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Real-time reporting and the definitive VAT system

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Introduction

The latest European Commission, Fiscalis and VAT Expert Group meetings and the developments in multiple EU Member States show that real-time reporting (or Transaction-Based Reporting) is seen as the most feasible solution to VAT fraud. However, the idea of moving towards a definitive VAT system where the exemption on intra-Community VAT is removed, is also still being considered by the European Commission. In the following we will show that implementing one doesn’t need to exclude the other and that both can be perfectly combined. So although we are not presenting an opinion on what and if it should be done, it gives options and to have options in life is always good.

The definitive system: a brief history

Ever since the implementation of the current VAT system in 1993 (when the EU Single Market went into force), it has been made clear that the rules regarding intra-Community transactions would only be transitional. Thirteen years later the European Commission proposed in the VAT action plan to reform the VAT system, make it less vulnerable to fraud and to move towards a definitive VAT system. The most important aspect of the plan is that the VAT exemption on intra-Community transactions will be abolished and a destination based system will be implemented. This is based on the idea that VAT should be paid in the country where the goods or services are consumed.[1]

This would indeed to a large extent prevent VAT fraud as we know it (see an actual VAT fraud case here), because fraudsters will no longer be able to abuse the margin between the standard VAT rate and the exempted rate. However, as VAT Dr. Prof. Marie Lamensch stated during a session in the European Parliament: “the problem is that although it removes this kind of risk [on MTIC fraud] there is now the risk that the Missing Trader is the supplier that collects the VAT and then goes missing.” She continuous to point out that the definitive system in its current form would create a “risk on tension between Member States” … “because the client in Member State B would pay VAT to someone in Member State A and then the VAT in Member State A is reported in Member State A and has to be paid back to Member State B.”[2] This complex situation could indeed result in enormous tensions between Member States in case one is not able and/or willing to exchange this type of data.

These and other concerns (i.a. a potential high administrative burden and cash-flow problems for companies[3]) resulted in the fact that no unanimity was reached between EU Member States to date regarding the definitive VAT system.

Real-time reporting combined with the definitive system

We have often written about the clear benefits of real-time reporting, both for the public and private sector. Implemented alone, it has an enormous effect on the VAT Gap as seen through many examples in Latin America.[4] Therefore, when introduced in the EU many problems related to VAT fraud will be resolved and the overall VAT gap will be significantly reduced. However, after implementation of real-time reporting for intra-Community transactions (as is currently investigated by the European Commission) there would be added value to still implement the definitive system in order to further eradicate opportunities to fraud and harmonise the EU VAT system.

A requirement for such a system to succeed is the application of modern cryptography which will enable Member States to exchange information without having to reveal any actual sensitive data. It is outside the scope of this article, but in case you want further information about how this technology works, see our previously written article.

When a confidential real-time reporting solution would be combined with the definitive system, there will be a taxable intra-Community transaction you can report, in real-time if the transaction has occurred. Without having to share any confidential information. The reporting is incentivised automatically because the right to deduct VAT can depend on the fact if VAT was reported or not.

Conclusion

This blog post is meant to show that real-time reporting is not only a narrow-focused solution, it can also be used to execute legislative changes in an efficient way. While real-time reporting is an instrument, a tool, to make the EU VAT system more robust, while the definitive system is the underlying legislative system that plugs the holes that exist in the current EU VAT system. Important to emphasize is that real-time reporting on it’s own already helps to massively decrease the €140 billion EU VAT gap, but in case the European Commission wants to abolish the exemption on intra-Community transactions all together, confidential real-time reporting can help. This would overcome the most important problems that were voiced by stakeholders in the EU as Member States will be able to share information in real-time without having to reveal confidential information.

In case you want to learn more about how summitto’s real-time reporting system exactly works and how it benefits both the public and private sector click here. For questions, shoot us a message at info@summitto.com

[1] https://www.europarl.europa.eu/RegData/etudes/BRIE/2018/625184/EPRS_BRI(2018)625184_EN.pdf

[2] https://multimedia.europarl.europa.eu/en/committee-on-budgetary-control_20210526-1345-COMMITTEE-CONT_vd?start=20210526132941&end=20210526134616

[3] https://www.businesseurope.eu/sites/buseur/files/media/position_papers/ecofin/2018-12-14_definitive_vat_system.pdf

[4] https://www.billentis.com/The_einvoicing_journey_2019-2025.pdf