Study on behalf of the European
Commission
Implementing the ‘destination principle’ to
intra-EU B2B supplies of goods
Presentation to the Group on the future of VAT - 7 November 2014
Overview of the Presentation
1.
Overview of the study
2.
Alternative taxation models being considered
3.
Summary of qualitative analysis findings
4.
Approach to quantative analysis
5.
6.
1.
Business Survey overview
2.
Member State Survey overview
Quantative analysis – next steps
1.
Business Survey
2.
Member State Survey
Next Steps - Economic Impact Assessment
Page 1
Implementing the ‘destination principle’ to intra-EU B2B supplies of goods
Overview of the Study
►
The current VAT treatment of intra-EU B2B supplies of goods can be
complex, creating a scenario of uncertainty which may deter businesses from
fully realising the benefits of the common market.
►
The European Commission wished to identify alternative concepts for a
properly functioning destination-based EU system of VAT. The guiding
principles of this are:
►
a)
The alignment of the simplicity and safety of intra-EU trade with purely domestic activities;
and
b)
The cost of VAT compliance for business activities across the EU must be reduced.
Following meetings with the VAT Expert Group and the Group on the Future
of VAT, five options were selected for more detailed examination.
Page 2
Implementing the ‘destination principle’ to intra-EU B2B supplies of goods
Qualitative Assessment of Each Option
Option
Practical
Application
Page 3
Legislation
Implementing the ‘destination principle’ to intra-EU B2B supplies of goods
Alternative Taxation models for the VAT treatment of
B2B Cross-Border Supplies of Goods – Option 1b
Option 1b: Improving the current rules without modifying them fundamentally
This option seeks to harmonise the VAT treatment applied to call-off stock, consignment stock arrangements, and also
chain transactions, as well as the form of documentation required to evidence the intra community supply.
MS 1
GOODS
MS 2
INVOICE
Customer
PAYMENT
(self-assesses
acquisition VAT)
Supplier
Call off/consignment stock
- Call-off stock simplification becomes compulsory in all Member States (including consignment stock)
- Time of intra community supply delayed until goods removed from warehouse
Chain transactions
- Uniform rules apply re: which supply in the chain receives the intra-EU exemption
Documentation
- List of relevant commercial documents that would support the exempt transfer
Compulsory use of current optional simplification provisions
- Domestic Reverse Charge, Appointment of Tax Representatives, ability to exempt with credit purchases relating to intra community
supplies, warehousing (non customs) reliefs.
Anti fraud Measure
Supplier required to hold form prepared by MS of departure, signed by the customer.
Page 4
Implementing the ‘destination principle’ to intra-EU B2B supplies of goods
Option 1b: Summary of Qualitative Benefits
Entity
Supplier
Impact Assumptions
→ Businesses no longer required to register for VAT in the Member State(s) where they do
not have an establishment.
• VAT return compliance burden reduced as number of VAT registrations reduced.
• Time spent dealing with VAT audits reduced as no longer have to deal with multiple
Revenue Authorities.
Likely to be an overall reduction of compliance costs on an ongoing basis.
Greater legal certainty for business. Beneficial as likely to result in fewer “negative” VAT
audits, and as such lower likelihood of interest and penalties.
Cash-flow benefit where VAT would otherwise be due to tax authorities before
customers have paid the invoice.
Customer
→ N/A
Member State
→ No longer required to register non resident enterprises for VAT, therefore no need to
undertake associated VAT audits etc., overall should see a reduction in
administration costs.
Reduced risk of VAT loss due to foreign enterprise failing to pay tax due.
Page 5
Implementing the ‘destination principle’ to intra-EU B2B supplies of goods
Option 1b: Summary of Qualitative Costs
Entity
Supplier
Impact Assumptions
→
Maintenance of a register of all goods despatched or transported under the proposed
reliefs. We assume that this is something that businesses would do already from a
commercial perspective, therefore this is cost neutral.
Additional reporting requirements. Likely to be a one-off set up cost in the year of
implementation, and then cost neutral after that.
Additional documentary requirement. One-off set up cost in the year of implementation,
and then cost neutral after that.
