Implementing the destination principle to intra-eu B2B supplies of goods

Transcription

1 Implementing the destination principle to intra-eu B2B supplies of goods Feasibility and economic evaluation study Inception report Contract: TAXUD/2013/DE/ May 2014

2 Table of Contents Background and objectives to the study... 3 Progress update... 5 Next steps...19 Appendix A Literature review process...25 Appendix B Online Survey Tools...29 Appendix C Description of our methodology in relation to the separate tasks (3.4 from our proposal)...31 Appendix D Proposed communications program...39 May

3 Background and objectives to the study Background to the study Since 1967, the EU has been committed to a system of VAT based on the principle of taxation in the Member State of origin. However, under the current arrangements for taxation of trade between Member States put in place in 1993, most transactions in goods are taxed at the destination. These arrangements are transitional and the intention had been to replace them with definitive arrangements based on the origin principle. In its Communication on the future of VAT, the Commission concluded that there was no longer political support for keeping the origin system as an objective. It is therefore looking towards devising alternative concepts for a properly functioning destinationbased EU system of VAT. The guiding principle of this work would be, first, that doing business across the EU must be as simple and as safe as engaging in purely domestic activities and, secondly, that the VAT compliance costs for doing business in Europe must be reduced. In any event, engaging in intra-eu trade must not generate additional costs. The Commission and the stakeholders examined in detail the workings of 13 different options and further discussed their pros and cons with a view to selecting the few options which would deserve further analysis. At the meetings of the Group on the Future of VAT (GFV) and the VAT Expert Group (VEG) in October 2013 the Commission services indicated the three options (in addition to maintaining the current system, namely option No 1) which should be further examined: Option No 2a Adapting current rules whilst still following the flow of the goods with the supplier charging the VAT of the Member State of destination; Option No 4b Aligning with the rules governing the place of supply of services with the reverse charge mechanism; Option No 5a Aligning with the contractual flow with the supplier charging the VAT of the Member State of destination. At the Group on the Future of VAT and VAT Expert Group meetings of February 2014, the Commission agreed to extend the scope of the study to include two further options to be examined in depth: Option No 2b Adapting current rules whilst still following the flow of goods with the reverse charge mechanism; Option No 1b Improving the current rules without modifying them fundamentally. The Commission services also agreed with EY that it would be more relevant to survey all 28 Member States and engage 7 Member States in more detailed consultation in order to obtain more information and in depth practical insights. This inception report reflects the extended scope of the study. Objectives to the study The objective of this study is to quantify the extent of the problems related to intra-eu supplies in comparison with domestic supplies and then identify the impacts of the implementation of each of the 5 selected options and assess in detail any positive and negative aspects and consequences of their implementation in comparison with the current situation. May

4 The assessment should cover the impacts of the changes that each option would have on the functioning of the VAT system in general and the risks it would bring. It should be made from the point of view of taxable persons and that of Member States and should cover the following: For taxable persons (acting as suppliers and/or customers): 1. Compliance costs; 2. Legal certainty; 3. Cash flow. For Member States: 1. Budgetary situation, including cash flow; 2. Ease of administration and costs of collection; 3. Fraud and avoidance. The economic aspects of the implementation of such changes in terms of quantifying the effects (e.g. estimates of the financial impact of these changes on VAT revenues in terms of receipts or potential fraud and avoidance, and of the additional or saved costs of collection and compliance they would entail) should also be considered in the context of this study. The economic analysis is needed as well in respect to the effects on: Cross-border trade; GDP; Consumer prices; Employment in the EU. Both the costs of implementation of each option and their running costs should be assessed. According to the methodology described in our proposal document, the given composite assignment will meet its objectives through work performed under the five tasks identified in the Terms of Reference (TOR) (Tasks 1 to 5) which we have allocated to four phases (Section 4 of this document): phase 1) Preparation and Identification Phase, phase 2) Data Collection Phase (Task 2 as well as elements of Tasks 1 and 3), phase 3) Analytics Phase (Task 4 as well as elements of Tasks 1 and 3) and phase 4) Drafting and Reporting Phase (Task 5). Timings for the study Inception report (draft) 16 April 2014 Inception report (final) W/C 12 May 2014 Interim report (draft) W/C 4 August 2014 Final report (draft) W/C 1 December 2014 May

