EU member states’ control of input VAT deductibility means the full single EU VAT return evades us
With the impending further extension of the One-Stop Shop VAT return in July 2027 via VAT in the Digital Age, why not tackle the final barrier to the single EU VAT return: Input VAT deductions? Create a ‘full OSS’ single VAT return – a proposal on the future EU VAT reforms after ViDA.
Today, the pan-European OSS return may only be used to declare sales or output VAT in member states for a limited range of supplies. It does not allow offset of purchases or input VAT. This means businesses of all sizes may need after ViDA to still have multiple, expensive VAT registrations for many supplies to recover input VAT cash flows.
So why not allow input VAT deductions in the hugely successful OSS?
The blocker: member states’ control of input deductions
A right to deduct means a VAT registered person’s right to claim from the tax authorities the VAT paid upon acquired goods and services. VAT is deducted by subtracting the deductible amount from the VAT payable in the regular VAT return submitted to the tax authorities.
But as February’s Remi ECJ bad debt ruling reminds us, EU states are still retain a tight grip on recovery of input VAT. They have accepted the idea of allowing other member states collect their VAT revenues via the 2021 OSS e-commerce launch and its 2015 MOSS predecessor. But they view deductibility as the route of much VAT fraud and cash flow manipulation, so are not prepared to include it within OSS. This means not only multiple local VAT registrations for businesses selling across borders, but a huge challenge in understanding the variability in national deductibility rules.
Challenges around EU VAT deductibility variations
From credits to penalties, the details of compliance differences may make the concept of a single return wishful thinking.
How would the existing varying national rules on deductibility be incorporated into a pan-EU scheme? Would country of establishment rules prevail? Would new, EU rules have to be developed for OSS? A mix of both? Which every path is selected, how would different tax authorities police each others’ deductibility rules and could this be evidenced to build trust?
Possibly the most challenging area is repayment of VAT return credits. The EU Commission recommends repayment within 30 days of the submission of a credit return. Many countries do this automatically with limited exception checking. But others see it as open to exploitation, so insist on rollovers to future returns and/or extensive audits of credits before any repayments.
The EU VAT Directive gives scope for variations on capital goods – again, how would this be harmonised? EU countries may totally or partly exclude expenditure on some or all capital goods from the right to deduct, for cyclical economic reasons.
Which rules for evidencing the right to deduct would be followed? It should be straightforward based on a purchase VAT invoice. But countries have conflicting detailed requirements, and are allowed local variations on. For example, transactions treated as intra-EU acquisitions and goods. Or the reverse charge application.
VAT Groups, which allow for voluntary single VAT registrations for related companies, typically in just one jurisdiction. Would they be entitled to use a single pan-EU full OSS? And what about non-EU established businesses – could they be included in an EU OSS VAT group? And how to track all of this.
Another major area of divergence is penalties and interest in the case of non-compliance. Many member states impose very limited charges. But others, especially the newer entrants from Central Europe, have high penalty regimes. How would taxpayers from other countries be treated when infringing rules in multiple countries?
And there are many other areas where the member states have differences that would need to be harmonised or incorporated into a full OSS:
- Private use of company assets
- % deduction of expenses such as entertainment for clients and employees
- Adjustment rules
- Temporary economic measures e.g. COVID or anti-inflation measures
Start simple: incorporate existing VAT Recovery mechanism
Perhaps the simplest route is to incorporate the existing 8th and 13th Directive VAT reclaims rules into OSS. The processes, administrative requirements, invoice evidence and deadlines are already in place (perhaps deadlines could be shortened!).