Customer
→
Additional documentary requirement so as to be able to identify the goods. We assume that
this is something that businesses would do already from a commercial perspective,
therefore this is cost neutral.
Additional documentary requirement. One-off set up cost in the year of implementation,
and then cost neutral after that.
Member State
→
Must set up system so that reporting of such transactions can be done electronically. We
have assumed that there will be a one-off set up cost in the year of implementation, and
then cost neutral after that.
Possible impact on MS cash-flow where relief is currently not implemented.
Page 6
Implementing the ‘destination principle’ to intra-EU B2B supplies of goods
Alternative Taxation models for the VAT treatment of
B2B Cross-Border Supplies of Goods – Option 2a
Option 2a: Adapting current rules whilst still following the flow of goods with
the supplier charging VAT in the Member State of destination.
MS 1
GOODS
Supplier
INVOICE
(accounts for VAT in
MS2)
MS 2
Customer
PAYMENT
►
The transfer of goods forming part of a supplier's business assets is treated as a supply of goods.
►
If the supplier is not established in the Member State of taxation, he will report the VAT due in the
Member State of taxation using (enhanced) One Stop Shop.
►
Either:
►
standardise the definitions of products eligible for reduced rates, utilisation of a “portal” database;
►
or the standard rate is applied to all B2B supplies (domestic and intra EU).
►
Simplification measures also being considered, supplies to Certified Taxable Person, supplies
between members of the same corporate family would fall within the reverse charge procedure
►
Equal treatment of B2B supplies of goods and services
►
Anti fraud measure - customer could be required to mention in his VAT return the purchases from
non resident entrepreneurs
Page 7
Implementing the ‘destination principle’ to intra-EU B2B supplies of goods
Option 2a: Summary of Qualitative Benefits
Impact Assumptions
Entity
Supplier
→
Businesses are no longer required to register for VAT in the Member State(s) where the supply
takes place. The VAT return compliance burden reduced as number of VAT registrations
required are minimised.
Time spent dealing with VAT audits reduced as businesses no longer have to deal with
multiple Revenue Authorities.
No longer required to submit EC sales lists therefore administration costs reduced.
Customer
Member State
→
→
No longer required to submit EC acquisitions list therefore administration costs reduced
Uniform accounting treatment applied to domestic and intra EU purchases therefore less
likelihood of error and the imposition of interest and penalties
Administration costs reduced as no longer need to audit non resident enterprises.
Tax receipts may increase
Cash flow may improve
Page 8
Implementing the ‘destination principle’ to intra-EU B2B supplies of goods
Option 2a: Summary of Qualitative Costs
Entity
Supplier
Impact Assumptions
→
Businesses may experience costs in determining what VAT rate to charge for each Member
State.
Assume this will be a one off cost in year one and cost neutral after that.
Suppliers may need to check if their customer has CTP status assumed cost neutral as they
already have to check VAT Number validity.
Cash flow could be impacted. Albeit will be neutralised in part if simplification measures
introduced.
Customer
→
May need to register for CTP status. Assume this will be a one off cost in year one and
cost neutral after that.
Partly exempt customers may experience additional VAT costs (or at best, negative cash
flow implications) if the reduced VAT rate is removed altogether.
Additional reporting obligation may result in additional compliance costs.
Cash flow could be impacted. Albeit will be neutralised in part if simplification measures
introduced
Member State
Page 9
→
Additional administration requirements such as CTP registration, development of content for
web portal (and its on going maintenance), amendment to VAT return or development of
additional document to enable enterprises to report purchases from non resident
enterprises, will result in increased costs in year one as well as ongoing costs.
Implementing the ‘destination principle’ to intra-EU B2B supplies of goods
Alternative Taxation models for the VAT treatment of
B2B Cross-Border Supplies of Goods – Option 2b
Option 2b: Adapting current rules whilst still following the flow of the goods
with the customer applying the reverse charge mechanism
►
In this model there is a single transaction (i.e., the supply of the goods). Reverse
charge mechanism is applied to the movement of the goods
MS 1
GOODS
MS 2
Supplier
INVOICE
Customer
PAYMENT
(self-assesses for VAT
via reverse charge
mechanism)
►
Customer required to register for VAT in a Member State where they have no establishment (like ‘As
Is’).