5 Progress update In line with the Terms of Reference ( TOR ), we agreed to deliver this inception report after Phase 1 of our proposed workplan. This report confirms the steps to be undertaken to carry out the project, detailing further the data and literature sources used, as well as outlining collection methods, including survey questionnaires and interview formats together with the methodology to be applied for the evaluation analysis. We will describe our progress to date in this chapter and outline our next steps in Chapter 3. Our Proposed Work plan According to the methodology set out in our proposal document, we have organised our work in 4 phases, covering all the tasks identified in the TOR and giving priority to tasks 2, 3 and 4 as requested in the TOR: 1. Preparation and Identification Phase, 2. Data Collection Phase (Task 2 as well as elements of Tasks 1 and 3), 3. Analytics Phase (Task 4 as well as elements of Tasks 1 and 3) and 4a. Drafting and reporting Phase (Task 5) 4b. Finalisation and Documentation Phase. Phase 1: progress to date In the table below we have detailed the steps to be undertaken in Phase 1 of our work plan and identified which steps have been completed to date. Step No. Activity Completed? Phase 1: Preparation and Identification 1. Review of literature screened by the Commission. Each study, report etc. will be reviewed and the following will be prepared: Summary of study objectives and key findings Details of data used and the source 2. Desk top literature research to identify any additional studies, reports etc. that would complement/be accretive to the literature identified by the Commission. Each study, report etc. will be reviewed and the following will be prepared: Summary of study objectives and key findings Details of data used and the source May

6 Step No. Activity Completed? Phase 1: Preparation and Identification 3 Kick-off meeting with Commission. n/a 4. Detailed description (including preparation of supporting flow diagrams) of the current as-is system from a VAT technical and compliance perspective, this will also take into consideration findings identified during the desk top literature review in order to produce a summary of positives and negatives. The "as-is" analysis will take into consideration the following transaction types: domestic, intra community B2B supply, triangulation, chain transaction, call-off/consignment stock transaction, and installed goods. It will also provide commentary from the perspective of the supplier, the customer and the member states. 5. Detailed description (including the preparation of supporting flow diagrams) of the to-be options and possible variants (excluding Pan European VAT Group) from a VAT technical and compliance perspective, taking into consideration findings identified during the desk top literature review in order to produce a summary of positives and negatives. The "to-be" analysis will take into consideration the following transaction types: B2B supply, triangulation, chain transaction, call off/consignment stock, and installed goods. as well as the various simplification measures (exc Pan European VAT Group), ant-fraud measures etc. identified in the Annex to the ToR 6. Validation of the "as-is" and to-be analysis by the EY indirect tax network in order to identify additional incountry nuances that had not been identified by the desk top research. 7. Review of data already available and identified from the desk top literature review in order to identify "secondary data gaps" for model requirements 8. Review and collation of additional information obtained from our expert network re: the "as-is" and proposed "to-be" options. Instead of a kick-off meeting with the Commission, we have had a series of telephone calls to kick off the project. Responses received and review is in progress May

7 Step No. Activity Completed? Phase 1: Preparation and Identification 9. Preparation of initial draft questionnaires/surveys/data collections instruments to be used to collate information from enterprises to support tasks 1, 2, 3 and Preparation of initial draft interview template and draft questionnaires/surveys/data collections instruments to be used to collate data from Member States to support tasks 1, 2, 3 and Liaison with Advisory Board to have an independent view re: our approach etc. 12. Preparation of inception report. 13. Review of draft inception report by Quality Review Team. 14. Delivery of inception report 15. Presentation of inception report. This meeting will be attended by 2 members of the delivery team. 16. Incorporating comments etc. received from the Commission into the final version of the inception report. 17. Review of final version of inception report by Quality Review Team. 18. Delivery of final inception report Literature review (1&2) The starting point for our analysis was a literature review 1 which encompassed: (i) a review of literature recommended by the Commission; and (ii) a desk top literature research exercise to identify any additional studies/reports to complement/be accretive to the literature in (i). Our methodology for undertaking the literature review is described in detail below. Criteria for selecting literature The literature review is being used to inform us of existing independent research and those commissioned by the EC on VAT in the EU. The conclusions and methodologies in the selected papers will help us design our approach to this study. The papers selected for the review were based on the scope of the study and were informed by suggestions from the EC and independent research by EY. The papers cover four areas that are important for the scope of the study; these are: 1. Impact of Fraud on VAT. 1 This is addition to our reference to relevant legislation. For example Council Directive 2006/112/EC of 28 November 2006 on the Common System of Value Added Tax. SOURCE: Tolley s Orange Tax Handbook , Part 1, Value Added Tax. CONSULTANT EDITOR: Roderick Cordara QC. PUBLICATION DATE: July May

