The origin-destination dichotomy: Common misperceptions about VAT principles in the EU

Published: 2018-12-04

There are two basic principles for value added tax (VAT) allocation, that is, the destination and origin principles. However, depending on which legal actor you ask and what legislature you refer to, the meaning of those principles will differ, according to recent research from Lund University School of Economics and Management.

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“This not only hinders the communication between legal actors, but may result in different legal outcomes,” says Mariya Senyk, Business Law researcher, whose doctoral dissertation Territorial Allocation of VAT in the European Union examines alternative approaches towards VAT allocation and their application in the internal market of the EU.

“For example, an origin-based taxation of goods could mean either that the goods are taxed in the production state or in the state where the supplier is established. Alternatively, it could also mean that VAT is collected in the state where the goods are produced or transformed, but the tax revenues are distributed to another state. The purpose of my thesis was to remove this confusion caused by different perceptions and to prompt policy makers to use correct terminology.”

Mariya Senyk states that in terms of jurisdictional principles applicable in international trade, the destination principle is preferable to the origin principle. This is because it gives flexibility to the states in determining VAT rates and it is better suited to the achievement of competition neutrality. However, the current EU VAT system, according to the thesis, is a hybrid as it combines origin-based and destination-based taxation. In view of the derogations available to the Member States, the system is also fragmented and complex. Although the new proposals for the definitive EU VAT system are claimed to be destination-based, they still reflect elements of the origin-based system.

“This means that the proposed future system is also hybrid and what is more – may be challenged by the WTO,” the author asserts.

The thesis puts focus on a common misperception: the belief that the destination principle has a coercive effect and is an ‘international norm’ in the WTO system.

“My research illustrates that the destination principle is one of the possible ways to apply indirect taxes in cross-border trade in goods. But it is not a binding norm. Another proposition that is challenged in my thesis is that a consumption-based VAT may only be based on the destination principle. An origin-based tax could perfectly serve the same purpose, as shown in the application of origin-based taxation – in the meaning of the common market principle – in the internal market of the EU.”

Mariya Senyk calls for a consistent legislation compatible with the requirements of the internal market, as stipulated in the Treaty on the Functioning of the European Union.

“A consistent VAT system and, as such, a simpler VAT system, would be beneficial for businesses that act as collectors of VAT and consequently encounter high administrative costs. My research illustrates how complex, fragmented and inconsistent the EU VAT system is today in terms of tax allocation principles. But it also suggests how the system could be improved and tailored to the requirements of the internal market. I hope that the results of my thesis can be used by policy makers – including the EU legislature currently changing the EU VAT system – the OECD and other legal actors.”

Mariya Senyk successfully defended her thesis on 14 September at the Department of Business Law.

Read the thesis abstract here


Mariya Senyk
Doctor of Laws
Phone: +46 722 612292