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Stefan Lehner Director

European Commission Directorate-General for Budget

Presentation for the HLG on OR

23 March 2015

An own resource based on VAT

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Why VAT ?

• In general, Value added tax (VAT) is visible, broad-based and represents a major source of revenue. It taxes final consumption, not a specific factor of production. Its distributional impact is an issue; most countries mitigate this concern by setting reduced or zero rates for socially sensitive goods and services, but not only.

• For the EU, VAT allows efficient cross border trading. A common VAT system has been a cornerstone for the creation of the single market since the first VAT directive in 1967.

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Why VAT as an own resource ?

• VAT was to become the single market tax, from which a small share should accrue to the level which ensures that the market functions effectively.

• It was first decided to have a VAT own resource in 1970; it was paid for the first time in 1979.

• In the early 1990s, even after the introduction of the GNP-based own resource, the VAT own resource was the biggest source of EU budget revenue.

Budget Revenue: evolution 1958-2011

EU budget revenue

1958-2011

(in % of EU GNI)

Financial contributionsTraditional own resources (custom

duties & sugar levies)

VAT-based own resource

GNI-based own resource

Other revenue & surplus

0,00%

0,20%

0,40%

0,60%

0,80%

1,00%

1,20%

1958 1963 1968 1973 1978 1983 1988 1993 2003 2008 2011

Other revenue & surplus

GNI-based own resource

VAT-based own resource

Traditional own resources (custom duties &

sugar levies)Financial contributions

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The difficulties of the current VAT own resource

• The intended full harmonisation of the VAT base across the EU was not achieved. For numerous goods and services, Member States retain derogations to apply reduced rates or even a zero VAT rate. The rates themselves differ widely.

• The current VAT own resource has therefore become stuck with complex calculations to approximate statistically what a harmonised VAT base would look like.

• In addition, since 1992 each round of "financial package negotiations" has reduced the importance of the VAT own resource in favour of the GNI own resource, due to the perceived regressivity for some Member States.

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Today part 2 - What the Commission does:

NB. - The harmonised VAT base is used to calculate the UK rebate - DE, NL and SE have a rebate on the VAT OR %age (the "call rate")

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Why end the current

VAT own resource?

• It is complex, it lacks transparency.

• No link to EU policies - in particular EU VAT policy.

• Member States have continuously reduced its share in EU financing.

• With capping it is a two-tier system: for several Member States it is in reality a GNI-based resource

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Why have a new VAT own resource?

• After stalling for some time when harmonisation proved unachievable the Commission launched new inititatives in 2011 as set out in the Commission Communication on the Future of VAT*.

• Those initiatives aimed at simplifying the system: making it easier to operate while widening the tax base, making it more robust and more resistant to fraud.

• In parallel, the Commission proposed in 2011 a new VAT own resource to take the opportunity to design a new more policy-linked system, taking current VAT legislation as a starting point, but able to adapt easily to changes that are expected to emerge in the VAT regimes in Member States.

• The new Commission proposal aims at obtaining a much simpler VAT resource calculation, addressing past criticism concerning the complexity and resource costs of the old system.

* COM (2022) 859

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2011 COM proposal for a new VAT OR

What is different

It has a new EU-wide centre piece:

- It focuses on the common denominator - taking only those items on which all consumers, regardless of which Member State they are in, pay a standard-rate of VAT when they buy.

This also means the new method can be much simpler than the old.

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Compared to current system

• Fewer corrections, no compensations, no weighted average rate, centralized calculation of the proportion to be applied to receipts, valid for several years, no capping.

System simpler, more transparent and predictable, much easier to control.

But new VAT-based OR still a revenue transfer, no direct link between taxpayer and EU budget.

Summary of 2011 COM proposal

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A combined VAT rate of the national and a new EU rate:

Direct link between EU and tax payer.

Possibilities:

• A full fledged parallel EU VAT – allows EU to define taxable transactions and rates. But requires a second VAT system to be administered, and would require a Treaty change.

• A share of national VAT, identified on the tax payer receipt – option: EU VAT rates could be "modulated" to have EU standarded rated and EU reduced rated transactions, but must not discriminate; alternative: "single-rated" EU VAT on all transactions (but: how to apply to "zero rated" goods ?!)

Key issue: Implementation will put considerable cost on businesses and national tax administrations, at least initially.

Other possible forms of an OR based on VAT (1)

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EU VAT on imported goods:

Possibilities:

• Adding a new VAT resource on top of existing VAT on imports: illegal under GATT.

• Taking a share of existing VAT on imports: possible, but very narrow base; problem of different rate structures between MS remains (zero rated goods apply zero import VAT). Risks to be seen as "Rotterdam II".

• Calculating national contributions on the basis of imports: no link with taxpayer, even more clearly "Rotterdam II".

Other possible forms of an OR based on VAT (2)

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How to deal with the incomplete harmonisation of the tax base:

• Complete the tax base by statistical corrections (the current system): Can deliver accepted approximation, but major effort, continuously contested details, intransparent.

• OR: Take a harmonised subset (the 2011 CION proposal): Much simpler, but not simple; smaller base, i.e. higher share required.

What visibility should the VAT-based OR have for the taxpayer:

• Visibility on the tax receipt (the "Langes" Report, the 2004 CION suggestion): Direct link between citizen and EU, but major investment and continuous running costs for businesses.

• OR: No visibility for the tax payer, contribution calculated by the MS in different ways (the current system, the 2011 CION proposal): Much simpler, only central governments involved, extent of simplification depends on calculation procedure.

Key elements for the design of any VAT-based OR

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Stefan Lehner Director

European Commission Directorate-General for Budget

Presentation for the HLG on OR

23 March 2015

An own resource based on VAT