EUROPEAN COMMISSION

Brussels, 4.10.2017

SWD(2017) 325 final

COMMISSION STAFF WORKING DOCUMENT

IMPACT ASSESSMENT

Accompanying the document

Proposal for a Council Directive

amending Directive 2006/112/EC as regards harmonising and simplifying certain rules in the value added tax system and introducing the definitive system for the taxation of trade between Member States

{COM(2017) 567final}
{COM(2017) 568 final}
{COM(2017) 569 final}
{SWD(2017) 326 final}

TABLE OF CONTENTS

1. 1. Introduction and context

1.1. 1.1. Introduction

1.2. 1.2. Scope of the initiative

1.2.1. 1.2.1. Taxation of trade between Member States

1.2.2. 1.2.2. Rationale for a two-step approach

1.3. 1.3. Interaction of the initiative with the upcoming VAT proposals on rates, SMEs and administrative cooperation

1.3.1. 1.3.1. VAT rates

1.3.2. 1.3.2. SMEs

1.3.3. 1.3.3. Administrative cooperation

1.4. 1.4. Functioning of the common system of value added tax

1.4.1. 1.4.1. Basic principle: the fractioned collection of VAT

1.4.2. 1.4.2. VAT treatment of intra-EU suppl ies of goods before 1993

1.4.3. 1.4.3. VAT treatment of intra-EU supplies of goods since 1993

2. 2. What is the problem and why is it a problem?

2.1. 2.1. Problem tree

2.2. 2.2. Evalu ation of the EU VAT system and other sources attesting to the problems

2.3. 2.3. Problem 1: intra-EU cross-border VAT fraud

2.3.1. 2.3.1. The problem and its EU dimension

2.3.2. 2.3.2. Evolution of the problem

2.3.3. 2.3.3. Problem driver: the endemic weakness of the current transitional VAT system resulting from the break in the fractioned collection of VAT

2.3.4. 2.3.4. Consequences: who is affected and how?

2.4. 2.4. Problem 2: The complexity of the current transitional VAT system

2.4.1. 2.4.1. The problem and its EU dimension

2.4.2. 2.4.2. Introduction and VAT notions

2.4.3. 2.4.3. Driver 1: The additional VA T obligations associated with the current transitional VAT system

2.4.4. 2.4.4. Driver 2: Divergent application of EU VAT rules acros s the Member States.

2.4.5. 2.4.5. Consequences: who is affected and how?

2.5. 2.5. Conclusion

2.6. 2.6. Summary of main causes/consequences to the complexity of the current transitional VAT system

2.7. 2.7. Evolution of the problem without ac tion at EU level (dynamic baseline)

2.7.1. 2.7.1. Intra-EU cross-border VAT fraud perspective

2.7.2. 2.7.2. Complexity perspective

2.7.3. 2.7.3. Limits to the effectiveness of the current transitional VAT system

3. 3. Why should the EU act?

4. 4. What should be achieved?

4.1. 4.1. General objectives

4.2. 4.2. Specific objectives

4.3. 4.3. Linking the objectives to the problem

4.4. 4.4. Consistency with other EU policies and with the Charter for fundamental rights

5. 5. What are the various opti ons to achieve the objectives?

5.1. 5.1. Selection of options

5.2. 5. 2. Baseline

5.3. 5.3. Option 1: Limited improvement of current rules

5.4. 5.4. Option 2: Taxation following the flow of goods

5.5. 5.5. Option 3: Reverse charge following the flow of goods

5.6. 5.6. Option 4: Alignment with the place of supply of services

5.7. 5.7. Option 5: Taxation following the contractual flow

5.8. 5.8. Summary: main features of the options

5.8.1. 5.8.1. Place of taxation

5.8.2. 5.8.2. Person liable for the payment of VAT

5.8.3. 5.8.3. Technological dimension

5.8.4. 5.8.4. Summary table

5.9. 5.9. Discarded option: Option 3

6. 6. What are the impacts of the different policy options and who will be affected?

6.1. 6.1. Methodology

6.2. 6.2. Analysis of the impacts of each of the options

6.2.1. 6.2.1. Baseline

6.2.2. 6.2.2. Option 1: Limited improvement of current rules

6.2.3. 6.2.3. Option 2: Taxation following the flow of good s

6.2.4. 6.2.4. Option 4: Alignment with the place of supply of services

6.2.5. 6.2.5. Option 5: Taxation following the contractual flow

7. 7. How do the options compare?

7.1. 7.1. Summary assessment of the impacts

7.1.1. 7.1.1. Impact on MTIC fraud and on other fraud aspects

7.1.2. 7.1.2. Impact on administrative costs

7.1.3. 7.1.3. Impact on cash flow of Member States

7.1.4. 7.1.4. Impact on compliance costs

7.1.5. 7.1.5. Impact on cash flow of businesses

7.1.6. 7.1.6. Internal market perspective

7.1.7. 7.1.7. Macroeconomic impact

7.2. 7.2. Overall feedback of stakeholders on the options

7.3. 7.3. Comparison of options

7.3.1. 7.3.1. Comparison of effectiveness

7.3.2. 7.3.2. Comparison of efficiency

7.3.3. 7.3.3. Comparison of coherence

7.4. 7.4. Identification of the preferred option: Option 2 (combined with Option 1)

7.4.1. 7.4.1. Option 2 and final target

7.4.2. 7.4.2. A staggered and balanced implementation: combining Option 1 and Option 2

7.5. 7.5. Subsidiarity of the preferred option

7.6. 7.6. Proportionality of the preferred option

7.7. 7.7. Impact on SMEs

8. 8. How w ould actual impacts be monitored and evaluated?

8.1. 8.1. Indicators for monitoring and evaluation

8.2. 8.2. Monitoring structures

8.3. 8. 3. Evaluation

Annex 1: Procedural information Annex 1: Procedural information

Annex 2: Stakeholder consultation Annex 2: Stakeholder consultation

Annex 3: Who is affected by the initiative and how Annex 3: Who is affected by the initiative and how

Annex 4: Analytical models used in preparing the impact assessment Annex 4: Analytical models used in preparing the impact assessment 102

Annex 5: background information on VAT Annex 5: background information on VAT 117

Annex 6: Evaluation and studies to support the impact assessment Annex 6: Evaluation and studies to support the impact assessment 144

List of tables

Table 1: Table 1: VAT Gap estimates, 2010 - 2014

Table 2: Table 2: Causes/consequences - Complexity of current transitional VAT system

Table 3: Table 3: Links objectives/problem s

Table 4: Table 4: Classification of the options

Table 5: Table 5: Main features of the options

Table 6: Table 6: Summary impacts on Member States in net monetary terms (EUR millio ns)

Table 7: Table 7: Summary impacts on compliance costs of businesses

Table 8: Table 8: Summary analysis of impacts

Table 9: Table 9: Monitoring and evaluation framework

Table 10: Stakeholders consulted Table 10: Stakeholders consulted

Table 11: Consultation activities Table 11: Consultation activities

Table 12: Primary data collection instruments Table 12: Primary data collection instruments

Table 13: Criteria for defining business types Table 13: Criteria for defining business types

Table 14: Table 14: Forecasts of the macroeconomic variables under the baseline (3-year cumulative growth)

Table 15: Table 15: Difference in % of the 3-year cumulative growth of the macroeconomic variables under each of the five policy options differ from the baseline

Table 16: Inventory of possible options Table 16: Inventory of possible options

Abbreviations

Glossary of terms in their meaning within this document and for its specific purpose

1.Introduction and context

1.1.Introduction

Value Added Tax (VAT) is a general tax on consumption applied to supplies of goods and services along the whole production and distribution process. It is a major and growing source of tax revenue in the European Union (EU). VAT raised slightly more than EUR 1 trillion in 2015, which corresponds to 7% of EU GDP or 17.6% of total national tax revenues 1 . One of the EU's own resources is also based on VAT (12.4% of the EU budget in 2015) 2 . As a broad-based consumption tax, it is considered to be one of the most growth-friendly forms of taxation.

One of the key strengths of VAT is that, by allowing businesses to exactly offset the tax incurred in previous stages of the production chain, it is much better suited than other types of indirect taxes to operate an internal market free of tax distortions. This was the main reason for its early adoption by the EU. It is governed by the VAT Directive 3 which aims at ensuring that the principles underlying the functioning of this tax apply consistently in all Member States.

In recent years, however, the VAT system has been unable to keep pace with the challenges of the global economy and the opportunities offered by new technologies. Therefore, the Commission adopted on 7 April 2016 an Action Plan on VAT 4 (hereinafter "Action Plan") setting out ways to modernise the VAT system so as to make it simpler, more fraud-proof and business-friendly. In this context, the Commission announced its intention to adopt in 2017 four VAT-related proposals:

1)a definitive VAT system for intra-EU cross-border trade based on the principle of taxation in the Member State of destination 5 in order to create a robust single European VAT area (first legislative step 6 );

2)a modernised VAT rates policy so as to allow Member States greater autonomy on setting the VAT rates;

3)a comprehensive simplification VAT package for SMEs 7 ;

4)a proposal to enhance VAT administrative cooperation and EUROFISC 8 .

This impact assessment relates to the first mentioned proposal on a definitive VAT system for intra-EU trade (hereafter the "initiative").

This initiative is part of the Commission's Regulatory Fitness and Performance Programme (REFIT). All the options (except baseline) of this initiative will likely have significant impacts on simplification and will reduce administrative burden and compliance costs. These benefits for businesses (including SMEs) would have a positive impact on economic growth and competitiveness.

1.2.Scope of the initiative

1.2.1.Taxation of trade between Member States

The VAT Directive defines the way in which VAT is to be collected both on domestic transactions (involving one single Member State) and on cross-border transactions (involving more than one Member State). As explained in Section 1.4 below, the current system for the taxation of trade between Member States is based since 1993 on "transitional arrangements" 9 .

These transitional arrangements suffer from numerous shortcomings which result in the VAT system being neither fully efficient nor compatible with the requirements of a true single market. This has been confirmed by the large majority of stakeholders during the broad based public consultation on the Green Paper on the future of VAT 10 and by more recent feedback received from business stakeholders via the REFIT Platform 11 (see further details in Annex 2 and Annex 5, Section 3). The European Parliament, the European Economic and Social Committee and the Tax Policy Group 12 also confirmed the need to reform the VAT system.

Further consultation with the Member States and other stakeholders in the framework of specialised and structured forums for discussion, respectively the Group on the Future of VAT (GFV 13 ) and the VAT Expert Group (VEG 14 ) (see more detailed information in Annex 1, Section 4), led to the conclusion that the transitional arrangements are too complex and costly for the growing number of businesses operating cross-border. It also showed that the transitional arrangements leave the door open to fraud.

While the reform of the taxation of trade between Member States regarding transactions between businesses and final consumers (hereafter "B2C 15 transactions") has started to be effective as from 1 January 2015 16 and its further development is currently the subject of negotiations in Council 17 , the initiative that is here being assessed is focussed exclusively on transactions between businesses (hereafter "B2B 18 transactions").

The purpose of this initiative is to put in place a definitive VAT system so as to pave the way for the creation of a genuine single EU VAT area for the internal market. This means a VAT system simpler for businesses trading across the EU while at the same time more robust to fraud, to the benefit of the Member States and also of compliant businesses. The efficiency of the VAT system needs to be further improved, in particular by exploiting the opportunities of digital technology and by enhancing greater trust between business and tax administrations and between EU Member States' tax administrations.

1.2.2.Rationale for a two-step approach

As announced in the Action Plan, the introduction of the definitive VAT system will be made through a gradual two-step approach 19 . As a first legislative step, the VAT treatment of intra-EU B2B supplies of goods would be settled. As a second legislative step, this treatment would be extended to all cross-border supplies, therefore also covering supplies of services. Only the first legislative step is the subject of the initiative that is here being assessed.

There are several reasons for this. In the first place, the introduction of the definitive VAT system means, above all, doing away with the transitional arrangements. These arrangements basically refer to goods. This owes to the fact that prior to 1 January 1993 only cross-border intra-EU supplies of goods (and not of services) gave rise to imports and exports. The transitional arrangements were a practical means of accommodating this situation. Therefore any attempt to replace those transitional arrangements will have to focus essentially on goods.

Second, the application of the principle of taxation at destination becomes particularly necessary when it comes to goods. As regards services, on 4 December 2007 the Council reached a political agreement on two draft Directives and a draft Regulation (the so-called "VAT package") aimed at changing the rules on VAT so as to ensure that VAT on services accrues to the Member State where consumption occurs 20 , i.e. according to the principle of taxation at destination. Its adoption by the Council on 12 February 2008 was an important step towards simplification for businesses 21 .

The rules regarding B2B supplies of goods remained however unchanged. Despite the fact that, in practice, their taxation effectively occurs at destination (i.e. where the goods arrive) the logic of the origin principle with its two transactions 22 still remains.

Third, intra-EU B2B trade in goods still requires a number of obligations which do not exist for services (e.g. proof of intra-EU transport of the goods, need to register in another Member State for particular transactions like consignment stocks, need to ascribe the intra-EU transport to a specific supply in the case of chain transactions - see further explanation under Section 2.4). There is therefore now a particular need to simplify the rules for goods.

Fourth, as will be seen further the preferred option for the definitive VAT system 23 builds on certain new technical solutions (a one-stop-shop mechanism (OSS) which includes the right to deduct input VAT - see further explanation in box 5 below). It seems reasonable to provide for a staged application of these solutions so that once they have proven to be efficient on transactions in goods, they will be also extended to intra-EU supplies of services. Such an approach has the advantage of limiting to one category 24 the number of transactions that will be affected by the new rules and of reducing the amounts of VAT channelled through the OSS.

In this regard, the staged approach is consistent with the one taken in VAT matters regarding the OSS. Initially a Mini One Stop Shop (MOSS - see further explanation in box 5 below) was established for B2C telecommunications, broadcasting and electronic services provided by third country suppliers 25 . That MOSS was later extended to intra-EU cross border supplies of those same services 26 . Next, it is foreseen in the e-commerce proposal for the OSS to be extended to intra-EU B2C supplies of goods and services and to supplies of goods imported from third countries or third territories 27 . The initiative means a further step in this direction targeting intra-EU B2B supplies of goods. Finally, the process will be completed at a later stage with the extension of the OSS to intra-EU B2B supplies of services.

In any event, the stage embodied by the initiative is an essential one since, as can be seen from the figures below, goods remain the main elements that are being traded across the EU as services represent only one third of the share of goods' transactions 28 . In focussing on goods, as a first step, the objective of reducing VAT losses resulting from cross-border fraud would also be better targeted.

Source: Eurostat

In addition and with a view to accommodate the specific request from Member States in Council 29 , the initiative will also propose certain improvements to the current VAT legislation. These improvements (hereafter the "quick fixes") are meant to address specific concerns with the current rules and are without prejudice to the more fundamental reform aimed at 30 .

1.3.Interaction of the initiative with the upcoming VAT proposals on rates, SMEs and administrative cooperation

The initiative on the definitive VAT system is an important step towards a modernised VAT system. It builds upon previous initiatives 31 and creates opportunities for the following particular areas that will each give rise to own legislative proposals.

1.3.1.VAT rates

Although the destination principle has been progressively implemented since 2008 32 , the initiative operates a fundamental (and therefore "definitive") change in the basic logic of the VAT system. The choice of a destination-based system raises the question of whether, and to what extent, the existing legal limits on rates are still necessary. Indeed, while harmonisation of the VAT rates is needed under an origin-based system to avoid distortions of competition 33 , this is not the case under a destination-based system. That is what the proposal on VAT rates will address. However, even without a change in the current VAT rates structure, the initiative 34 will have consequences on the collection of VAT. Therefore, the initiative will, independently from the proposal on VAT rates, provide for a central web-portal that will include information on the VAT rates applicable in all Member States.

