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Enlargement of the European union--transitional guidance.

Letter Submitted by TEI International President David L. Bernard on October 10, 2006, to Alexander Wiedow, Director of Indirect Taxation and Tax Administration of the European Commission.

On behalf of Tax Executives Institute, I am pleased to provide comments from a tax perspective on the practical implications of the accession of Romania and Bulgaria into the European Union. I am also writing to recommend that the European Commission (EC) take steps to ameliorate the significant administrative burdens enlargement will impose on businesses during the transitional period preceding and following the accession.

TEI Background

Tax Executives Institute was founded in 1944 to serve the professional needs of business tax professionals. Today, the organization has 53 chapters in North America, Europe and Asia. As the pre-eminent international association of business tax professionals, TEI has a significant interest in promoting tax policy, as well as in the fair and efficient administration of the tax laws, at all levels of government. Our 6,000 members represent 2,800 of the largest companies in the United States, Canada, Europe, and Asia. In 1999, TEI chartered a chapter in Europe, which today encompasses a cross-section of European and multinational companies. TEI members are accountants, lawyers, and other corporate and business employees responsible for the tax affairs of their employers in an executive, administrative, or managerial capacity. The Institute espouses organisational values and goals that include integrity, effectiveness and efficiency, and dedication to improving the tax system for the benefit of taxpayers and tax administrators alike.

Accession of Bulgaria and Romania

On 26 September 2006, the President of the European Commission announced the accession of Bulgaria and Romania to the European Union effective 1 January 2007. Although only two countries are joining the EU (as opposed to the ten that joined on 1 May 2004), multinational businesses face significant challenges in accommodating the enlargement, for example by making myriad changes to their information and recordkeeping systems. The magnitude of the task is especially daunting inasmuch as there are only 67 working days, including the Christmas holiday period when many employees take leave, between the announcement and the date of accession.

The challenge faced by businesses should not be underestimated: They must assess the effect of the enlargement and the accompanying legal changes in Romania and Bulgaria across all facets of their operations. For indirect tax and other tax compliance purposes, they must analyze a number of legal issues, possibly restructure business operations, gather information (especially VAT numbers) from partners, customers, and suppliers, and, in many cases, renegotiate agreements. From a VAT perspective, they must develop and test changes to enterprise resource planning (ERP) systems at a time when, for many businesses, there is essentially a "block" on systems development during the period including the peak Christmas season and year end.

Many businesses made tentative preparations in advance of the accession announcement, but such preparations can only go so far pending the EU's formal decision. Indeed, much of the detail regarding the application and implementation of the laws in the Acceding Countries (e.g., detailed reporting requirements) remains unclear even after the accession announcement. (1) Given the extremely short transition period, even the best organised business will be challenged to implement all the necessary changes in a timely manner. We believe that many businesses in the Member States and in the Acceding Countries will simply not be ready on 1 January.

TEI Recommendations

TEI recommends that the EC, the Member States, and the Acceding Countries develop transitional rules to ease the administrative burdens on businesses and minimise the potential disruption of cross-border trade. Specifically, TEI recommends:

(i) Adopting a "light touch" in respect of documentation requirements and penalties.

Romania and Bulgaria, along with the other Member States, should be encouraged to issue transition rules adopting a "light touch" in respect of (a) strict documentation requirements, especially for zero-rated intra-EU supplies, and (b) the application of penalties.

TEI recommends that a transitional period of sixth months from 01 January 2007 be adopted during which the tax authorities of the Member States:

* Suspend the imposition of penalties for inadvertent errors; (3)

* Impose interest charges only where the tax administration can demonstrate a real loss of revenue (e.g., a supply did not qualify for zero rating because of the use of the supply by the recipient rather than because of the omission of a VAT registration number);

* Waive the requirement to correct reporting and primary documents, unless the corrections are essential for the smooth and effective operation of the EU tax system. For example, suppliers should not be required to reissue or amend any invoices issued to customers in Acceding Countries for intra-EU supplies made during the transition period where the supplier is able to demonstrate the taxable status of the customer by other supporting documentation.