►
In addition suppliers would be required to register in the Member State to which they have
transferred their own goods (like ‘As Is’).
Page 10
Implementing the ‘destination principle’ to intra-EU B2B supplies of goods
Option 2b: Summary of Qualitative Benefits
and Costs
Benefits:
Entity
Impact Assumption
Supplier.
→
Consistency of treatment re: supplies of goods and services, simplification may help to
reduce number of errors and as such possible imposition of interest and
penalties.
Customer
→
→
N/A
Member State
N/A
Costs:
Scenario
Supplier
Customer
Member State
Page 11
Impact Assumption
→
→
→
Will incur one off systems change costs in year of implementation, cost neutral
thereafter.
Problems in relation to current systems will still exist re: movement of own goods,
therefore at best cost neutral.
Will incur one off systems change costs in year of implementation, cost neutral
thereafter.
Additional compliance costs where they have to account for VAT in MS where not
established .
May increase possibility of cross border fraud
Implementing the ‘destination principle’ to intra-EU B2B supplies of goods
Alternative Taxation models for the VAT treatment of
B2B Cross-Border Supplies of Goods – Option 4b
Option 4b: Aligning the rules governing the place of supply of services with the
customer applying the reverse charge mechanism.
►
Once again in this model there is a single transaction. The place of supply will be
where the customer has established (incl. fixed establishments) his business.
MS 1
MS 2
Customer
GOODS
INVOICE
Supplier
PAYMENT
(self-assesses for
VAT via reverse
charge mechanism in
MS of establishment)
►
Actual destination of the goods will remain an essential element. For reverse charge to apply
supplier can not be established in MS of customer (or, if established there, fixed establishment
should not intervene in the supply).
►
Customer must provide VAT number in MS of destination.
►
A Mini OSS will be used in two situations: firstly, where goods are supplied to a non EU customer
but are staying in the EU and secondly, where non EU business purchase and sell goods within the
EU.
►
Simplification measures also being considered, supplies to Certified Taxable Person would not
require a recapitulative statement.
►
Anti fraud measure – location of goods to be mentioned on invoice/recapitulative statement.
Page 12
Implementing the ‘destination principle’ to intra-EU B2B supplies of goods
Option 4b: Summary of Qualitative Benefits
and Costs
Benefits:
Entity
Supplier.
Impact Assumption
→
Customer
→
Member State
→
Consistency of treatment re: supplies of goods and services, simplification may help to
reduce number of errors and as such possible imposition of interest and penalties.
For non EU businesses there would be a reduction in compliance costs as no longer
required to register in multiple member states, instead they can use extended MOSS.
Consistency of treatment re: supplies of goods and services, simplification may help to
reduce number of errors and as such possible imposition of interest and penalties.
N/A
Costs:
Scenario
Impact Assumption
Supplier
→
Will incur one off systems change costs in year of implementation, cost neutral
thereafter.
Customer
→
Will incur one off systems change costs in year of implementation, cost neutral
thereafter.
Additional reporting obligations may result in increased compliance costs
Member State
Page 13
→
May increase possibility of cross border fraud
Implementing the ‘destination principle’ to intra-EU B2B supplies of goods
Alternative Taxation models for the VAT treatment of
B2B Cross-Border Supplies of Goods – Option 5a
Option 5a: Aligning with the contractual flows with the supplier charging the
VAT of the Member State of destination.
The supplier has an obligation to collect and account for VAT in the member state
where the contracting party is established.
MS 1
Supplier
(reporting VAT using
the OSS)
GOODS
INVOICE
MS 2
Customer
PAYMENT
►
The transfer of goods forming part of a supplier's business assets is not treated as a supply of goods.
►
If the supplier is not established in the Member State of taxation, he will report the VAT due using the OSS.
►
If contracting party reallocates the cost to another establishment that will be a deemed supply.
