EU VAT in the Digital Age ViDA adopted by EC

ViDA – progress needed on Single VAT Registration and Platform Economy reforms for 24 Oct 2023 ECOFIN vote. Significant consensus on more complex Digital Reporting Requirements for 2028 implementation

On 8th December 2022, the European Commission (EC) published its proposed VAT in the Digital Age (ViDA) reforms in three pillars: Single VAT Registration, Digital Reporting Requirements; and Platform Economy. Below is a summary of how these proposed reforms will rollout between 2023 and 2028:

• 2023 – Member states agreement

  • Three-month public consultation by EC lasting until 5 May 2023
  • Review data security issues by EDPS
  • Further public consultation on E-invoicing Directive
  • EU Member states are already opening their own public consultations to gather local views.
  • The EU Parliament and states will review, negotiate and approve at the European Council the proposed changes. It seems there is widespread backing for the reforms as they promise additional tax revenues balanced with flexibility to suit national priorities. Not all of the reforms will need to be adopted in 2023 since they do not come into effect for several years.
  • 24 October 2023 for vote by member states at ECOFIN on proposals
  • However, 2024 is EU Parliament elections year meaning limited political bandwidth for major reform debate. So the 2025 reforms (Single VAT Registration and Platform Economy pillars) will realistically have to be agreed by the Council by end of 2023 to meet the implementation target.

• 2024

  • Member states free to impose national e-invoicing without prior approval of the EC.
  • Issuance of e-invoices will no longer be subject to the agreement of the customer, and therefore businesses must be prepared to accept e-invoices.
  • A revised definition of ‘structured e-invoices‘ is added to the VAT Directive. This will, for example, clarify that PDF’s do not qualify as e-invoices.

• 2025 – Single VAT Registration & Platform Economy pillars

  • The extension of the OSS return to e-commerce and own stock movements across EU borders.
  • Call-off stock withdrawal as traders will be able to use OSS (see above)
  • Marketplaces become deemed suppliers for their EU sellers’ B2C goods sales across EU borders. They already carry this responsibility for non-EU sellers.
  • The IOSS to become mandatory for marketplaces which have facilitated their sellers’ imported goods sales. Deemed supplier marketplaces will therefore no longer be able to use the special arrangements VAT collections option introduced as part of the 2021 e-commerce VAT package.
  • Harmonisation of reverse charge B2B goods when the customer or supplier is non-resident, and change to ‘may’ provision.
  • Accommodation and ride sharing platforms become liable for users’ VAT collections and reporting.

• 2028 – Digital Reporting Requirements pillar

  • Introduction of Digital Reporting Requirements for header-level data of intracommunity supplies within two days of the supply.
  • E-invoices supplant paper invoices for legal purposes except in limited circumstances. Member states have the option to impose e-invoices for domestic transactions but all national regimes must converge with the EU e-invoicing standard, EN 16931.
  • No new pre-clearance e-invoice regimes may be introduced by member states. Those already in place, Italy SdI and Poland’s 2024 planned e-invoicing, may continue until January 2028.
  • Ending of summary invoices
  • Mandatory structured e-invoicing for intra-community supplies of goods based on EN 16931 standard. These will include new data fields (e.g. settlement details)
  • Withdrawal of ESL reporting since supplanted by the new DRR regime, above.

The EC believes these measures will save €1 billion in compliance costs for e-commerce sellers, and curb €11 billion of the €50 billion lost in missing trader (carousel) fraud. Shifting VAT collection obligations to travel and accommodation platforms will raise a further €6.5 billion. There will be significant implementation costs for DDR: businesses €11.3bn and tax authorities €2.2bn.

Benefits include: cutting the latest EU VAT Gap of €93 billion in lost revenues each year by over €4bn;  raise €6bn per year in new revenues from platforms; and save e-commerce sellers €1bn per year on compliance costs.

1  Digital Reporting Requirements – Jan 2028

Under ViDA’s second strand for Digital Reporting Requirements, there will be two paths to tackle VAT fraud and realise the efficiencies of digitalisation of invoicing and reporting. The EC will put in safeguards and incentives to ensure these two paths converge to the single EU Invoicing Standard (EN 16931) as an open, regulated system without full clearance. Business are already spending €1.6bn per annum just complying with the introduced Italian SdI, Spanish SII, Hungarian and other variations.