1.3.2. SMEs

The fundamental nature of the changes made by the initiative means that all businesses will be impacted. While the simplification measures provided for under the initiative would also benefit SMEs, they are not specifically targeted to help SMEs. The difficulties of SMEs, in particular when trading cross-border, will be addressed through a specific proposal 35 .

1.3.3.Administrative cooperation

As will be explained later, one of the problems the initiative intends to tackle is VAT cross border fraud. However, since the full operation of the initiative will take some time, it is necessary to already improve the mechanisms in place in order to fight this type of fraud. Improved administrative cooperation between the Member States and a better functioning of the VIES system 36 (which will allow enhancing the quality and reliability of the information exchanged between the Member States) are elements which, at the same time, will in the short term improve the fight against fraud and in the medium term will support each step of the implementation of the definitive VAT system. Further, it will allow building trust between the Member States, which will facilitate the proper operation of the initiative 37 .

As can be seen, there is a direct link between the four proposals in that they together result in a coherent reform as put forward in the Action Plan. This is why they are planned to be adopted by the Commission this year as a package. However, although they are logically connected, the four proposals are nevertheless technically not linked. This means that each proposal can work on its own independently of the others although it would be preferable, for the sake of soundness of the reform, to have them all adopted by the Council.

1.4.Functioning of the common system of value added tax

1.4.1.Basic principle: the fractioned collection of VAT

VAT is assessed on the value added to goods and services that are bought and sold for use or consumption in the EU 38 . It is, as a rule, collected fractionally 39 by businesses 40 and, as a consumption tax, is borne ultimately by the final consumer 41 .

This system of partial payments allows the tax to be collected at each stage in the production and distribution chain 42 and ensures the self-policing character of this tax (see box 1 below).

1.4.2.VAT treatment of intra-EU supplies of goods before 1993

When the common system of VAT was established in 1967 43 , intra-EU cross-border supplies of goods between businesses were treated differently as compared with domestic transactions (see box 8 in Section 1 of Annex 5). They gave rise to exports exempted in the Member State of origin (Member State of departure of the goods) and were taxed upon import in the Member State of destination (Member State of arrival of the goods), according to the principle of taxation at the Member State of destination (for further explanation on origin and destination concepts see Section 2 of Annex 5).

However, the commitment was made already at that time to establish a definitive VAT system, based on the principle of taxation in the Member State of origin, which would therefore operate within the EU in the same way as it would within a single Member State.

1.4.3.VAT treatment of intra-EU supplies of goods since 1993

The abolition of fiscal frontiers between Member States by the end of 1992, of which the objective and timing were set out in the Single European Act 44 , made it necessary to reconsider the way in which trade in goods was taxed in the EU. That was due to the fact that exports and imports were no longer possible for VAT purposes as far as intra-EU cross-border trade in goods was concerned. At that time, the goal remained that goods would be taxed in the Member State of origin, perfectly reflecting the idea of a genuine internal market.

Under that origin system, a business established in a Member State ("MS1") would invoice its cross-border supplies of goods to other Member States ("MS2") in exactly the same way as the domestic supplies in MS1; i.e. by charging the VAT of MS1. The taxable customer would be allowed to deduct that VAT, collected by MS1, in his VAT return submitted in MS2. Because of that so-called cross-border deduction, a compensation or clearing system had to be put in place for reallocating the revenues between the Member States. This system would, in practice, create a collective responsibility whereas under the then existing system each Member State was individually responsible for the administration, control and collection of its own VAT. A high degree of trust between Member States was therefore a pre-condition for the new system.

Another essential element in order for the origin system to work properly was the convergence or approximation of VAT rates (and some other technical aspects such as exemptions). Otherwise major distortions of competition would occur since consumers would tend to acquire goods, for fiscal reasons, from Member States applying low VAT rates. This would run counter to the basic principle of VAT neutrality.

However, on these two essential points Member States were unable to agree before the foreseen date and since the political and technical conditions were not ripe, transitional arrangements were instead adopted and entered into force on 1 January 1993 (see box 2 below). These arrangements split the cross-border intra-EU movement of goods into two different transactions: an intra-EU supply of goods exempt in the Member State of origin (the supplier does not charge VAT on his supply) and an intra-EU acquisition of goods taxed in the Member State of destination (the customer self-accounts for the VAT due via a mechanism equivalent to a "reverse charge 45 "). With some few exceptions, these arrangements are essentially equivalent to the previous export/import customs system.

These rules were intended to be temporary (initially four years) but are still in force. Further, the currently applicable VAT legislation provides that these temporary arrangements (hereinafter referred to as the "current transitional VAT system") have to be replaced by definitive arrangements based on the principle of taxation in the Member State of origin 46 .

2.What is the problem and why is it a problem? 

2.1.Problem tree

The following figure summarises the problems, the problem drivers and the consequences as explained in the next sections.

2.2.Evaluation of the EU VAT system and other sources attesting to the problems

A comprehensive retrospective evaluation of the EU VAT system 48 was conducted in 2011 and its findings have been used as a starting point for the examination of the current transitional VAT system. This evaluation was a comprehensive exercise that covered all important aspects for the design of an improved VAT system.

The evaluation had been carried out before the Better Regulation Guidelines were put in place. This means in practice that the structure of the 2011 evaluation was not organized around the five evaluation criteria (Relevance, Effectiveness, Efficiency, Coherence and EU added value) that became mandatory later on. Nevertheless, the evaluation provided solid analysis of the problems underlying the current transitional VAT system, the results of which have been confirmed by further consultation of stakeholders (open public consultations, targeted stakeholder consultation through the GFV and the VEG - see Annex 2) as well as recent studies (see Annex 6). It looked in particular into the design and implementation of the most important elements of the current VAT system, including the functioning of the transitional VAT arrangements, and assessed their effectiveness and efficiency in terms of results (meeting objectives they were serving) and impacts (direct, indirect, expected and unexpected) they had created. It also examined their relevance and coherence with the smooth functioning of the single market and the requirement to avoid distortion of competition specified in Article 113 of the Treaty on the Functioning of the European Union.

The findings of the evaluation are therefore still valid and relevant for use in this impact assessment. A summary of the key elements of this evaluation organised around the five evaluation criteria mentioned above is provided in Annex 6.

According to the evaluation and further research, there are two fundamental problems regarding the current transitional VAT system:

1)The existing levels of VAT fraud within the EU caused by fraudulent activities such as Missing Trader Intra-Community fraud (hereinafter MTIC fraud) 49 .

This problem is referred to as "Intra-EU cross-border VAT fraud".

2)The complexity of the current transitional VAT system leading to additional costs for those businesses which engage in intra-EU cross-border trade.

This problem is referred to as "Complexity of the current transitional VAT system".

The problems, their drivers and consequences are further developed below. For more details on the reform process and the sources attesting to the existence of the problems see respectively Sections 3 and 4 of Annex 5.

2.3.Problem 1: intra-EU cross-border VAT fraud

2.3.1.The problem and its EU dimension

The evaluation of the EU VAT system 50 underlined the revenue losses that the Member States face as a result of the high levels of VAT fraud. According to this evaluation, although most of the VAT fraud is considered to be domestic, it has increased at EU level because of the growth in the phenomenon of MTIC fraud following the abolition of the EU’s internal fiscal frontiers 51 . This particular fraud is associated to the fact that the current transitional VAT system allows trading VAT free across Member State borders (see further explanation under Section 2.3.3).

The size of the VAT fraud is difficult to measure but the VAT gap 52 offers a useful and also unique EU-wide indicator. According to the latest Commission report on the VAT gap 53 which relies on data from 2014, the overall EU VAT gap in nominal terms is estimated at almost EUR 160 billion in revenue losses each year or 14.06% of the total expected VAT revenue. The VAT gap varies considerably between Member States. The smallest gaps are observed in Sweden (1.24%), Luxembourg (3.80%), and Finland (6.92%). The largest gaps are registered in Romania (37.89%), Lithuania (36.84%) and Malta (35.32%). Overall, half of the EU-27 Member States 54 record a gap above 10.4% (see Figure 1 below).

That VAT fraud problem has been made worse, according to views expressed by certain Member States in the GFV and in the VAT Committee 55 by the case-law of the Court of Justice of the European Union (CJEU). According to that case-law the exemption of an intra-EU supply of goods cannot be refused if the material conditions for the exemption are met, even in absence of the VAT identification number of the customer acquiring the goods 56 .

The problem created by this case-law stems from the fact that the EU legislator established the VAT identification number as the basic tool to control the proper functioning of the current transitional VAT system for intra-EU trade. In fact, the recapitulative statements and the VIES system 57 , which are also essential elements of control in this regard, are all based on the VAT identification number and cannot work without it.

Figure 1: VAT Gap as a percent of the VAT Total Tax Liability (VTTL) in EU-27 Member States, 2014 and 2013 (source CASE, 2016)

Very few Member States publish estimates of the size of MTIC fraud, supposedly because the nature of this type of fraud makes it difficult to measure. However, a recent study commissioned by the Commission confirmed the findings of the evaluation as MTIC fraud alone is found to be responsible for VAT revenue losses of approximately EUR 45 billion to EUR 53 billion annually 58 .

The MTIC fraud portion of the VAT gap ranges from 12% in Bulgaria to 39% in France (see Figure 2 below on the share of MTIC fraud in the VAT gap). On average (weighted average) it is estimated that 24% of the overall VAT gap is due to MTIC fraud. The rest of the VAT gap is attributed to losses of revenue due to domestic fraud and evasion, tax avoidance, bankruptcies, financial insolvencies, as well as miscalculations.

Figure 2: Share of MTIC fraud in the VAT gap (source "Own calculations" based on EY, 2015 study)

2.3.2.Evolution of the problem

Monitoring at EU level of VAT collection by individual Member States is relatively recent as the first study on the VAT gap dates back to 2009. The methodology is continually improved and annual updates of the study include the latest revised figures. Although the Commission is seeking to develop methods to extract data on fraud from the VAT gap, such information is still not available. The next VAT gap study is expected for 2018. The above estimations on MTIC fraud were provided by one specific study 59 and, contrary to the VAT gap study, no further data on its trend evolution is available.

The trend of the VAT gap over the period 2010-2014 is shown in Table 1 below. For the EU-26 60 as a whole, the VAT gap has increased from 13.53% in 2010 to 14.06% in 2014, which in absolute monetary terms amounts to an increase of about EUR 25 billion. 61 .

Table 1: VAT Gap estimates, 2010 - 2014

Source: CASE, 2016 and own calculations based on CASE, 2016.

Information on the VAT gap and on MTIC fraud for the period 1993-2009 (which followed the entry into force in 1993 of the current transitional VAT system put in place at the time the fiscal frontiers between the Member States were abolished) is not available, although it is likely that MTIC fraud (which finds its roots in the way the transitional VAT system is designed) has taken a few years to appear and to develop.

2.3.3.Problem driver: the endemic weakness of the current transitional VAT system resulting from the break in the fractioned collection of VAT

In domestic trade, as a rule 62 , the collection of VAT is based on fractioned payments. VAT is collected at each stage in the production and distribution chain and this ensures the self-policing character of this tax (see box 1 above). Customers pay the VAT due on their purchases to their suppliers who will remit it to the Treasury after deduction of the VAT charged to them by their own suppliers 63 . The collection of VAT on behalf of the Treasury is therefore ensured by suppliers through direct payments received from their customers.

In intra-EU trade in goods, this fractioned payment system is broken. The rules of the current transitional VAT system split every cross-border sale of goods between businesses into an exempted supply in the Member State of origin (i.e. no VAT is charged by the supplier to his customer) and a taxable acquisition in the Member State of destination (i.e. the customer is liable to pay the VAT due to the Treasury but no VAT is actually paid as he has an immediate right of deduction 64 - see further explanation in box 2 above). It is like a customs export-import scheme 65 , but lacks equivalent border controls and is therefore at the root of MTIC fraud, the typical intra-EU cross-border fraud.

MTIC fraud exploits the endemic weakness of the current VAT system (which was meant to be transitional – see explanation in box 2 above), that allows for goods to be bought cross-border VAT-free because of the break in the fractioned payment chain. The basic MTIC fraud scheme (see further details in box 3 below) involves a cross-border purchase of goods by a fraudster, followed by a domestic supply by that fraudster. The cross-border purchase of goods allows the fraudster to make a VAT neutral purchase (no payment of VAT, either to the supplier or to the Treasury). The subsequent domestic supply allows the fraudster to charge and collect the VAT from his customer. Instead of paying the whole of this VAT over to the Treasury, he takes the VAT with him and disappears.

Another type of fraud which must be mentioned here is "diversion fraud". Although not considered as typical intra-EU cross-border fraud because it mainly happens regarding exportation of goods to third countries 66 , diversion fraud also exploits the rules of the current transitional VAT system.

Intra-EU diversion fraud occurs when a fraudster reports an intra-EU supply of goods but then "diverts" the goods to the domestic market so that they remain in the same Member State and are sold without leaving the territory. The VAT fraud is crystallised in the amount of VAT charged by the fraudster to the customer, which is not accounted for to the Treasury (since the fraudster has reported to the authorities a fake intra-EU supply exempt from the VAT) (see Section 5, box 9 in Annex 5).

MTIC fraud can be committed in many different ways and the schemes become more elaborated every time. During the nineties of the last century, the fraudsters started their fraudulent activities in the simplest way. The typical MTIC fraud was committed by three or four companies involving two Member States. The most serious form of the fraud – known as carousel fraud – involves a series of contrived transactions within and beyond the EU, with the aim of creating large unpaid VAT liabilities and fraudulent VAT repayment claims. Similar to how a carousel goes round and round, the goods are passed around between companies and jurisdictions, generating each time losses for the Treasuries involved.

The following scheme illustrates the typical MTIC fraud leading to carrousel fraud.

The recent legislative proposal submitted by the Commission to Council 67 , which echoes the request from certain Member States to be allowed to apply a generalised reverse charge mechanism as an urgent measure to combat carrousel fraud, shows how the shortcomings of the current transitional VAT system can severely affect certain Member States. It also reveals the limits of traditional measures to combat such fraud. This is corroborated by recent reforms implemented in several Member States (e.g. new collection methods introduced in respect of certain transactions, compulsory electronic invoicing transiting via the tax administration) with a view to improving VAT collection.

2.3.4.Consequences: who is affected and how?

·Member States: MTIC fraud represents a cost for Member States through losses in tax revenue of approximately EUR 45 billion to EUR 53 billion annually. It is also likely to generate additional administrative costs through the need for additional audits, administrative and/or judicial proceedings.

·Businesses: MTIC fraud may also generate unexpected costs for businesses that inadvertently and unknowingly become involved in a fraudulent supply chain and may need to bear the unpaid VAT and any relevant penalties. Further it creates unfair competition between compliant and non-compliant businesses since fraud enables the latter to sell goods in the market at a lower price than the former 68 . Finally, it generates extra compliance costs, since Member States in an attempt to fight fraud impose new obligations which fall upon honest businesses. This problem was raised on various occasions by businesses including in submission XVIII.1.a provided via the REFIT platform.

·Citizens/Society: By depriving Member States of tax revenues, MTIC fraudsters are effectively robbing EU citizens of the means for governments to fund the provision of infrastructure such as schools and hospitals as well as other public services 69 . Losses in tax revenues might also have to be compensated by other forms of additional taxation. MTIC fraud is associated to organised crime. Fraudsters often use their profits to fund other forms of criminality, such as cigarette smuggling or drug trafficking 70 . MTIC fraud also appears to be used to launder money and return a healthy profit 71 . During the consultation process (see Annex 2), stakeholders concurred that MTIC fraud and other fraudulent schemes have negative effects on the tax collected and the protection of the rights of the honest businesses. Stakeholders insisted that fraud must be tackled by specific long term remedies addressed only to fraudulent businesses and the vast majority of the respondents commented that antifraud measures should be harmonised to be effective. Over 74% agreed that the current system is not sufficiently resistant to VAT fraud.

