VAT is a tax on consumption, thus relying on market transactions to happen. Accordingly, the VAT system should impose the lightest burden on commerce necessary to effectively collect the tax and limit the possibility of fraudulent abuse of the system.
Today, the fragmentation of VAT rules between Member States create legal uncertainty as well as administrative difficulty for traders. Moreover significant tax leakage occurs through fraud which directly impact legitimate businesses through onerous anti-evasion regulations, unfair competition and arguably higher rates of tax. The differences in implementation and interpretation of VAT rules between Member States as well as the detailed reporting obligations and the potential for significant penalties for honest errors is a powerful disincentive for businesses considering transacting across borders. Of course, this affects small and micro businesses disproportionately compared to larger companies which more often have the required expertise and knowledge in-house.
Indeed, the Commission's two robust 2009 studies on e-commerce identified the fragmentation of VAT rules as one of the main regulatory barriers to cross-border e-commerce, together with diverging consumer protection rules and recycling fees and levies:
"The way in which these rules are implemented differs markedly from one Member state to another, giving rise to a business environment that is complex, costly and unpredictable for those businesses considering selling cross-border."
In addition, the lack of user-friendly "e-solutions" for VAT calculation and collection as well as refund for online purchases from non EU-countries creates barriers for consumers who want to benefit from the Internet to shop also from outside the EU. The Internet presents consumers with the possibility to search for and purchase legitimate products from anywhere in the world. Nevertheless, "consumers do not yet have global commerce", as former Competition Commissioner Neelie Kroes put it. For consumers who most of all seek convenience on the Internet, any uncertainty around VAT calculation or (perceived as) complex practical steps with regard to collection and refund of VAT will act as a barrier. And where European consumers abandon potential foreign purchases because of such barriers, the European market is artificially shielded from competition — to the detriment of our long-term competitiveness and greater consumer welfare — and Member States forsake VAT revenue.
Our vision for revamped VAT system is a system which supports commerce, both within the EU and with non-EU countries. It should do so through simple and uniform rules and adminitrative process, close cooperation between taxpayers, national authorities and the Commission, and openness to novel technological solutions.