VAT in EU

By: EconomyWatch   Date: 30 June 2010

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Since the common VAT system was introduced in the 1970s, its declared objective has been to create the conditions necessary for the establishment of an internal market characterized by competitive atmosphere under which the taxation of imports and the non-taxation of exports in intra-Community trade would be abolished.


The VAT system which was tailored to the internal market and operated within the EU area in the same way as it would within a single country, i.e. to introduce a system of taxation where goods and services would taxed in the Member State of origin. However, in practice, such a radical change has not secured the necessary support from Member States. Foremost amongst the reasons for this are reservations about the efficiency of the necessary clearing mechanism for the distribution of VAT receipts, and the degree of harmonization of rates that such a regime would necessitate. The elimination of custom controls within the EU area in 1993 made it necessary to reform the VAT system operating up to then according to the destination principle.

Implementing destination principle. The destination principle implies that consumption taxes are levied where the products are consumed for both final consumers and producers. This system ensures production neutrality since indirect taxes do not discriminate between foreign and domestic producers, and exports are exempt from domestic taxation. However, this principle requires the monitoring of cross-border trade flows and administrative co-operation since goods and services travel free of tax.

3. The origin principle. The origin principle implies the taxation of goods and services where produced, regardless of where they are consumed.
It is better because it can be applied without border controls and exports would not travel tax-free and the potential for tax fraud would be lower. However, the origin principle introduces the possibility for the tax system to discriminate between domestically produced goods and imports. The full move from the destination to origin principle would also induce significant changes in the distribution of VAT revenues across countries.

Transitional" dual systems.

Transitional dual system attempts to fulfill the requirements of an internal market without frontiers whilst allowing room for manoeuvre at the national level as regards the establishment of VAT rates and the collection and auditing of the tax. The transitional regime replaced custom controls by the obligation, for all EU firms exporting to another EU country.

Under current VAT rules, public sector bodies are subject to a special VAT treatment, which potentially distorts competition. One key exemption case of public sector bodies applies to the supply of postal services, which have been traditionally operated by monopolistic public agencies and are increasingly operating in competitive markets. So the special VAT treatment granted to public bodies, in place in some countries, may operate to distort competition. It may also introduce a bias for public authorities towards self-supply of goods and services versus contracting out to the private sector since they may not claim back the VAT paid on their inputs provided by the private sector. However, Denmark, Finland, the Netherlands, Sweden, and the United Kingdom have introduced special refund schemes to allow local authorities for a refund of VAT outside the VAT system.


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