►
Simplification measures also being considered, supplies to Certified Taxable Person, supplies between
members of the same corporate family would fall within the reverse charge procedure
►
Anti fraud measure - customer could be required to mention in his VAT return the purchases from non
resident entrepreneurs
Page 14
Implementing the ‘destination principle’ to intra-EU B2B supplies of goods
Option 5a: Summary of Qualitative Benefits
Impact Assumptions
Entity
Supplier
→
Businesses are no longer required to register for VAT in the Member State(s) where the supply
takes place. The VAT return compliance burden reduced as number of VAT registrations
required are minimised.
Time spent dealing with VAT audits reduced as businesses no longer have to deal with
multiple Revenue Authorities.
No longer required to submit EC sales lists therefore administration costs reduced.
Customer
Member State
→
→
No longer required to submit EC acquisitions list therefore administration costs reduced
Uniform accounting treatment applied to domestic and intra EU purchases therefore less
likelihood of error and the imposition of interest and penalties
Administration costs reduced as no longer need to audit non resident enterprises.
Tax receipts may increase
Cash flow may improve
Page 15
Implementing the ‘destination principle’ to intra-EU B2B supplies of goods
Option 5a: Summary of Qualitative Costs
Entity
Supplier
Impact Assumptions
→
Businesses may experience costs in determining what VAT rate to charge for each Member
State.
Assume this will be a one off cost in year one and cost neutral after that.
Suppliers may need to check if their customer has CTP status assumed cost neutral as they
already have to check VAT Number validity.
Cash flow could be impacted. Albeit will be neutralised in part if simplification measures
introduced.
Customer
→
May need to register for CTP status. Assume this will be a one off cost in year one and
cost neutral after that.
Partly exempt customers may experience additional VAT costs (or at best, negative cash
flow implications) if the reduced VAT rate is removed altogether.
Additional reporting obligation may result in additional compliance costs.
Cash flow could be impacted. Albeit will be neutralised in part if simplification measures
introduced
Member State
Page 16
→
Additional administration requirements such as CTP registration, development of content for
web portal (and its on going maintenance), amendment to VAT return or development of
additional document to enable enterprises to report purchases from non resident
enterprises, will result in increased costs in year one as well as ongoing costs.
Implementing the ‘destination principle’ to intra-EU B2B supplies of goods
Qualitative Analysis – Legislation
►
An ‘As Is’ and ‘To Be’ analysis template was prepared in order to illustrate the VAT treatment
of a selection of common types of goods transactions both from an existing approach (‘As Is’
analysis), and from the approach of the five alternative taxation models (‘To Be’ analysis).
►
VAT experts in all 28 Member States consider that there are no significant differences
between the EU Directive and the local VAT legislation.
►
VAT experts in all 28 Member States considered that there were no significant
obstructions in the local legislation that would prevent the taxation models being
implemented in each territory.
►
Minor potential legislative considerations were raised in the following areas:
Page 17
Implementing the ‘destination principle’ to intra-EU B2B supplies of goods
Business Survey: Process Overview
Page 18
Implementing the ‘destination principle’ to intra-EU B2B supplies of goods
Business Survey - Responses
MEMBER STATE
#
SMEs #
Austria
10
4
Belgium
4
Bulgaria
5
3
Croatia
14
2
Czech Republic
2
Cyprus
1
1
Finland
6
3
France
1
Germany
26
Greece
4
Hungary
8
3
Ireland
11
8
Italy
8
3
Netherlands
3
Poland
11
4
Romania
1
1
Slovakia
3
Spain
2
Sweden
5
1
UK
Total
24
149
5
44
Target
840
-
17.74%
29.53%
6
The Business Survey launched in
English on 12 May 2014. In addition,
the survey was also made available
in French, German, Italian, Spanish
and Polish.
The survey was closed on 12
September 2014.
The proportion of SMEs that have
responded to the survey is 29.5%.
Percentage achieved
Page 19
Implementing the ‘destination principle’ to intra-EU B2B supplies of goods
Member State Survey: Process Overview
Page 20
Implementing the ‘destination principle’ to intra-EU B2B supplies of goods
Member State Survey
Member State survey question
Alternative proxy used in absence of response
1 Percentage split of a Member State’s total trade in respect of business to We use the data on a Member State’s total turnover (from Eurostat) and
business (B2B) trade and business to customer (B2C) trade.
reduce that by data on retail turnover (from Eurostat) to derive non-retail
turnover (which we consider business to business trade). The ratio of these
two will give an estimate for this question.