Firstly, near-real time digital reporting of transaction summary data to be consolidated at the EU level. This double track may result in a major, complex burden for taxpayers, and much scope for diverging standards. But no doubt it is a product of a set of compromises to meet member states’ wishes to retain local control and limit the burden on digital reporting to reflect the differing economic conditions and levels of VAT fraud. Secondly, mandatory intra-community supplies (ICS) – sales across EU state borders – e-invoicing to EN 16931, and e-invoicing will supersede paper-invoices except in limited cases.

This will lead to an estimated €11 billion per annum (€111 billion over ten years) in additional VAT revenues. There should be further gains of €4bn per annum (€41.4 billion over 10 years) in savings for businesses from pre-filled VAT returns, ending recapitulative statements and general e-invoicing savings.

But the estimated costs of implementation will be significant: €11.3bn and €2.2bn for businesses and the tax authorities, respectively.

1. Mandatory B2B Intra-community digital reporting requirement (DRR) near-live transaction reporting replacing EC Sales Lists summaries
   • Intra-community supplies (ISC) and acquisition digital reporting regime will be introduced for all companies, including non-residents, from 2028. This data will be submitted first to the national tax authorities for immediate consolidation in a common EU database with endpoints. However, no reporting technical details for passing transaction data to a central database has yet been confirmed and will remain flexible for member states but comply with Implementation Decision (EU) 2017/1870.
   • A new ‘Central VIES’ central database will be overseen and maintained by the EC, and will include DDR transactions and ID info of taxpayers, including their VAT identification number. It will also have some integration into the Customs Surveillance system and the upcoming Central Electronic System of Payment CESOP information.
   • There will be a header-level transaction reporting schema based on the European standard for e-invoicing (EN 16931) and so following exiting B2G initiatives. For data protection law reasons, not all the invoice information will be reported. And no pre-clearance of invoices, but Continuous Transaction Control CTC
   • However, since tax authorities will be able to cross-check sales and purchase information in the central database to identify fraud, this is not necessary.
   • It will also give transparency for customers to see what intra-EU transactions are being reported against their VAT numbers. This will help prevent them potentially being caught-up in VAT frauds unaware. This may be enabled by a common EC endpoint.
   • Reporting frequency will be within two working days of a chargeable event – so not real-time. The VAT Directive therefore will be amended from the current 45-day limit for invoicing intra-community supplies. Taxpayers may submit the information directly or via 3rd party.
   • It would only apply to B2B transactions – intra-community B2C will be excluded for the time being.
   • Following EN 16931 will help encourage adoption of the standard by all countries for their domestic digital reporting requirements, improving interoperability and reducing costs for taxpayers since it will be a subset of the above e-invoicing requirements.
   • The introduction of the new intra-community reporting regime will enable the withdrawal of EC Sales Lists (ESL), known as recapitulative statements.
2. Mandatory intra-community E-invoicing; domestic transactions left to member states’ local plans
   • All businesses will be obliged to be able to issue and receive e-invoices for ICS’s based on European standard for e-invoicing (EN 16931) for intra-community supplies. This will be a structured e-invoice format (XML; UBL; PDF/A3 etc) and not PDF’s.
   • Further data will be added to existing invoicing information including: IBAN number (or other identifier) of supplier’s account that will receive payment; Payment due date; and if invoice correction.
   • Jan 2024: For domestic transactions, member states will be free to remove the obligation for customers to accept e-invoicing from their suppliers to help adoption of domestic e-invoicing.
   • States will also no longer have to seek EU approval for mandatory domestic e-invoicing as per the current Article 232 of the VAT Directive. This will require a VAT Directive amendment, Article 218, that electronic invoicing will be the default system for the issuance of invoices. The use of paper invoices will only be possible in situations where Member States authorise them. Summary invoices would also be ended.
   • Member states may still adopt their own formats, but will be encouraged to follow or converge towards EN 16931 to help with long-term harmonisation of EU reporting systems. It is therefore not clear yet if or what role there will be for PEPPOL or e-invoicing agents for transmission of e-invoices at the national level. The key requirement is that they are interoperable with the EU plans.
   • Jan 2028: Member states will not allowed to use pre-clearance authorisation (mandatory authorisation or verification) on e-invoices. However, where already implemented, e.g. Italy, this may continue until January 2028.
   • Member states with existing domestic digital transaction reporting regime will have to converge by 1 January 2028.

