The European Commission has stepped up its efforts to improve Value Added Tax (VAT) compliance through a new legislative proposal focused on closing tax loopholes against fraud. This measure belongs to a broader plan to ensure a fairer and more efficient tax system across the European Union.
Background
The European Union faces significant annual losses, amounting to billions of euros, due to VAT non-compliance, according to the most recent VAT Gap report published by the European Commission. These losses hinder Member States’ ability to finance essential public services, such as hospitals, schools, and infrastructure, and compromise tax fairness and the sustainability of national and EU budgets. In order to address this challenge, the proposal mainly aims to reduce these losses through implementing solid measures, such as:
- Advanced digital monitoring: Introduction of real-time reporting systems and e-invoicing for more efficient tracking of transactions.
- Increased information exchange: Strengthening the flow of tax data among Member States’ tax authorities to detect irregularities promptly.
- Enhanced cross-border collaboration: Improved coordination among countries to effectively prevent and combat VAT fraud.
Key Measures of the Proposal
- Pan-European E-VAT System: Implementing a common e-system for Member States to share and analyze tax data in real-time. This digital approach will facilitate identifying suspicious transactions.
- Mandatory Periodic Reporting: Companies must report their business transactions thoroughly and frequently, allowing tax authorities a clearer overview of economic flows.
- Stricter Penalties: Penalties for VAT non-compliance will be more severe, particularly for those engaging in structured fraud schemes. It includes significant fines and other dissuasive penalties.
- Encouraging Voluntary Compliance: Promoting the implementation of good practices among companies through tax incentives and reduced administrative burdens for those compliant with the regulations.
Progress on VAT Compliance
Between 2018 and 2022, most EU Member States made significant progress in reducing the VAT gap, reducing annual losses from €121 billion in 2018 to €89 billion in 2022. This progress reflects the positive effects of specific measures, such as digitizing tax systems and implementing real-time reporting and e-invoicing, which have improved collection efficiency and reduced fraud.
Expected Benefits
Implementing these measures will generate key benefits for member states and businesses:
- Increased tax revenues: A significant portion of the €93 billion lost annually should be recovered.
- Fair competition: A fairer system will remove unfair advantages for tax dodgers.
- Reduced administrative burden: Digitization will simplify compliance for businesses, especially SMEs.
Implications for Businesses
Multinational and local companies should adapt their internal systems to comply with the new information and reporting regulations. It will include the introduction of digital technologies for tax management and the training of personnel in the use of these systems.
Conclusion
The European Union’s new VAT compliance initiative represents a significant step forward against tax fraud. More sophisticated tools and greater collaboration among Member States should reduce tax losses and foster a more transparent and competitive market. Businesses have this opportunity to align with these reforms and contribute to a fairer system.
Source: https://ec.europa.eu/commission/presscorner/detail/en/ip_24_6482