8 2. Operating costs applicable in complying with VAT. 3. Impact of change in VAT on prices. 4. Impact of VAT on trade. In addition, there are papers that look at the general state of changes to VAT in the EU over the last few years. Process of literature review The papers were reviewed by EY s specialist data collection and knowledge team, with constant feedback and supervision from the core engagement team. The EY knowledge team has been provided with the scope of the study and also specific instructions on what the review should focus on. These instructions include general instructions for each paper and also specific instructions for the four critical areas of study mentioned above. These specific instructions seek to answer important questions in each of the four areas, as identified by us based on our understanding of the scope and our discussions with EC. A more detailed outline of the process and a list of papers reviewed so far are included in Appendix A. Output of the literature review We are in the process of reviewing the outputs for relevant information (as described above) for this study. It should be noted that additional papers may be included as references as they become available/are identified throughout the course of the study. As discussed we would be happy to share the outputs from the literature review with you. Data collection design As part of the data collection exercise in this study, we have been undertaking the following 6 data collection exercises: 1. EY offices AS IS and TO BE analysis templates 2. Secondary data collection 3. Survey for businesses 4. Interview guides for 7 Member States 5. Survey for all Member States The design process for each of these data collection instruments, and our progress so far, is described in detail the sections below. AS IS and TO BE analysis templates (4, 5 & 6) Following an initial review of the literature, a template of VAT changes under the various proposed scenarios was drafted by the EY indirect tax team. The purpose of this template is to illustrate the VAT treatment of a selection of common types of goods transactions both from an existing approach ( AS IS analysis), and from the approach of the suggested options ( TO BE analysis). Existing legislation, contained within the Council Directive 2006/112/EC, was used as the basis for the AS IS analysis. Literature produced by the European Commission was used to inform the TO BE analysis. May

9 The VAT treatment for the following scenarios was analysed within the template: 1. Domestic supply of goods. 2. Intra-EU supply of goods. 3. Transfer of own goods between Member States 4. Call-off stock and consignment stock scenarios 5. Installed goods. 6. Triangulation supply of goods. 7. Chain transaction supply of goods. The treatment of these scenarios was considered in detail under existing legislation (option no. 1 maintaining the status quo). It should be noted that given the expected relative volumes of transactions, and therefore significance for each scenario, we would expect the study to primarily focus on scenarios 1 and 2. This will be confirmed during our data collection exercise and in our interim report. Each scenario was then considered under the following options: 1. Option no. 1b Improving the current rules without modifying them fundamentally. 2. Option no. 2a Adapting current rules whilst still following the flow of goods with the supplier charging the VAT of the Member State of destination. 3. Option no. 2b Adapting current rules whilst still following the flow of goods with the reverse charge mechanism. 4. Option no. 4b Aligning the rules governing the place of supply of services with the reverse charge mechanism. 5. Option no. 5a Aligning with the contractual flows with the supplier charging the VAT of the Member State of destination. The template describes in detail how the EU VAT system would work with the implementation of each option and the impact they would have on the VAT obligations for both suppliers and customers, as well as their respective Member States. Flow diagrams were used to illustrate each scenario and the treatment of the flow of goods according to the respective option. Each option was analysed side-by-side, so as to enable direct comparisons to be made more easily and to make it more apparent where differences in VAT treatment between the options exist. Summary of the five options Option 1b: Improving the current rules without modifying them fundamentally This option essentially maintains the status quo, whilst seeking to harmonise the VAT treatment applied to call-off stock (and consignment stock) arrangements, and also chain transactions, as well as the form of documentation to be held to support the exemption of the intra-community supply. In order to have consistency across all Member States, this model suggests amending the following key items: i) Where there is call off stock (i.e., where the customer is known prior to dispatch of the goods), the cross border transfer of goods would be treated as an intra-eu supply at the time that the buyer removes the goods from stock. The supplier and the customer would need to maintain a register of all goods dispatched/transported, and also submit a recapitulative statement which would indicate that the transfer of the May

10 goods will be disregarded for VAT purposes until the customer removes the goods from stock. ii) For consignment stock (i.e., where the customer is not known prior to dispatch of the goods), the VAT treatment should be aligned to that of call off stock mentioned above. iii) For chain transactions, there are two alternative VAT treatments proposed. Firstly, that the exemption should apply to the first supply in the chain which takes place in the Member State where the goods are dispatched from or, alternatively, that the exemption should apply to the supply of goods by the person who then arranges the transport of the goods. iv) The following options that are currently granted to Member States would become mandatory: Domestic reverse charge for supplies carried out by non-established businesses. In the case of triangulation, the ability for a non-established business to appoint a tax representative. The scope for exemption will be extended to services linked to intra-eu acquisitions. The supply of goods which are intended to be placed under warehousing arrangements (other than customs warehousing) will be exempt, when the goods are removed and transported to another member state the person removing the goods is deemed to have carried out the intra-eu supply. v) Suppliers who exempt intra-community supplies would be required to hold a mixture of non-contradictory commercial evidence and other associated documents. Option 2a: Adapting current rules whilst still following the flow of goods with the supplier charging the VAT of the Member State of arrival In this option the supplier has an obligation to collect and account for VAT in the member state of arrival of the goods. Where goods are transported, the place of supply will be where the goods are located at the time when the transport ends. Where goods are not transported, the place of supply continues to be the place where goods are located at the time when the supply takes place. The transfer of goods forming part of a supplier s business assets is treated as a supply of goods. If the supplier is not established in the Member State of taxation, he will report the VAT due using an enhanced One Stop Shop VAT return (essentially this would allow the offsetting of input tax against output tax due). This would require Member States to standardise the definitions of products eligible for reduced rates and to make this information readily available. Alternatively, the standard rate of VAT could be applied to all B2B supplies of goods. There are various possible simplifications provided. For example: Customers could become "Certified Taxable Persons" and account for the VAT using the reverse charge procedure. May