2  VAT treatment of the platform economy – Jan 2025

• Extension of the deemed supplier VAT obligations to short-term accommodation and transport economies platforms which represent over 70% of the platform economy when excluding goods (so gig & sharing economies).
• This recognises the major market distortions for traditional hotel operators and taxi operators who must charge VAT today, and so ensure a level playing field between traditional and digital channels.
• This will exclude transactions under the special scheme for travel engines (TOMS) which is under a separate modernisation review.
• This will raise an estimated €6bn per annum, or €66bn in VAT for member states between 2023-32.
• Other areas of the gig & sharing economies may be included in the future. These include professional and manual services, ‘click work’, crowdfunding and P2P lending.  But the VAT and difficulties with small entrepreneurs operating in these sectors mean this will happen at a later date.
• This measure is highly complex, and there was heavy reluctance from the digital platforms. They believed their business models, with multiple parties in the supply chain, are too complex for simplistic division of VAT liabilities.  However, some tourist-popular states pushed for the full liability model for platforms. This makes any ratification and implementation timing difficult to predict.
• Alongside the DAC7 marketplace reporting reforms, there will be improved definition and clarifications of the players and roles in the digital marketplace sphere, and standardisation of information requirements.
• In particular, definitions around the taxation of fees charged as there are many inconsistencies between member states leading to double or no taxation. Also clarification that the VAT exemption does not apply to short-term rental as some countries have not correctly applied this.
• These measures will save an estimated €480m per annum.

3  Single VAT Registration (SVR) and extension of marketplace deemed supplier to EU sellers – Jan 2025

• The e-commerce package success of One-Stop-Shop VAT return for distance selling will be extended to movements of own stock by e-commerce sellers prior to B2C e-commerce sale (B2B2C transactions).
• The SVR will enable businesses to charge, report and manage their entire EU VAT through their domestic tax authorities, including eventually the entire audit process.
• The stock movement remains taxable with two transactions – arrival and sale. Both would be reported in the OSS, which would need additional information added to be reported to the member state of indentification (where OSS is registered).
• This will eliminate the need for hundreds of thousands of foreign VAT registrations for e-commerce sellers. The EC estimates that managing each single foreign registration costs €5,000 per annum for businesses. This change in total will cut sellers’ cost by €800m per annum or €8.7bn between 2023-32 estimates the EC.
• Extension of deemed supplier: Where this is facilitated by a marketplace, the VAT on the local domestic sale to the consumer will flip to the marketplace as the deemed supplier. The exception is sales in the country where the seller is resident.
• This is irrespective of where the seller is established, meaning an extension from the 2021 e-commerce package for just non-EU to include EU sellers. This will level the playing field.
• The seller will use OSS to report the zero-rated taxable acquisition to the marketplace. B2B transactions under the scenario would be zero-rated for VAT. The disadvantage of this option is that it would favour sellers using marketplaces and penalise own website sales which would still be responsible for the domestic VAT reporting.

OSS Special scheme for movement of own goods

• Plus, under OSS for other own stock movements there will be a special scheme within OSS. The intra-Community acquisition of goods in the Member State where the goods are dispatched or transported to, is exempt. This must be supported by detailed records. The existing call-off stock provisions of the EU VAT Directive will therefore be withdrawn from 1 January 2025 for new movements as no longer required with OSS. Existing stocks already held in call-off stock will still follow the current rules until 31 December 2025.
• There will be ring fence exceptions with right of deduction e.g. cars; capital goods; and non-saleable company assets.
• The current €10,000 pan-EU distance selling threshold will be limited to where the seller is established. So they may not use it a second+ time if they hold stocks in other member state territories.
• In addition, traditional cross-border services where the seller is not resident will be added to OSS option, which includes: Installation and assemble of goods; goods made on board means of transport; goods supplied at exhibition or trade fairs; goods at weekly markets; and local hire of transport.
• Purely B2B transactions are not included for the time being in this extension because of the complexities of right of VAT deduction and fraud risks. Instead a change to reverse charge for non-established sellersrules to reduce the instances of foreign VAT registrations.

IOSS updates – Jan 2025

• There were three important modifications considered for the Import One-Stop-Shop which was introduced under the 2021 e-Commerce VAT Package:
  • The current €150 consignment threshold for imported B2C sales will NOT be raised in the immediate future. It will likely be postponed until the Customs processes and requirement can be reformed, too.
  • IOSS will be mandated for marketplaces to cut down fraud and errors.
  • As an anti-fraud measure, a link between IOSS numbers and consignment stocks
• Other quick fix improvements to IOSS double taxation issues are included.