2.4.Problem 2: The complexity of the current transitional VAT system

2.4.1.The problem and its EU dimension

The establishment in 1993 of the single market was meant to reduce compliance costs associated with intra-EU trade, chiefly through the abolition of customs procedures. However, according to the evaluation of the EU VAT system 72 , the parallel introduction of the current transitional VAT system resulted in a very complex system for intra-EU trade in goods (as compared with the previous one) which led, as a consequence, to higher compliance costs for businesses trading cross-border as compared to businesses trading only domestically.

According to the evaluation, this complexity arises not only from the new specific VAT rules but also from other related provisions. In this regard, the statistical requirements that were put in place to allow identification of VAT-taxable transactions and to help record trade between Member States (the Intrastat system 73 ) have resulted in a substantial burden for intra-EU traders (estimated at 5% of the value of trade, with wide variation according to size and country).

A recent study 74 confirmed the findings of the evaluation: on average, the VAT cost of compliance per euro of turnover is 11% higher for intra-EU trade compared with the corresponding VAT compliance per euro of turnover for domestic trade.

2.4.2.Introduction and VAT notions

The next sections describe the two main drivers leading to the complexity of the current transitional VAT system which are (i) the additional VAT obligations associated with the current transitional VAT system and (ii) the divergent application of the VAT rules across the Member States. They make reference to particular VAT notions. To avoid repetition, these VAT notions are explained in box 10 in Annex 5.

2.4.3.Driver 1: The additional VAT obligations associated with the current transitional VAT system

In comparison with domestic trade, doing business across the EU triggers additional obligations. These obligations are meant to ensure an "administrative" follow-up of the goods traded within the EU, in order to remedy the break in the VAT ‘audit trail’ resulting from the abolition of intra-EU border controls. In this regard, some stakeholders consider that the customs controls at the internal borders between Member States that were abolished in 1993 have been replaced by controls and administrative obligations shifted onto the economic operators. Moreover, they are of the view that there is no consistency between domestic and intra-EU cross-border supplies (see Annex 2).

Further feedback collected from expert stakeholders and Member States (see Annex 2) allowed identifying the main elements triggering these additional obligations which make trading in the EU more complex, and therefore more onerous, than engaging in domestic trade (see list of main additional obligations and further details in Section 7, box 11 in Annex 5). These obligations must be fulfilled in the Member State of establishment of the business and in any other Member State where the business performs economic activities. This requires particular investigations and maintenance of appropriate records and details, in addition to normal commercial documentation, if the VAT obligations linked to intra-EU transactions are to be fulfilled.

2.4.4.Driver 2: Divergent application of EU VAT rules across the Member States.

The complexity of the current transitional VAT system is partly the result of the divergent application of the EU VAT rules by the Member States. According to the evaluation of the EU VAT system 75 , differential requirements for dealing with different tax administrations are the determinants of intra-EU additional transaction costs. The evaluation also pointed out that so long as the application of the EU VAT rules across the Member States varies, small businesses will undoubtedly continue to have considerable difficulties with intra-EU trade.

This further impacts on key issues like the place of taxation, leading to potential double taxation (to the detriment of businesses) or non-taxation (to the detriment of Member States). In this regard different application of the EU VAT rules by the Member States is seen by stakeholders as one of the most serious obstacles to benefiting from the single market (see Sections 2, 4, 5 of Annex 2). This is also the main reason why respondents (see Sections 2 and 6 of Annex 2) considered the current transitional VAT system to be extremely complex and creating high administrative burdens.

Such differences stem firstly from the numerous derogations and options in the VAT Directive, secondly from the discretion left to the Member States in their implementation and application and thirdly from divergent interpretations. These differences can affect the scope of the tax, the scope and number of exemptions, the chargeability of the tax, the structure of the VAT rates applied, formal obligations such as invoicing, the rules on deduction or the organisation and efficiency of the tax authority.

However, the focus of the initiative that is here being assessed, and of the in-depth discussions held with the Member States and expert stakeholders, is limited to the complexities resulting from differences that are specifically linked to the functioning of the current transitional VAT system.

The main differences can be grouped in the following two categories: (i) divergences in obligations and procedures imposed on businesses by the different Member States and (ii) divergences in the qualification of certain transactions and their VAT treatment between Member States (see list of main discrepancies and further details in Section 8, boxes 12 and 13 in Annex 5).

2.4.5.Consequences: who is affected and how?

·Member States: Ensuring business compliance with complex rules makes monitoring and audit tasks more difficult which results in higher administrative costs. Although national administrative practices established unilaterally by Member States can be held partly responsible for the complexity, a greater part is due to the rules laid down in the VAT Directive aimed to ensure the follow-up of the goods circulating VAT-free across the EU.

·Businesses: Businesses trading cross-border bear an extra compliance cost of 11% in comparison to businesses trading only domestically. Further there are additional risks associated with legal uncertainty for businesses engaged in cross-border trade. Those costs and risks can deter businesses, in particular SMEs, from trading across the EU. The functioning of the single market is therefore affected by the VAT rules as they influence where goods and services are produced, traded, bought and sold. This goes against the basic principle of neutrality governing VAT, according to which VAT must be neutral regarding economic activities.

The evidence collected through the whole consultation process (see Annex 2) demonstrates that the current transitional VAT system is extremely complicated and entails costs for businesses and difficulties for Member States when it comes to ensuring compliance. Complexity was pointed out as leading businesses to seek specialised advice when embarking in cross-border activities. The added cost was referred to as high and one which SMEs might not always have the resources to deal with. Moreover, errors were mentioned as resulting in substantial and sometimes disproportionate penalties 76 . Complexity was also found to make it difficult for businesses to have legal certainty with regards to the VAT treatment of their transactions.

2.5.Conclusion

It results from the analysis of the problems that the functioning of the current transitional VAT system is causing disturbance to both Member States and businesses. The problems are interrelated since complexity creates opportunities for fraudsters and increased fraud leads to more complexity. These are problems that are exacerbated by the increase in cross-border activity that is the result of globalisation of the economy and the extension of the EU VAT area (from 12 to 28 Member States) since these rules entered into force in 1993.

2.6.Summary of main causes/consequences to the complexity of the current transitional VAT system

Table 2: Causes/consequences - Complexity of current transitional VAT system

2.7.Evolution of the problem without action at EU level (dynamic baseline)

2.7.1.Intra-EU cross-border VAT fraud perspective

For the time being, Member States and the Commission have joined efforts to combat MTIC fraud through the so-called "conventional measures" 77 , i.e. by improving administrative cooperation between the Member States. Amongst these measures are the set-up of the EUROFISC platform and the recourse to multilateral controls (i.e. controls involving tax administrations of more than one Member State).

In order to improve their fight against intra-EU cross-border VAT fraud, it is expected that Member States will continue reinforcing their cooperation in order to speed the exchange of quality information between them. The following upcoming proposals will soon be tabled by the Commission:

·A set of 20 measures 78 by which urgent action will be taken on the following fronts:

-Improving cooperation within the EU and with non-EU countries.

-Moving towards more efficient tax administrations.

-Improving voluntary compliance and tax collection.

·Directive on the fight against fraud to the Union's financial interests by means of criminal law 79 .

·Regulation on the establishment of a European Public Prosecutor's Office 80 .

These measures are expected to help improve the fight against fraud in general. Improvements to the quality of information exchanged between the Member States and the speed of such an exchange through the use of electronic means will be particularly helpful in fighting against cross-border fraud. However, these measures alone would not be sufficient to radically reduce the level of cross-border fraud as they are not targeted at putting an end to the endemic weakness of the current transitional VAT system leading to the specificity of MTIC fraud.

2.7.2.Complexity perspective

Regarding the main issues linked to the complexity problem (need for certain transactions to be VAT registered/liable, need to comply with specific rules in Member States other than the Member State of establishment, proof of transport), any improvement would require a change in the EU rules.

Concerning the complexity linked to the VAT treatment/qualification of certain transactions, Member States might continue trying to agree common guidelines in the VAT Committee. However, this would be based on a case-by-case basis and further guidelines issued by the VAT Committee are merely views of an advisory committee. They do not bind either the European Commission or the Member States who are free not to follow them.

Regarding the input tax deduction, improvements to the cross-border intra-EU refund procedure have been introduced in 2010 (an electronic procedure for submission of the refund applications via a web portal only in the Member State where the business is established and not in all Member States where VAT has been incurred as under the old rules) 81 . While certain improvements could still be made by the Member States at national level (e.g. speeding-up the processing of applications, facilitating access to information and guidance as regards national implementing rules) there is no solution to overcome the cash flow disadvantage intrinsic to such a refund procedure.

2.7.3.Limits to the effectiveness of the current transitional VAT system

The current transitional VAT system was designed to provide a one-off solution to the abolition of the fiscal frontiers in 1993 and was a short-term practical system meant originally for four years. This system quickly showed its shortcomings 82 which the Member States tried to address each in their own way. This has led to a fragmented VAT system, making intra-EU cross-border transactions difficult and risky for businesses, in particular SMEs. The consequence is that the VAT rules have the potential to see businesses refrain from trading across borders.

The development in recent years of e-governance has provided Member States' tax administrations new tools to improve their tax collection systems through better efficiency in collecting, processing, controlling and exchanging information. However, the pace of development but also the type of Information and Communication Technology (ICT) used differ from one Member State to another. This entails challenges for the cooperation between Member States' tax administrations not only in terms of technological factors but also from an administrative, legal and institutional perspective. If no fundamental solution is found at EU level, this might in turn entail that Member States focus on the development of own specific measures which deviate from the normal functioning of the VAT system.

The recent history of the VAT Directive 83 shows the spill-over effect linked to the use of the reverse charge mechanism in an effort to combat MTIC fraud. Requests for derogating measures in order to introduce new methods for the collection of the VAT are also likely to continue. The solutions sought by the Member States are not only likely to increase fragmentation of the VAT system, but they can also lead to disproportionate or even legally doubtful measures. All this means a high risk that businesses will be faced with individual rules specific to each one of the Member States although the problem to solve is common to all of them. For these reasons, in the REFIT Platform, businesses called for a common solution 84 .

As long as an EU-wide systemic solution is not put in place to counter the problems created by the current transitional VAT system, fraudsters and Member States will continue the endless loop of efforts in which the former will develop more aggressive fraud schemes while the latter will need to implement new control measures that will increase costs for both businesses and Member States.

Without action at EU level, the endemic weakness of the current transitional VAT system will continue to be exploited by fraudsters. Fraud levels might be stabilise but this will be to the detriment of compliant businesses that will pay the price through high compliance costs (already 11% higher than for domestic trade) or even increasing compliance costs.

The complexity of the current transitional VAT system will continue to negatively impact the functioning of the internal market by failing to capture new business models, new markets and technologies, which translates into losses of competitiveness of honest EU businesses and losses in efficiency of tax administrations.

3.Why should the EU act? 

According to the principle of subsidiarity, as set out in Article 5(3) of the Treaty on European Union (TEU), action at EU level may only be taken if the envisaged aims cannot be achieved sufficiently by the Member States alone and can therefore, by reason of the scale or effects of the proposed actions, be better achieved by the EU.

VAT rules for cross-border EU trade can, by their nature, not be decided by individual Member States since, inevitably, more than one Member State is involved. Moreover, VAT is a tax harmonised at EU level. The problems identified in Section 2 of this impact assessment are embedded in the rules of the VAT Directive. Therefore any initiative to change the current transitional VAT system into a definitive system as regards intra-EU trade requires amending the current VAT Directive. This entails a proposal from the Commission and its adoption by the Council, acting unanimously in accordance with a special legislative procedure, and after consulting the European Parliament and the Economic and Social Committee.

The legal basis for the present initiative is Article 113 of the TFEU according to which: "The Council shall, acting unanimously in accordance with a special legislative procedure and after consulting the European Parliament and the Economic and Social Committee, adopt provisions for the harmonisation of legislation concerning turnover taxes, excise duties and other forms of indirect taxation to the extent that such harmonisation is necessary to ensure the establishment and the functioning of the internal market and to avoid distortion of competition".

Given the need to modify the VAT Directive, the objectives sought by the present initiative cannot be achieved by the Member States themselves. Therefore, it is necessary for the Commission, which has responsibility for ensuring the smooth functioning of the internal market and for promoting the general interest of the European Union, to propose action to alter and improve the situation.

As regards the provisions to harmonise and simplify rules within the current transitional VAT system (the "quick fixes"), they have unanimously been requested by the Member States which demonstrates that action at Union level is likely to be more effective as action at national level has proven not to be sufficiently successful.

Furthermore, the 2011 retrospective evaluation (see annex 6) already referred to the "piecemeal" approach by Member States as an unsatisfactory way to solve the problems of the transitional arrangements.

4.What should be achieved?

4.1.General objectives

The general objectives of the initiative are:

·To contribute to fiscal consolidation within the EU – by ensuring that taxes due are collected to feed national and EU budgets.

·The smooth functioning of the internal market – by reducing obstacles to intra-EU cross-border trade.

·To ensure fair taxation – so that all businesses are treated equally in order to avoid distortions of competition.

4.2.Specific objectives

The specific objectives of the initiative are:

·To make the EU VAT system more robust – by addressing the endemic weakness of the current transitional VAT system linked to the break in the fractional collection of VAT.

·To make the EU VAT system simpler – by addressing the complexities of the current transitional VAT system and by providing a level playing field for businesses whether engaged in domestic or cross-border transactions 85 .

4.3.Linking the objectives to the problem

Table 3: Links objectives-problems-solutions

*Qualitative assessment criteria:

·Equality and simplicity – Domestic and intra-EU transactions should be treated the same so that doing business across the EU becomes as simple (reducing compliance costs) and as safe (providing legal certainty) as engaging in purely domestic activities. Rules should not be an obstacle to the proper functioning of the single market. 

·Budgetary impact – VAT revenues should be allocated to the Member State of the final consumption of the goods in accordance with its conditions in particular its VAT rates. The impact on the cash-flow of business should be similar to that for domestic transactions to ensure a genuine level playing field.

·Ease of administration and cost of collection – An increase in costs for the tax administrations and business should be avoided in order to allow that the cost of collecting tax revenues is similar to that for domestic transactions.

·Prevention of fraud and abuse – Breaks in the VAT chain within the single market should be avoided to the extent possible to ensure that the VAT system remains robust and fraud-proof.

4.4.Consistency with other EU policies and with the Charter for fundamental rights

The creation of a simple, modern and fraud-proof VAT system is one of the fiscal priorities set out by the Commission for 2017 (Annual Growth Survey 2017 86 ) which should contribute to deepening the single market and making national markets bigger.

The main objectives of the initiative of reducing cross-border VAT fraud and lowering compliances costs for businesses trading across the EU by using new technologies are in line with this priority. The initiative would prompt Member States to put in place modern tax systems that can support growth and fairness between businesses and bring a new level of cooperation between Member States and between Member States and businesses to improve tax collection.

MTIC fraud is also one of the nine 87 , the European Union’s priority crime areas, under the 2014-2017 EU Policy Cycle of Europol.

Reducing administrative burdens, particularly for SMEs, is also an important objective highlighted in the EU’s growth strategy for the coming decade (Europe 2020 – A strategy for smart, sustainable and inclusive growth 88 ).

The proposed initiative and its objectives would be consistent with the EU SME policy as set out by the Small Business Act (SBA) 89 , in particular principle VII on helping SMEs to benefit more from the opportunities offered by the Single Market. It would be consistent with the Single Market Strategy (SMS) 90 which referred to the single European VAT area mentioned in the Action Plan. It would also be consistent with the EU objectives under REFIT 91 .

The objectives envisaged do not affect fundamental rights.

5.What are the various options to achieve the objectives? 

5.1.Selection of options

When looking at possible options to tax B2B transactions at destination, two fundamental issues have to be considered, namely:

·the place of taxation (whether it will be based on the physical flow of the goods or not); and

·the person liable for payment of VAT (whether the supplier charges the VAT of the Member State of destination and pays the VAT via the One Stop Shop or if instead the customer accounts for the VAT through the reverse charge).

