VAT is a key revenue source for governments, accounting for 17.5 % of total tax revenue in the EU27, and one of the own resources of the EU budget. Billions of VAT revenues are lost each year due to tax fraud and inadequate collection systems. The current VAT system, created in 1993 and intended as a transitional system, is fragmented, complex for the growing number of businesses operating cross-border and prone to tax fraud.
The VAT Directive provides the legal framework for national VAT rates: one standard rate (above 15%) and one or two reduced rates (>5%) to specific goods and services, but in practice many derogations exist which led to more complexity.In 2016, the Commission presented an action plan on VAT to create a definitive system. Various legislative proposals were put forward in 2017 and 2018, including a reform of the system of VAT rates, on cross-border cooperation and on simplified VAT rules for SMEs.
The European Parliament has adopted many resolutions in the past, expressing support inter alia for a system based on the destination principle, for narrowing the VAT rate variation between countries and reducing the number of exemptions. Recently, the FISC Subcommittee started working on an implementation report on the VAT Directive to take stock of what has been achieved and still needs to be done to reduce the EU VAT gap.
Source: Subject files – Towards a single EU VAT area – Subcommittee on Tax Matters