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EU VAT, quo vadis: the expert's advice to the European Commission

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Introduction

As the European Commission is preparing its legislative proposal under the heading of “VAT in the Digital Age” for Q3 2022, we believe it might be a good time to share the advice experts provided to the European Commission throughout our VAT Talks series. We are very thankful that so many experts shared their views on VAT with us. This resulted in advice regarding the use of technology, the need to focus on harmonisation and simplification, and the importance of a continuous dialogue with the business community. We hope this article might offer a little help to the European Commission in answering the question: EU VAT, quo vadis?

Technology

Various experts expressed that the European Commission should make more use of technological solutions. For example, Tax Law Professor at the University of Groningen, Redmar Wolf advises: “make use of technological solutions. The confidence in paper invoices is very outdated. We also saw a digitalisation of the work-space within a couple of days after the lockdown was installed. For VAT, this evolution could take place as well.” European VAT Manager at Nidec (and ex-IBFD), Zsolt Szatmári shares Redmar’s view. He states that: “the European Commision has been focussing on substantive rules, and those are very important as well, but I think the Commission realised that they should put even more focus on technological solutions with all the potential difficulties of trying to harmonise the approaches of 27 Member States.”

Also from Latin America, where the first real-time reporting systems were implemented, similar advice is provided. Alfredo Collosa, Head of the Training Division at the Argentine Tax Authority and Consultant for CIAT believes that first of all tax authorities “should digitalise even further” and that they should “make use of new technologies, such as blockchain”. Partner at the Tax Research Center of BDO and Professor of Indirect Taxes at the Erasmus University of Rotterdam, Madeleine Merkx also points toward the usage of technology to improve the EU VAT system. She argues the focus should be “on detection and for the future to think about how to prevent fraud by using technology.”

Harmonisation

Another extremely important topic for the interviewed experts is harmonisation. SAP-expert Marinus Peters is clear when he says: “Focus on harmonisation, harmonisation throughout the entire EU. I think the Member States have too many freedoms regarding VAT right now.“ Tax Professor at the UCLouvain and the Vrije Universiteit Brussel (VUB), and member of the VAT Expert Group, Marie Lamensch also points towards harmonisation. She acknowledges the importance of real-time reporting regarding strengthening the EU VAT system, but in order to implement it successfully: “we need to make sure that it is affordable for businesses and that requires harmonisation.” IBFD’s Fabiola Annacondia, amongst other things editor of the renowned International VAT Monitor, agrees by stating that it’s essential to: “first harmonising the [EU VAT] system as much as possible.”

Sovos’ vice president Christiaan van der Valk provides a very specific piece of advice regarding harmonisation: “start looking at what are the smaller things we can do to create more harmonisation. In terms of data standards or authentication protocols and other things that will be common on a lower level where you can just force interoperability without facing the immediate political challenges of the European Union on the bigger pieces where investments are already made.”

Dutch e-invoicing expert Gerard Bottemanne summarises this discussion beautifully by saying: “We need harmonisation and transparency!”

Simplification

Closely related to harmonisation is simplification which is actually often a result of harmonisation. Head of Tax Risk Analysis, Dame of Honour Ksenija Cipek, emphasises that: “First, legislation should be simplified. We need a reasonable level of compliance and if it is too hard to be compliant, taxpayers will not comply”. Regarding the idea of real-time reporting for intra-Community transactions, Partner Indirect Tax Technology and Transformation at PwC Societé d’Avocats Laurent Poigt, stresses the importance of an implementation that is done “simply and effectively.”

Chief Commercial Officer and Co-owner of Dutch bookkeeping software provider Informer, Peter Potters, makes this idea very tangible: “I really think that you should strive for a [EU VAT] system where the right solution is the easy solution. Currently, the process of sending an invoice to another EU Member State and subsequently correctly entering it into your bookkeeping system is very complex and prone to mistakes. I would prefer that we invest into a system which can handle such transactions easily and correctly. In other words, the best solution should take compliance-by-design into account.”

Tax Partner at VGD Slovakia, board member of the Slovak Chamber of Tax Advisors and Treasurer of the CFE Tax Advisors Europe, Branislav Kováč also focuses on the importance of simplification. “In my opinion, the European Commission should aim at specifying exactly what should be reported. Additionally, there should not be too many exemptions, because if there are too many exemptions the probability of fraud is likely to increase.” Similarly, member of the VAT Expert Group Andrea Parolini told us: “I think that it is time to be brave and reshape exemptions laid down in Article 132 to 135 of the VAT Directive with the aim to have a more “modern” VAT.”

Confirmation bias and a dialogue with the business community

Senior manager at Accountancy Europe, Paul Gisby points towards the danger of confirmation bias for the European Commission and governments in general. “Confirmation bias means that people are increasingly picking their news just to hear the things they want to hear. This is really quite dangerous and for any sort of policy development, you have to look at the way that is framed (i.e presented) – which has been proven to have a substantial impact on the way that it is perceived by the recipient.”

One way to overcome this problem is by starting a dialogue with professionals from outside the government bodies. As Piotr Arak, Director of the Polish Economic Institute, rightfully points out: “we know from our experience that you need a good dialogue with the business community.” The importance of a dialogue between the European Commission and the business community is also stressed by Senior Adviser Indirect Taxes at EK - Confederation of Finnish Industries Tiina Ruohola. According to her the European Union would benefit if more meetings would be arranged “with Member States and VEG at the same time, in the same room. The Commission is doing great work along with the Member States through the Group on the Future of VAT and great work with the business community through VEG. However, often a deeper understanding can be gotten when we are able to talk about the issues face to face. Hence, keeping mutual meetings would take the stakeholder work to the next level.”

Conclusion

This article provides an overview of the most important pieces of advice some of the VAT Talks participants gave to the European Commission. Many stressed the importance of an increased usage of technological solutions, more focus on harmonisation and simplification, and the need for a dialogue between the European Commission and business representatives. The group of experts interviewed is diverse in terms of profession (e.g. tax authority officials, professors and business representatives) and nationality (11 different nationalities) and therefore offer a unique view of the EU VAT system. We hope this can help policymakers to achieve their goal to prepare VAT for the digital age.

We would like to thank all VAT experts again for their amazing insights!