11 In relation to supplies between entities within the same corporate group, the customer could account for VAT using the reverse charge procedure. This approach could be extended to services. There are various anti-fraud measures provided. For example, customers could be required on their VAT return to include the non-established supplier s VAT number when making a deduction for the VAT charged by the non-established supplier. Option 2b: Adapting current rules whilst still following the flow of the goods with the customer applying the reverse charge mechanism In this model the reverse charge mechanism is applied to the movement of the goods cross border, and the customer is required to account for VAT irrespective of whether the customer is established in the Member State of arrival of the goods. As in Option 2a Where goods are transported, the place of supply will be where the goods are located at the time when transportation ends. Where goods are not transported, the place of supply continues to be the place where goods are located at the time when the supply takes place. The transfer of goods forming part of a supplier s business assets is treated as a supply of goods. This model would require the customer to register for VAT in a Member State where they have no establishment. In addition suppliers would be required to register in the Member State to which they have transferred their own goods. Option 4b: Aligning the rules governing the place of supply of services with the customer applying the reverse charge mechanism In this model the reverse charge mechanism is applied to the supply, and the customer is required to account for VAT in the members state where they are established. If those goods are provided to a fixed establishment of the taxable person located in a place other than the place where he has established his business, the place of supply of those goods shall be the place where that fixed establishment is located. In the absence of such place of establishment or fixed establishment, the place of supply of goods shall be the place where the taxable person who receives the goods has his permanent address or usually resides. The transfer of goods forming part of a supplier s business assets is not treated as a supply of goods. This option would therefore not require the customer to register for VAT in Member States where they have no establishment, nor would it require a supplier to register where they transfer their own goods. As the customer will account for the VAT via the reverse charge mechanism, there is no need for a full One Stop Shop. Instead, a Mini One Stop Shop will be used in two situations; firstly, where goods are supplied to a non EU customer but are staying in the EU, and secondly, in relation to other supplies made by the supplier for example, B2C supplies. May

12 There are various anti-fraud measures provided, for example, customers could be required on their VAT return to include the non-established suppliers VAT number when making a deduction for the VAT charged by the non-established supplier. Option 5a: Aligning with the contractual flows with the supplier charging the VAT of the Member State of destination. In this option, the supplier has an obligation to collect and account for VAT in the member state where the contracting party is established. This is irrespective of whether or not goods are transported; the place of supply of goods will be where the contracting party (the customer) is established. The transfer of goods forming part of a supplier s business assets is not treated as a supply of goods. If the supplier is not established in the Member State of taxation, he will report the VAT due using the enhanced One Stop Shop. There are various possible simplifications provided. For example, customers could become "Certified Taxable Persons" and account for the VAT via the reverse charge procedure, or if the supply is between two entities within the same corporate group, the customer would account for VAT under the reverse charge procedure. There are various anti-fraud measures provided. For example, customers could be required on their VAT return to include the non-established suppliers VAT number when making a deduction for the VAT charged by the non-established supplier. Secondary data collection (7) As well as identifying and reviewing relevant literature, we have undertaken a comprehensive review of publicly available economic and business data that can be used to underpin our economic modelling. As part of our initial data collection in phase 1, we have collected the data listed in the table below for all EU Member States. We expect additional data needs to be identified during phase 2 of the study. May

13 Data Economic Data for EU Member States National accounts European sector accounts Government finance statistics Exchange rate Interest rate Monetary and other statistics HICP (Harmonized indices of consumer prices) PPPs (Purchasing power parities) Balance of payments Structural business statistics Postal services International trade Manufactured goods Source National Accounts data, Eurostat Annual sector accounts, Eurostat Annual government finance statistics, Eurostat Eurostat Eurostat Eurostat Eurostat International trade data, Eurostat Eurostat Eurostat Eurostat To be confirmed Data to support our country sample selection and individual interview country selection EU joining date and currency details Total GDP Sector contribution to GDP European Union World Economic Outlook Database, IMF National Accounts data, Eurostat VAT Revenue/Contribution European Commission (2011), A retrospective evaluation of elements of the EU VAT system, TAXUD/2010/DE/328; Eurostat for 2012 data (code gov_a_tax_ag) CAGR Exports/Imports National Accounts data, Eurostat Debt Government finance statistics, Eurostat May

