Towards a new Reverse Charge Regime for EU VAT?

‘VAT carousel fraud’ is a major challenge in the EU. Research has shown that it leads to yearly EU-wide revenue losses of approximately EUR 50 billion. The European Commission has now proposed a measure which is specifically aimed at combating the VAT carousel fraud: the generalized reverse charge mechanism. In this contribution, we discuss the Commission’s proposal in further detail. Further, we address the impact that the proposal could have for (internationally operating) businesses.

VAT carousel fraud explained

The central element of VAT carousel fraud is that fraudsters can purchase goods or services VAT-free from other Member States. Once they have received the goods or services, the fraudsters supply them onwards in their own Member States. The VAT that the fraudsters charge to their customers is due to the tax authorities, yet it is never reported or paid. Instead, the fraudsters pocket the VAT themselves. Since such fraud often takes place within circled chains of companies, it is often referred to as carousel fraud.

Reverse charge measure

The Commission now proposes to change the current VAT system (at least temporarily until June 30, 2022) in such a way that VAT carousel fraud becomes difficult, if not completely impossible. Under the current rules, the business which makes the supply of goods or services (i.e. supplier) is required to pay the VAT due to the tax authorities. Following the proposed legislation however, the Member States are allowed to apply a Generalized Reverse Charge Mechanism (GRCM) to all business-to-business (B2B) transactions taking place in their territory. Such a reverse charge mechanism shifts the liability to report and pay VAT from the supplier to the business purchasing the goods or services (i.e. customer). In that way, fraudsters do not receive a payment of VAT from their customers, and can therefore no longer disappear with the VAT proceeds. The GRCM would apply to transactions with an invoice value exceeding € 10,000.

Adoption by Member States

The Member States can only adopt the GRCM in case the VAT fraud in their territory exceeds certain thresholds. For example, the so-called ‘VAT gap’ – a measure of the VAT revenue which is lost, due to, among other things, VAT fraud – of the Member State must be at least 5 percent above the EU median. Further, Member States are also allowed to introduce the GRCM in case VAT fraud in their territory increases because of the adoption of the GRCM in neighboring Member States. In any case, it will be interesting to see which Member States indeed adopt the GRCM, and what the VAT fraud effects will be for the other Member States.

Impact for businesses active in multiple Member States

In case the Commissions proposal is adopted, the implementation of the GRCM may affect countless businesses. Whilst the intention is to reduce VAT fraud, the impact on ERP systems and invoicing could be enormous. For companies active in a multinational context, this temporary regime may trigger significant costs in monitoring and implementing the VAT changes in the various Member States. In that sense, the differing national rules on the GRCM could pose a considerable challenge to, for example, Shared Service Centres and in-house tax departments.

In our view, it is very important to be prepared for the changes that the proposals may bring about.