and ‘ever closer union’. As with the introduction of the euro, the Commission’s plan is to change facts on the ground, and wait (or hope) for political and economic reality to catch up.
But, in perhaps yet another example of 2016’s rebellions against the schemes of distant global elites, the Commission’s generally loyal supporters at the European Parliament backed by a landslide at the end of November proposals by individual member states to be allowed to implement their own anti VAT fraud measures. The proposals are completely counter to the spirit of the VAT Action plan.
Naturally, the Commission has resisted these assertions of national tax control. ‘Replacing the VAT by a sort of sales tax could significantly increase fraud and administrative burdens for business.
'This is not the right approach’, European Commission vice president Jyrki Katainen warned the parliament. But member states (including the Czech Republic and Austria) believe that the application of domestic reverse charges (where VAT is accounted for but not paid over, and hence cannot be stolen) to high risk sectors will be more effective against fraud than the Commission’s own plans. They believe they have to act in their national interest, which, in this case, is not in the direction of more EU coordination, but less.
Just before Christmas (and after this article was first written), the Commission announced, in a press release covering sundry matters, that it had capitulated to the rebels. In what looks like a total U-turn, the Commission now proposes that all member states should have the option of introducing a reverse charge. But (and it is a classic deadlock-inducing EU ‘but’), it has stipulated that the mechanism will only be permitted for transactions over 10K Euros, and only if the member state concerned can prove that fraud levels considerably exceed median EU levels. Member states will also need to demonstrate that alternative measures have either failed, or would be unlikely to succeed.
If the whole thing sounds catastrophically confusing, that may be because it is supposed to be. The Commission is also insisting that option should be temporary, and that the right to a domestic reverse charge should itself be reversed in 2022. Pierre Moscovici, EU Commissioner for Taxation, may feel he has lost the battle, but he isn’t giving up on the war. Even as he announced the concession, he reiterated the harmonisation agenda:
'Once again, I call on Member States to support our ongoing efforts to modernise the EU's VAT system and to create a robust and fraud-proof single European VAT area. This is the only long-term viable solution for the internal market when national treasuries are losing €160bn (£16bn) in VAT revenues every year.'
The problem for the Commission is that it has based its case for harmonisation on the emotive topic of fraud prevention. By first resisting and now only grudgingly and confusingly acceding to the proposals of member states, it risks creating the impression that the ideology of harmonisation matters far more to it than the reality of crime and financial loss.
About the author
Nicholas Hallam is chief executive of VAT consultancy Accordance