The Czech Republic has won its battle to have an EU reverse charge VAT pilot. It gained the concession at the European ECOFIN meeting last week in return for giving its backing to the EU’s anti tax avoidance directive for direct taxes.
The reverse charge pilot will involve no VAT cash payments on domestic sales of goods within any EU member state. The ‘domestic reverse charge’ means no VAT cash payments on B2B supplies through the chain of supply. There will only be a full VAT charge when there is a sale to a final VAT consumer.
The EU in limited circumstances permits the domestic reverse charge when a member state suspects there is missing trader VAT fraud. It is not considered desirable since it undermines one of the central planks of VAT – collection of VAT through the production chain.
However, the Czech Republic (and other central EU states) believes it has been subject to multi-billion VAT missing trader fraud. The EU itself thinks this costs member states over €40 billion per annum in lost VAT revenues. The Czech Republic also believes the domestic reverse charge is the only option to prevent this fraud.
The Czechs won a victory at EU finance minsters’ regular meeting, ECOFIN, on Friday by initially withholding its support on the new tax avoidance direct until other states agreed to the reverse charge pilot on all goods.
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