It’s almost Christmas so time for an End of Term report, the European Union 2013 report.
As this is its first End of Term report (at least on TMP), it will have to cover the whole history of the EU.
Let’s look at the famous four freedoms – free movement of people, services, goods and capital established under the Treaty of Rome (1957).
People: 6/10. Should do a lot better.
While the initial 6 (later 9, 10, 12 and then 15) countries did allow for free movement of people, albeit with passports or ID cards, later expansion by 10 in 2004 and 2 more in 2007 have led to a great deal of protectionism.
Restrictions placed on the 2004 entrants by 12 of the 15 were not good; the 2007 accession of Bulgaria and Romania has even in the UK led to petty restrictions which will be lifted in the New Year.
The Schengen agreement has meant easier movement between some EU countries but immigration concerns elsewhere.
Goods: 7/10. Some room for improvement.
The original treaty abolished quotas and duties, establishing a common external tariff – good.
There are some business issues (below) that will still be a problem next year.
Services: 4/10. Poor – must do a lot better.
It is still quite difficult to conduct services across the EU.
Small businesses find it difficult to trade across the bloc even if language and currency are not an issue, again quite a problem next year.
Capital: 8/10. Good but problems particularly in the Eurozone.
Money generally flows where it is needed – it always has and probably always will.
The formation of the common currency has been a technical triumph but remains a political and banking issue.
The Central Bank has been unwilling – or unable – to re-capitalise banks which have come close to failure, leaving the people to pay the bill.
Imposition of capital controls on Cyprus contravened completely this founding principle.
Summary: Overall 62.5% – the EU is Work in Progress.
The Founding Fathers did not foresee the fall of the Berlin Wall and the Soviet bloc nor the Internet and its results, e-services, e-products, or just how this has enabled business globally.
While each nation has different systems for reporting company performance, profit and tax liability, these are in process of being harmonised, driven by the activities of tax avoidance lawyers working for the big companies.
Amazon, Apple, Google, Starbucks and Vodafone have actually hastened more sensible apportioning of profit.
The Work in Progress status suggests that much needs to be done to foster business, particularly as emerging economies will begin to challenge the old Continent in the years to come.
The big problem for businesses – particularly in the service sector – is VAT.
I have always thought VAT to be quite an intelligent tax (if that is not an oxymoron); it is also the basis of EU funding.
VAT rules affect all businesses trading in the EU, wherever they are resident.
But they are still very messily implemented across the Union.
Companies the size of Amazon can employ people to work out all the nuances – and ensure that a profit is made; smaller companies are vulnerable.
If a company buys goods or services from within its country of residence, there is no problem – the VAT charged on the bought product or service is called Input Tax and allowable against the Output Tax (VAT) charged on the goods or services sold.
But reclaiming across the Union is virtually impossible, which often makes it cheaper for businesses to buy from the home market, undermining the benefits of a common market.
The rules will change in 2015 – mainly to catch the Amazons and Apples of this world but there will be collateral damage for all businesses.
While a business can make a product, develop a service, set up a delivery system, use a fulfilment house or whatever, if they are trading across border, just getting the right VAT information for each country is a nightmare – even finding the correct turnover or the date of the transaction.
Report what to which country and when?
There are 28 (the number of member countries) different ways of doing it! Unbelievable!
While your micro-business may work perfectly well within one jurisdiction, immediately it begins to expand via its online presence and get trade from other parts of the EU, all hell breaks loose!
Issues: Supply chain
Where is the stock kept?
How do you handle returns?
What VAT rate will apply?
What about printed – even 3D-printed – goods? eBooks?
Do you deliver from a single warehouse or establish a warehouse facility in each country?
Do you run activities in other countries as a subsidiary or a branch?
All these affect what tax is paid to whom and when.
Issues: Registration and rates
VAT registration thresholds differ between countries.
When VAT rates were lower, it wasn’t such an issue but these days most countries have levels up in the 20% region, which is more than enough to wipe out any profit.
Baby products and children’s clothes, for example, are zero-rated in the UK but not elsewhere (the UK is the only country to have a 0% rate).
Not only do the rates vary between countries but the exempt category is different.
If you sell at one price across the whole of the EU in a very competitive environment, either you find that you take a hit on VAT in one jurisdiction or you face competition from local suppliers who know the ropes rather better.
Issues: Place of supply
If the EU is to have a true transparency these problems must be solved otherwise people will just buy from their national source, regardless of a more competitive price elsewhere.
But it is not just buying across borders – what happens if you start a purchase operation in one country and complete it elsewhere?
There are plans for a single VAT return system but don’t hold your breath and we are never going to have harmonised rates, let alone full fiscal union!
Every country has its interests so there will never be agreement – you only have to look at the Euro problems to see that.
And there is the issue of trust both with a central authority and individual nations – some countries haven’t being paying VAT refunds at all.
So despite the potential for customisation, some companies do not want to enter certain national markets because of these complications; it just isn’t worth their while.
It’s all very well with goods – even e-commerce delivered e-products – but what about services?
You can find a substantial amount of help on the HMRC website but they won’t actually do things for you.
More active information and help can be found on Accordance VAT’s website, which includes a country-by-country table showing the main requirements and rates. They can help not only EU companies but non-EU resident companies that wish to trade into the EU.