WIREDGOV

The European Commission yesterday launched a wide public consultation on how the EU’s Value Added Tax (VAT) system can be strengthened and improved, to the benefit of citizens, businesses and Member States. The aim is to give all stakeholders a chance to express their thoughts and views on the problems that currently exist with regard to VAT, and how these can be addressed. The Commission will use the feedback from this consultation to decide the best approach in creating a more stable, robust and effective VAT system for the future.

Taxation Commissioner Algirdas Šemeta said: "We need a VAT system for the 21st century: simple, modern and effective. VAT is paid by citizens, collected by businesses and is a main source of revenue for Member States, so everybody has an interest in this tax. I would urge people to make their voices heard in this consultation, so that we can ensure that the future VAT system works better for everyone.”

Why does the VAT system need to be reviewed?

VAT was introduced in the EU more than 40 years ago, at a time when the marketplace looked very different from today. Despite efforts over the years to modernise and simplify the VAT system bit by bit, it is clear that the regime no longer fits the needs of a service-driven, technology-based, modern economy. The complexity of the current VAT system creates unnecessary costs and burdens for taxpayers and administrations, and obstacles to the Internal Market. Moreover, certain weaknesses within the VAT system leave it vulnerable to fraud and evasion. Therefore, a fundamental review of the VAT system is needed.

Why now?

The current economic situation has highlighted the important role that VAT plays in ensuring economic stability and growth. VAT is a major source of revenue for Member States (up to 20% of total tax revenue). It can be expected to become even more important as the recession and aging populations affect other revenue sources. In addition, economic studies show that consumption taxes are among the most growth-friendly, and a robust VAT system could contribute to economic regeneration in Europe. It is therefore of great importance to ensure that the EU’s VAT system is fully-functional and delivering to its full potential.

What is the Green Paper?

The Green Paper sets out questions under a few broad headings, while keeping the consultation as open as possible to all ideas and opinions. First, it asks whether the fundamentals of the current VAT system should be overhauled, and whether goods and services should be taxed in the Member State of origin or where they are sold. Next, the Green Paper looks at specific issues which have come into question over the years. Among these are whether reduced VAT rates are still relevant today, whether the rules on deductions are neutral enough, whether and how the system can be made more fraud-proof, and how red tape can be cut in VAT transactions. Finally, contributors to the consultation are asked whether and how the collection of VAT could be improved in order to close the €100 billion VAT gap that currently exists in the EU. The Green Paper encourages all points of view, and the consultation is not limited to the set questions. In fact, contributors are encouraged to raise any other issues that they feel might be relevant to the future of VAT.

Next steps

The Commission invites all interested to contribute to the public consultation, which will be open until 31st May 2011. Based on the feedback received, the Commission will present the priorities for the future VAT system in a Communication at the end of 2011.

For MEMO, see: MEMO/10/633

Further information on the Green Paper as well as its technical annex can be found at: http://ec.europa.eu/taxation_customs/index_en.htm