What You Should Know About The VAT Package Of 2022

"VAT is a major source of tax revenue for EU Member States. Yet, we face a staggering fiscal gap: the VAT revenues collected are EUR 170 billion short of what they should be. This is a huge waste of money..."1

Pierre Moscovici's statement feels quite clear. The VAT rules, as they currently exist, do not seem suitable for a constantly evolving tax environment. They need to be upgraded and to take into consideration the changes wrought by a globalized economy. On top of this, they must harness the latest technological developments and be fit enough to fight a persistently inventive type of VAT fraudster.

This article will describe the various measures foreseen by the European Commission to modernize VAT in the EU. We will address their potential implications as well.

But to start from the beginning... how did the idea of a new definitive VAT system emerge?

Old transitional VAT rules in need of an update

In 1985,2 the European Commission decided to remove all tax controls on the internal borders of the EU. The idea was to launch a Single Market with free movement of goods, where traders were no longer liable for the payment of VAT when their goods crossed internal borders. By 1993, however, considering the state of technological developments, this system could not be implemented. It therefore remained transitional (leading sometimes to a huge VAT gap, as Mr. Moscovici underlined).

Action needed to be taken, which came in the form of an Action Plan on VAT3 in which the EU Commission underlined the necessity to revise the VAT system and to pave the way towards a single European VAT area.

Thus, the foundation for a "new definitive VAT system" was laid.

Legislative proposals and timeframe

To create this single European VAT area, the European Commission defined a "package" to be implemented by 2022. The package introduces new concepts (e.g. the notion of a certified taxable person), foresees short-term quick fixes (to help the transition phase), and encourages administrative cooperation. On top of this, the Commission also started modernizing the rules on VAT rates through a reform,4 and also prepared a SME VAT simplification package.5 Five years after its implementation (2027), an evaluation should be made.

Cornerstones

The setting up of this new VAT system implies compliance with what the Commission calls "cornerstones," or the fundamental principles standing behind its proposals.

The most important idea is that VAT fraud has to be prevented more...