On June 21, the finance ministers of the European Union are gearing up once again to deliberate on the EU’s VAT in the Digital Age (ViDA) proposal, following Estonia’s veto in mid-May.
The revamped ViDA proposal, which surfaced on May 8, 2024, comprises three fundamental pillars: digital reporting requirements, the categorization of platforms as deemed suppliers, and streamlined single VAT registration. The European Commission’s overarching aim is to enhance the tax system by curbing tax fraud and facilitating easier VAT compliance for businesses.
However, for these objectives to be achievable, the policy must adhere to fundamental tax principles—something the ViDA’s deemed supplier and location of supplied services rules struggle to accomplish.
### The Significance of Tax Neutrality
A key pillar of sound tax policy is neutrality, ensuring that tax codes neither incentivize nor deter particular personal or business decisions. The ViDA initiative, however, breaches this principle on several fronts.
Under the traditional VAT model, tax is accumulated at each production stage and during the distribution of goods or services. This system remains neutral as each supplier levies VAT on the additional value at that specific stage and can claim deductions for VAT paid on inputs. Ultimately, the final consumer bears the VAT burden, as they cannot deduct input VAT costs.
For instance, if a hotel buys a bed to furnish a room, which it subsequently rents out, the consumer renting the room pays VAT on the full rental price. The hotel can, however, claim a deduction for the VAT paid on the bed as part of its input costs.
ViDA’s deemed supplier rules disrupt this balance by mandating that online platforms are responsible for VAT collection and remittance, even when the service provider isn’t obligated to register for VAT. This scenario results in renters being charged VAT without the possibility for input VAT deductions.
To illustrate, if a person rents out an apartment short-term, they must now charge VAT on the rental price without deducting VAT on furniture costs, unlike a hotel. Similarly, individuals using platforms for services, like ride-sharing, can’t claim input costs as deductions.
Critics might argue that the present system unfairly benefits individuals over traditional businesses, as individuals under national VAT thresholds are exempt from charging VAT. However, a more balanced approach would be to lower VAT exemption thresholds to ensure all service providers charge VAT while benefiting from input deductions, rather than exacerbating the imbalance.
Additionally, ViDA distorts market neutrality by not eliminating VAT registration thresholds, making online-sold products more expensive than those sold via phone or in person. For example, an apartment rented directly by its owner might be VAT-exempt due to national thresholds. However, the same apartment rented via an online platform under ViDA rules would be more expensive due to mandatory VAT.
In the updated proposal, Member States might exclude specific services like short-term rentals from deemed supplier rules. Still, this approach wouldn’t significantly simplify compliance for the Single Market.
A comprehensive solution would be to reduce VAT-exemption thresholds to zero, requiring all sellers to charge a lower VAT rate to fund governmental expenses—despite its potential political unpopularity.
### Location and VAT Rules
ViDA also proposes changing where platform service fees are taxed, shifting revenue distribution among EU Member States. Under current rules, if a French resident books accommodation in Italy, the VAT on the platform service fee is assigned to France. ViDA aims to shift this to Italy, affecting VAT distribution from northern to southern Europe.
This change could also lead to double taxation for consumers outside the ViDA regime, as their home countries might still levy VAT based on consumer location, in addition to the new supplier location VAT.
VAT plays a crucial role in the EU tax scheme due to its efficiency in generating revenue with minimal economic disruption, compared to income tax. Therefore, the EU’s future fiscal health hinges on adopting tax policies grounded in principles like neutrality over political convenience.
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