The Commissionís work programme
for the gradual introduction of the new common VAT system


Tino Eggermont*

On the 10th of July 1996, the Commission made public its approach for the new common system of VAT set out in form of a work programme accompanied by a timetable for progress in stages, the last one being envisaged for 1999 (COM 96/328 final). The choice of a staged approach was made in view of the scope and the technical complexity of the various and very different problems to be solved.

This article summarises:



The VAT reform as envisaged in the programme is centred on three pillars :

  1. Providing for more uniformity in the practical application of the tax throughout the European Union; which is why it is suggested to turn the VAT committee into a regulatory Committee to reach a more unified approach in interpreting existing EC-legislation;
  2. The modernisation and simplification of the present VAT system in order to adapt taxation to recent technical and economic developments (e.g. telecommunications, electronic commerce, transfer of public services into private ownership....);
These two first pillars are seen as improvements of the current VAT system preparing the ground for the third pillar :

(3) The changeover to the new system (from taxation at destination to taxation at origin) providing for an unique place of taxation.

The Commission approach for the new system is based on the fundamental concept that, in a true Single Market, there should be no distinction between domestic transactions and intra-Community transactions. In other words, selling to customers in other countries should be as easy and should have the same consequences as selling to customers in the sellers home country.

What are the main elements of the envisaged system?
  1. Taxation at origin
All transactions giving rise to consumption in the EU would be taxed from their point of origin so that the existing remission/taxation mechanism for trade between Member States would be abolished.

This means that differences between domestic and intra-Community transactions will be abolished, and all inland and intra-Community supplies will be subject to VAT by the supplier.

The notion of origin is quite different from the 1987 Commission proposals where the point of origin was considered to be:

Under the new system, the point of origin would be the Ďtax domicileí of the taxable person (still to be precisely defined).

(2) Unique place of taxation, unique place of deduction, single VAT supervisory relationship

Today, within a single Member State, an operator only has to register once, but if he operates in several Member States he may require multiple registrations. In the future, under the new system, he will only need an unique VAT identification number for the whole of the EU. At this place, he will fulfil all his VAT obligations with regard to operations within the scope of VAT in the EU. This approach also implies that the right to deduct input VAT must be exercised strictly and exclusively at that place of identification. Also, all transactions of a given operator will be administered by a single tax administration.

Obviously, this approach does away with the direct attribution of the VAT receipts to Member States through the tax mechanism itself. In fact, it has been that mechanism, which is reliant on the physical movement of goods instead of on the commercial operation, which has complicated our system and which has made it, for example, impossible to find a satisfactory solution for the so-called chain-transactions. To overcome such problems, we have to look for a system of attribution independent of the tax mechanism itself.

VAT, being a general consumption tax, the most convenient criteria for the attribution of tax receipts is actual consumption. The Commission have found it to be possible to calculate the taxed consumption of each Member State on the basis of its national accounts and the statistics collected in that context. It has to be very similar to what we do today for the calculation of the VAT own resources.

The approach will call for more harmonisation than is achieved at present, especially on rates and the right to deduct input VAT, because major differences in rates and the deduction of input VAT would create major distortions of competition and might ultimately lead to dislocations of businesses.



The Commission received the advice of a very large business environment. The consultation process currently organised on an ad-hoc basis (the Commissionís conference November 1996, written contributions from trade associations, participation of EC officials in conferences organised by the private sector) made clear that the general thrust of the programme was welcomed, that simplification of the VAT system was a top priority and that harmonisation through legislation and a more uniform application of the tax were both essential. The Commission is planning set-up a more formal consultation process to ensure continuous access to the opinion of the business community and to involve them in the technical work on drawing up the different proposals laid down in the programme. The Commission is fully aware that it will need the support of the business community of the Union in the no doubt difficult discussions with the Member States and Parliament ahead.

With its resolution (A4-0164/97 - June 10,1997) the European Parliament endorsed the shortcomings of the current VAT arrangements and agrees with the Commission plans to the move to an unique place of taxation-based system, which is simpler, more transparent, more uniform and more capable of being monitored. However, the resolution is also indicative of a considerable scepticism with regard to a rapid transition to the final regime and the will to maintain national autonomy in the field of VAT, especially in setting the level of VAT rates.

