The visions of the VAT Expert Group – VAT after ViDA

At the request of the EU Commission, the VAT Expert Group published a report entitled "VAT after ViDA – Reflections on the Future of VAT" on 2 December 2024. We summarise the VAT Expert Group's vision for the VAT of the future here. At this point, we will initially focus on general proposals for change. The further development of the ViDA measures will be the subject of our next client information.

Neutrality

The VAT system of the future must offer a level playing field for EU businesses and businesses from third countries as well as for the traditional and digital economy. The right to deduct input VAT should always be granted if there is an intention to use an input supply for an economic activity and must not be restricted, as it currently still is in some Member States. Simplified VAT compliance channels also contribute to neutrality.

Broadening the VAT base

Tax exemptions should be reduced as far as possible, ideally even abolished altogether, as they have often proven to be inefficient and difficult to manage. They currently also give rise to planning opportunities, which should not be the case in a simple VAT system. This also applies, for example, to essential tax exemptions such as financial services and insurance. Fewer tax exemptions may then create scope to reduce the standard rate of VAT. A zero VAT rate is a good idea for transactions that affect basic needs (e.g. food).

The option for Member States to exempt certain transactions from taxation should be abolished in order to achieve a standardised system in the EU, while retaining the option for national pilot projects.

Special taxation regimes may have been justified in the past, and some may still be today, but they are so difficult to manage that it is better to do without them. This applies to travel services, for example. For reasons of sustainability, special rules for second-hand goods should continue to exist, but should be improved.

Having hundreds of different VAT rates in the Member States complicates international trade. The VAT Expert Group therefore proposes a standardised EU database for tax rates, called TEDB for "Taxes in Europe database". One could start with a standard rate and a reduced rate per Member State, and develop this into standardised EU-wide rates. The burdens arising from higher tax rates for low-income consumers could be cushioned by the Member States through non-tax measures.

Simplification of the rules for supplies of goods and services

The move towards the country of destination principle in the area of supplies of services should be transferred to the area of goods. This requires a shift from tracking the movement of goods to linking it to the residence of the recipient. However, account must be taken of the existing VAT exemption, which should be maintained. Measures relating to the destination principle should also always be considered together with the one-stop shop.

VAT collection mechanism

Despite its advantages, the fractionated payment system, in which every business in the chain pays VAT on their sales and claims input VAT on their purchases, also has weaknesses. Against the background of the digital reporting obligations of the ViDA package, it is worth asking whether the fight against fraud really still requires VAT to be settled between businesses with unrestricted deduction rights.

VAT refunds

It must be just as easy to recover VAT from another Member State as it is in your own country. This is required by the principle of neutrality. It can be achieved with, among other things, standardised EU regulations on reciprocity for refund applications from third countries. The one-stop shop procedure should make it possible to offset input VAT from one EU member state against output VAT from another.

VAT Regulation instead of Directive

The current VAT Directive has to be transposed into national law by all Member States, which is inefficient and can lead to late or incorrect transpositions. A directly applicable regulation could provide a remedy here. 

Decision-making processes at the EU level

The number of EU Member States is likely to increase further, meaning that the unanimity principle will reach its limits when it comes to decisions on VAT. Consideration should be given to switching to a majority principle, although this is likely to require greater democratic legitimisation of the decision-making process.

Functioning of the VAT Committee

The work of the VAT Committee is highly regarded by legal practitioners, but its decisions are not currently binding. Although this would be desirable in the interest of uniform interpretation and application of EU law, the EU treaties do not allow this. Nevertheless, the role of the VAT Committee should be strengthened, e.g. by acting as a comitology committee with a veto right for the EU Commission. 

Same interpretation of basic VAT concepts

It is important for the functioning of the system that VAT terms are interpreted uniformly throughout the EU. Currently, there are various sources for the interpretation of the law, first and foremost the decisions of the ECJ. There is also a VAT Regulation and Explanatory Notes for certain areas, but the role and reliability of this "soft law" is often not entirely clear. Major uncertainties also arise from the fact that national courts interpret VAT law in the first instance, sometimes with insufficient specialised knowledge. The taxable person also has little influence on whether the national court refers a case to the ECJ. In an ideal world, the taxable person could appeal directly to a body at the EU level – e.g. the VAT Committee, which would be given new competences for this purpose.

Resolution of disputes between Member States

The VAT system of the future needs an efficient system for dispute resolution between Member States – through an extended programme for cross-border rulings and binding information by the VAT Committee or another institution.

EU VAT Agency

Of course, the EU member states enjoy fiscal sovereignty. Nevertheless, the VAT Expert Group believes that an "EU VAT Agency" should be considered to monitor the work of the national tax authorities. The tasks of this institution could be gradually expanded, starting with pure information for the authorities.