Real-Time Collection of the Value-Added Tax: Some Business and Legal Implications

Abstract:     
Recent estimates of the level of VAT fraud in the EU are commensurate with the EU budget. With the Green paper on the future of VAT, the European Commission stressed the urgency and necessity of comprehensive VAT reforms. This paper analyses the business and legal implications of the recently proposed split-payment mechanism, which, if implemented, would move VAT’s method of collection to real-time. The discussion is positioned in the context of two increasingly visible trends in the EU – the general shift towards greater reliance on indirect taxation and the growing popularity of electronic payment instruments. The potential implementation of VAT withholding would be a radical reform, given its shift of the taxation system from voluntary to forced compliance. We argue that, on the one hand, real-time VAT collection would constitute a potent preventive measure against VAT fraud, which could generate synergetic effects within SEPA, and further deepen integration through the harmonisation of VAT policies. On the other hand, real-time audit/refund would require tax authorities’ access to confidential business information that may be incompatible with EU privacy rules. The trade-off between efficient tax collection and privacy concerns mirrors the general debate on data protection in a cashless economy.

Number of Pages in PDF File: 29

Keywords: Value Added Tax, Fraud, real-time collection, tax design, European Union

JEL Classification: H25, H26, K34, K42

working papers series