14 Initial draft questionnaires/surveys/data collection instruments (9 &10) During phase 1 we also identified the primary data requirements for the study and have developed collection instruments (surveys) for businesses in all 28 EU countries and for Member State administrations. Survey design Our draft questionnaires have been designed with all task requirements in mind. For example: Task 1: as-is assessment We have collated responses from businesses that are indicative of the benefits and negative aspects associated with intra community trade. This has been achieved by utilising information submitted by businesses, trade bodies and professional firms in response to the VAT Green Paper Consultation. We have designed surveys to businesses to obtain data on indirect tax administration costs and the associated impact on cash flow that they incur under the current system. We have designed surveys to Member States to obtain data on costs in relation to administration, collection, enforcement and monitoring, disputes and also the quantum of tax lost as a result of fraud. Task 2: Detailed technical review of Policy Options We will validate our detailed descriptive analysis of each option and the associated benefits and weaknesses with EY office in all other Member States. Specifically we will ask them to confirm the assumptions that we have made, as well as affirm the positives and negatives, and if appropriate provide details of any that we have missed. Task 3: Assessment of Implementation Costs We have prepared surveys for businesses in order to obtain data on the estimated one off additional costs they would incur if they had to implement each of the options. The types of costs we will obtain information on include: professional fees, systems costs (accounting, warehouse management systems) and training. We have prepared surveys for Member States to obtain data on estimated one off costs associated with the implementation of each of the options, in particular: systems costs, staff training, publicity costs, updating of internal manuals, publications etc. This data will be complemented by information/data obtaining during face to face meetings with selected Member States. Task 4: Impact Assessment of Each Option We have prepared data collection instruments for businesses in order to obtain data on the estimated changes to on-going (i.e. not implementation) costs that would result from each option. We seek to collect information on various types of costs that will differ with each option: compliance costs, cash flow implications and more qualitative information about expected behavioural response to the proposed options 2. We have prepared data collection instruments for Member States to obtain data on estimated on-going costs associated with the operation of each of the options, including: administration, collection, cashflow, inter European Community cooperation, management of fraud and avoidance. This data will be complemented by information/data obtained during face to face meetings with selected Member States. 2 This will also be informed by our review of literature and understanding of relationships between variables. May

15 Draft Surveys 3 Business survey We have ensured our questionnaires capture the data that we require to support the study, but at the same time are user-friendly and relatively straight forward to complete via Survey Monkey. The business survey consists of the following set of questions to capture the required data for our analysis in Phase 3. The questions are broken into four main sections: 1. Business related questions, 2. Trade related questions, 3. Costs related questions, 4. Implementation related questions. The survey will be distributed to our client networks and beyond in all Member States. We would expect to receive responses from at least 30 businesses in each Member State (on average), from a range of sectors and industries. SME survey Due to the way that we have designed the Business Survey we agreed with the Commission that it was not necessary to prepare survey specifically for SME s. We will work with the Commission s Enterprise Europe Enterprise Network to identify relevant SME members bodies, and engage with them in order to obtain their agreement to circulate the survey amongst their members, as well as actively encouraging and supporting the surveys completion. This will complement our network of clients and contacts. We expect SMEs to form 10% of our responses in each Member State. Member State survey This survey will be designed based on the feedback from our 7 interviews with 7 Member States taking into account data availability and willingness to provide data. Survey providers selection The survey will be in an electronic format so as to speed up distribution, facilitate responses in a uniform format aiding the collation of the data, and will be accompanied with a clear explanation of purpose and objectives. In summary the survey tool should have the following key features: 1. It should be easy to follow for the participants. 2. Should have the ability to incorporate different types of questions. 3. The nature of the responses should be comparable. 4. Should have the ability to allow monitoring of responses in real time, thus allowing us to monitor progress and take necessary actions. 5. Should have the ability to provide analytical tools to assess the responses. 6. Should have the ability to export/import data onto Microsoft excel. Different types of survey tools Offline survey tools Offline survey tools, in the form of s or excel worksheets do not meet our requirements for this survey. They make designing of different formats of questions cumbersome and the nature of participant responses can vary thus making them less comparable. Offline survey tools also don t provide the ability to monitor responses in real time thus making monitoring of responses more difficult. Hence we do not propose to use any offline survey tools for this study. 3 Content of the surveys will be reviewed and discussed with the Commission. May

