The plan is a blunt instrument which on the one hand will enable tax authorities across the EU to collect an estimated additional €150bn lost through fraud, tax evasion, and miscalculations. However, it will also reduce the cashflow and increase the red tape for all types of exporting firms.
In Ireland’s case, the commission estimates that under the new system the tax authorities here could collect an additional €1.5bn a year.
The commission has been pushing for years to have this so-called Vat gap in all EU states reduced through improved enforcement and compliance measures. Under the plan which has gone out for consultation, the current Vat system which was established when the EU single market was set up in 1993 to facilitate trade across Europe will be dropped.
This system as it stands enables any business which derives 75% or more of its annual sales of goods or services across the EU to apply to Revenue to be exempt from charging and collecting Vat.
This is a major advantage to exporters, who do not have to worry about collecting Vat on foreign sales, but who also are released of this burden on the remaining part of sales which may be made on the home market.
The cashflow advantages, as well the reduction in paperwork to meet the Vat returns on sales, are quite significant for exporters generally but particularly for small businesses.
The commission proposes to fundamentally change the current Vat system by a move to the ‘destination’ principle of charging Vat at the rate applicable in the country of consumption, rather than the rate applicable to the exporters’ country of origin. Whereas the destination system has already been introduced for e-services — sales over the internet — in 2015, its extension to the vast majority of exports as a quick fix to catch fraudsters has the potential to greatly hinder the free movement of goods within the single market.
To ease some of the red tape, the commission has offered ‘a one-stop shop’ support online. The proposals have been sent to the Government for comment.
The move is part of a broader EU campaign to clamp down on low levels of corporate taxation collection following revelations that many multinationals exploit loopholes in the single market to ensure they pay little or no tax in Europe.
As Ireland is the poster child for low taxation on corporates, it will be hard for the Government to object too strenuously to the new Vat measures. An analysis carried out by the Revenue on the new ‘destination’ collection system for e-services, introduced in 2015, shows the vast majority of the monies collected were for return to the other EU member states.
We can expect the same will be the case when the new Vat collection system for all exports is introduced. Collecting Vat on multinational sales out of Ireland and returning them to other EU countries where the goods or services are consumed could be the thin edge of the wedge in the battle for sovereign control over corporate taxation.