The following qualitative assessment criteria were suggested and agreed by both the GFV and the VEG: (i) equality and simplicity; (ii) budgetary impact; (iii) ease of administration and cost of collection; and (iv) prevention of fraud and abuse (see Section 4.3 above).

On the basis of the outcome of a series of technical discussions in the GFV and the VEG on the possible options 92 , in addition to the Baseline, the five options discussed in the next section were selected (out of thirteen different options initially identified in close collaboration with stakeholders in the VEG and representatives of Member States in the GFV) to be assessed in-depth in an external study.

5.2.Baseline 

The baseline option assumes that no legislative action will be taken at EU level as regards the VAT treatment of cross-border transactions and that the current transitional VAT system will continue to apply. The functioning of the current transitional VAT system as such is described in Section 1.4 Functioning of the common system of value added tax and Box 2: Transitional VAT system since 1993.

The baseline takes into account the current applicable rules and not those which are contained in proposals currently discussed in Council or which might be adopted by the Commission in the future. However, it seems appropriate to dwell on the impact that those proposals might likely have in case they would be adopted.

A reference is needed, in the first place, to the VAT proposals on e-commerce, on a Generalised Reverse Charge Mechanism (GRCM - see footnote 83) and on reduced VAT rates on e-publications that are currently under discussion in the Council. While once adopted the e-commerce proposal should have positive effects on the baseline as it is expected to raise Member States' VAT revenues and decrease compliance costs to businesses, the effect of the adoption of the other proposals is uncertain, especially concerning the GRCM 93 which might pending its final design result in further fragmentation of the VAT system and have negative impact on compliance costs of business.

Finally, it is appropriate to make a reference to the impact that in the baseline might entail the adoption of the three other VAT legislative proposals (rates, SMEs and administrative cooperation) 94 which, according to the VAT Action Plan, should be adopted by the Commission in the near future.

The VAT rates proposal could be adopted even in the absence of an adoption of the initiative on the definitive VAT system. The current transitional VAT system is indeed de facto based on the destination principle which limits the distortions of competition due to the differentiation of VAT rates between the Member States 95 . As the current transitional VAT system would continue to apply, the business customer will also continue to self-assess the VAT due on his cross-border purchases in his own Member State 96 .

The proposals on the SME VAT Package and on administrative cooperation could also be adopted even in the absence of an adoption of the initiative on the definitive VAT system. Only the specific parts of these proposals linked to the initiative on the definitive VAT system would need to be adapted. Both proposals should on their own have positive impacts on administrative and compliance costs once adopted. Further the proposal on administrative cooperation should also have a positive impact regarding the problem of cross-border VAT fraud.

The baseline option will serve as the benchmark against which the other options will be assessed.

5.3.Option 1: Limited improvement of current rules

Option 1 consists in improving the current rules for intra-EU B2B supplies of goods without modifying them fundamentally. This means that the underlying principles and functioning of the transitional VAT system for intra-EU supplies of goods would remain unchanged (see also Diagram 1 in Section 10 of Annex 5 for its functioning).

The improvements that would be made to the current system under this option cover very specific set of rules that have been identified by national tax administrations and stakeholders, in particular during the consultation process, the discussions in the GFV, the VEG and by way of feedback from the REFIT platform, as the main areas of the existing legislation where legal clarity and certainty need to be enhanced. As requested by the Council in its conclusions on "Improvements to the current EU VAT rules for cross-border transactions" adopted on 8 November 2016, the following four issues will be addressed 97 :

1)The legal value of the VAT identification number of the customer as regards the exemption for the intra-EU supplies of goods in the Member State of departure of the goods

Providing a valid VAT identification number of the purchaser would become a substantive condition (and not merely a formal condition, as stated by the CJEU with regards to the current VAT rules) for applying the exemption of intra-EU supplies of goods. This modification would be proposed in reply to the demand made by Member States to amend the current VAT Directive in order to allow for better monitoring of the flow of goods using the recapitulative statements and the VIES system.

2)The VAT treatment applied to call-off stock arrangements

Call-off stock refers to the situation where a supplier moves stock to a Member State where he is not established, in order to sell it at a later stage to an already known buyer. Currently this gives rise to (i) a (deemed) intra-EU supply made by the transferor, (ii) a deemed intra-EU acquisition in the Member State of arrival of the goods made by the transferor (who has to register there), (iii) a domestic supply. The proposed amendment under Option 1 would consist in treating the cross-border transfer of goods and subsequent domestic sale as a single exempt intra-EU supply, with an intra-EU acquisition of goods made by the buyer (thus avoiding any obligations for the transferor in the Member State of arrival of the goods).

3)The VAT treatment applied to chain transactions

Chain transactions refer to cases where multiple parties are involved in one commercial transaction: company A sells to B, who sells to C, who sells to D and the goods are transported directly from company A to D, so B and C are simply intermediaries. Under the current VAT rules it is difficult to determine which supply involves the intra-EU movement of goods (which will be the only exempt supply in the chain). The proposed amendment under Option 1 would consist in establishing a legal presumption in this regard, which would bring legal certainty to tax administrations and businesses.

4)The rules on the proof of transport or dispatch of goods sold cross-border

That proof is necessary in order to justify, before the tax authorities of the Member State of departure of the goods, the application of the VAT exemption of the intra-EU supply of goods.

A legal presumption would be proposed establishing that when the supplier holds a certain number of non-contradictory commercial documents to certify the transport or dispatch made to another Member State, the goods will be presumed to have left the Member State where the supplier has declared an exempt intra-EU supply. This presumption will be rebuttable by national tax administrations providing evidence to the contrary.

The benefit of the last three simplification measures (call-off stock, chain transactions and proof of transport) would be limited only to Certified Taxable Persons (see box 4 below).

5.4.Option 2: Taxation following the flow of goods

Option 2 consists in modifying the current rules whilst still following the flow of the goods (see also Diagrams 2 and 3 in Section 10 of Annex 5 for its functioning).

When the goods sold are transported cross-border, VAT is due in the Member State where the goods arrive at the end of the transport or dispatch (i.e. the place of supply for VAT purposes is in the Member State of destination of the goods). If the goods are not transported or dispatched, the place of supply is in the Member State where the goods are located when the supply takes place.

The person liable for collecting the VAT due in the Member State of destination is, by default, the supplier of the goods. When the supplier is not established for VAT purposes in the Member State of taxation, VAT on that particular supply would be accounted for using a OSS in the Member State of establishment. The OSS would allow offsetting output VAT due on supplies made against input VAT incurred on purchases made within the EU.

Owing to the use of the OSS under this option and contrary to the rules of the current VAT system, a single VAT registration in the Member State of establishment would be sufficient for the supplier to report and account for all VAT due on sales made within the EU. Thus the supplier would no longer need to be registered in all Member States where he sells goods.

However, certain cross-border supplies of goods would continue to be subject to the reverse charge. This means that the place of taxation would still remain in the Member State of arrival of the goods but the person liable for collecting the VAT due would be the business customer rather than the supplier as explained above under the default rule. This would be possible only when the customer has requested and obtained the CTP status (see box 4 above). If the certified customer is not established in the Member State of arrival of the goods, VAT due on this transaction will then have to be reported and accounted for by the customer using the OSS in the Member State where he is established.

In this option, the supplier will not have to submit a periodical recapitulative statement. However, in order to combat fraud, the customer will be required to report his purchases from suppliers established in Member States other than that where he is established (except those for which the reverse charge is applied) and to mention the supplier's VAT identification number. When the transport of the goods is not organised by or on behalf of the supplier, the customer will have to provide the supplier with the name of the Member State of arrival of the goods within ten working days following the month in which the supply took place.

For this option to apply in a simpler and more consistent manner across the EU, it would be desirable to standardise the definitions of products eligible for reduced rates 100 and provide such information via a central web portal.

5.5.Option 3: Reverse charge following the flow of goods

Option 3 consists in adapting the current rules whilst still following the flow of the goods and applying the reverse charge for the collection of the VAT (see also Diagram 4 in Section 10 of Annex 5 for its functioning).

The current transitional VAT system splits every cross-border transaction into an exempt intra-EU supply and a taxable intra-EU acquisition. Under Option 3, the two separate concepts of intra-EU supply and intra-EU acquisition are abolished and replaced by one single transaction, the intra-EU supply, taxable in the Member State of destination. This means that from a practical point of view there will be no significant changes compared to the current system: goods sold and transported to another Member State will continue to cross borders free of VAT but from a conceptual and legal point of view, there will be only one rather than two intra-EU transactions.

When goods are dispatched or transported from one Member State to another the place of taxation will be in the Member State of arrival of the goods. If the goods are not transported or dispatched, the place of supply is in the Member State where the goods are located when the supply takes place.

Since this option involves a collection method based on the reverse charge, the person responsible for accounting for and collecting the VAT due will be the customer receiving the goods supplied rather than the supplier of the goods. The customer will therefore declare and deduct simultaneously the VAT relating to the cross-border supply in his domestic VAT return.

This option does not make use of a OSS for the reporting and collection of the VAT due. In any event, the customer will be obliged to provide the supplier with his VAT identification number attributed by the Member State of taxation. Further information would be exchanged via the recapitulative statement to be submitted by the supplier.

5.6.Option 4: Alignment with the place of supply of services

Option 4 consists in aligning the place-of-supply rules for goods with those governing the place of supply of services and using the reverse charge for the collection of the VAT. There will be only one taxable transaction – the supply of goods – meaning that the concept of intra-EU acquisition of goods will be abolished (see also Diagrams 5 and 6 in Section 10 of Annex 5 for its functioning).

Irrespective of whether or not goods are dispatched or transported, the place of supply will be where the customer has his main place of business and VAT will accrue to the Member State where that main place of business is located. This is also valid if the goods are transported to a Member State where the customer has no presence at all (neither in the form of his main place of business nor in the form of a fixed establishment) – the VAT due on that supply will still be due in the Member State where the main place of business of the customer is located.

However, where the goods are provided to a fixed establishment of the business customer, and this is in a Member State other than that where he has his main place of business, the place of supply will be where the fixed establishment is located. If the taxable person has neither a place of establishment nor a fixed establishment, then his permanent address or usual residence will serve as the place of supply.

In any event, to be subject to VAT the goods must be located within the EU. If a transaction involves goods located outside the EU, the transaction will not be taxable. On the other hand, if goods are in the EU, VAT will always be due, even if the customer is not established in the EU.

This option does not allow to completely disregarding the physical flows of the goods. In cases where the goods are provided to a fixed establishment of the business customer, and this is in a Member State other than that where he has his main place of business, the actual destination of the goods will remain the essential element to take into account.

When the supplier is not established in the Member State of taxation, the customer will be liable for the payment of VAT by applying the reverse charge.

The customer will be obliged to provide the supplier with his VAT identification number attributed by the Member State of taxation. In order to combat fraud, the location of the goods will need to be mentioned on the invoice/recapitulative statement and information would be exchanged via the recapitulative statement to be submitted by the supplier.

A simplification measure would be introduced whereby supplies to CTPs (see box 4 above) would not require a recapitulative statement. Given that the reverse charge will be applicable in all cases where the goods are supplied to a customer established in a Member State other than that of the supplier and that in those cases the supplier will not have to charge VAT, a fully extended OSS is not required under this option. A limited OSS would however be needed for goods supplied to a non-EU customer where those goods are located within the EU.

5.7.Option 5: Taxation following the contractual flow

Option 5 consists in aligning the place-of-supply rules for goods with the contractual flow and having the supplier charge the VAT of his customer (see also Diagrams 7 and 8 in Section 10 of Annex 5 for its functioning).

This means that the supplier will have to charge the VAT of the Member State of establishment of the customer which has contracted the supply of the goods, irrespective of whether or not the goods are transported cross-border.

If the supplier is not established in the Member State of taxation, he will report the VAT due using the OSS.

If the contracting party reallocates the cost to another establishment of the contracting party, that will be treated as a deemed supply and this entity will be required to account for and report the VAT due, once again using the OSS if the entity is not already registered for VAT in the Member State of taxation.

In any event, to be subject to VAT the goods must be located within the EU. If a transaction involves goods located outside the EU, the transaction will not be taxable. On the other hand, if goods are in the EU, the VAT will always be due, even if the customer is not established in the EU. In this last case, the place of supply will be the Member State where the supplier is established, or the customer will have the obligation to register in a Member State of the EU and all the supplies made to him will be located in this Member State.

A simplification measure will allow supplies made to CTPs to be subject to the reverse charge with the customer accounting for and paying the VAT.

For this option to apply in a simpler and more consistent manner across the EU, it would be desirable to standardise the definitions of products eligible for reduced rates 103 .

In order to combat fraud the customer will be required to report all purchases from non-established businesses (except those for which the reverse charge is applied).

5.8.Summary: main features of the options

5.8.1.Place of taxation

In addition to the baseline, the five alternative policy options ensure taxation at destination of cross-border B2B supplies of goods. However, they differ as to the actual place of taxation (see Table 4 below). Similar to the baseline, Option 1, Option 2 and Option 3 deem the place of taxation to be the Member State of arrival of the goods (follow the flow of goods), whilst Option 4 and Option 5 deem the place of taxation to be where the customer is established (follow the contractual flow). This distinction is important from a Member State's audit perspective (e.g. impact on administrative costs, efficiency of VAT collection) as following the flow of goods means that the movement of goods is monitored by the Member States. Such control instrument does not exist when taxation follows the contractual flow.

5.8.2.Person liable for the payment of VAT

When considering the way VAT would be collected, the options can be further classified in two main models (see Table 4 below): the "taxation model" (Option 2 and Option 5) and the "reverse charge model" (baseline, Option 1, Option 3 and Option 4). The taxation model, with the supplier charging the VAT to his customer, is based on fractionated payments. It ensures the self-policing character of the VAT system 104 and is also the system that applies in domestic trade. The reverse charge model, with the customer self-assessing the VAT due, suspends the collection of VAT until the final consumption stage (it allows VAT-free purchases by businesses) and therefore differs from domestic trade treatment. This is an important element as regards equal treatment but also more particularly with regard to MTIC fraud.

Table 4: Classification of the options

5.8.3.Technological dimension

Option 2, Option 4 and Option 5 build on the existing MOSS (in excess of EUR 3 billion was collected through the MOSS in 2015. This is estimated to account for 70% of total cross-border B2C sales of electronic services). These options would extend the use of such system which has shown to be successful in collecting VAT as a central point of contact.

Option 1 builds on the existing VIES system. Through the introduction of the CTP concept and the mandatory reference of the VAT identification number of the customer, it is expected to improve the quality of data exchanged between Member States.

5.8.4.Summary table

As can be seen from the summary Table 5 below, the five options have a number of similarities and differences. The summary table shows the scope of the obligations under each option and the applicable rules. It further outlines whether specific legislative issues 105 identified with the current transitional VAT system are addressed under each option.

Table 5: Main features of the options 106

5.9.Discarded option: Option 3

The changes proposed under Option 3 are of a technical legislative nature. Instead of having two transactions (exempt intra-EU supply and taxed intra-EU acquisition), Option 3 provides for one single transaction, the intra-EU supply taxable in the Member State of destination. There is no significant difference between this option and the current transitional VAT system. In both situations, the place of taxation is the Member State of arrival of the goods and it is the customer that pays the VAT.

Even if the legislative changes are minor, their implementation is expected to have some impacts on different elements as compared to the baseline (see further details in box 6 below). However, their magnitude compared to other options (in particular Option 2, Option 4 and Option 5) is negligible. Although, when compared to Option 1, it might seem to have slightly more positive impacts (mainly due to compliance costs reduction for large businesses), it does not address any of the legislative issues raised by the current transitional VAT system 108 . Moreover, it does not address MTIC fraud. Therefore this option has been discarded as an alternative option for future policy reform.

