Intellectual Property Law

The European Recently-Approved One-Stop-Shop Scheme for VAT Compliance

By Martha L. Arias

On November 1, 2008, the European Parliament approved a "one-stop-shop" scheme for value added tax (VAT) compliance within the European Union (EU).  This scheme simplifies VAT obligations for EU traders, especially in cross-border transactions.   Traders who are liable to pay VAT in several Member States will now have the option to choose a single place for VAT compliance; concretely, the Member State where they are located.  The one-stop-shop scheme initially applies to EU merchants only but it will eventually be extended to non-EU merchants.    

The new VAT scheme comprises the following characteristics, (1) it is an optional scheme for EU merchants; (2) merchants may choose the Member State of establishment and submit VAT returns electronically.  The website for VAT returns will be set by the local tax authority of the Member State chosen; (3) the VAT return information will be automatically transmitted to the Member States of consumption. These are the Member States where the VAT is due; (4) the VAT payment then will be made directly to the Member State of consumption; and (5) the Member States of consumption still maintain the right to control and check on EU merchants.    

The VAT one-stop-shop scheme, therefore, requires communication and cooperation between the tax authorities of the 25-Member States.  Those local tax authorities will be supporting the Web portal for this VAT compliance and generating further communication with the other Member States where the VAT is due.  Despite being an advance on VAT management in cross-border transactions, some EU tax practitioners such as Winni Nielsen, senior VAT manager at Carlsberg, said: "The one-stop shop is better than nothing but it is not optimal as you will still need in-house or external advice on other VAT regimes." Yet, other practitioners welcome this measure as a great measure to reduce VAT compliance costs for companies transacting across the EU. 

In addition to this harmonized VAT reporting mechanism, the one-stop-shop scheme introduced other VAT practices.  For instance, the categories of expenses to which Member States apply restrictions for VAT deductions will be harmonized; Member States still hold the right to establish exemption threshold for SMEs but this threshold was assigned a cap of ?$100, 000; the reverse charge mechanism is extended.  This mechanism makes the receiving trader, rather than the supplying trader, accountable for the VAT payment; and, very important for e-commerce transactions, the arrangements for distance selling of goods subject to VAT will be based on a global threshold of ?$150, 000.  This threshold is calculated on all supplies to the EU Member States. 

Also, under the one-stop-shop scheme, merchants will be able to request and process tax refunds through the same VAT reporting portal. Merchants will submit their refund request and this will be re-directed to the Member State where the expenses were incurred.  This Member State then will send the refund directly to the merchant.  The proposed time for these refunds is three months, and any delay in sending the refunds could accrue interest for the merchant at 1% based on the amount to be refunded.        

The one-stop-shop proposal was presented in 2004 and after a lengthy process was approved in November 2008.  Yet, its implementation is still pending which relate to the practical issues of this scheme.  During the implementation process, new information on how this VAT scheme may be applicable to non-EU merchants is expected.  Yet, some already predict that the same VAT registration state for non-EU merchants will be used as the Member State where that merchant may have access to the Web portal for VAT compliance under the one-stop-shop scheme. 

Full post as published by IBLS Internet Law Blog on November 05, 2008 (boomark / email).