16 Online survey tools There are a number of online survey tools that can be used for this study. We considered a number of survey tools, including popular survey tools such as Survey Monkey and Survey Gizmo, and advanced survey tools like Qualtrics and Key Survey. After a thorough comparison of these survey tools (see Appendix B for summary), and based on our current understanding of the study and the types of questions we will include in our questionnaire, we believe our requirements are met by Survey Monkey. Interview guides for 7 Member States Individual interview country selection We propose conducting individual interviews with 7 Member States to gather additional information about the impact of each policy option. Our selection criteria for these 7 Member States were to consider how countries represent the EU in terms of scale, type of economy and geographic scope. In terms of scale, the member state selection criterion is based on the contribution of the member states to the VAT collections, the highest contributors having been selected as these will drive the largest and observable impact to any policy changes. Including these economies in the sample size will ensure the detailed analysis is representative in terms of quantifying the ease of administration, cost of collection and budgetary decisions. Therefore, understanding the outcome of the proposed policy change options in these economies would be most meaningful for the purposes of our study and drawing conclusions for the whole population of EU Member States would be justifiable. The top ten Member States, by percentage contribution to EU VAT are shown in the table below. Member State % Contribution to EU VAT 2009 Germany 22.7% France 16.5% United Kingdom 11.5% Italy 11.0% Spain 5.5% Netherlands 5.1% Sweden 3.6% Belgium 3.0% Poland 2.9% Austria 2.9% Source: European Commission (2011) From the above ten Member States, we have selected the following 7 to be interviewed. The final selection was based on the type of economy and geographic location of countries, so we had a selection of countries representative of the EU as a whole. Sweden Germany France May

17 UK Poland Belgium Italy The 7 selected Member States were agreed with the Commission during a pre-study meeting on Friday 22 November Development of interview guides Interview guides have been developed to collect the information we need to inform our study from relevant contacts in the above Member States. This will include information about key data and policy in these economies including VAT receipts, VAT fraud, administrative processes and costs, cash flow (budgeting) issues. The interviewer will aim to collect information to compare domestic trade with international trade and assess the potential impact of each option. They will be flexible enough to account for the he particular country and the issues it currently faces in terms of VAT administration, trade and other economic factors. Development of analytical approach After all required data is acquired; we will assess in detail the possible economic outcomes of VAT changes and their implications for EU Member States and businesses, including SMEs. This analysis will take place in Phase 3, however it is important to develop a methodology prior to this, which we prepared at the proposal stage and is reproduced in Appendix C. Selection of an appropriate econometric model We are currently in the process of confirming appropriate models to use in the analysis phase of the study (Phase 3). The table below summarises the models we expect to use as the basis for our analysis: Model Description Use QUEST III QUEST III is an open economy Dynamic Stochastic General Equilibrium model which incorporates active monetary and fiscal policy rules and can be used to analyse the effectiveness of policies. It is not specifically constructed to assess VAT policy changes (which in essence is a fiscal policy), but it measures trade and might be useful when solving the dynamic outcome of EC policy. Standard Cost Model The Standard Cost Model (SCM) has been developed to provide a simplified, consistent method for estimating the administrative burden imposed on business i.e. costs incurred when complying with information obligations duty to We are assessing this model for adaptation/use measuring the macro-economic impacts of the options. We will work with the model author to determine the appropriateness of this vs. building a macro economic model. We are asking for activity costing from our businesses to determine so that May

18 Model Description Use Static micromodels procure or prepare information and to make it available, stemming from Government regulation. Various partial equilibrium models can be used to determine the relationship between variables without looking at the outcome for the whole economy. E.g. a regression which only captures the direct (partial equilibrium) effects of VAT policy on trade and does not take into account trade diversion and other indirect effects. this approach can be used to derive an average cost impact on businesses in each Member State. This will feed into our options analysis. This will be used to help understand historical relationships between variables which will help inform our assumptions in the options analysis. May

19 Next steps The next stage of the study is Phase 2: Data Collection, after which we will deliver an interim report. Phase 2: Data collection We have summarised below the key steps that will need to be undertaken in order to ensure that we have the appropriate data set for analysis, which will enable us to undertake the economic evaluation that is required to support the study. A key element of this phase will be the execution of an effective communications program, which will be the catalyst for business engagement in the study. Overviews of our proposed communications programs are included in Appendices D and E. Step No. Activity Phase 2: Data Collection 1. Collation of business responses that are indicative of the positive and negative aspects of the current "as-is" model. 2. Finalisation of data collection instruments and questionnaires/surveys taking into consideration comments made by the Commission as well as representative bodies. 3. Uploading data collection instruments/questionnaires/surveys onto appropriate platform. 4. Publicise study and associated request for businesses to participate. (Preparation of specific alerts to go to all EY clients that receive weekly Indirect Tax updates. Inclusion of regular reminders in a number of weekly updates thereafter). 5. Engagement with members bodies (institutes, trade associations, etc.) to obtain their support for the study and encourage responses from their memberships. We will also work with them to prepare any associated alerts etc. 6. Liaise with the VAT expert network in order to identify a diverse range of EY clients who we feel should be encouraged to participate in the questionnaire survey. We will specifically target this group by sending them a personal invitation and following up with at least two phone calls. 7. Issue/enable access data collection instruments and questionnaires/surveys to businesses. 8 Organisation of and conduct interviews with representatives of selected member states (7 in total). 9 Collation of information received from the face to face interviews with the relevant authorities in member states. 10. Issue/enable access to data collection instruments and questionnaires/surveys to member states (21 in total) 11. Collation of information received from the MS surveys. 12. Presentation of inception to the GFV and VEG May

