Recently, the European Commission has published a legislative proposal, which aims to drastically change the intra-Community business-to-business (B2B) VAT system. If the Council adopts the proposal, almost all internationally active entrepreneurs will have to change the VAT treatment of their cross-border intra-EU supplies of goods. In this newsflash – which forms the first in a series – we discuss the primary elements of the new VAT system. First, we explain the current system in more detail.
Susceptibility to fraud
The current intra-Community B2B VAT system is based on two core concepts. Firstly, the supplier makes an exempt (zero-rated) ‘intra-Community supply’ of goods in the Member State of departure of the goods. The entrepreneur who purchased the goods carries out a so-called taxable ‘intra-Community acquisition’ of the goods in the Member State of arrival of the goods (see Figure 1).
Because mala fide entrepreneurs can purchase VAT-free goods across the border, the current VAT system has proven to be highly susceptible to VAT fraud. It is estimated that the Member States lose €50 billion of VAT receipts per year due to cross-border VAT fraud. With this in mind, the European Commission has designed a new VAT system based on a categorically different VAT treatment of intra-Community supplies of goods. In the following section, we discuss this system.
Main elements of the new IC VAT system
Under the new VAT system, the intra-Community supply and acquisition are replaced by one taxable event: the Intra-Union supply. This supply is taxable in the Member State of arrival of the goods, against the VAT rate applicable there. For example: when a Dutch entrepreneur supplies and transports goods from Maastricht to an entrepreneur (customer) in Madrid, the Dutch entrepreneur is required to charge 21% Spanish VAT to the latter. This VAT is payable to the Spanish Treasury (see Figure 2).
It is believed that the new IC VAT system is more resistant to fraud. To make it as simple and administratively efficient as possible, the entrepreneur may use a One-Stop Shop (OSS) for reporting and paying VAT that is due in other Member States. For example: if the Dutch entrepreneur uses the OSS in the Netherlands, he can declare and pay the Spanish VAT via his OSS return in the Netherlands (see Figure 3).
The Certified Taxable Person
There is one important exception to the taxation method described above. If the entrepreneur who makes the Intra-Union supply is not established in the Member State of arrival of the goods, and his customer is a so-called ‘Certified Taxable Person’ (CTP), the VAT is levied from the customer. In that case, the supplier is not required to mention any VAT on his invoice (see Figure 4).
The recognition as a CTP is dependent on the trustworthiness of the respective entrepreneur. In the next article in this series, we will discuss the CTP status further – including requirements and consequences.
If the Commission’s proposal is accepted, entrepreneurs throughout the EU will face drastic changes. Amongst other things, they will have to redesign or alter various business processes – e.g. invoicing, client and supplier acceptance procedures, ERP configurations, VAT reporting – in line with the new VAT system. Additionally, they will have to decide whether to apply for CTP status. If you want to discuss the potential implications for your company, please contact your local Baker Tilly expert.