VAT reform in the EU: benefits of a principles-based tax policy
“The new own resources must meet the criteria of simplicity, transparency, predictability and fairness.”
You would think that the above recommendation comes from a report by the Tax Foundation on the principles-based policy of the EU’s own resources. Although we would like to claim credit, the recommendation instead comes from the EU’s 2016 Monti report and, more recently, from the 2020 EU institutional agreement on new own resources.
When policy is designed on these sound principles, governments can generate sufficient revenue, support the economy, and pave the way for an efficient tax system. The recent EU VAT reform on e-commerce is an example of this victory for governments, consumers and businesses.
In July 2021, the EU agreed to remove a VAT exemption for goods imported into the EU with a value of less than €22 by non-EU businesses. In other words, by eliminating an exclusion and broadening the tax base, customers will now pay the same tax regardless of the value of the good or whether the online seller is from the EU.
The EU found that the exemption was being misused by importers who artificially set the price of their goods below the exemption limit and cost the EU treasury nearly €7 billion a year. This, by definition, increased the tax burden on taxpayers who imported more expensive or larger volumes of goods and hurt public budgets.
When authorities were able to identify this fraud, EU customers received a call from customs requesting payment of the additional VAT after the goods arrived at the customer’s doorstep. The extra cost surprised many consumers.
Furthermore, non-EU companies were gaining an unfair competitive advantage by avoiding the tax compared to EU companies that were unable to benefit from the exemption.
The reform also addressed business concerns about compliance. Before July 2021, sellers had to be registered for VAT in each Member State in which they had a turnover above a certain overall threshold. The threshold varied from country to country.
The reform has simplified this requirement by replacing the different thresholds with a common European threshold of €10,000. In addition, online sellers can now register on an electronic portal called a “one-stop-shop” where they can fulfill all their VAT obligations for their sales in the EU.
For importers, a similar mechanism has been put in place called “Import One Stop Shop” to register for VAT in the EU and ensure that the correct amount of VAT is paid to the correct Member State.
Six months later, how has the reform worked? Is the VAT system for e-commerce more simple, transparent, predictable and fair?
According to the preliminary results, the answer is yes.
Member States collected around €1.9 billion in VAT revenue from July to December 2021. This would translate to €3.8 billion per year. This figure includes 690 million euros in additional revenue for parcels with a value of less than 22 euros.
However, the data available so far only concerns one aspect of the new rules, those relating to imported parcels of online purchases with a value of less than €150. Other data on other parts of the reform, such as the new rules applied to online sales within the EU and the new obligations for online shopping platforms that store goods in warehouses in the EU. EU, should be available in the coming weeks.
More than 8,000 traders have registered with the “one-stop import shop”. Overall, EU customs processed around 500 million items covered by the new simplified dataset, 94% of which were provided by IOSS registered traders.
Under the old system, governments lost revenue, consumers didn’t have price transparency, and businesses didn’t compete on a level playing field. The e-commerce VAT reform is a success story for a principle-based policy emphasizing simplicity, transparency, predictability and fairness.
Unfortunately, in December 2021, the Council took two steps backwards in terms of principled reforms. The Council agreed to extend the list of goods and services to which reduced VAT rates can be applied. In other words, more exclusions can be implemented despite fringe benefits to consumers and more complex tax rules. The approach also goes against the usefulness of VAT as a source of revenue.
As the EU considers further VAT reforms and other new own resources, policymakers should continue to build on these guiding principles, rather than using tax fairness as a code word for income inequality or corporate profitability. Clear and transparent rules make it easier to see if the tax system is working fairly. Member States and the EU can work together to simultaneously increase revenue and support the economy.