The Economic and Social Committee welcomed the Commissionís initiative and agrees in principle with the broad concept of its work programme. The ESCís opinion (ESC 37/97 - July 9,1997) highlighted some doubts over the possibility of establishing accurate statistical data for the re-attribution of VAT receipts among Member states and the unique place of registration concept and political problems regarding convergence of VAT rates and Member States apparent loss of fiscal autonomy.

In the absence of fully-worked solutions and because of the staged approach, political and formal discussion with Member States, at this time, about the general concept of the Commissionís ideas for a new origin based VAT system is seen as premature. Discussing the basic approach of the programme could mean rushing into binding statements on questions of principle instead of finding a pragmatic approach to Ďrealí problems and thus harm the common interest of all parties involved. The Commission needs to proceed with its work of considering the concepts and developing techniques for implementing new VAT legislation in order to make the necessary proposals to the Council of Ministers. The Council will at that stage have the opportunity to consider each proposal on its merits.



Further to our programme and following the discussions in the EP, ESC and from what we know from informal contacts with some Member States, it is clear that top priority is to be given to the elimination of some of the shortcomings of the present VAT system. In parallel with our work to improve the current system and to set conditions favourable for the changeover to the origin based taxation scheme, the services of the Commission have to pursue their work to find solutions to the outstanding technical problems of the new system.

Improvements to the current VAT system

Pending the changeover to the origin system, the present system is to be modernised, more uniformly applied and made simpler where possible. At the same time the capacity of national tax administrations to collect tax and to prevent tax fraud or tax evasion is to be strengthened.

The Commission will, as announced in the programme, prepare the necessary proposals to meet these first priorities.

In implementing its programme, the Commission already presented its proposals on :

  1. the change of the legal status of the VAT Committee (COM(97)325 - 25.06.97). A key instrument to ensure more uniformity in the practical application of the tax. The transformation of the VAT Committee from an advisory to a regulatory body should ensure a more unified approach to interpreting existing EC-legislation and remove an important source of unhealthy competition and complexity for traders. Also, more uniformly applied rules should counteract the legal exploitation of the systemís loopholes and lead to a better enforcement and control of the tax. The role of a regulatory VAT Committee would be very similar to what happens within Member States in that administrative circulars would contain interpretation of primary legislation.
  2. the FISCALIS programme (COM(97)175 - 23.04.97), a significant new initiative at Community level aiming at establishing a new spirit of administrative co-operation in the fight against fraud. The Commission has long been convinced of the vulnerability of the transitional VAT system to fraud and has explicitly expressed its concern, particularly in the VAT programme. The Commission has therefore taken several steps to analyse the problem and propose long term solutions (the new VAT system) and some immediate steps. The key factor in all these solutions is the need for more administrative co-operation and mutual assistance both to improve the operation of the present system and to prepare the ground for the new system. In a world offering new technological opportunities which reinforce the trend towards globalisation, administrative co-operation becomes an increasingly vital link in the VAT control chain.
In the near future, the Commission will present its proposals : The 6th VAT Directive stems from 1977 and has nearly not been amended or modified since, leaving aside its adaptation to a situation without frontier controls within the EU. However, we cannot close our eyes and say that the conditions of todayís world are the same as they were at that time.

The line to take will be to increase the scope of the tax to enforce the systemís neutrality and simplicity and to counteract the erosion of the tax base resulting from the Courtís case-law on the definition of the concept of economic activity.

First priorities would be :

- revision of the VAT treatment of transactions designed to finance economic activities to respond to the Courtís case-law on definition of the concept of economic activity and direct link theory between in-and outputs (Polysar, Satam, welcome Trust, Harnas&Helm, BLP...);

- extension of the scope to include some public bodies. However, the fiscal treatment of public bodies cannot be seen as an isolated topic as it has major links with other fundamental provisions of the 6th VAT Directive like exemptions, taxable basis (e.g. subsidies) and the right to deduct input VAT;

- harmonisation of the right to deduct input VAT (especially the limitation of this right on car expenses; more generally article 17.6 of the Sixth VAT Directive) in combination with a radical reform of the procedures for refunding VAT to non-established taxable persons (the Eighth refund Directive);

- review of certain rules determining the taxable basis (treatment of subsidies, marketing schemes, vouchers..);

- limitation to the scope of exemption for financial services;

- review of the arrangements for levying VAT on groups.

