Rethinking VAT compliance (1): single EU VAT return

“One Return to rule them all, One Registration to find them, One Format to report them all and in the compliance bind them” – Just as the One Ring was one of the most powerful and desired artifacts ever created in Middle Earth, a single VAT return and a single VAT registration could become the most powerful compliance instruments ever implemented in the European Union. But are they as desirable as the One Ring?

As the European Commission is currently looking into modernising VAT compliance and registration obligations, it makes sense to examine the usefulness of a standard EU VAT return and a single EU VAT registration. This post discusses the single VAT return while Part 2 will focus on the benefits of one EU VAT registration.

The first attempt

Having to file VAT returns in many EU countries places a heavy burden on businesses because the information to be provided varies per Member State and is not based on any uniform definitions. Moreover, each country has different rules for return submission and correction.

The European Commission presented a proposal for a standard VAT return in 2013. Under the Commission’s proposal, the standard VAT return should consists of a minimum of five boxes.
This proposal did not get enough support from the EU Member States and was ultimately dropped.

Do we still need a VAT return when CTCs are on the rise?

As more and more countries are implementing some form of continuous transaction controls (CTCs), we could consider abolishing VAT returns rather than harmonizing them. If tax administrations get all transaction data via CTCs (e.g. real-time reporting, SAF-T reporting, e-invoicing), why do they need to be provided with the same data in an aggregated form every month? Well, the fact is that not all VAT-relevant data can be obtained from transactional reporting. Private use of business assets, input tax deduction adjustments – all this information that is not reflected in sales and purchase transactions must be reported by the taxpayer to the tax administration.  This means that we still need some kind of a VAT return although it may be partially pre-populated by the tax administration (Spain, Italy)  with data obtained via CTCs or it be part of another reporting obligation (Polish SAF-T).

CTCs are slowly becoming the core VAT reporting obligations. They are quite burdensome for businesses as the data to be reported and its format varies per country. A standardisation of a VAT return would not be useful if combined with a wide variety of country-specific CTC obligations. Thus, there is more urgency in harmonising CTCs than in having one standard EU VAT return.

One set of CTC requirements?

Implementing uniform CTC requirements across the EU may be even more difficult than agreeing on a standard VAT return. Some countries that already have CTC obligations in place would be rather unwilling to go through the process of changing their systems to new requirements. It is very likely that political considerations defeat efficiency arguments.

Governments would be more interested in finding a compromise if tax revenue was at stake. If the EU attempts to harmonise VAT compliance obligations keep failing because of political reasons, the EU could consider some kind of financial compensation for businesses suffering from increasing compliance costs. In the United Sates, sellers are compensated for their tax collection efforts and allowed to retain a small portion of the sales tax revenue they collect. The European Union has 35 million unpaid VAT collectors facing severe penalties if they fail to comply with increasingly complex VAT law. Maybe it’s time for the EU to think about vendor compensation?