6.What are the impacts of the different policy options and who will be affected? 

6.1.Methodology

A specific study 113 has been commissioned to assess the impacts of the implementation of each of the policy options on the MTIC/VAT fraud, the administrative costs 114 and the cash flow of Member States, and on the compliance costs 115 and the cash flow of businesses. The macroeconomic impacts and in particular the effects on macroeconomic variables such as gross domestic product (GDP) are also assessed. The impact of the policy options from an internal market perspective, in particular the overall consistency in the VAT treatment of domestic and cross-border supplies of goods, is also covered.

A range of methodological tools are used to analyse the various impacts. In particular, the study relies on primary and secondary data (business survey and interviews, tax experts' survey, Member States' survey and interviews) collected across all 28 EU Member States to inform the analysis of compliance costs for businesses, administrative costs of Member States, cash flow impacts on businesses and Member States and the economic impacts. The data collected has been used to develop useful qualitative (technical, legislative, etc.) and quantitative insights, and inform also the assumptions and the parameters in the macro econometric Vector Autoregressive (VAR) model used for analysing the economic impacts.

The findings are therefore sensitive to the opinions of a sample of business respondents, tax officials and tax experts on questions that do not cover every possible element that might be required in order to fully assess the implications of the current and proposed policy options.

A detailed description of the overall methodology, the variety of data collection tools, the VAR model used, the key assumptions, and the limitations and caveats of the study is presented in Annex 4.

Finally, the environmental and social impacts of all policy options should be negligible or even zero and are not therefore covered in the below analysis.

6.2.Analysis of the impacts of each of the options

6.2.1.Baseline

Section 2 outlines in detail the problems and the problem drivers of the baseline. In summary, the situation is as follows.

1.MTIC fraud - Ranges from EUR 45 billion to EUR 53 billion annually 116 .

2.Administrative costs of Member States 117  - The monetary value of the labour costs associated with VAT administration is estimated at approximately EUR 1 730 million in the EU. In addition, Member States' non-labour costs associated with the administration of VAT (including external consultancy, IT systems and staff training costs) are on average EUR 27 million per Member State or EUR 745 million for the EU.

3.Cash flow of Member States 118  - Neutral as VAT on intra-EU purchases of goods continues to be declared and recovered (to the extent the business is entitled to do so) by businesses in the same VAT return.

4.Compliance costs of business - The intra-EU VAT compliance cost of businesses is estimated to be 0.62% of turnover from intra-EU trade 119 . On average, the VAT cost of compliance per Euro of turnover is 11% higher for intra-EU trade as compared with the corresponding VAT compliance per Euro of turnover for domestic trade. 

5.Cash flow of businesses 120  - Neutral as VAT on intra-EU purchases of goods continues to be declared and recovered (to the extent the business is entitled to do so) by businesses in the same VAT return.

6.Internal market perspective - Non-equal treatment domestic/cross-border supplies of goods.

7.Macroeconomic forecast – The EU-28 per capita real EU GDP is estimated to grow at a cumulative rate of 4.465% over an estimated 3-year period 121 . In absolute terms, the baseline real EU GDP at 2005 prices in 2013 was EUR 11 768 billion.

6.2.2.Option 1: Limited improvement of current rules

6.2.3.Option 2: Taxation following the flow of goods

6.2.4.Option 4: Alignment with the place of supply of services

6.2.5.Option 5: Taxation following the contractual flow

7.How do the options compare? 

7.1.Summary assessment of the impacts

A summary assessment of the options against the baseline is presented below.

The Table 6 below gives a summary of the net impacts on Member States and the impacts on MTIC fraud, administrative costs (in the year 1 of implementation and annual ongoing post implementation) and cash flow under each policy option.

Table 6:    Summary impacts on Member States in net monetary terms (EUR millions) 147

Source: Based on EY, 2015.

7.1.1.Impact on MTIC fraud and on other fraud aspects 

Under Option 1, the proposed legislative changes should not impact the current level of fraud carried out through MTIC or diversion. Under Option 4, a new exposure to fraud may arise. This is due to the fact that the Member State of destination of the goods may be different to the Member State where the VAT is required to be reported. As such, Member States have a reduced ability to identify and reduce the occurrence of fraud. Although under Option 2 and Option 5 there will still be an opportunity for MTIC fraud to be perpetrated, it will be significantly reduced in scale. The magnitude of this reduction will be influenced by the level of the mark-up applied by businesses on their purchases. A notable observation under Option 5 is that since the VAT is chargeable in the Member State where the customer is established, this could (similarly to Option 4) increase fraud on the basis that the goods could be shipped to a different Member State from where the customer is established.

In the public consultation 149 , almost all tax advisors and academics (94%) expressed the opinion that taxation of B2B intra-EU supplies 150 would improve fighting fraud, while businesses seem to be less persuaded as only 43% of SMEs 151 and 39% of large businesses agreed with this view. This important difference could be explained by the fact that academics and tax advisors have usually more global approach and a wider understanding of the key elements of the VAT system as such. In the context of the proposal on the definitive VAT system the understanding of the importance of the self-policing character of fractioned payments is very relevant for the assessment of the proposed options. On the other hand it should be pointed out that businesses are open to changes but at the same time they are more cautious in respect of possible additional costs that could be generated in this respect.

Further it is worth to note that over 74% 152 of the respondents agreed that the current system is not sufficiently resistant to VAT fraud within the EU.

In addition, the reverse charge mechanism as applied currently was recognised by 67% of all the stakeholders (within the group this position was held by 64% of SMEs and by 68% of larger business) as an effective, but rather costly measure to fight fraud.

7.1.2.Impact on administrative costs

Option 1 has the lowest cost impact from a VAT administration perspective in the year of implementation and annually post implementation. This may be due to the fact that some Member States have already implemented elements of this option. With regards to labour costs, under Option 2, Option 4 and Option 5, some additional FTE 153 requirements are expected in the year of implementation. However, only Option 5 would require notable additional FTEs in the years post implementation. With regards to non-labour costs, the implementation of IT systems is associated with the most significant cost increase expectations under Option 2, Option 4 and Option 5 154 .

7.1.3.Impact on cash flow of Member States

For Option 1 and Option 4 there should be no material impact on cash flow of Member States. Option 2 and Option 5 will result in the majority of Member States having a cash flow benefit. This is due to Member States receiving and holding VAT for a period of time before businesses in their local Member State seek to recover the VAT on their domestic VAT return.

7.1.4.Impact on compliance costs

Table 7 below presents a summary of the impacts on compliance costs of businesses (both as percentage change and as change in monetary terms, in comparison to baseline) under each policy option for each type of business (SME Type 1, SME Type 2 and Large Business) as well as for an 'all businesses' aggregate.

Table 7: Summary impacts on compliance costs of businesses 155

Source: EY, 2015.

As the above Table 7 shows, Option 1 is estimated to result, in percentage terms, in the largest VAT compliance cost savings for all types of businesses analysed and for all businesses. However, this option will only impact a limited number of businesses: approximately 13% of the business community would benefit which is also likely to be an over representation 159 . Therefore, the positive monetary impact of this option is significantly less than the other options. Option 4 is estimated to generate in monetary terms the highest compliance cost reductions for all types of businesses analysed. A notable observation is that the implementation of the OSS under Option 2 and Option 5 could result in cost increases for SME Type 1 businesses in the year of implementation and annually post implementation. However, with respect to SME Type 2 and large businesses cost reductions are expected in the year of implementation as well as on an ongoing basis.

Feedback from the open public consultation 160 showed that for 47% of the stakeholders the change that would introduce only one taxed transaction 161 would reduce business compliance costs whereas for 16% such costs would increase. Others believed that they will not be affected (17%) or had no opinion on this question (19%). The above information should be read together with the reply indicating that more than 89% of the respondents confirmed that businesses are confronted with some or many additional compliance costs linked with the application of the current VAT rules to intra-EU supplies of goods in comparison with the domestic supplies. None of the respondents replied that there are no additional compliance costs for the current situation. It is worth to note that more than 79% of the stakeholders believe that because of the additional compliance costs linked with VAT rules small companies do not engage in cross-border supplies.

80% of the stakeholders supported the extension of the OSS which would remove the obligation from the business to register in Member States in which it is not established and in this way reducing the compliance costs.

31% of the stakeholders believed that the introduction of the CTP would reduce the compliance costs of the suppliers while 45% indicated their potential increase.

Further it is important to note that the final assessment of the level of compliance costs linked with the CTP measure highly depend on whether the criteria to apply it would not be too burdensome 162 . 44% of the stakeholders would wish to request for such a status only if its application would not be too burdensome in practice. Only 8% would apply regardless of the level of difficulty linked with the requirements.

The feedback received from some business stakeholders via the REFIT Platform (see Annex 2), shows nevertheless support to measures for a correct VAT collection based on the concept of CTP (provided that the criteria used to define a CTP are easy and that information on CTPs is accessible to businesses on-line) and an extended OSS, as provided for under Option 2.

7.1.5.Impact on cash flow of businesses

There should be no significant impact upon cash flow of businesses under Option 1 and Option 4. Under Option 2 and Option 5, businesses are likely to either have a cash flow benefit or a cash flow cost. This will depend on the trade profile of businesses, filing deadlines and, in the case of net repayment traders, remittance timeframes. Where there is a cash flow cost, it is expected that this will be offset by the compliance cost savings the business would enjoy as a result of the implementation of these options.

In respect of the possible impacts on the cash flow, the stakeholders in the public consultation 163 had a visible preference for the customer being liable for VAT 56% in comparison with the supplier – 25%. Further, in the context of the cash flow the stakeholders had a strong preference – 88% - for including in the OSS the possibility to deduct the input VAT.

7.1.6.Internal market perspective

For over 50% of the respondents of the public consultation 164 the fact that domestic and intra-EU supplies of goods are currently treated differently for VAT purposes can be discouraging when making a decision about cross-border supplies which hampers the functioning of the internal market.

Although the specific legislative issues identified for the current transitional VAT system 165 are adequately addressed by Option 1 166 , Option 2, Option 4 and Option 5, only Option 2 and Option 5 would ensure equal treatment between domestic and cross-border supplies of goods. In addition, under these two options, the single VAT registration through the OSS allows simplification for businesses as they would only have to comply with the VAT obligations (reporting, payment and deduction of VAT, including VAT due and incurred in other Member States) in the Member State in which they are established. This means that the tax administration of that Member State will also be their main contact point for practical issues (seeking information, etc.) and for audit purposes.

7.1.7.Macroeconomic impact

Figure 3 below represents a summary of the estimated net impact of each policy option on the 3-year cumulative real GDP growth, distinguishing between impact due to the effect of the compliance costs reduction and the effect of fraud reduction.

Figure 3: Differences of the EU 3-year cumulative per capita real GDP growth from the baseline under each policy option

Source: EY, 2015.

As illustrated in Figure 3 above, on the basis that Option 1 and Option 4 would reduce compliance costs but that there will be no material reduction in the level of MTIC fraud, the economic analysis shows that these options would have a relatively small but positive effect on the EU economy. On the basis that Option 2 and Option 5 assume a reduction in VAT fraud in addition to businesses’ compliance cost savings, the economic analysis shows that these options would create a further boost to the EU economy. Either of these two options is expected to increase EU GDP by EUR 18.5 billion over a 3-year period, compared to the current situation.

However, it must be emphasised that the favourable economic forecasts of Option 2 and Option 5 are primarily due to the assumption that the expected additional VAT revenues from a reduction in the scale of VAT fraud are used to fund a VAT rate reduction. When the implication of the fraud reduction on the economic outcome is disregarded, Option 2, Option 4 and Option 5 are estimated to generate similar impacts on real EU GDP (about EUR 2 billion) 167 .

7.2.Overall feedback of stakeholders on the options

Taking together the feedback received from stakeholders through the different channels 168 , Option 1 appears to be the preferred option of both businesses and Member States. The reason is that Option 1 does not imply fundamental changes to the current transitional VAT system and as such is considered by both as a reasonable means to settle, at least in the short term, the most "easy" problems (reason why it is referred to these improvements as "quick fixes"). However, apart from Option 1, and as a more far-reaching option, Option 4 is the preferred option of businesses because it is more close to the treatment of services. However, Option 4 is not acceptable for the Member States because it does not solve the MTIC fraud problem and because the physical flow of the goods is not followed anymore. Option 2 is, among those which solve the fraud problem (Option 2 and Option 5) the preferred one of Member States because it allows following the flow of the goods and therefore ensures better control of the transactions.

7.3.Comparison of options

The following comparison assesses the options against the following criteria - effectiveness, efficiency and coherence - as defined below.

Options are compared to the baseline (0) by rating them as neutral/no significant change (0), slightly positive (+), positive (++), very positive (+++), slightly negative (-), negative (--) and very negative (---).

7.3.1.Comparison of effectiveness

As far as effectiveness is concerned, Table 8 below assesses how the options achieve the two objectives.

1)Making the EU VAT system more robust. The rating takes into account whether and to what extent current MTIC fraud can be reduced. It also takes into account whether occurrence of a new type of fraud is likely to happen under each option and to what extent additional anti-fraud measures could eventually counter such new types of fraud.

2)Making the EU VAT system simpler. The rating looks at whether and to what extent current burden of obligations is reduced and to what extent new obligations are likely to contribute to further reducing compliance costs for businesses while maintaining administrative costs for Member States at an acceptable level. The rating also takes into account the simplicity and level of harmonisation of EU rules with the aim to ensure better compliance by business and legal certainty to the benefit of both businesses and Member States. Moreover, it takes into account whether and to what extent the VAT treatment of domestic and cross-border transactions in goods are aligned.

7.3.2.Comparison of efficiency

As far as efficiency is concerned, Table 8 below assesses the costs and benefits to both Member States and businesses. It takes into account the implementation costs of the policy options and their on-going costs expected for Member States and businesses. It looks in particular to the benefits in terms of VAT receipts for the Member States (including cash flow) and how the variation in compliance costs for businesses and the variation of VAT revenues for Member States (including administrative costs) would translate into the economy.

7.3.3.Comparison of coherence

As far as coherence is concerned, Table 8 below assesses how the options fit with the previous legislative proposal on e-commerce 169 and with future legislative proposals announced in the VAT Action Plan as regards VAT rates, the VAT package for SMEs and administrative cooperation.

1)As regard previous legislative proposals, for the record, the recent e-commerce proposal includes simplifications such as the extension of the use of the MOSS (introduced in 2015 to deal with B2C transactions on cross-border electronic services) to all cross-border B2C e-commerce supplies. While the e-commerce proposal focusses on B2C transactions, the rating takes into account whether the options for reforming cross-border B2B transactions are coherent with and to what extend build on the existing simplification provided under the MOSS.

2)As regards future legislative proposals, the rating takes into account the following considerations:

·Rates: whether the option for reform is compatible with more flexibility to be given to the Member States in setting their VAT rates. It takes into account the impact that such flexibility might have on compliance to business and the extent to which simplification measures (e.g. VAT due by the CTP customer, standardisation of definitions of VAT rates rules) would facilitate the application of possible more divergent VAT rates rules;

·SMEs package: whether some aspects of the option could negatively impact cross-border trade for SMEs and to what extend this can/would be addressed by the targeted proposal on SMEs;

·Administrative cooperation: how each option is capable of taking stock of improvements envisaged at the level of exchange of information (quality and speed of exchange of information) and cooperation between the Member States. To what extent technological developments (OSS, CTP concept) under certain options would build on current MOSS and VIES systems.