20 Step No. Activity Phase 2: Data Collection 13. Monitor completion of questionnaire surveys. We will call clients/targets etc. who have expressed an interest in completing the questionnaire survey but who have not completed it after 10 days. 14. Follow up with members bodies, institutes etc. to maintain momentum re: their support for the study. 15. Collate data. 16 Review and follow-up on questionnaire survey feedback from key stakeholders. 17. Liaison with the Commission throughout the data collection period to keep them informed as to progress etc. 18. Liaison with EY s Advisory Board to have an independent view re: the qualitative assessment of the "as-is" and "to-be" options. 19. Preparation of interim report. 20. Review of draft interim report by Quality Review Team. 21. Delivery of interim report. 22. Presentation of interim report. 23. Incorporating comments etc. received from the Commission into the final version of the interim report. 24. Review of final version of interim report by Quality Review Team. 25. Delivery of final interim report. Finalisation and distribution of questionnaires The first stage of Phase 2 will involve finalisation of the data collection instruments and questionnaires/surveys. In this stage we will ensure we take into consideration comments made by the Commission as well as representative bodies. We will then upload the data collection instruments/questionnaires/surveys onto Survey Monkey. In relation to the questionnaire/survey to be used to collate information from business this will need to be proactively publicised in order to ensure that we attract and obtain data from as diverse a population as practically possible from across the European Community. This will be achieved utilising a number of different communications platforms, for example: 1. Dedicated alert to all of the EY clients who have registered to receive our weekly indirect tax updates outlining the objectives of the study and the support/input that we require from them in order to assess the impact of the options on them. 2. to all members of the indirect tax network based in Europe asking them to engage with their clients and encourage them to sign up for and complete the questionnaire/survey. 3. Liaison with appropriate members bodies and institutions (for example the Fédération des Experts Comptables Européens, European Association of Euro Pharmaceutical Companies, European Automobile Manufacturers Association to May

21 name but a few) to obtain their support for the study and agreement to engage with and encourage their members to sign up for and compete the questionnaire/survey. 4. We will work with the European Enterprise Network to complement our network of SMEs and to ensure that the SME population are represented in our sample of businesses. 5. Publicise the survey at the EY Global Indirect Symposium in Rome, April Once a business has expressed an interest in participating in the survey the following process will be activated: 1. Business with be provided with a link to the survey. Businesses will initially be given 4 weeks to complete the survey. 2. The business will be provided with an overview of the objectives of the study as well as details of information that they will need to gather in order to complete elements of the questionnaire/survey, and last but not least they will be provided with easy to follow instructions as to how to complete the questionnaire/survey. 3. We will monitor the completion of surveys on a regular basis. If a survey has not been completed within 10 days of the business being issued with a link, we will liaise with an appropriate member of our indirect tax network and ask them to contact the business and encourage them to complete the survey. 4. We will also send out regular reminders to clients via our weekly indirect tax alerts. 5. We will keep in regular contact with member bodies and institutions to maintain momentum regarding their members etc. In relation to the questionnaire survey that Member States are requested to complete we will liaise on a weekly basis with the individual nominated to supply the data on behalf of the member state concerned to ensure that they are on track to meet the required deadline, answer any questions that they may have as well as support them as much as possible in relation to problems that they may encounter. A pilot study will be conducted over the first two weeks during phase 2 to verify the content of the questionnaire survey, to determine whether the respondents are likely to be representative, and to test the response rate. The pilot study will also provide feedback from the respondents to determine if any of the questions were difficult to answer or ambiguous. We will also identify any omissions in the questionnaire and other areas of improvement. Pilot studies serve as a valuable input for the final questionnaire. Individual country interviews After finalisation of individual country surveys, we will organise and conduct interviews with representatives from our sample of 7 Member States selected in Phase 1. We will then proceed to collate the information received from the face to face interviews in preparation for Phases 3 and 4. Data consolidation and analysis After all required data is acquired; we will consolidate the data and begin to assess in detail the possible economic outcomes of VAT changes and their implications for EU Member States and businesses. Our analysis will then begin in Phase 3. May

