The current system is a common system of VAT, whereby each EU country implements a VAT system based on common principles.
However, the Commission said that the current way in which cross border supplies are treated is the "root of cross-border fraud". Cross-border transactions are split into an exempted cross-border supply and a taxable cross-border acquisition.
Under the current system, fraud occurs when a supplier pretends to have transported the goods to another member state but the goods are in fact consumed VAT-free locally or when a client of a cross-border transaction purchases goods or services VAT-free and charges VAT without remitting it to tax authorities. The 'VAT gap', which is the difference between the expected VAT revenue and VAT actually collected in EU countries, was almost €170 billion in 2013, with cross-border fraud estimated to €50 billion a year, the Commission said.
The Commission proposes a single European VAT area which would treat cross-border supplies of goods from one business to another (B2B supplies) in the same way as domestic transactions, with taxation in the country of destination of the goods. It will present its proposals for achieving this in 2017.
It also proposes simplifications to the system so that businesses will only need to register for VAT in one country and so that they will not have to deal with different VAT procedures in each member state.
The Commission also proposes that individual countries be given greater autonomy to set VAT rules under the proposed plan, subject to some safeguards against "complexity and distortion of competition.
Under current rules, EU countries can allocate zero or reduced VAT rates to a pre-defined list of goods and services. The Commission has proposed two options: either this list could be regularly reviewed, keeping the minimum standard rate of 15%, or the list could be abolished.
In response to protests about the imposition of VAT on sanitary products the UK prime minister David Cameron has confirmed that sanitary products will be subject to a zero rate of VAT, if the EU decides to give the freedom to countries to abolish the list of permitted zero or reduced rated goods.
As part of its "digital single market strategy", the Commission said it will propose measures by the end of 2016 to reduce the administrative burden on businesses caused by different VAT regimes. It also proposes to address the fact that e-publications are subject to a higher rate of VAT than physical books.
Pierre Moscovici, commissioner for economic and financial affairs, taxation and customs, said: "VAT is a major source of tax revenue for EU member states. Yet we face a staggering fiscal gap: the VAT revenues collected are €170 billion short of what they should be. This is a huge waste of money that could be invested on growth and jobs. It's time to have this money back. We are also keen to grant member states more autonomy on how to define their VAT reduced rates. Our action plan will deliver on each of these points."