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Thursday, 04 October 2018

VAT update: Ecofin agreement on quick fixes, the generalised reverse charge mechanism and reduced rate for e-books

On 2 October 2018 a much-anticipated ECOFIN meeting was held in Luxembourg. The EU Ministers of Finance reached an agreement on quick fixes, the generalised reverse charge mechanism and the application of a reduced rate to e-books. The main results of this meeting can be found by clicking here. Please find below a short summary.

While waiting for the definitive VAT regime on goods to be taxed in the country of their consumption, the European Commission last year announced four quick fixes to improve the current VAT system for intra-Community trade. These quick fixes should come into force from 1 January 2019. In brief they contain:

  • a simplification and harmonisation of rules regarding call-off stock arrangements;
  • a requirement that the VAT identification number of the customer will become a substantive condition for exempting the intra-Community supply of goods;
  • a simplification of chain transactions to enhance legal certainty; and
  • a harmonisation and simplification of the rules for proving the intra-Community transport of goods for the purposes of applying the VAT exemption.
In the initial European Commission proposal, three of these quick fixes were linked to the condition that the parties involved should have the status of “Certified Taxable Person” (CTP).

These quick fixes were discussed during the ECOFIN meeting on 22 June 2018 but a decision was put on hold because certain EU Member States had introduced a fifth quick-fix relating to the VAT exemption for cost-sharing associations.

During the last ECOFIN meeting, the EU Member States and the European Commission came to an agreement on the (four) quick-fixes:
  • the initial requirement of being a CTP for three of the four quick-fixes has been dropped. The Commission, who introduced this concept in VAT law, agreed to this outcome but stressed the importance of establishing the definitive VAT regime as soon as possible.
  • the Commission committed itself to further examining the rules on the VAT exemption for cost-sharing associations and potentially will come forward with a proposal in this respect.
  • after discussions in the European Parliament, the proposal on the four quick fixes can be adopted by the European Council.
  • the four short-term quick-fixes are expected to enter into force on 1 January 2020. Thus, this has been suspended for one year compared to the initial Commission proposal.

Another important decision is the acceptance of the generalised reverse charge mechanism. This was a demand from the Czech Republic, who had previously blocked an agreement on the reduced VAT rate on e-books if this demand was not granted by the Council. Now, EU Member States will be able to use a reverse charge mechanism for all sorts of domestic supplies of goods and services, above a threshold of €17 500 per transaction. The mechanism can be installed up until 30 June 2022 and very strict technical conditions must be met. Among others, these are that 25% of the national VAT gap must be due to ‘carousel’ fraud and that appropriate and effective electronic reporting obligations must be implemented.

A third VAT decision is the authorisation for Member States to apply a reduced VAT rate for e-books. For many years this subject has led to various discussions between and amongst EU Member States, the European Commission and before the Court of Justice of the European Union. Now, the Commission’s proposal in this respect has been accepted. As a result, in the future it will be possible for EU Member States to apply a reduced VAT rate to e-books.

Lastly, in the ongoing battle against VAT fraud, further measures in the field of administrative cooperation between the EU Member States and between the national tax authorities and EU law enforcers have also been agreed to.

This ECOFIN meeting has shown that EU Member States are still able to compromise and to achieve improvements to the EU VAT system. However, the most important change still needs to be agreed on, namely the introduction of the definitive VAT regime for intra-community trade. The European Commission’s plan to tax intra-Community supplies in the country of destination, combined with a reverse charge mechanism for CTPs will certainly need much more discussion between EU Member States before it will be accepted. The outcome remains unsure.

Tiberghien’s VAT team continues to monitor all EU (and national) developments in the field of VAT law. If you would like to receive further information on any of the aspects discussed above (or any other aspects), then please do not hesitate to contact us.
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