What is the EU Trinity of Indirect Taxation?

‘Indirect taxation’ in the European Union (EU) comprises customs duties, excise duties and VAT. These are the harmonised taxes whose laws are coordinated across EU countries. They affect the free movement of goods and the freedom to provide services. They are the taxes that yachting and aviation must cope with.

A group of 27 countries in Europe, including their territorial waters and airspace, has a fiscal fence around them. Borders have dissolved within the fence – they are a “Single Market”. People and businesses trade goods and services with each other with no restrictions but subject to internal rules and controls which are mutually enforced by state tax administrations.

Outside the fence is considered foreign. Goods which are sold for export or services which are provided to customers abroad are not taxed. Conversely, people and businesses must declare their goods and services and pay a single tariff at the borders to enter economic circulation. This is to keep the system fair for internal producers so that they can compete on equal terms with foreign suppliers.

The EU carved out its internal Single Market in 1993. At the same time, its Customs Union has defined what common import tariff to charge at the borders. Trade and mobility have increased steadily within the EU since this creation. Yachts and aircraft are part of this boon. The EU’s seas and airspace are sought after by yacht and aircraft owners.

The legal instruments which regulate taxation of the trade in goods and services between EU businesses are the VAT Directive and the Excise Directive. Taxation of trade between EU businesses and foreign countries is regulated by the Union Customs Code. These legal instruments have been continuously modernised to be efficient. Mutual assistance and cooperation agreements are in place between EU tax administrations who are responsible for managing these taxes within each EU country.

The European Commission overseas the EU countries to ensure they correctly apply the common rules as set out in the legal instruments. The Commission also ensures that the national legislation which adopts the common rules and the general practice comply with EU Law. The Commission can initiate legal action against any EU country that fails to implement EU law. Such an infringement procedure may culminate with a reference to, and a judgement by, the Court of Justice of the European Union (CJEU). The CJEU can impose financial sanctions. The CJEU’s judgement is final.