The plan is to publish a legislative framework for EU VAT reform in 2017, setting out a definitive VAT system for cross-border trade. This definitive VAT system will be based on the principle of taxation in the country of destination of the goods, as agreed by the European parliament and the Council.

The action plan also sets out options to modernise policy on EU rules governing VAT rates.

It is also reviewing VAT charges for cross-border e-commerce as part of its digital single market strategy.

‘The current VAT system for cross-border e-commerce is complex and costly for member states and business alike,’ the Commission says.

A legislative proposal on digital VAT issues will be released by the end of 2016. This will include plans to modernise and simplify VAT for cross-border e-commerce by:

• extending the current One Stop Shop (OSS) concept to all cross-border e-commerce, including distance sales;
• introducing common EU-wide simplifications measures to help small start-up e-commerce businesses;
• streamlining audits in this sector (home country audits); and
• removing the VAT exemption for the importation of small consignments from suppliers in third countries.

The Commission is also reviewing VAT for SMEs as the sector ‘bears proportionally higher VAT compliance costs than large businesses due to the complexity and fragmentation of the EU VAT system’, according to VAT reformers in the EU.

In addition to the new single market strategy, the Commission is working on proposals to simplify VAT compliance for SMEs to0 encourage growth and cross-border trade. In particular, the special scheme for small enterprises will be subject to review. This proposal will be presented by the end of 2017.

As part of the review, the Commission is planning to give member states more freedom on VAT rate setting policies, although this will be subject to political discussion and debate before any decisions are made.

The current VAT Directive sets out general rules limiting member states' freedom to set VAT rates. These rules were designed over two decades ago in the context of a VAT system based on the origin principle. They were intended to guarantee, above all, the neutrality, simplicity and workability of the VAT system and had lower limits on the levels of the VAT rates and a list of the goods and services which could benefit from reduced rates.

The decision to implement a VAT system based on the destination principle will require a rewriting of the rules governing VAT rates. In line with the subsidiarity principle, member states could be granted greater autonomy on setting VAT rates, subject to appropriate safeguards to prevent excessive complexity and distortion of competition, and to ensure that the operation of the single market is not affected.

Vice-president Valdis Dombrovskis, responsible for the euro and social dialogue said: ‘Today, we are starting a dialogue with the European parliament and the member states for a simpler and more fraud-proof VAT system in the EU.

‘Every year, cross-border VAT fraud costs our member states and taxpayers about €50bn. At the same time, the administrative burden for small businesses is high and technical innovation poses new challenges for VAT collection. This Commission has already proposed clear measures to address corporate tax avoidance and we will be equally decisive in tackling VAT fraud.’

Further information on the European Commission Action Plan on VAT, is available here