Harmonization of VAT in the EU: Back to the Future

Abstract

The Neumark Report was the point of departure of one of the most exciting fiscal experience: the worldwide expansion of VAT as the turnover tax. Despite having initiated this process, laid down and implemented the principles of VAT, the EU has failed to substantially improve and adapt its own model to a true single market in modern economies. The consequence is a large number of difficulties with this VAT system, huge compliance costs and a degree of dissatisfaction. This paper is reviewing these situations. Moreover, the transitional VAT regime for intra-EU transactions with its weaknesses has lasted for too long, and it is now unable to cope up with the development of fraud. Reforming is always more difficult than to start from scratch; nevertheless, there are a number of ideas and experiences, including where VAT was introduced more recently in the rest of the world, which offer interesting solutions for a modern VAT system. Suggestions are made that conform to the fundamental principles of VAT and provide notably the degree of neutrality and efficiency that contributed to make VAT such a success. It is time to return to these fundamentals and the objective of a better coordination of economic and notably tax policies may offer the right occasion.