Published on November 30, 2014
In international taxation, indirect taxes on consumption are governed by a fundamental principle: that of taxation in the country of destination. In other words, taxes are charged in the country in which the goods and services are consumed. This principle is in particular implemented by allowing goods to be exported exempt from tax but taxed instead when they are imported. Value-added tax (VAT) is Europe’s longest-standing consumption tax. In 1967 the commitment was made to establish a definitive VAT system operating within the European Union (EU) in the same way as it would within a single country 1 . The need to abolish physical borders between Member States by the end of 1992 made it necessary to reconsider the way in which trade in goods was taxed in the EU. The goal was that goods would be taxed in the country of origin, so that the same conditions that apply to domestic trade would apply to trade within the EU, perfectly reflecting the idea of a genuine internal market. Since the political and technical conditions were not ripe for such a system, transitional VAT arrangements were adopted. These arrangements split the cross-border movement of goods into two different transactions: an exempt intra-EU supply and an intra-EU acquisition taxed in the country of destination. These rules were regarded as temporary and are not without drawbacks: for instance, allowing goods to be bought free of VAT increases the opportunity for fraud, while the inherent complexity of the system is not conducive to cross-border trade. However, these ‘transitional arrangements’ are still in operation more than 20 years after their adoption. After a broad public debate launched with a consultation on the Green Paper on the future of VAT , 2 on 6 December 2011 the Commission adopted the communication On the future of VAT — Towards a simpler, more robust and efficient VAT system tailored to the single market . 3 The consultation confirmed that many businesses consider that the complexity, additional compliance costs and legal uncertainty of the VAT system often prevent them from engaging in cross-border activities and reaping the benefits of the single market. It also provided an opportunity to examine whether the commitment made in 1967 was still relevant. Discussions with Member States confirmed that the objective was still politically unachievable, and this was confirmed by the Council in May 2012. 4 The European Parliament 5 and other stakeholders such as business, tax practitioners and academics, also recognised the deadlock and therefore favoured a new system based on taxation at destination as a realistic solution. 1 First Council Directive 67/227/EEC of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes, Second Council Directive 67/228/EEC of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes — Structure and procedures for application of the common system of value added tax. 2 COM(2010) 695, Commission Staff Working Document, SEC(2010) 1455, 1.12.2010. 3 COM(2011) 851, 6.12.2011. 4 http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/130257.pdf. 5 Resolution of 13 October 2011, P7_TA(2011)0436.