2 Percentage split of a Member State’s total VAT receipts in respect of B2B We will use the split between the Gross Value Added of the retail sector and
trade and B2C trade.
3
4
5
6
7
the non-retail sector (from Eurostat) as a proxy to split the Value Added tax
receipts into B2B trade and B2C trade.
Percentage split of a Member State’s total domestic B2B trade between We will use the difference between the total turnover (from Eurostat) and the
goods and services.
aggregate of intra and extra EU trade (also from Eurostat) to derive a proxy for
domestic trade. We will then obtain the goods and services split for the
aggregate of intra and extra EU trade and assume that proportional split will
also apply to domestic trade.
Percentage split of a Member State’s total B2B VAT receipts between
We will apply the goods and services trade split from question no.3 to the B2B
goods and services.
VAT receipts split we obtained from question no.2.
Estimate of the number of Full Time Equivalents employees (FTEs)
We will use estimates obtained from other countries as proxy information for
currently employed in all of a Member State tax authority offices and the this response.
number of FTEs employed dealing specifically with VAT per average
calendar month.
Average cost per hour (compensation) in a Member State for an
We will use the average income levels in the Member State as an assumption.
employee responsible for dealing with VAT.
Percentage split of total FTEs dealing with VAT in your Member State
We will use the split between domestic and international trade in a Member
according to whether it relates to domestic trade or intra-EU trade.
State as an assumption, validated by information provided in another question
detailing the split in VAT registrations between domestic and foreign
businesses in a Member State.
Page 21
Implementing the ‘destination principle’ to intra-EU B2B supplies of goods
Member State Survey - Responses
MEMBER STATE
Austria
Belgium
Bulgaria
Croatia
Cyprus
Czech Republic
Denmark
Estonia
Finland
France
COMPLETE
No
Yes
Yes
No
Yes
Yes
Yes
Yes
Yes
No
Germany
Greece
Yes
Yes
Hungary
Ireland
Italy
Latvia
Yes
Yes
Yes
No
Lithuania
Luxemburg
Malta
Netherlands
Poland
Portugal
Romania
Slovakia
Yes
Yes
Yes
No
Yes
No
No
Yes
Slovenia
Spain
Sweden
UK
Average
Yes
No
No
Yes
Page 22
PERCENTAGE
0%
20%
83%
0%
69%
86%
78%
47%
17%
0%
50%
41%
52%
8%
100%
0%
59%
23%
92%
0%
5%
0%
0%
78%
94%
0%
0%
6%
37%
The Member State Survey launched in
English on 5 August 2014. In addition, the
survey was also made available in French,
German, Italian, Spanish and Polish.
Implementing the ‘destination principle’ to intra-EU B2B supplies of goods
Qualitative Issues Identified with Business Survey
Response Data and Proposed Next Steps
•
It was decided that a minimum number of 30 responses from each Member State
should be obtained in order to ensure a reliable indication of business data across the
EU. The actual number of business survey responses has fallen short of this.
•
The risk is that a lack of responses from certain Member States and types of
businesses could skew the data in favour of other Member States or types of
businesses.
•
Three additional steps have therefore been proposed to add greater detail and breadth
to the existing data set:
Interviews with specific
business respondents to
gain a more detailed
understanding of their
trade and cost profiles.
•
Utilisation of EY’s internal
billing data to obtain a profile
of typical VAT administration
and compliance costs for
businesses across the EU.
Utilisation of local tax expert
contacts in each Member
State to obtain specific cost
estimations re: the costs
associated with complying
with the five options.
It is intended to use these three additional sources of data to corroborate the primary
Business Survey response data where possible.
Page 23
Implementing the ‘destination principle’ to intra-EU B2B supplies of goods
Qualitative Issues Identified with Member State Survey
Response Data and Proposed Next Steps
•
Responses received from Member State Tax Authorities have not been consistent in respect
of:
•
Which Member States have provided responses.
•
How many questions have been answered in the responses provided.
•
Member States have, in some cases, struggled to extract the relevant data needed for
completion of the survey. Member States have also proved unwilling to provide estimated
figures for changes in their costs for administering the proposed alternative VAT system
options.