TEI believes that a request by the EC to the Member States to accord these administrative concessions is necessary and proper in view of the limited time available to businesses to prepare and make the necessary system changes. Written guidance about the treatment of transactions immediately following accession is critical so that business taxpayers can have greater certainty about the treatment of their transactions and both the tax authorities and the business community can understand the proper approach for documentation requirements and the imposition of penalties on audits.

(ii) Temporarily relaxing the requirement for validation of registration numbers through the VAT Information Exchange Services (VIES) database.

Where a customer's VAT number cannot be validated on VIES, the VAT laws in some Member States unambiguously prohibit zero-rating of intra-EU supplies. In Member States where the VAT rules are unclear, anecdotal evidence suggests that zero rating of intra-EU supplies is similarly restricted.

During the last EU enlargement, businesses were assured that the VIES database would be updated promptly and that taxpayers across the EU would be able to consult with local tax authorities to validate the VAT number of their EU trading partners in the acceding Member States. The VIES system was updated quickly, but there was still a gap between the accession date and the updated VIES database's coming fully "on-line." During the interim period, the tax authorities were unable to validate VAT numbers of businesses in the acceding countries. (3)

Unless the Member States and the Acceding Countries relax the requirement to include a valid EU VAT number on an invoice, there is a risk of significant disruption of trade, especially business-to-business supplies, following accession. Alternatively, for commercial reasons businesses may be forced to zero-rate intra-EU supplies even though the strict conditions for zero-rating cannot be satisfied and even though such an approach may expose the supplier to penalties and interest. In addition, the customer may be exposed to penalties and interest for failing to hold a valid invoice to support recovery of acquisition VAT. At a minimum, there will be many disputes over the application of VAT to intra-EU supplies.

In order to avoid these problems, TEI urges the EC to work with the Member States to formally announce a temporary relaxation of the requirements to validate the EU VAT number through VIES.

(iii) Encouraging post accession dialogue with businesses in the Acceding Countries.

In connection with their accession, Romania and Bulgaria will be adopting legislation with the aim of ensuring compliance with the minimum requirements of the EU's Directives. Both countries will likely defer making decisions in respect of the permissive provisions in the Directives. As a result, there will be a period of uncertainty for businesses about the application of the VAT (and other) laws in Bulgaria and Romania.

TEI urges the EC to encourage Romania and Bulgaria (including the Ministries of Finance, the tax authorities, and the trade and industry representatives) to enter into meaningful dialogue with the business community to ensure that the direct and indirect tax laws in these countries correctly implement EU law (4) and adopt the "best practices" of the EU Member States.


Tax Executives Institute believes it is essential that EU encourage Member States to assist businesses with the challenges posed by the impending enlargement of the EU. We believe that adoption of our recommendations will help smooth the transition and ensure that these benefits of enlargement are fully and immediately realized.

TEI's comments were prepared under the aegis of its European Tax Committee whose chair is William Morris. If you have any questions about the submission please contact William Morris at +44 (0)20 7853 1645 ( or Jeffery P. Rasmussen of the Institute's legal staff at 1.202.638.5601 (

(1.) The Romanian and Bulgarian governments are to be commended for assisting business's advance preparations by releasing their VAT laws early and in the English language.

(2.) Indeed, TEI recommends that penalties be reserved for demonstrable noncompliance and intentional disregard of the rules.

(3.) In many cases, the tax authorities referred to the VIES database and if there were no VAT number, they assumed the customer was not registered. If additional information was available in the VIES system to confirm that business was registered, the tax authorities of many Member States were unable to access that information.

(4.) For example, Article 114(1), item No. 6 of Bulgaria's VAT, requires an issuer of an invoice to sign the invoice. This requirement, however, conflicts with Article 22.3(b) of the 6th EU VAT directive, which prohibits Member States from requiring signatures on invoices. We encourage the EU to bring this to the attention of the Bulgarian authorities.
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Publication:Tax Executive
Date:Nov 1, 2006
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