The system of intra-Community transactions is a transitional arrangement, but we have now become very accustomed to it. In 1993, internal borders within the European Union were abolished for the purposes of VAT. The system of intra-Community supplies of goods was introduced. This was intended to remain in place until a permanent arrangement was introduced. It appears that this will indeed be introduced within a few years.
Intra-Community transactions
Intra-Community transactions consist of two parts. On the one hand, there is the intra-Community supply; on the other, the intra-Community acquisition.
When is it considered a intra-Community supply of goods?:
– goods are supplied to a trader established in another EU Member State and
– which is transported or dispatched from one Member State to another in connection with that supply.
The trader supplying the goods must then charge VAT at the 0% rate. The supply must be reported on the intra-Community supply return (ICP).
The business purchasing the goods must pay VAT on the intra-Community acquisition of the goods. This is done in the recipient business’s domestic VAT return. To the extent that the recipient trader is entitled to deduct VAT, the VAT on the intra-Community acquisition is deducted immediately.
Disadvantages
The system of intra-Community transactions has a number of drawbacks. The most significant of these is that it opens the door to fraud. It is estimated that this fraud involves many billions across the European Union every year.
In addition, businesses face a significant administrative burden. They are, in fact, obliged to provide convincing evidence that the goods have indeed been dispatched to another EU Member State. If they fail to do so, they will be required to pay the VAT retrospectively. Often, the well-meaning business owner is then unfairly made to bear the brunt of this.
Solutions
The European Commission has issued a action plan put forward with a view to establishing a system that resolves these issues. The aim is to achieve a genuine EU-wide VAT system. After all, the current transitional regime has not actually erased borders, but has shifted them to the door of the purchaser of the goods.
Under the new system, the basic principle remains that VAT on the supply must be charged at the rate applicable in the country of destination of the goods. However, just as with a domestic supply, that VAT is settled in the Member State where the trader supplying the goods is established. Making the most of the opportunities offered by modern automation should ensure a smooth process.
Private customer
Measures are also being proposed with regard to the supply of goods to private customers. We set out the rules currently in force in this regard in our article VAT on sales to foreign private individuals.
The proposed measures concern the extension of the One-Stop Shop mechanism to these transactions. This system is currently applied on a limited scale in the case of telecommunications, broadcasting and electronic services. In addition, it is proposed that the VAT exemption for imports of small consignments of goods be abolished. Start-ups in the e-commerce sector will be encouraged by the introduction of an EU-wide threshold below which no VAT will be payable.