By Max Clarke

Uniformity of VAT rules across EU Member States is critical to strengthen and simplify the system, according to Baker Tilly’s response to the European Commission consultation on the future of VAT.

“We welcome this consultation and believe that while VAT is a major source of tax revenue;” explains baker Tilly’s tax partner, George Bull, “there are a number of issues stemming from inconsistencies across Member States including collection costs, administrative burdens and costs for taxpayers.”

Inconsistencies in the scope and extent of VAT rules encourage “rate shopping” and create a barrier to trading more widely in the EU. There are significant obstacles to creating a full ‘origin-based system’ including the divergence in VAT rates across the EU and the need for Member States to exchange tax revenues. However, there is an inherent susceptibility of a destination-based system to fraud in the absence of greater Member State cooperation and technological advances.

Continued Bull “We believe that the VAT consequences of particular transactions should be determined by their economic reality, rather than their legal form and that remaining inconsistencies across Member States in this regard should be removed by centrally agreed common VAT code. Further efforts to simplify the system could include a centrally agreed list of reduced rate activities and potentially to remove the exemption for B2B financial and insurance services and B2B real property transactions.”

Although the recent VAT package rules have helped, there remains a lack of consistency in application and interpretation of the rules on international services and on the definition of ‘establishment’. Greater coordination and cooperation between Member States could develop a ‘destination-based system’. The taxation of all transactions should be based on economic reality, including online products, which should be treated in the same way as their physical counterparts.