Table 8: Summary analysis of impacts

7.4.Identification of the preferred option: Option 2 (combined with Option 1)

7.4.1.Option 2 and final target

The analysis above indicates that Option 2 and Option 5 are the options that can best address altogether the specific objectives of making the EU VAT system more robust and simpler. By re-establishing the fractionated payments system in cross-border supplies of goods, their collection model based on the "taxation model" remedies the great flaw of the transitional arrangements that leads to MTIC fraud 172 and to complexity 173 . In doing so they also fulfil the key objective of providing a level playing field for businesses as both Option 2 and Option 5 ensure that cross-border supplies of goods are taxed within the EU in the same way as domestic supplies. In addition, they could both further extend the taxation model to all cross-border B2B supplies in goods (and therefore extend to B2B supplies of goods made to CTPs) and cross-border supplies of services. This would then make the VAT system for intra-EU transactions fully coherent.

Option 2 and Option 5 would broadly provide comparable effects. However, Option 2 appears to score slightly better in terms of administrative costs for the Member States and with respect to making the VAT system more robust (conversely, Option 5 appears to score slightly better in terms of compliance costs for business but includes a risk of developing new types of fraud) as it allows continuing to follow the flow of the goods. As such an approach is prioritised by most Member States 174 , Option 2 has been retained as the preferred option for reform.

Option 2 allows for a gradual implementation 175 of the taxation model to all supplies of goods and services, being it domestic or cross-border. By providing, as a first legislative step, that the taxation model would only apply to cross-border B2B supplies of goods made to non-CTPs, it ensures a smooth transition for businesses and Member States. It would allow testing the functioning of the OSS before its further extension. Only where all necessary conditions would be met (i.e. Member States and businesses are legally and technically ready for it) would the second legislative step extend the taxation model to all businesses and to supplies of services so that the definitive system is fully implemented. It is to note that the changes envisaged under the second legislative step are not covered by Option 2 as described and analysed in this impact assessment.

7.4.2.A staggered and balanced implementation: combining Option 1 and Option 2

The implementation by the Member States of a proposal based on Option 2, including its negotiation in Council, is expected to require several years. Therefore, it would make sense to meet the request of Member States and businesses by also including in that proposal swift improvements to the current system ("quick fixes") as a short term measure. The right balance would therefore consist in combining in one proposal the benefits of two options:

·Option 2 as the preferred option for implementing the definitive VAT system (of which the entry into force of the different elements would be gradual);

· Option 1 allowing in the short term swift and limited improvements to the current transitional VAT system.

Improvements such as those contained under Option 1 are realistic as the concrete solutions it includes result from long discussions with the stakeholders 176 , are in line with the contributions received through the REFIT platform (particularly relevant in this respect are submissions XVIII.2.a, and XVIII.7.a) 177 , and should therefore easily get consensus. The entry into force of these improvements at an earlier date would already be beneficial for both Member States and business in the meantime the first step of the definitive VAT system is put in place. With limited administrative costs 178 , Member States would gain legal certainty as regards the VAT treatment of intra-EU transactions in goods. Although Option 1 is not expected to have a significant impact on tax revenues, as it does not address the endemic weakness of the current transitional VAT system leading to MTIC fraud, it would however contribute to enhancing the quality of information exchanged between the Member States. Further, it is expected to bring some simplifications which should reduce compliance costs at least for some businesses.

The implementation of Option 1 should further not be seen as an additional layer but as complementary to Option 2. Indeed, the simplifications envisaged under Option 1 would be based on the new concept of CTP. The introduction of this concept and the simplifications linked to it are in line with the request formulated by stakeholders (see Sections 2 and 6 of Annex 2 and the REFIT initiatives reported in the same annex Section 5) to limit burden on compliant businesses. It would further allow testing the process of certification by the Member States and also its practical functioning and scope. On this basis adjustments might still be done if needed before the implementation of Option 2.

In order to ensure a smooth transition for business and allow all Member States to reach higher levels of cooperation and administrative capacity, a staggered implementation (divided into two sub-steps) of the first legislative step 179 is therefore envisaged as follows.

The sub-step 1 will consist of a first Directive and two Regulations. In the Directive the legal cornerstones of the definitive VAT system (cornerstones of the preferred Option 2) are introduced together with the short-term improvements to the current transitional VAT system ("quick fixes") requested by the Member States (Option 1). This first Directive therefore comprises the following elements:

Cornerstones of Option 2:

·Modification of Articles 402 to 404 of the VAT Directive 180 . The new wording of these articles would state, in connection with the definitive VAT system, the following:

(I)the definitive VAT system will be based on the principle of taxation of the intra-EU supplies in the Member State of destination;

(II)the supplier will be liable to VAT unless the customer is a CTP, since in this later case the customer would be liable to VAT;

(III)where the supplier is not established in the Member State of destination he will declare the VAT through the OSS;

(IV)the OSS will allow not only declaration-payment of the VAT due but also deduction of input VAT.

Option 1:

·Legal value of the VAT identification number of the customer;

·Concept of Certified taxable person (CTP);

·Special scheme for call-off stocks arrangements between CTPs;

·Harmonisation and simplification of the rules as regards ‘chain transactions’ where CTPs are involved;

·Simplification where CTPs are involved of the rules as regards the evidence to prove the transport of goods to another Member State.

The sub-step 2 will consist of a second Directive (which will be likely accompanied by an Implementing Regulation), currently scheduled for adoption by the Commission in 2018 but with a later entry into force (2022). There the detailed implementing rules related to the following issues would be addressed (remaining elements of Option 2):

·Place of taxation in the Member State of arrival and single supply (abolition of the intra-EU acquisition concept);

·Taxation of intra-EU supplies (with reverse charge if the customer is a CTP);

·Technical functioning of the OSS and extension of the OSS for non-established taxable persons;

·Abolition of recapitulative statements.

7.5.Subsidiarity of the preferred option

The preferred Option 2 is considered to be consistent with the principle of subsidiarity as the main problems which have been identified (MTIC fraud leading to lost VAT revenues, complexity leading to high compliance costs) are triggered by the rules of the existing VAT Directive. Given that VAT is an EU-harmonised tax, Member States are currently not allowed by themselves to set different rules and therefore any further improvements require a proposal by the Commission to amend the VAT Directive. Therefore Option 2 will clearly offer value over and above what can be achieved at Member State level.

The same is valid for the combined implementation with Option 1. Although some improvements could already be introduced by the Member States by themselves without a need for an EU action the fact is that even where this has been done in some Member States, the measures differ from one Member State to another. Without mandatory and uniform improvements (contrary to what would be the case with the implementation of Option 1) complexity and legal uncertainty would not be solved.

7.6.Proportionality of the preferred option

The preferred Option 2 is considered to be consistent with the principle of proportionality i.e. it does not go beyond what is necessary to meet the objectives of the Treaties, in particular the smooth functioning of the internal market.

1.There is an overall positive impact on the revenues for EU Member States through a reduction in the VAT fraud and a positive cash flow impact which together more than compensate administrative costs changes.

2.There is equal treatment between domestic transactions in goods and intra-EU transactions in goods (in a second legislative step, there will be also equal treatment with transactions in services).

3.The main legislative issues leading to complexity of the current transitional VAT system are addressed.

4.There is an overall reduction in compliance costs to businesses 181 .

5.The CTP status will be open to all businesses (including the smallest ones, start-up businesses 182 ) but will remain optional for them. The certification would allow businesses to maintain existing arrangements until the implementation of the second step of the definitive VAT system. In the short term, it provides simplification for businesses (see Option 1 below). Once granted by a Member State, the CTP status will be valid in all EU Member States.

6.The OSS would build upon the existing MOSS 183 and therefore will be integrated into the web portal of each business' tax administration.

Prior implementation of Option 1 is also consistent with the principle of subsidiarity as it provides Member States and business with limited but nevertheless quick solutions for the most straightforward problems. It maps out the way to the implementation of Option 2 as simplification rules would be linked to the new concept of CTP, a cornerstone under Option 2.

1.Member States have more legal certainty with respect to the current exemption of intra-EU supplies of goods. Exchange of information between Member States about goods circulating across the EU is improved.

2.Certain businesses will benefit from simplification measures once they will be recognised as CTP. Such certification could already be requested by all business (and be granted by Member States) so that they would be ready when Option 2 is implemented.

3.Administrative costs for Member States are relatively small due to low cost of implementation and compliance costs reduction is expected for all businesses (although it will only be of benefit of a maximum of 13% of the business population due to the limited scope of the simplification envisaged).

As outlined in Section 2.7, a soft law approach, such as a Member State volunteering to introduce new anti-fraud measures or further simplification rules, is either not feasible or would lead to an even more fragmented VAT system.

As with the subsidiarity test, it is not possible for Member States to address the problems and problem drivers without a proposal to amend the VAT Directive.

7.7.Impact on SMEs

The initiative is not specifically targeted to SMEs as it does not foresee a preferential VAT treatment for SMEs. It addresses the problems of fraud and complexity of the current transitional VAT system and related compliance costs for all businesses. Simplifications such as the use of the OSS or those linked to the granting of the CTP status, including the granting of such status, would also be available to SMEs.

In this context, it is however important to underline that SMEs, which currently benefit from the VAT exemption scheme for small enterprises (see Chapter I of Title XII of the VAT Directive which encompasses Articles 282 to 294 of the VAT Directive) will continue to be exempt. Concerning their intra-EU acquisitions of goods, they would no longer have to report them as their suppliers would instead charge and be liable for the payment of VAT in the Member State of arrival of the goods (see more details in Annex 3). As for their intra-EU supplies of goods the new rules would theoretically imply the need for SMEs to charge to their customers the VAT in the Member State of destination 184 . However, the Commission will in parallel come forward with a proposal in the form of a comprehensive VAT simplification package for small enterprises which, inter alia, will address this problem 185 .

The impact of the various options on smaller businesses has nevertheless been taken into account through the definition of two specific categories, to take account of differences in the extent to which SMEs engage already in intra-EU trade and have to deal with VAT obligations in other Member States: SME Type 1 and SME Type 2 186 .

The benefits/costs of the preferred Option 2 to both types of SMEs can be summarized as follows:

1.The extended use of the OSS could result in cost increases for SME Type 1 in the year of implementation and annually post implementation. However, with respect to SME Type 2, costs saving are expected in the year of implementation as well as on an ongoing basis.

2.The main legislative issues linked to the complexity of the current transitional VAT system are addressed and would benefit to both categories of business.

As regards Option 1, the reduction in compliance costs is expected to benefit all businesses, thus including SME Type 1 and SME Type 2 as confirmed by the study 187 . However, as already mentioned, the maximum percentage of businesses positively impacted would be 13%.

8.How would actual impacts be monitored and evaluated? 

8.1.Indicators for monitoring and evaluation

In line with the VAT Action Plan and following, inter alia, the views of stakeholders from the VEG, the definitive VAT system for intra-EU trade is to be introduced progressively via two main legislative steps 188 . It is recalled that the initiative that is here being assessed only covers the first legislative step.

The results of the monitoring will be used as a basis for deciding on the feasibility and timing of the second legislative step which would imply the extension of the system to all B2B supplies in goods (no distinction any more between CTP and non-CTP customers) as well as to supplies of services.

Table 9 below gives an overview of the main policy objectives, the indicators to measure whether they will be achieved, the tool for measuring these and the operational objectives. A specific indicator meant to evaluate the pace of implementation and the readiness for the second legislative step is provided.

Table 9: Monitoring and evaluation framework

8.2.Monitoring structures

The VAT Committee, an advisory committee on VAT issues in which representatives of all Member States participate and which is chaired by Commission officials from DG TAXUD, will monitor the implementation of the definitive VAT system for intra-EU trade and discuss and clarify possible interpretation issues between Member States regarding the new legislation. It is also envisaged that the Standing Committee on Administrative Cooperation (SCAC) will deal with all possible issues regarding administrative co-operation between Member States resulting from the new rules on the taxation of intra-EU trade. In case new legislative developments are required, the GFV and the VEG might be further consulted.

8.3.Evaluation

Member States and the Commission shall examine and evaluate the functioning of the definitive VAT system provided for in the new legislation. To that purpose, Member States shall communicate to the Commission any relevant information as regards the level and the evolution of the administrative costs, MTIC fraud and number of businesses recognised as CTPs necessary for the evaluation of the effectiveness, efficiency, coherence with other interventions with similar objectives, and continued relevance of the new legislation. The evaluation should also seek to collect input from all relevant business stakeholders as regards the level and the evolution of their compliance costs. The Commission will prepare a retrospective evaluation of the functioning of the new legislation five years after its entry into force.

Annex 1: Procedural information

1.    Agenda planning and Work Programme References

The proposal for a definitive VAT system is linked to the VAT Action Plan.

TAXUD is the lead DG for this initiative. The Agenda Planning Reference is [2017/TAXUD/006]. The Inception Impact Assessment was published on 22 December 2016 190 .

2.    Inter-Service Steering Group (ISSG)

The meetings of the Inter-Service Steering Group have taken place on 5 December 2016, 6 April 2017, 14 June 2017 and 27 July 2017. The following Directorates-Generals (DG) and services were part of the group: Secretariat-General, Legal Service, DG Agriculture and Rural Development, DG Budget, DG Competition, DG Communications Networks, Content and Technology, DG Environment, DG Energy, DG Justice and Consumers, DG Financial Stability, Financial Services and Capital Markets Union, DG Internal Market, Industry, Entrepreneurship and SMEs, and European Anti-Fraud Office. The feedback received from these directorates and services has been taken into account in the final public consultation document.

It has to be noted that the ISSG as such had been set-up back in 2010 and had been consulted on all the main issues relating to the reform of the VAT system (Green Paper on the future of VAT, EY study (2015) on implementing the destination principle, Action Plan).

3.    Consultation of the Regulatory Scrutiny Board (RSB)

The Regulatory Scrutiny Board was consulted on 12 July 2017. On 14 July 2017, the Board gave a positive opinion on the report. The recommendations made by the Board to further improve the report were taken into account. The main changes introduced concern the following aspects:

·Under the policy context (Section 1), clarification on the two-step approach to the initiative and its rationale is provided. The interrelations and sequencing of the initiative with recent proposals and upcoming VAT proposals on rates, SMEs and administrative cooperation is explained.

·Expected evolution of the baseline as well as risks are further described under the "dynamic baseline" (Section 2.7). Under the options section (Section 5), the components of the baseline are further explained, with specific clarification on its scope in relation to recent and upcoming proposals. Options are streamlined and differences between them are better described and illustrated (Section 5 and Annex 5, Section 10).

·The concept of Certified Taxable Person and its application in practice is explained in more details (Box 4). Clarification is given on the eligibility of this concept under the various policy options.

·The REFIT dimension of the analysis is strengthened by making more explicit reference to the feedback received from stakeholders under the problem definition, the selection of options and the impacts sections. Annex 2 on stakeholders consultation is further strengthened with detailed analysis of feedback received from the REFIT Platform.

Other specific changes were also made in the report in order to take account of more technical recommendations made by the Board.

4.    The Group on the Future of VAT (GFV) and the VAT expert Group (VEG) 

Following the publication of the 2011 Communication on the Future of VAT, the Commission started in-depth technical discussions with Member States in the GFV 191 and stakeholders in the VEG 192 . A total of 12 meetings of the GFV and 14 meetings of the VEG took place to discuss different issues related to the possible ways to implement the destination principle in intra-EU trade of goods, in particular in the process of identifying the possible options and the criteria for their qualitative assessment, examining how they work, their pros and cons. Both groups had several occasions to comment on the findings of the various studies discussed and presented to the groups which served to feed the debate on possible options (see Section 6.2 of Annex 6).

A Fiscalis seminar was organised in June 2015 in Vienna which brought together both the GFV and VEG to discuss the results of the EY's study on implementing the destination principle to intra-EU B2B supplies of goods. In addition, both the GFV and the VEG had already an opportunity, earlier in the process, to express their views on the draft terms of reference for the study on the selected options.

