Joint value-added tax system: Quo vadis?
Within the scope of the fundamental renewal of the value-added tax system, the European Commission is planning measures to make the system simpler, more efficient and better protected against fraud. Tax exemptions for non-profit organisations and reduced tax rates are also being examined closely.
Value-added tax (VAT) has come under the scrutiny of the Commission for two reasons. On the one hand, harmonisation of the VAT system should contribute to the expansion of the Internal Market, with the fundamental revision of the VAT regulations forming part of the package of measures announced in October 2010, “Towards a Single Market Act”. On the other hand, VAT is an essential source of income for the European Union. The EU generates funds of around EUR 14 billion per annum from VAT. This gives it great appeal to budgetary authorities in times of crisis.
An initial stage in the fundamental revision started last year was the Commission’s public consultation in a Green Paper on the future of VAT (cf. europeinfos no. 136). The Commission believed that the extraordinarily high response, with 1700 contributions, confirmed the need for reform.
In December 2011 the Commission published the results of the public consultation, as well as the plans for further action. One essential outcome has been that the Commission abandoned its decades-long aim to arrange VAT in accordance with the principle of the country of origin (whereby goods and services are taxed in the Member State of origin and not the country of destination). This would have been the most desirable option from an economic viewpoint, but was politically unattainable. Instead of this, the focus should be on improving the applicable regulations in accordance with the country of destination principle.
In the case of tax exemptions for not-for-profit organisations, the Commission is of the opinion that such organisations already benefit from the tax exemption for activities in the public interest and the exemption for small enterprises. Further compensatory measures in their favour would be a matter for the Member States. There should be an examination as to whether the social grounds for the exemptions are still valid.
As a further course of action, the Commission announced that on efficiency grounds it would be examining the application of reduced rates in 2012. In the previous year’s Green Paper the Commission had already considered abolishing reduced VAT rates in favour of a lower standard rate. To date these have been applied to essential goods such as food, and also to leisure activities such as theatre visits and sporting events. However, a change of this kind risks impacting lower income groups and would affect families in particular. In the view of the Commission, reduced rates are not the optimum instrument for pursuing political goals, especially not for redistributing wealth to low-income households (p. 12). After in-depth consultation with interest groups and Member States, the Commission will put forward some new proposals before the end of 2013.
This plan will increase the significance of VAT overall, marking the trend away from direct taxes towards indirect taxes. In the Green Paper the Commission referred to the fact that in many Member States VAT is the most important source of income for financing the national budget. This is a cause for concern, since with indirect taxes such as VAT all taxpayers bear the burden, and so low-income groups in the population are particularly hard hit. According to Pope John XXIII, in a just and equitable tax system the burdens should be proportional to the capacity of the people contributing.
However, the Commission’s plans treat the efficiency and functioning of the market as the sole determining factor. Its planned action is in conflict with a social market economy, which was specified as one of the Union’s objectives in the Treaty of Lisbon. The social market economy should be a concept that, by unifying economic and social perspectives, aims for the welfare of society, according to Cardinal Marx, Vice-President of COMECE, when presenting the COMECE Bishops Statement on Social Market Economy.
Legal intern in the COMECE Secretariat
Translated from the Original German