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Luxembourg Tax Alert 2018-18

Luxembourg Tax Alert 2018-18

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Before the implementation of a new “definitive” VAT system: Member States progress during the ECOFIN meeting of 2 October 2018

As a reunion of the Economic and Financial Affairs Council, comprising the economics and finance ministers from all the Member States and responsible (among others) for taxation matters, the ECOFIN configuration at the Council met on 2 October 2018.

While the implementation of a new ‘definitive’ VAT system is on the way, the ECOFIN Council agreed on some transitional and urgent measures which are hereafter listed:

  • The four adjustments to the EU’s current VAT rules or so-called ‘short-term fixes’ (1);
  • The adoption of a ‘generalized reverse charge mechanism’ (GRCM) (2);
  • The application of a reduced/super-reduced or sometimes even a zero VAT rate to electronic publications (3).

Let’s examine these provisions further.

1. Short-term ‘quick fixes’

The short-term ‘quick fixes’ constitute adjustments, mainly taken in view of the preparation for the adoption of the new VAT ‘definitive’ system. These are aimed at fixing specific issues arising from the application of the current EU VAT rules. These fixes will be applicable as from 1 January 2020.

In a nutshell, the European Commission presented to the Council three legislative proposals mainly dealing with the ‘improvement of the current EU VAT rules for cross-border transactions’. On 2 October 2018, the Council agreed on the following four quick fixes which were contained in these proposals:

  • The first fix is aimed at simplifying and standardizing the VAT treatment of call-off stocks arrangements throughout the EU. This item points to the situation where a vendor transfers a stock to a warehouse at the disposal of an identified client in another Member State. Where specific conditions are met, these transactions should be considered as one exempt supply in the Member State of departure and one intra-EU acquisition in the Member State of arrival in the hands of the final acquirer of the goods.
  • The second fix provides that, as regards intra-EU supply of goods, the VAT identification number of the customer will be a material (and no longer a formal) requirement to the application of the related VAT exemption. In this respect, omitting to provide such a number would surely impede the application of the VAT exemption.
  • The third fix relates to chain transactions which can be defined as successive supplies of goods, subject to only one transport. The movement of the goods should be allocated to one of the supplies, which only should benefit from the VAT exemption for intra-EU supplies (provided certain conditions are met). The other supplies at hand should therefore be subject to VAT and may require the identification of the supplier. Under this fix, the conditions determining which transaction should benefit from the VAT exemption are defined for a common approach.
  • The last fix refers to the proof acceptable for the claim of the VAT exemption on an intra-EU supply. This fix mainly foresees that the application of a VAT exemption should depend on a common (obligatory) framework of documents, which should sustain the transport or dispatch from one Member State to another. Furthermore, the VAT exemption might apply in case the specific conditions of proof are fulfilled. 


2. VAT GRCM

The idea behind this adjustment is to combat VAT and more specifically carousel fraud. Carousel fraud or missing trader fraud happens where the traders do not remit the VAT they receive from their customers to the tax authorities. In the meantime, the customers ask for a tax deduction on the valid invoices they hold for the services rendered by the traders. In such a case, the supplies are purchased and then resold without the payment of any VAT. This scheme often happens as regards intra-EU supplies, but can also occur when services are rendered.

  • Usually, the VAT gap allows to measure the difference between the expected VAT revenues and the VAT actually collected by the tax authorities. It provides an estimation of the revenue loss due to tax fraud or tax evasion.
  • As the Member States are not touched equally by such kind of fraud and while waiting for the implementation of the new ‘definitive’ VAT system, urgent transitional measures need to be taken. In this respect, the Council presented a derogation from the application of the standard VAT rules — the so-called ‘generalized reverse charge mechanism’.
  • Mainly, the latter involves a shift from liability for the payment of VAT from the supplier to the customer. However, the application of such a mechanism will be exceptional and therefore subject to the fulfillment of strict conditions.
  • Thus, the GRCM can only be used where the Member State has made a specific request to the Commission and provided information as to the reasons justifying this demand. In case the Commission agrees with the request, it passes it through the Council. Note that the application of the GRCM is therefore subject to the granting of an authorization by the Council to the Member State.
  • Until June 2022, the GRCM can only be used in the case of domestic supplies above a threshold of EUR 17,500 per transaction. Where the Member State at hand would like to apply such a mechanism, it should comply with strict technical conditions (level of its VAT gap, proof that the domestic measures are not sufficient to combat fraud, that the administrative cooperation is not working, and in particular 25% of the VAT gap has to be caused by the carousel fraud). The Member State will also have to establish appropriate and effective electronic reporting obligations on all taxable persons.

3. VAT rates for electronic publications

Currently, since the Commission against Luxembourg case, there is a mismatch between the VAT rate applicable to physical publications and the one applicable to e-books in a number of Member States. Indeed, the 2006/112/EC Directive (‘VAT Directive’) provides that electronically supplied services are taxed at the standard VAT rate throughout the European Union, while books on all means of physical support (books, newspapers and periodicals) can benefit from the application of a (super or) reduced (or sometimes zero) VAT rate.

In light of this, the European Commission submitted, in 2016, a proposal to the Council of the EU regarding the VAT rates applicable to books, newspapers and periodicals. This document was discussed at the ECOFIN Council in 2017 and 2018 without obtaining unanimous support from the Member States.

However, due to the urgent need to obtain an alignment of taxation for both the categories of publications and in order to maintain the technological progress in a constantly growing digital economy, the Council agreed on 2 October 2018 with going ahead with a proposal allowing Member States to apply reduced, super-reduced or zero VAT rate to electronic publications.

Note that the application of the super-reduced and zero rates should only be allowed in case the Member State currently uses them for physical publications.

This item constitutes one of the contributions to the EU’s digital single market plan and should apply until the introduction of a new ‘definitive’ VAT system proposal.


Any tax advice in this communication is not intended or written by KPMG to be used, and cannot be used, by a client or any other person or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing, or recommending to another party any matters addressed herein.The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity.

Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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