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14.2.2.  VAT rates and removal of fiscal frontiers in the EU

    One of the main challenges to the completion of the single market was in the tax field [see section 6.1]. Prior to 1992, goods and services moving within a Member State were taxed differently from those that were exported. On exportation, the product benefited from full tax remission and was in return subject to the VAT of the country of import at the crossing of borders. The tax was paid to the country in which the goods arrived at the final consumption stage. The protection, which that system afforded against tax evasion, depended on controls at borders. Without a check at the border to ensure that the goods which were the subject of an application for the reimbursement of tax had actually been exported, it would be all too easy for dishonest operators to invoice goods at the zero rate for exportation and subsequently resell them on the internal market, either free of tax, thus placing their competitors in a disadvantageous position with regard to price, or by including the tax component in the price, but keeping its amount for themselves. That would not only have constituted a loss of tax revenue for the exporting State, but also a source of serious trade distortion. For the authorities of the importing State, on the other hand, frontier controls were used to tax imported goods at the rates prevalent in the country in question, so as to collect the revenue due to them and, at the same time, make sure that these products did not unduly compete with national products.

    The export refunds and import taxes, which accompanied intra-Community trade, and the resultant controls, constituted the so-called "fiscal frontiers". To remove those barriers to trade, it was vital that cross-border trade be treated in the same way as purchases and sales within a State. The Commission actually proposed that as from 1 January 1993 all sales of goods and services should be taxed at the rate of the country of origin [COM/87/321]. But the Council did not follow the Commission's lead. In conclusions of 9 October 1989, adopted unanimously (necessary condition in order to counter the proposal of the Commission) [see section 4.3], it considered that conditions could not be fulfilled for a system of taxation in the country of origin and that it was therefore necessary to continue, for a limited period, to levy VAT and excise duty in the State of consumption.

    The Directive on the common system of value added tax stipulates that, during the operational period of the transitional VAT arrangements (where the VAT rate is that of the country of destination and not that of the country of origin), the Member States shall apply a standard VAT rate of at least 15% [Directive 2006/112, last amended by Directive 2016/856]. However, the standard VAT rate varies between 15 and 27% in the twenty-eight Member States. In fact, in mid-2014 the standard VAT rate was:

    - 15%, in Luxembourg;

    - 18%, in Malta;

    - 19%, in Germany and Cyprus;

    - 20%, in France, the United Kingdom, Bulgaria, Austria, Estonia and Slovakia;

    - 21%, in Italy, Spain, Belgium, the Netherlands, the Czech Republic, Latvia and Lithuania;

    - 22%, in Slovenia;

    - 23%, in Poland, Greece, Ireland and Portugal;

    - 24%, in Romania and Finland;

    - 25%, in Denmark, Sweden and Croatia;

    - 27%, in Hungary.

    All the higher VAT rates existing in several Member States have been abolished, leading to a significant fall in consumer prices in some sectors, such as automobiles. The Member States however enjoy the option of applying, alongside the normal rate, one (or two) reduced VAT rates, equal to or higher than 5%, applicable only to certain goods and services of a social or cultural nature. Examples include foodstuffs, pharmaceuticals, passenger transport services, books, newspapers and periodicals, entrance to shows, museums and the like, publications and copyright, subsidised housing, hotel accommodation, social activities and medical care in hospitals. The preservation of the zero and extra-low rates (below 5%) is authorised on a transitional basis, along with reduced rates on housing other than subsidised housing, catering and children's clothes and shoes.

    The common system of VAT dispensed with customs procedures [Directive 91/680]. Intra-European trade in goods between taxable bodies is subject to taxation in the country of destination. In the case of sales between companies subject to VAT, i.e. the vast majority, the vendor exempts the deliveries made to clients in other Member States. In his VAT return, he indicates, in a separate box, the total of his exempted intra-European sales. In another return (usually quarterly), he lists the VAT number of his customers in the other Member States and the total amount of his sales to each of them during the period in question. The purchaser applies VAT to his purchase in another Member State, termed an "acquisition". He must declare the total amount of these acquisitions in a separate box in his normal VAT return and can request the deductibility of this VAT in the same return.

    Individuals travelling from one Member State to another pay VAT there where they purchase the goods and are no longer subject to any VAT-related taxation or any border formality when they cross from one Member State to another. In return, the system of travellers' allowances (tax free sales in ports, airports, etc.) was abolished in intra-European travelling [Directive 94/4].

    In the framework of the transitional system, the seventh VAT Directive has introduced certain special systems. For remote sales (mail order) of an undertaking to individuals and other non-taxable bodies, VAT is counted at the rate in force in its Member State, except when its sales in the Member State of destination are above a certain limit (generally, EUR 100,000 per year) or if it prefers taxation in that State. New vehicles (cars, boats, aircraft) which form part of the operating stock of the vendor and which do not have a mileage of more than 3,000 kilometres are taxed in the country of registration, i.e. in the purchaser's country of origin, whereas second-hand vehicles are subject to the VAT rates practised in the country of the vendor. Institutional non-taxable bodies (government authorities) and exempted taxable bodies (banks, insurance companies...) are able to purchase goods in other countries, paying the VAT applicable in the country of origin, provided that their purchases do not overstep a certain threshold to be set by each Member State. For second-hand goods, works of art, collectors' items and antiques, sales between individuals are free of VAT and those realised by second-hand dealers and tradesmen are taxed in the Member State of destination on the dealer's profit margin and not on the total value of the goods [Directive 2006/112, last amended by Directive 2016/856]. Goods in small consignments of a non-commercial character sent from a third country by private persons to other private persons in a Member State shall be exempt on importation from turnover tax and excise duty [Directive 2006/79].

    The abolition of frontier controls and the resultant fraud risk require cooperation between government authorities in the area of indirect taxation to combat tax evasion. This cooperation is based primarily on regular exchanges of data between the relevant authorities of the Member States on intra-European trade [Regulation 1798/2003]. The backbone of the system is an on-line network linking the relevant administrations of the Member States ("SCENT- taxation"), enabling rapid and efficient information exchange designed to combat fraud in the VAT and excise-duties fields. A directive lays down the rules concerning mutual assistance for the recovery of claims, which arise in another Member State, relating to taxes, duties and other measures of indirect taxation [Directive 2010/24].

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