In December last year, the European Commission unveiled one of the biggest VAT reform proposals of the 21st Century. Called ‘VAT in the Digital Age’ (ViDA), the three-part proposal intends to not only take a hardened stance on VAT fraud, but also improve VAT efficiency through real-time reporting and e-invoicing. Add to this a significant extension of platform VAT liabilities and a reduced admin burden through single VAT registration, and ViDA could result in major modernisation. The current VAT system is already several decades old, and despite some recent upgrades, it has not kept pace with technological developments, the digital economy or the evolution of business models.
In addition, EU trade has a major VAT gap problem, with 2020’s figures showing that the VAT gap stands at €93 billion (approximately $100 billion). Taking advantage of new technology, the proposal intends to allow member states to recoup €11 billion more every year, allowing them to be more resilient in times of economic uncertainty.
To get a better understanding of the proposal and the impact it will have on EU trade, we explore the three pillars of the EU’s new grand plan (VAT reporting obligations and e-invoicing, VAT treatment of the platform economy, and single EU VAT registration) and whether the proposal will be as revolutionary as we’re told it will be.
VAT reporting obligations and e-invoicing
The ViDA proposal aims to modernise the way VAT is collected in the EU by introducing mandatory e-invoicing for some transactions and making it optional for others. This system would require businesses, both vendors and recipients, to submit their VAT invoice data electronically to the tax authorities of the member state where that business is established or VAT registered. This would be based on e-invoicing in compliance with the EU regulation on electronic invoicing in public procurement (2014/55/EU).
On the plus side, proponents argue that e-invoicing will improve the accuracy and efficiency of VAT collection, reduce compliance costs for businesses, and combat fraud. The use of e-invoicing would eliminate the need for businesses to process invoices manually, which would reduce the associated costs of compliance and the risk of errors. Additionally, e-invoicing would make it easier and quicker for tax authorities to match invoices with VAT returns, reducing the risk of tax evasion or fraud.
On the flip side, opponents argue that mandatory e-invoicing would impose a significant burden on small and medium-sized enterprises, who may not have the resources or technical capabilities to comply with the new requirements. In addition, there are concerns that mandatory e-invoicing could increase the administrative burden on tax authorities, as they would need to invest in new systems and infrastructure to process and store the increased volume of electronic invoice data. Critically, you could question if mandatory e-invoicing reduces the current VAT gap, if the mandate only applies to cross-border transactions that are typically not taxed for VAT.
Ultimately, a comprehensive analysis of the costs and benefits of mandatory e-invoicing will be necessary to determine whether it is the most appropriate solution for closing the EU VAT gap. A more fundamental change of the VAT system might be worthwhile, for example considering current technologies that could facilitate a split-payment system at the consumption stage of the supply chain.
VAT treatment of the platform economy
If ViDA does become a reality for businesses operating cross-border within the EU, what potential benefits does this proposal bring to their growth ambitions, especially for SMEs and start-ups within the platform economy? And what technical financial infrastructure do they need to embrace ahead of the proposal’s implementation?
In essence, ViDA intends to challenge the status quo for how businesses operating within the platform economy calculate and process their VAT obligations. Currently, businesses wanting to take advantage of the single market must navigate a tax minefield with up to 27 different national VAT systems, each with their own reporting obligations.
For those operating within the platform economy, particularly those in the transport and accommodation sectors, if they are a private individual or small business they can provide VAT-free services via a platform such as Airbnb or Enterprise Rent-A-Car. Due to the economies of scale, these businesses can fall into direct competition with traditional VAT-registered suppliers such as hotels and passenger transport companies. The impact of this is that the current VAT legal framework potentially distorts a level playing field.
What the proposal intends to do is to introduce a deemed supplier model which will address these issues. Under the current rules, it is the underlying provider of services (for example, the person who is renting out an apartment) who is obliged to collect and remit the correct VAT (if any) to tax authorities. The issue this presents is that many underlying suppliers could be unaware they are liable for VAT on the services they offer and can face extreme difficulty navigating the complexity of the VAT system.
The proposal hopes to ensure that treatment between the digital and traditional sectors of short-term accommodation rental and passenger transport is equal by making the platforms account for VAT. This would ensure that there is an equal economic ecosystem established with the local hotel and passenger transport sector.
Single EU VAT registration
The final chapter of the three-tier ViDA proposal is aimed at reducing the VAT compliance burden for businesses in the EU. As of January 1 2025, several changes to e-commerce rules and a single VAT registration will be put into effect.
The existing Union One Stop Shop (OSS) scheme for B2C intra-EU supplies of goods and services will be extended to include B2C domestic supplies of goods in an EU member state where the supplier does not have a VAT identification number.
Additionally, a new OSS scheme will be introduced for intra-EU movements of own stock and the Import One Stop Shop (IOSS) scheme, for the importation of low-value consignments into the EU, which will be mandatory for marketplace operators.
The existing exemption for call-off stock arrangements will end, as it will no longer be necessary once intra-EU movements of own stock can be reported in the new OSS scheme. This exemption will end on December 31 2025, providing a 12-month period for finalising call-off stock arrangements that were in effect by December 31 2024. A domestic reverse-charge mechanism will also be introduced for B2B supplies of goods and services where the supplier is not established in the country where VAT applies, and the customer does have a VAT identification number in that country.
The existing deemed supplier rule for marketplaces facilitating B2C supplies of goods will be extended, so that all suppliers of goods (B2C and B2B) within the EU, facilitated by marketplaces, will be caught by the extended deemed supplier rule. This includes intra-EU movements of own stock facilitated by marketplaces.
Digital transformation today, not tomorrow
It must be stressed that ViDA is essentially a proposed revision to the EU VAT Directive. However, if implemented correctly, ViDA has the potential to streamline e-commerce transactions for businesses big and small across the EU. Although the European Commission is optimistic that a final agreement can be reached, the question of if and when ViDA will become a reality remains to be seen, as complete unanimity from member states is required for the proposal to become law. Universal political agreement is incredibly challenging, especially for those within the bloc who have already invested significant time and money into their tax infrastructure. This could create a stumbling block as it is unclear if they want to return to the drawing board to adopt the proposal’s infrastructure.
But, to comply with the suggested new rules, platform businesses will need to invest in new technologies to optimise their financial processes. From VAT compliance software that can calculate VAT for multiple EU jurisdictions, to systems which accurately identify the location of customers to charge the appropriate VAT rate, or systems that can report VAT-relevant information in real-time, investing in the right and appropriate tax technology is essential. If they don’t, businesses run the risk of non-compliance, resulting in hefty fines, audit failures and reputational damage: a recipe for disaster for their growth ambitions.
For businesses, it is crucial to monitor the developments around this legislative proposal closely. If the proposed rules do take effect in two years’ time, this gives a very short window for businesses to adjust their digital transformation strategies to comply with these legislative changes. The digital transformation of financial systems needs to be at the top of business leaders’ agendas to avoid complications if VAT in the digital age becomes a reality.
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