22 Delivery of interim report At the end of Phase 2, we will deliver an interim report to the Commission which will detail the outcome of the data collection exercise(s), and the methodology used in evaluating the data as well as a detailed time table for the remainder of the project. The report will be subject to review by our Quality Review Team. The report will then be presented at a meeting with the Commission in Brussels. Phase 3 (to be initiated during Phase 2) During Phase 2, we will begin assessing the quality of data collected and designing the model. The steps involved in this are detailed in the table below and notes below and apply to each model we will develop (econometric modelling, standard cost modelling (SCM) and impact modelling), as relevant: Step No. Activity Phase 3: Analytics 1. Data quality will be assessed for example: data validation to check for any statistical and econometric errors, financial data will be cross referenced to existing data; post survey data validation will be undertaken. 2. Pilot study to be undertaken to verify the content of the questionnaire survey, to ensure that respondents are representative and to assess the response rate. 3. Model design and development with secondary data and definitions of assumptions. 4. Liaison with advisory board re: the models to ensure that they are fit for purpose. 5. Review of models by Quality review team. Step 1 and 2: It is important to ensure that data is robust, reliable and meets the research requirement. As it is collected, the data will be validated and checked for any statistical and econometric errors that are encountered. For example financial data will be cross validated with existing data sources to avoid double counting, ensure there is no accounting/taxation overlapping, and checked for consistency. We intend to test our surveys with a small sample of clients to ensure its usability, as outlined in our communications strategy in Appendix D. Post-survey data verification will also be required to assist further explanation on data outliers and explain possible respondent inconsistencies. Step 3: The model design and development stage would include the setting up of the right level of functionality to respond to the research hypothesis formed. The process of the model build will include, for example, granular correlation analysis and hypothesis testing to determine significant-impact variables that can be used in establishing macro and microeconomic relationships that are of interest to intra- EU VAT study. Steps 4 and 5: Once we have developed functioning models, we will test the models using dummy data for potential model set up irregularities. The models will then be assessed further for logical flow, quality and risk to ensure it meets the requirements it has been built for. May

23 Phase 3 (after Phase 2) After completion of the interim report at the end of Phase 2, we will proceed to conduct the data analysis (Phase 3). The remaining steps involved in Phase 3 are detailed in the table below. Step No. Activity Phase 3: Analytics 6. Model builds with primary data. 7. Extrapolation of the data to agreed populations. 8. Development of an impact-outcomes matrix. 9. Analysis and modelling of linkages and flows to determine the impact of change in trade on other economic indicators such as GDP and employment. 10. Impact modelling. 11. Comparative analysis. 12. Testing and validation of model outputs. 13. Review of model "outputs" by quality review team. Steps 6 and 7: After all required data is collated and cleansed; we will check the variables compatibility (for example using advanced econometric techniques). At this stage we would also revisit our base hypothesis and formalize specific assumptions that would be informed from qualitative information we acquire. We will also validate that our models are fit to appropriately address the research questions that have been finalized. The acquired data would also be extrapolated to reflect the dynamics of the agreed population within the EU. Steps 8 and 9: The next stage in the analysis will encompass running the models. For example this will help establish the relationship that would determine the impact of change in trade. We will ensure that all regressions developed pass standard econometrics residual tests for co-integration (if time series are not stationary), multi-colinearity, normality, serial/autocorrelation, and hetero-scedasticity. We will ensure that results from the SCM are consistent with outputs from other studies into administration costs. Results from the SCM will provide an indication of the differences from each Option and feed into the impact modelling. Steps 10 and 11: A general equilibrium model would be used to quantify how changes in the intra-eu VAT would affect the wider EU macro-economy. Each option would be compared in order to quantify which would be the optimal policy change. The burden of the implementation cost will also be taken into account when comparing the options. Steps 12 and 13: These processes are dedicated to ensuring the validity of the results and testing the stability of the models used. Based on these econometrics tests, we would be able to form meaningful conclusions for the model outputs. May

24 Phase 4 Phase 4 will encompass a small number of steps, see table below. The key deliverable will be a final report which will detail the following: Abstract Executive Summary Objectives of the study Approach taken re: data collection and associated analytics Individual assessment of each of the options using the agreed qualitative and quantitative criteria Comparison of each of the options against the domestic supply benchmark Recommendations Step No. Activity Phase 4: Drafting and Reporting 1. Preparation of final report in draft. 2. Liaison with Advisory Board. 3. Review of draft final report by Quality Review Team. 4. Translation of the final report (this will also include an element of quality review to ensure that the translation is accurate). 5. Delivery of final report. 6. Presentation of final report. 7. Incorporating comments etc. received from the Commission into the final report. 8. Review of updated final report by Quality Review Team. 9. Translation of the updated final report (this will also include an element to quality review to ensure that the translation is accurate). 10. Delivery of the updated final report. The report will be the subject of a detailed quality review. It will be delivered before being presented at a meeting with the Commission in Brussels. May