As an international entrepreneur, you have probably heard what the One Stop Shop (OSS) is. The new one-stop shop system was introduced last year, but why? The most practical reason was to simplify VAT returns. In addition, one of the reasons for changing the rules was the existence of the „VAT gap“. That’s right, a VAT gap. What that means and what the OSS has to do with it, we explain below.
Summary of the One Stop Shop
For the record, let’s do a quick recap of the One Stop Shop. With the new VAT rules for 2021, you can now submit all your international VAT returns once per quarter in one central place. Hence, it is also called the One Stop Shop system. You submit your OSS return to the tax authorities, who then forward your details to the (tax authorities of) the relevant countries. So you no longer need to apply for a VAT number for each country you operate in and submit VAT returns regularly.
You are eligible for the One Stop Shop if your company sells more than 10,000 euros cross-border per year. Will you stay below that? Then you must submit your VAT return via the tax authorities of the countries where you sell. If you meet the requirements for the OSS, you can also apply this way, but take into account possible language barriers and the fact that the application deadline may vary from country to country. If you prepare your VAT return via the OSS, you do not need any additional language skills and only have to observe one deadline. So even more advantages of the OSS!
What is the “VAT gap”?
In Dutch, this is called the VAT gap. The word itself suggests that there is a discrepancy somewhere. That’s true: in 2019, EU member states lost an estimated €134 billion in VAT, see the gap there. If things continue as they are, it would take 13 years to catch up. That equates to about €4,000 in lost VAT per second.
To paint a picture: The missing money would be enough for 250 modern hospitals or a high-speed railway line from Tallinn to Porto. And that’s with lost VAT in one year. In 2019, Romania had the most VAT missing. Around 34.9% (!) of the VAT owed was not collected. If you look at the absolute figures, Italy was in the lead with a share of 30.1 million euros.
It is important to track the size of the gap because, first, it reflects how well a country deals with tax laws, fraud, evasion, etc.
In addition, VAT revenues, and hence their losses, have a major impact on government spending. Think of schools, hospitals, transport and climate finance. And it goes even further: this money could also have been used to cushion the impact of COVID-19.
Going a step further, we no longer think of a national budget, but of the EU budget. In fact, the VAT collected also contributes to this. This is the immediate reason why the EU-wide VAT gap is a problem that needs a quick solution.
Finally, it is important to monitor the gap because it allows good policies to be tailored to it and their effectiveness to be measured. Despite the fact that the VAT gap has shrunk, it represents a challenge for the future.
What is the cause of the “VAT gap”?
VAT is abused due to frequent fraud. This is partly because tax collection systems are not foolproof enough. The full list of reasons for the VAT gap is as follows: tax fraud, tax evasion, tax avoidance, bankruptcies, financial problems, calculation errors and administrative errors. Other factors, particularly economic developments and how good the quality of national statistics is. So there are a whole range of factors that can vary a lot from country to country.
The future of VAT: what’s next?
VAT Action Plan
The European Commission has drawn up a plan to centralise and simplify VAT. The reason for this was the extent of tax fraud that was being committed. The scale would show how flawed the tax systems were – a new solution was needed.
Introduction of the One Stop Shop
It was also intended to promote cooperation between EU Member States. One way of achieving this was to simplify European VAT affairs. Here you can see the first version of the One Stop Shop. Indeed, one of the European Commission’s measures to combat the VAT gap was the introduction of the One Stop Shop. The introduction of the OSS simplifies administration and thus improves control. This is because entrepreneurs submit their data to a single authority and not to several. These are also bundled in one declaration. In addition to better managing the VAT gap, simplifying the VAT procedure for entrepreneurs was of course also an important goal.
In the old situation, every entrepreneur had to submit data broken down by country. One of the reasons for the VAT gap is, as already mentioned, administrative errors and also calculation errors. By recording the entire process in one system, at least the risk of such human errors is reduced.
Digitisation of the VAT return
The biggest impact on tax collection will be the digitization of the entire VAT procedure. In some EU member states, the registration process is already digital (e.g. Italy and Hungary), in other member states digitization has started (e.g. England ). Digitization is the simplest solution to obtain better VAT revenues. If the tax authorities require entrepreneurs to digitize all data, there will be more control over it. One example is Spain. Here, companies with a turnover of more than 6 million must report their transactions within four days and have them checked by the tax authorities.
So: The solution has not yet been found. However, there is the prospect that the OSS could do even more to close the VAT gap. Perhaps the One Stop Shop as we know it now will be expanded. The European Commission even believes that the OSS could simplify the filing of European VAT returns even further. One of the possible extensions is, for example, the inclusion of a refund mechanism. The target audience of the OSS could also be expanded. Then entrepreneurs who do not provide their services digitally could also submit their tax returns via the One Stop Shop.
What do you think about closing this gap? Do you think the introduction of the OSS and the VAT Action Plan will help?