•
Proposed additional steps to handle these issues are as follows:
•
Discussions with Member State Tax Authorities where the surveys are completed in order
to understand how they were able to respond to all of the questions. Where the Member
State Tax Authorities have used proxies, we can provide these to the Member State Tax
Authorities who have not been able to fully complete the survey.
•
Discussion with Member State Tax Authorities through calls and follow up emails
requesting them to respond to all questions and providing proxies that other Member
State Tax Authorities have used. This approach will be in conjunction with an email issued
by the European Commission to the same effect.
•
Assistance to be provided directly to Tax Authorities where difficulties in completing the
survey have been raised or identified.
Page 24
Implementing the ‘destination principle’ to intra-EU B2B supplies of goods
Economic Impact Assessment
Methodology
Data analysis
Qualitative
analysis
Secondary data from
external resources
Quantitative
analysis
Input from primary
data analysis
Data
transformation
Data collection
Primary data from
Member States,
business, and tax
experts
The QUEST III economic model
Macroeconomic
modelling
Model results “As-is”
Model results “To-be”
Variation = Economic Impact
Page 25
Implementing the ‘destination principle’ to intra-EU B2B supplies of goods
Economic Impact Assessment
Data analysis
1. Primary data
► Objective:
a. To highlight trends, as well as draw attention to areas of importance and
concern.
b. To determine the magnitude and the timing (split between one-off and
ongoing) of expected changes in
i.
Associated compliance costs;
ii.
VAT fraud gap;
iii. Intra-EU trade volumes,
iv. Any other factor to be identified in qualitative analysis.
in order to inform key input requirements for our macroeconomic impact
analysis.
► Resources: Business survey, Member state survey, expert opinions.
Page 26
Implementing the ‘destination principle’ to intra-EU B2B supplies of goods
Economic Impact Assessment
Data analysis
2. Secondary data
► Objective: Provide input to the macroeconomic model required to assess the
macroeconomic impact of the proposed changes.
a. Economic data.
b. Financial data and prices.
c. External trade & trade partners data.
d. Demographics.
► Resources (amongst others):
a. Eurostat,
b. IMF,
c. World Bank,
d. United Nations Economic Commission for Europe (UNECE),
e. International Labour Organisation (ILO),
f. Business Monitor International (BMI),
g. National Statistics Offices and Central Bank databases,
h. Bloomberg.
Page 27
Implementing the ‘destination principle’ to intra-EU B2B supplies of goods
Economic Impact Assessment
Macroeconomic modelling - QUESTIII
► The QUESTIII model is used to forecast the impact of changes to VAT
legislation on macroeconomic outcomes.
► Preferred modelling approach used extensively by EC DG ECFIN to evaluate
the economic impact of a number of policy proposals.
► Requires significantly detailed data over a long period of time.
► Built on microeconomic foundations of the economy such as:
►
Behaviour of households and firms.
►
Fiscal policy of the government (taxation and spending).
►
Monetary policy of Central bank.
►
Market frictions such as lack of liquidity.
►
Role of external trade.
► The variant in this study closely follows that of Ratto et al. (2009).
Page 28
Implementing the ‘destination principle’ to intra-EU B2B supplies of goods
Economic Impact Assessment
Next Steps
► Further insight over the costs and benefits resulting from each of the 5 policies
to be obtained from primary analysis and expert opinion prior to submission of
the final report.
► Using these insights, we will quantify the parameters of the economic model
separately for each of the proposed policies effectively creating 5 scenarios.
► Selected macroeconomic indicators for the ‘As-Is’ state will be forecasted
using the economic model in order to determine the baseline to compare postpolicy impacts. This baseline will be presented in the interim report.
► We will forecast the macroeconomic indicators under each of the 5 scenarios.
► Results from these scenarios will be compared to “As-Is” baseline to assess
the macroeconomic impact of each of the 5 scenarios.
► Additional analyses will be performed under each scenario, in order to
evaluate how sensitive the results are to variations in our key assumptions.
Page 29
Implementing the ‘destination principle’ to intra-EU B2B supplies of goods
Questions?