EU enlargement - are you ready?

• Author: James, Stephen

On May 1, 2004, the European Union (EU) will admit an additional 10 countries to its existing 15. The addition of Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia will bring 75 million new consumers to the EU, resulting in a total consumer base of approximately 450 million. Although the EU has grown since its inception in 1957, it has never seen an expansion as large as the one taking place next year.

Members of the EU enjoy the benefit of trading in a harmonized single market free of most trade barriers. As a consequence, upon inclusion into the EU, each accession country's borders will essentially disappear effective May 1, 2004. This removal of trade barriers between accession countries and existing EU members will require business to evaluate the effect this will inevitably have on existing and future cross-border trade. They will be required to navigate new compliance regulations and critically evaluate the effect of new tax rules on their business. The effects of the enlargement of the EU will be felt by all business that are trading within, purchasing from, or selling to the new accession countries. Consequently, these businesses will need to assess the effect of the EU enlargement on their particular activities.

Of particular significance is the requirement that each of the 10 new countries bring their local legislation in line with EU law, including legislation specifically focused on taxation. Adopting EU laws will pose challenges and create opportunities in these countries. The accession countries are in varying states of readiness. Some have already drafted local laws to implement EU rules, but many have yet to do so.

The major issues facing EU accession target changes to the Value Added Tax (VAT) systems, Customs regimes, and income taxes. The effects of EU expansion do, however, extend beyond tax to all areas of trade. This article highlights the key issues for businesses to address as they prepare themselves for the transition, with the primary focus on VAT.

While significant challenges undoubtedly confront companies that currently do business in the accession countries, the benefits of EU membership and the opportunities it may bring could ultimately outweigh the initial difficulties that will inevitably arise in the newly enlarged single market.

Value Added Tax

Existing local VAT laws in the accession states will be replaced by the rules outlined in the EC Sixth VAT Directive, the body of laws that govern VAT within the EU. Most of the accession countries already have a VAT regime in place, but these systems are generally less complex than the regime they will be required to operate. Local rules will require significant modification in order to bring them in line with the more sophisticated tax concepts mandated as a consequence of EU membership.

The accession countries will be required to adopt new VAT rules that specify who is responsible for collecting and remitting tax due on transactions and the jurisdiction where the tax is deemed to apply. There will be changes from the current regimes. For example, some transactions that are currently treated as goods will likely become services, and vice versa. Businesses providing or receiving goods or services to or from the accession countries should reexamine the...