Moreover, both GFV and the VEG discussed in-depth during several meetings the shortcomings of the current VAT system and identified the priority areas in which improvements to the current rules could be undertaken. In this respect, following the request of many delegates in GFV and VEG, the Commission services created two sub-groups, composed of members from the VEG and the GFV, to examine the VAT treatment of consignment stocks and chain transactions 193 . As regards the burden of proof to exempt intra-EU supplies, a third mixed sub-group 194 was established in the framework of the EU VAT Forum 195 . Each sub-group had to examine the precise problems faced by business and tax administrations, look at practical examples and identify possible ways to address these problems. All three sub-groups reported back with their recommendations to both the VEG and GFV 196 .

During two rounds of discussions in 2016 both the GFV and the VEG were given opportunity to examine and express their views on the main features of the definitive VAT system as well as to identify and analyse the issues which would arise and to develop the ways to tackle them with a view of preparing the legislative proposal to be tabled in 2017. Among others the concept of Certified Taxable Person (CTP) was examined 197 .

Finally, in January 2017, the GFV and the VEG met to discuss a series of questions prepared by the Commission services 198 which dealt with the issues of the VAT identification number, chain transactions, call-off stock and proof of intra-EU supplies, in respect of which in its conclusions of 8 November 2016 the ECOFIN Council 199 invited the Commission to present a legislative proposal on improvements to the current EU VAT rules for cross-border transactions. Both groups were once more also asked to provide feedback on the suggested list of conditions for granting the status of Certified Taxable Person (CTP).

Annex 2: Stakeholder consultation

1.    Introduction

The consultation with stakeholders on the best possible solutions for the definitive VAT system included several different elements and started as early as 2010. It was organised around several main axes:

1)Open public consultation on the Green Paper on the future of VAT (2010) which took place between 1 December 2010 and 21 May 2011 and resulted in around 1 700 contributions providing a detailed view of problems linked with the application of VAT in Member States;

2)An in-depth, targeted and on-going consultation process with key stakeholders (from 2012 until 2017) via the GFV (representing Member States – 12 meetings) and the VEG (representing business, academics and accounting professions – 14 meetings);

3)Consultations with stakeholders (businesses, tax professionals and Member States) through online surveys and direct interviews undertaken by an independent consultant (EY) as part of the study on ‘Implementing the ‘destination principle’ to intra-EU B2B supplies of goods’ (2015);

4)Contributions received via the REFIT platform and as a spontaneous feedback from business;

5)Open public consultation which took place between 21 December 2016 and 20 March 2017.

The consultation strategy had two main purposes. The first was to identify the problems of the current transitional VAT system and the possible ways of solving them. The second was to get the views of the stakeholders on how to shape the definitive VAT system.

This approach, developed in line with the Better Regulation Guidelines, allowed the public to give valuable input at all stages of the preparatory work of the initiative over an extended period of time (from 2010 until 2017). Stakeholders were given the opportunity to provide feedback on all key elements, including the problems experienced, the design of regulatory alternatives and possible impacts. Thanks to the various instruments used, all stakeholder groups (Member States, general public, businesses and tax experts) were consulted in the process and the outcome of the whole consultation process was of high quality. Further it provided a valuable input for the proposal.

Tables 10 and 11 – Overview of the consultation strategy

Table 10: Stakeholders consulted

Table 11: Consultation activities

2.    Open public consultation: the Green Paper on the future of VAT

The open public consultation on the 'Green Paper on the future of VAT' – Towards a simpler, more robust and efficient VAT system" 200 resulted in around 1 700 contributions. On 6 May 2011, the European Commission organised a one day conference in Milan on the Green Paper which brought together policy makers, experts, businesses and other stakeholders and the general public from all over Europe, and beyond.

The results of the public consultation were endorsed by the Commission in the Communication on the future of VAT 201 adopted on 6 December 2011. The main problems identified in the document could be summarized under two key headings:

1) The VAT fraud, and

2) The complexity of the VAT system.

1) VAT fraud

VAT fraud has negative effects on: (i) the tax collected by each Member State, (ii) the EU own resources and (iii) the protection of the rights of taxpayers (the honest traders).

The stakeholders consulted noted that carousel fraud and other fraudulent schemes must be tackled by specific remedies addressed only to fraudulent taxpayers, rather than measures that could involve indirectly compliant taxpayers creating a disadvantage for them. The vast majority of the respondents commented that antifraud measures should be harmonised to be effective.

Improving the administrative cooperation between tax authorities and a faster exchange of information were mentioned as the first step towards a fraud proof system. This should be combined with the improved efficiency of VIES in order to protect bona fide traders. A few respondents suggested, as possible measures to combat fraud, the generalised (domestic) reverse charge on individual transactions exceeding specific value thresholds, the targeted reverse charge or the exemption of B2B transactions.

Destination principle and One Stop Shop

A considerable group of respondents stressed that the destination principle should be applied together with One-Stop-Shop arrangements (OSS) as an alternative to the reverse charge mechanism. Some stressed that an OSS mechanism like the one introduced for the e-commerce sector in 2015 would be a significant improvement. The establishment of a comprehensive OSS system (especially one including the possibility of cross-border deductions) would allow the fulfilment of all VAT obligations in the Member State of establishment. However, several respondents were worried that the Member States would not be ready to cope with a major change in the system for the collection of VAT given the limited amount of public finance available for further technological advancement.

Certified Taxable Person

Some respondents thought the model of certification of taxable persons is promising as a tax collection method. It would be the easiest system in the short term and would require the lowest initial investment as there are no real changes to the collection system. However amongst all the proposals recorded, this would seem to be the least efficient in preventing carousel fraud. To be truly attractive to businesses, it should provide the certified business with incentives e.g. the possibility of benefitting of reduced obligations, fewer audit queries, reduction of penalties, faster refunds of tax credits and greater legal security and reliability. Some respondents insisted that the conditions of the certification process should be the same and recognised in all Member States.

2) Complexity of the system

The complexity of the system leads to high administrative costs both for taxable persons (which have to understand and to comply with the individual requirements of up to 28 different VAT systems) and for tax administrations. It further leads to a lack of legal certainty.

With regards to this issue the main areas of concern are: (a) the evidence needed for the exemption of intra-EU supplies; (b) the rules on chain transactions; (c) the rules on consignment stocks; (d) certain rules on tax compliance that create administrative burdens.

a) The evidence needed for the exemption of intra-EU supplies

There are no clear and uniform rules about the evidence to be provided by the supplier to prove that the conditions for the exemption for intra-EU supplies of goods are met. Many issues are related to the proof of cross-border transport. The main problems derive from the mismatches between national forms or documentation in different languages and the different procedures in force in each Member State.

For that reason the majority of respondents requested EU-wide harmonised forms of proof. Some respondents mentioned the need to introduce also supporting or alternative means of proof in cases where the main proof is unavailable.

b) The rules on chain transactions

The VAT Directive provides a simplification for triangular transactions but this is not applied in a uniform way by Member States and it is the only simplification provided by the current rules. There are no common guidelines on the treatment of chain transactions.

c) The rules on consignment stocks

Rules for consignment stocks are not applied uniformly. Some Member States allow for certain simplifications (not provided for in the current rules) while others do not.

d) The rules for tax compliance that create administrative burdens

Rules for VAT registration should be standardised with the aim to clarify and make uniform the requirements in each Member State in respect of non-established businesses. Further a standardisation of the recapitulative statements and Intrastat reporting obligations is needed. Some respondents requested the abolition of the recapitulative statements.

3.    Targeted consultation with key stakeholders (GFV and VEG)

The Commission has organised an in-depth, targeted, technical and on-going consultation with key stakeholders: businesses, academics, accounting professions and Member States. It started in 2012 and lasted until the beginning of 2017.

It took the form of regular meetings of the two groups. One composed of representatives of national tax administrations (GFV) and the other composed of businesses, academics and tax practitioners (VEG).

Both groups discussed on several occasions the shortcomings of the current transitional VAT system and the possible ways to implement the destination principle in intra-EU trade of goods. In parallel, they also discussed in-depth the priority areas in which improvements to the current VAT rules could be undertaken.

In June 2015, a Fiscalis seminar was organised in Vienna which brought together both the GFV and VEG in order to discuss the outcome of the EY study on "Implementing the 'destination principle' to intra-EU B2B supplies of goods". The discussion showed that views diverge as regards the five possible options to implement the destination principle. For almost all Member States following the physical flow of goods remained fundamental. Therefore, options which do not follow the goods appeared not acceptable (options 4 and 5). Among those Member States’ representatives that share this view, there was a preference for option 2, given its potential to combat MTIC VAT fraud. Very few delegations advocated for option 3. Mitigation measures, such as the certified taxable person (CTP), were considered very important to alleviate the negative cash flow impact on businesses for options under which the supplier charges the VAT of the Member State of destination. It was concluded that a phased entry into force of the definitive regime is needed.

At the same time, members of both groups underlined the need of introducing short term improvements of the current VAT system (“quick fixes”), namely: chain transactions, call-off stock and proof of transport of intra-EU supplies. Additionally Member States requested that the role of the VAT identification number for the exemption for intra-EU supplies be also addressed in the scope of the “quick fixes”.

4.    EY study on ‘Implementing the ‘destination principle’ to intra-EU B2B supplies of goods’ (2015) – Consultations of stakeholders (businesses and Member States) online surveys and direct interviews – relevant elements

The EY study focused on the assessment of the current VAT environment and the possible impacts of the analysed options to change the existing VAT system. As part of the analysis businesses, Member States and tax experts were consulted.

In respect of the stakeholder consultation the following instruments were used: (1) a business survey addressed to stakeholders in 28 Member States on compliance costs and monetary and non-monetary impacts of the presented VAT policy options; (2) a tax experts' survey addressed to tax experts in 28 Member States on compliance costs and technical information on the proposed policy options; (3) a Member States' survey addressed to tax authorities in the 28 Member States on administration costs and the VAT Gap problem in the context of the policy options 202 .

The feedback received through the consultation, performed within the scope of the EY study, concerned: (i) compliance costs 203 (identified as a fundamental issue for business); (ii) impact on VAT fraud (identified as a fundamental issue for Member States); (iii) legal certainty; (iv) administrative costs 204 ; (v) cash flow implications.

The current VAT situation

The businesses' perspective

Business representatives were asked about: (1) the structure and the scope of their current trade activities; (2) the way in which they deal with fulfilling VAT obligations, separately in the domestic and intra-EU supplies contexts; (3) the estimation of the detailed costs (increase, decrease, no change) under the proposed changes.

Based on the data collected from the business survey it was estimated that on average for the current VAT system, the VAT cost of compliance per Euro of turnover is 11% higher for intra-EU trade as compared with the corresponding VAT compliance per Euro of turnover for domestic trade.

The Member States' perspective

In order to assess the current state of administrative labour and non-labour costs, Member States were asked to provide an average cost per hour for employees responsible for dealing with VAT. Based on the survey results, the monetary value of the labour costs associated with VAT administration was estimated at approximately EUR 1 730 million in the EU. In addition, Member States’ non-labour costs associated with the administration of VAT were also considered. These included external consultancy, IT systems and staff training costs.

Assessment of the possible VAT options

Different taxation policy options were analysed with a view to reducing compliance costs (making EU cross-border trade as simple and safe as domestic trade); reducing the VAT fraud and assessing the possible shift in burdens with which tax administrations could be confronted. Detailed description of the impacts of the options and on how they compare is included in Sections 6 and 7 of the Impact Assessment.

5.    Contributions received via the REFIT platform

Stakeholders disclosed their position also through the Refit Platform where it is possible to participate actively in the law making process by providing an overview with the aim to evaluate and improve existing laws. Some stakeholders submitted their contributions along 2014, 2015 and 2016 regarding specific issues they are facing and the way to overtake them. All the submissions on taxation provided up to date can be found under the following link 205 .

VAT registration – CTPstatus

One of the contributors (DIHK) provided some proposals to improve the VAT system, in particular on the simplification of chain transactions by the extension of the rules on triangulation, avoiding the registration of the intermediate businesses in the transactions. Further input was related to the extension of the MOSS to avoid multiple registrations which are expensive for businesses, and for improving the cross border refund process.

In 2015 Business Europe complained about the negative effects of unjustified geo-blocking due to excessive administrative burdens related to VAT on companies involved in cross border trade. The same association with its position paper on the VAT Action Plan stated that the current system – exempting cross-border supply and taxing cross-border acquisition - should be changed and simplified. Amongst the detailed measures for a correct VAT collection, providing a single online service was mentioned which could be used by businesses to easily determine if their customer is a Certified Taxable Person, and ensuring that the criteria used to define a Certified Taxable Person do not increase current administrative burdens on business. Further, there must be equal treatment of both domestic and cross-border suppliers and of goods and services as this supports the supply chain. They supported the destination principle and its implementation via improvement of the MOSS.

Fraud – Reverse charge mechanism

The Ministry of business and growth in Denmark with the Danish business forum mentioned that the problem of VAT fraud should be addressed with long term solutions limiting the use of the reverse liability (the reverse charge mechanism) which requires changing sales and accounting systems thus increasing administrative burdens for businesses. Another contributor clearly expressed the need for EU support with respect to honest businesses, avoiding the increase of administrative burdens. They are affected in particular by the increased burden of proof related to cross-border supplies which hinders the development of the single market. Effective tools against VAT fraud should be used in combination with simplification measures, like the possibility for small business to use a VAT reporting threshold on B2C sales across EU.

In 2016 Confcommercio in its contribution stated that VAT fraud generates unfair competition. At the same time VAT obligations should be reduced, amending the current rules without introducing new systems like the Generalised Reverse Charge that will entail very heavy reporting obligations. The OSS should be used in order to reduce the burdens for companies. It has to be noted that such a system would be affordable for middle and big companies but the charges would be still high for small businesses.

Stakeholders presented in the Refit Platform their position regarding the application of the reverse charge mechanism applicable to all the domestic transactions. The message from the economic operators reported by one business forum is that it would be worth to "replace that measure with a simpler and more basic VAT regime in the EU".

In fact, according to operators the reverse liability has as a disadvantage since it obliges businesses to "operate different sales and accounting systems for different business transactions", notably increasing the administrative burdens. In their opinion the same results could be achieved by enhancing the administrative cooperation between Member States and businesses.

In the same context another group stressed that the reverse charge is very important when it comes to combating VAT fraud at cross border level. Also the application of that measure in certain sectors has given satisfactory results.

Reference should also be made to the opinions adopted by business federations as well as to input received from academics in scientific publications. All these contributions are mentioned in detail in the impact assessment related to the General Reverse Charge Mechanism proposal.

6.    Contributions received as spontaneous feedback from businesses

The Commission also received spontaneous contributions from experts, academics, members of the VEG and delegates of Member States.

Regarding the current system, it was pointed out that the exemption for intra-EU supplies should be conditional only upon the possession of a valid VAT number by the acquirer. At the same time the identification procedure and the control of registered taxpayers should be harmonised at EU level to be reliable. Recapitulative statements should be considered only as an additional piece of evidence.

Regarding the CTP status, it could be used to improve the current rules during the passage to the definitive regime but the criteria to provide the status should be common for all Member States, like the AEO certification for customs. However the CTP should not be a condition for the application of the rules on burden of proof in order to ensure legal certainty for all the businesses, not only for the certified. Further the CTP status could be a useful tool for the simplification of complex transactions like chain transactions.

Academics expressed their position that the VAT identification number is totally inadequate to ensure effectiveness of the VAT regime for intra-EU trade. Regarding the CTP they believe that this status can be defined as effective only if the requirements and the procedures are harmonized.

The simplification of the VAT system and the introduction of some quick measures (for chain transactions, call-off stock and use of the VAT number) were deemed necessary. It is believed that new measures should not be more burdensome than existing ones.

With regard to the extension of the OSS it is necessary to balance the need of simplicity for stakeholders and the duty of the tax authorities to ensure revenues. It is questionable whether a system designed as a “pay only” scheme is capable of adaptation to incorporate refunds of VAT or deductions.