Also, the modernisation exercise is to take into account recent technical developments in the telecommunication sector and particularly the increase in services supplied via internet.

The changeover to the new origin based taxation scheme has to form part of a long-term strategy. For this reason, the Commission has considered it necessary to consider right away to propose complementary simplification measures that would reduce burdens for business while preparing the introduction of the new VAT system.

In the framework of the SLIM II exercise (Simpler Legislation for the Internal Market) the Commission intends to propose before the end of 1998 :

- a reinforcement of mutual assistance on recovery;

- a legislative reform aiming at easing the tax representation. The non-binding recommendations contained in the report on arrangements for taxing transactions carried out by non-established taxable persons (COM(94)471 final, 3 November 1994) were not implemented to a sufficient extent by the Member States. Legislative action is needed now to implement these recommendations;

- a legislative reform of the tax-refund procedures laid down by the 8th VAT Directive. . Since most of the difficulties encountered by traders derive from the fact that they have to deal with foreign administrations, the Commission is currently looking into the possibility of refunding to the taxable persons in the Member State of establishment the tax paid in another Member State. Besides the genuine simplification for traders, this proposal will put an end to distortions of competition in the field of cross-border leasing stemming from the interpretation given by the Court on the place of supply rule for hiring out cars ("Aro-lease" case), since the VAT amount eligible for refund would be determined by the Member State of establishment in stead of the Member State of reimbursement as it is today.

It should be stressed that the modernisation exercise is not restricted solely to the transitional VAT arrangements. It also touches upon the basic provisions of the 6th VAT Directive, into which the transitional arrangements have been integrated. The same applies to the simplification exercise. A genuine simplification of the present VAT system is unthinkable if we are not prepared to change the 25 complex place of supply rules. As a consequence, the Commission sees the improvements to the current VAT system only as a preparation for the move to a new VAT system, providing for an unique place of taxation, which is the sole guarantee to bring drastic simplification to the VAT system and to redress budgetary losses by providing for long term revenue security for Member States.

Outstanding work to solve technical problems of the new origin based system

Much remains to be done in order to introduce all the measures necessary for changing over to the new common VAT system as envisaged by the Commission. For the time being, the programme only sums-up the broad lines and the format of the origin based taxation scheme without providing for technical solutions to all its outstanding questions.

Although concrete proposals for the changeover to the origin system are not scheduled before late 1998/mid 1999, preliminary work is to start within DG 21 to fill in some technical gaps in the envisaged system.

The items for which thorough preliminary studies are needed are to be tackled first:

Currently the concept of the unique place of taxation i.e. the place where taxable persons would be registered for VAT purposes and where all the transactions for the entire Community would be taxed, is not yet precisely defined. The following criteria will need to be considered :

place where the company is incorporated or legally established, headquarters, place where the company is effectively managed, genuine centre of activity ......Another outstanding question is how to involve third country operators not established in the Community in the scope of the tax.

The scope of VAT is to be clearly established by means of a definition of the concept of the consumption of goods or services in Community territory in order to ensure that, as is the case at present, only sales giving rise to consumption within the Community are subject to VAT. The re-attribution system must ensure that Member States will not lose in VAT revenue terms compared to the present system. A lot of analytic work remains to be done and one of the key aspects for the proper functioning of the envisaged re-attribution system is the quantification of the underground economy included in the final consumption to be excluded from the calculations. Administrative co-operation and mutual assistance will become more important in the operation of the new system. In short, a level of co-operation between the Member States equivalent to that currently achieved within each Member State will be required. The existing legal framework for mutual assistance and administrative co-operation requires extensive reform.



As you may have realised from the above, with the limited resources available, an enormous amount of work is still to be carried out in different areas like :

* finding solutions for immediate problems;

* improving the operation of the current system;

* filling in technical gaps of the new system;

* modelling the revenue consequences of the new VAT system;


The Commission is well aware of the difficulties which will have to be overcome before its ideas for a new common VAT system can be realised, but these should not deter it from undertaking the task. The reward for success in simplifying and modernising the tax are considerable in terms of promoting free trade and strengthening the European economy.

* European Commission. Usual disclaimer apply