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Designing and managing VAT in federations and
regional trading blocs
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EU LEGAL BASE

• Article 93 of Treaty requires harmonization "to
  the extent necessary to ensure the
  establishment and functioning of the internal
  market"

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WHY HARMONISE?

• -To avoid distortion of competition (to ensure
  neutrality and avoid double non taxation)
• -To enable the free movement of goods and persons
  (to avoid controls etc at frontiers)
• -To ensure allocation of tax receipts to country
  of consumption

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COMMON VAT SYSTEM

• Introduction of uniform basis of assessment in
  1977 (6th VAT DIRECTIVE)

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IDEAL SYSTEM

• Taxation at origin
• Rules and tax rate of country of origin
• Receipts reallocated to country of consumption

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Obstacles to origin system

• Requires harmonised rates, rules on deduction
  etc.
• Political reluctance to give up fiscal
  sovereignty

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CURRENT ARRANGEMENTS

• "Transitional" measures put in place on 1
  January 1993
• Permitted removal of frontier controls

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B 2 B GOODS

• Exempt intracommunity supply
• Taxable acquisition
• Ensures correct revenue allocation
• Simple for traders
• Susceptible to fraud

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B 2 B SERVICESCURRENT SITUATION

• Main rule taxation where supplier has his place
  of business art. 9(1)
• Increasing list of exceptions art. 9(2)(e)
• Revenue distortions (e.g. cross-border leasing)

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B2B SERVICESSOLUTION

• Taxation where customer has his business
• Method reverse charge
• Proposal on council table

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B 2 C GOODS

• Internal Market principle freedom of purchase
• Circumscribed for high value goods (cars) and
  commercial activities (distance sales)
• Ensures revenue allocation
• Not trader friendly

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B 2 C GOODSSOLUTION

• Maintain taxation at destination (distance sales
  etc)
• Allow obligations to be fulfilled in country of
  establishment

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B 2 C GOODSSOLUTION

• One stop shop
• Harness modern technology
• No changes in "place of supply"

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B 2 C GOODSSOLUTION
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B2C SERVICES(CURRENT SITUATION)

• Main rule taxation where supplier has his
  business art. 9(1)
• Simple for traders
• Revenue distortions where service capable of
  delivery from a remote location (e.g. telecomms,
  e-commerce etc)

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B2C SERVICES(Solution)

• Where necessary, tax where customer is resident
• To avoid complications for traders use one stop
  shop system

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SUMMARY