7.    Open public consultation

The open public consultation for the initiative was held for 13 weeks between 21 December 2016 and 20 March 2017 using the EU survey tool. The Commission received 121 submissions therefore the results of this open public consultation should be read taking into account this rather limited number of responses. Nevertheless business community was much better represented than Member States (only two replies). This is especially true having in mind that 37 business associations provided their input to this consultation. All public submissions are available on the DG TAXUD website under following link [https://ec.europa.eu/taxation_customs/consultations-get-involved/tax-consultations_en].

The profile of the participants is presented below:

In terms of the Member States where the contributors indicated where they were based most replies came from Germany (almost 30%), Belgium (almost 15%), United Kingdom (10%), Sweden (6.6%), Netherlands (5.8), Italy (almost 5). No reply was received from 10 countries 206 .

The purpose of the consultation was to seek feedback on the following issues:

(i) the problems linked to the current transitional VAT system;

(ii) the main elements constituting different options:

   -    option 1 – 'quick fix measures to the current system;

   -    options 2-5 based on the combination of 2 factors: the place of supply (the destination principle following the flow of goods or the contractual arrangements) and the person liable to account for VAT (the supplier or the customer), accompanied by the concepts such as OSS + CTP.

The current transitional VAT system

Complexity/costs

The current transitional VAT system is burdensome because of its complexity and costs incurred. Almost 90% of the contributors 207 confirmed that there are additional costs linked with intra-EU supplies of goods in comparison with domestic ones. 79% 208 indicated that small businesses are deterred from cross-border supplies for those reasons.

Fraud – Reverse charge

Over 74% 209 agreed that the current system is not sufficiently resistant to VAT fraud. More than 67% 210 believed that the reverse charge mechanism is an effective measure to combat fraud. But at the same time 54% 211 admitted that the current application of the reverse charge increased the compliance costs. 30% 212 of respondents were of the view that these costs decreased.

Quick fix measures – Option 1

Over 90% 213 confirmed that a VAT identification number is a reliable proof of the status of the customer regarding intra-EU supplies. But only 55% 214 believed that the lack of a VAT number of the customer should deprive the supplier from the possibility to exempt intra-EU supplies.

There was strong support for the need to improve the rules on chain transactions (83% 215 ), proof required to demonstrate that the goods were moved from one Member State to another (almost 80% 216 ) and simplification of call-off stock situations (75% 217 ).

Elements of the possible future options – Options 2 to 5

More than 68% 218 of the respondents stated that there should be only one taxed intra-EU transaction as it is currently the case for the domestic supplies. However, 19% 219 of the respondents disagreed.

Compliance and administrative costs

For 47% 220 of the stakeholders the change to only one taxed transaction will reduce compliance costs. 25% 221 of the respondents believed that administrative costs for Member States will be reduced but 51% 222 did not have opinion on that.

Place of taxation (the flow of goods or the contractual arrangements)

As for the place where goods should be taxed, 53% 223 believed that it should be the place where the goods arrive and 48% 224 that it should be the place where the customer is located.

Liability rules (the supplier or the customer)

In relation to the question of the liability for VAT due on B2B intra-EU supplies of goods 56% 225 indicated the customer and 25% 226 the supplier.

OSS

80% 227 supported the extension of the OSS to taxable intra-EU B2B supplies of goods seeing it as a simplification measure eliminating the need for multiple registrations. 88% 228 of the respondents agreed that the OSS system should also allow for the deduction of input VAT.

CTP status

There was no clear cut majority in relation to the introduction of the Certified Taxable Person (CTP). Almost 44% 229 of the respondents indicated that they would be interested to apply for CTP if the criteria were not too burdensome. 8% 230 were ready to apply regardless of the difficulty. 14% 231 informed that they are not interested in using this measure and more than 33% did not provide any answer on this issue. However there was clear support for the idea that the criteria for obtaining the CTP status should be harmonised at EU level (79% of the support 232 ).

Fraud – taxation options/reverse charge

In relation to improved fraud fighting thanks to taxation of B2B intra-EU supplies, 50% 233 of respondents believed it would be helpful and 24% 234 were of the opposite opinion.

On the optional application by Member States of a generalised reverse charge mechanism on domestic transactions 40% 235 agreed that such a measure would help fighting fraud, while 42% 236 were of the opposite opinion. More than 58% 237 of the contributors indicated that such a solution would increase compliance costs.

Annex 3: Who is affected by the initiative and how

The initiative will directly impact businesses and Member States. Businesses in the way they comply with their VAT obligations and Member States in the implementation of the new rules and the audit of their application by businesses. Citizens should not be affected by the changes. They will continue to purchase goods and services with payment of VAT in exactly the same way as is currently the case. They might be indirectly impacted through lower consumer prices although these are not expected to be substantially altered by the initiative.

1.    Businesses

The scope of the initiative is limited to intra-EU transactions in goods that take place between businesses 238 . Therefore it will only affect businesses that sell or buy goods cross-border within the EU. Businesses carrying out only domestic transactions (i.e. only in the Member State in which they have established their business) will not be affected.

No distinction is made between types of businesses trading cross-border since the changes proposed are of a general nature. They consist in a change in the VAT collection principle which will be applicable to all businesses (see however below exception for CTP businesses and special scheme for SMEs).

The quantitative impacts on businesses have been measured in terms of changes in compliances costs and cash flow in the year of implementation of the initiative and in the years after (for more details on such quantification see Section 6 of this impact assessment).

1.1.    CTP

Businesses that are granted the CTP status will continue to purchase goods cross-border in the same manner, i.e. they will buy without the payment of the VAT due and will instead self-account for the VAT in their VAT return via the reverse charge.

When they supply goods cross-border, they will benefit from VAT obligation simplifications in respect of certain transactions (call-off stocks, proof of transport). Further when acting either as a buyer or as a purchaser simplifications regarding chain transactions will also be applied to them.

The certification would be open to all businesses 239 . The implementation of the criteria for its granting would need to be proportionate to encompass small businesses but also start-ups.

The process of certification will require some administrative procedures but remains optional for businesses.

1.2.    OSS

Instead of having to register in multiple Member States and resort to different tax administrations, businesses trading cross-border will use a single point of registration (the one that currently have in their Member State of establishment) to comply with their cross-border VAT obligations.

Technical changes in the accountancy systems (e.g. invoices, listings, VAT returns) are expected.

1.3.    VAT identification number 

The proposed change in the VAT Directive makes the mentioning in the invoice of the valid VAT identification number of the customer compulsory for the supplier to be allowed to exempt his intra-EU supplies. This means that businesses will need to check in the VIES system the validity of the "taxable" status of their customers. For businesses having a great number of transactions combined with a large number of customers this can be cumbersome.

Although the change might appear as important, it is however not a new issue. Indeed, under the current rules, the mentioning in the invoice of such a valid identification number is already required (penalties can be imposed on the supplier if such an obligation is not fulfilled). The difference with the proposed change is that the exemption for the intra-EU supply that today cannot be questioned on grounds that the VAT number of the customer is lacking (according to the CJEU) will in future be refused where this is the case. Compliant businesses trading with other compliant businesses should not be affected at all by the changes. Compliant suppliers may however not be aware that they are trading with customers that do not possess a valid identification number (to note that the reason might be due to the fact that the VAT identification process of the customer is not yet completed or that information/updates put by tax administrations in the VIES system are delayed). Therefore, the functioning of the VIES system needs to be improved (this will be the purpose of another legislative proposal on administrative cooperation - see Introduction in Section 1.1 and Action Plan) so that it can provide easy access to up-to-date information.

1.4.    SMEs

Under certain conditions and optionally, SMEs may currently benefit from the special exemption scheme for small enterprises (see Section 2 of Chapter I of Title XII of the VAT Directive which encompasses Articles 282 to 294). When they are covered by such special scheme, SMEs are relieved from practically all the VAT obligations imposed on businesses. In particular they should not charge VAT to their customers on their supplies and are, as a consequence, also not able to deduct their input VAT. In this respect, they are not much different from private individuals who sell personal goods.

SMEs that currently benefit from the VAT exemption scheme for small enterprises will continue to be exempt. However, according to the current rules (Article 283(1)(b) of the VAT Directive), the exemption scheme only applies to supplies made in the Member State where the SME is established. Given that under the current rules, intra-EU supplies are technically located at the Member State of origin the exemption for SMEs also applies to their intra-EU supplies of goods, so that SMEs are currently not charging any VAT on such supplies. Once the move to the destination principle takes place, the fact that intra-EU supplies will be located at the Member State of destination would mean that SMEs would have to charge the VAT due in that Member State of destination to their customers. In theory the situation would be as follows:

-Concerning their domestic supplies, they will continue supplying their goods without having to charge the VAT.

-Concerning their intra-EU purchases of goods, their suppliers will charge and be liable for the payment of VAT (through the OSS) in the Member State of arrival of the goods.

-Concerning their intra-EU supplies of goods the new rules would theoretically imply the need for SMEs to charge to their customers the VAT in the Member State of destination. However, the Commission will in parallel to the current initiative come forward with a proposal in the form of a comprehensive VAT simplification package for small enterprises which, inter alia, will address this issue 240 .

2.    Member States

All Member States will be impacted by the changes proposed. They will need to implement the new rules and ensure their correct application by the businesses. In particular, they will need to introduce and control the new concept of CTP and make changes in their IT systems (provide for an OSS, adapt the current VIES system).

The quantitative impacts on Member States have been measured in terms of changes in administrative costs, cash flow and tax revenues in the year of implementation of the initiative and in the years after (for more details on such quantification see Section 6 of this impact assessment) .

Annex 4: Analytical models used in preparing the impact assessment

1.    Overview of the methodology

A specific study 241 has been commissioned to assess the impacts on Member States and on businesses that would result from the implementation of each of the policy options for reforming the EU VAT rules applicable to cross-border supplies of goods.

In particular the impacts on the MTIC/VAT fraud, the labour and non-labour administrative costs 242 and the cash flow of Member States, as well as on the compliance costs 243 and the cash flow of businesses have been examined.

The macroeconomic impacts and in particular the effects on macroeconomic variables such as gross domestic product (GDP) have also been covered.

The assessment is carried out in comparison with what is currently applicable under the current tax rules (baseline), from both a qualitative and a quantitative perspective.

The methodology described here underpins the approach to estimating the impacts of each policy option and is based on the following steps:

·Primary and secondary data collection across all EU Member States (businesses, tax experts 244 and EU Member States' tax authorities) to inform the technical, legislative, compliance cost, administration cost and economic analysis; and

·Analysis of data collected to develop useful qualitative (technical, legislative, etc.) and quantitative insights and inform the assumptions and the parameters in the macro econometric Vector Autoregressive (VAR) model used for the economic analysis.

The above approach has been selected in view of the nature of the information available and the appropriate analysis techniques. It has been developed specifically for the study and tailored accordingly to ensure that each element of the analysis is suitable for the particular study objectives.

Full details on the methodology are available in the various annexes of the above-mentioned study. These are specifically referred to, where relevant, in the various sections that follow below.

2.    Data collection tools for the analysis of the impacts

2.1.    Primary data collection

As part of the specific study, a set of primary data 245  have been collected from businesses, tax experts and Member States' tax authorities across the 28 EU Member States to carry out the assessment and also inform variables and assumptions in the economic model.

The objective has been to gather information from businesses and tax experts on VAT compliance costs and from Member States on administrative costs and on the size of MTIC fraud (and the share of the MTIC fraud gap) associated with the B2B trade of goods across the EU under the baseline, as well as the expected likely changes under each reform policy option.

Table 12 below presents a summary of the primary data instruments used as well as their purpose.

Table 12: Primary data collection instruments

Source: EY, 2015

2.2.    Business Survey 

A survey of businesses across all 28 Member States has been conducted in order to establish the compliance obligations and costs of businesses regarding the baseline, as well as how these obligations and costs would change under each policy option. The survey has also provided data used for the calculation of the potential cash flow impact on businesses under some of the options 246 .

The survey has been published through the online survey tool Survey Monkey. It consisted of a total of 32 questions 247 which were categorised as follows:

·Section 1: Trade related information. This section involved basic questions about the business profile of the respondent and certain specific questions about the VAT profile with regard to the sales and purchases, as well as trading partner information. The information was required and used to calculate the cash flow impact on businesses under some of the options.

·Section 2: VAT information. This section requested information in relation to the costs businesses incur in order to comply with the VAT legislation. The information was required to gain an understanding of how the business managed its VAT compliance obligations and the associated current compliance costs both as regards domestic and intra-EU B2B trade.

·Section 3: Estimation of detailed cost information. This section sought to obtain information in relation to how certain VAT compliance costs for businesses might change under the different policy options.

The Business Survey responses cover both implementation and ongoing annual intra-EU B2B compliance costs. The focus is on four categories of costs in relation to the policy options, namely (i) employee costs; (ii) training and retraining costs; (iii) system (software) related costs; and (iv) consultancy fees.

Against this background, the elements of the cost changes that the five proposed policy options may create through more compliance requirements 248 have been analysed. This analysis sets out a number of statistical measures to further underline the impact of policy options to businesses. These measures include:

·A frequency distribution of cost estimates to identify the compliance cost change ranges that were most or least prevalent amongst business respondents;

·The mean and median cost differences outlined by the survey respondents with respect to how costs will change under each of the alternative policy options.

As part of the process of verifying the data received from the survey, additional information via direct interviews has been collected from businesses which had completed the business survey. Interviews were held with seven different businesses: three based in the UK, one based in Germany, two based in Poland and one based in Sweden.

The purpose of the interviews was to discuss in detail the expected benefits and costs of each policy option. The business representatives were asked to comment on whether they associated each option with an overall cost or benefit and, where possible, to quantify the value of these costs or benefits. They were also asked to provide comments on any further costs/benefits that they foresaw under each option 249 .

Due to the low response rate overall to the survey itself (146 responses) and to limited or no responses in some Member States, reliance placed on the results was limited to understanding the current compliance costs for businesses 250 .

Cash flow

Cash flow implications are expected under Option 2 and Option 5 for which the supplier will charge the VAT to his customer. The extent of these cash flow implications, whether positive or negative, depends on a number of factors, such as (i) the average remittance time for payments to businesses from their local Tax Authority; (ii) applicable VAT rates; (iii) the value of VAT payable to other Member States by the business; and (iv) interest rates applicable to businesses on saving/borrowing. In calculating the cash flow cost or benefit, a number of assumptions were made as regards the above factors 251 . To quantify the cash flow implications for businesses, the study has examined three different examples, based on different trade profiles of three businesses, assuming a set value of EUR 100 000 of VAT per return. To estimate what impact the concept of CTP would have on the overall cash flow, a proxy was used, namely the proportion of businesses that have applied for 'Authorised Economic Operator' (AEO) 252 status compared with the number of businesses that have an 'Economic Operator Registration and Identification' (EORI) 253 number used in the area of customs. It is anticipated that if a business registers for CTP status, the business would benefit from simplifications in relation to the purchase and sales of goods within the EU. Applying the AEO proxy, approximately 0.3% of businesses within the EU would potentially register for CTP status 254 . Therefore, whilst this would reduce any cash flow benefit or cost, it is likely to be limited.

The analysis identified that where a business is in a net payment position on its One-Stop Shop (OSS) return, and it has received payment from its customer, then it will benefit from a positive cash flow due to receiving VAT from its EU customers and holding this VAT until the One-Stop Shop filing deadline. On the other hand, where a business is in a net repayment on its OSS return, the business will experience a negative cash flow position under this option; this is due to paying VAT to its EU supplier and not being able to benefit from an immediate right of deduction.

2.3.    Tax experts' survey

Further to the business survey, to quantify how compliance costs for businesses will be impacted as a result of the implementation of the proposed policy options, a tax experts' survey has been carried out across all 28 EU Member States 255 . These tax experts provide tax compliance and tax advice services to hundreds of small, medium and large businesses.

To ensure representation of all business sizes, the assessment covered three distinct business types 256 : Type 1 SME, Type 2 SME and Large Businesses. The criteria for defining the three business types are outlined in Table 13 below.

Table 13: Criteria for defining business types