The transitional Value Added Tax System

The guiding principle of VAT is that supplies of goods and services should be taxed in the state in which they are consumed. Accordingly, in relation to intra-EU supplies, VAT should be charged according to the rules and tax rates of the state of consumption and revenues allocated to the member state of final consumption.

Under the “definitive” VAT system, as originally envisaged, VAT would be charged by the supplier of the goods or services (as if there were no internal frontier within the single market). If the customer is a taxable person in its member state, it would be able to deduct the VAT charged as input tax. To deal with output tax charged in one state and deducted in another, there would be a member state clearing system to reallocate revenues (for example, net exporters would pay into a central account, while net importers would be paid from the central account). When internal frontiers were removed in 1993 (and the current system for intra-EU trade was introduced, there was no political will to move to the definitive system. However, moving to the definitive VAT system has remained a goal and, accordingly, the current VAT system is described as “transitional”. 

In May 2012, the Council confirmed that a move to the definitive system was still not politically achievable. Accordingly, in light of the strong support for change, particularly from business, work has been carried out on the possibility of introducing a new destination-based system.

On 29 October 2014, the Commission issued a working document outlining four options under consideration:

• Taxation of intra-EU supplies where the goods are delivered. The supplier would charge VAT under the member state of delivery’s rules but account for the VAT in its own member state under a “one-stop-shop” arrangement.
• Taxation of intra-EU supplies where the customer is established (regardless of the place of delivery of the goods). The supplier would charge VAT under the member state of establishment’s rules and account for the VAT in its own member state.
• Reverse charge where the customer is established. The goods would be taxed in the member state in which the customer is established and the customer would account for the VAT (reflecting the current business-to-business supplies of services rules.
• Reverse charge where the goods are delivered. Like the current system, the place of taxation is the state of delivery and the customer accounts for the VAT.