ViDA search for compromise on 3 pillars; focus on Pillar 1 e-invoicing blockers
Following the missed 2023 political agreement on the EU’s VAT in the Digital Age (ViDA) reforms, Finance Minister’s working group on indirect tax has met twice this year to resolve technical outstanding issues. It has already met twice this year, and next meets on 8 March with a focus on Pillar 1, Digital Reporting Requirements (e-invoicing).
The aim is for political agreement on 14th May at the monthly ECOFIN meeting. New implementation timetable likely to be 2025-2030. BUT… there remains the question of whether the complex Pillar 1, e-invoicing & digital reporting, be separated to enable progression in 2025 of the other pillars (2. Platform Economy and 3. Single VAT Registration). Latest issues include:
- Pillar 1: Pre-validation requirement for e-invoices near agreement; may remove requirement for recipients of e-invoices to report; limited format summary invoices will be permitted; compromise expected on proposed disclosure of IBAN payment details; proposal for optional system for domestic transaction digital reporting.
- Pillar 2: Still no agreement on new accommodation & ride sharing deemed supplier obligations
- Pillar 3: Reassign mandating IOSS proposal to 2028 EU Custom Reform proposals; and Full deemed supplier for marketplaces of EU sellers’ transaction may be back in reinstated into proposals;
Potential revised launch for 3 pillar ViDA reforms
- Pillar 1, Digital Reporting Requirements & e-invoicing, delayed from 2028 to 2030 or even 2032. This pillar requires more technical discussions and agreements. It introduces mandatory structured VAT e-invoicing for suppliers and digital reporting of intra-community B2B transactions by suppliers and customers. Major outstanding issues include:
- Pre-clearance, or at least some basic validations of e-invoice data, will be introduced in the eventual pan-EU scheme. The original ViDA proposal has planned to have no government checks.
- Delaying the ending the requirement for EC approval on e-invoicing until full DRR measures come into effect;
- IBAN numbers to be excluded on intra-community Digital Reporting;
- Lengthen the proposed 2-day digital reporting and e-invoicing deadline for intra-community transactions. Something closer to 10 days is likely.
- Withdrawal of EC’s proposal to prohibit summary invoices;
- Following the planned French e-invoicing, allow ‘certified private platforms’ model for member states to choose. So moving from central reporting to a distributed ‘Y-model’. Also, perhaps the option of certified software to issue approved e-invoices – following the Denmark plan.
- Providing sufficient notice and regulatory details for member states to plan development of IT; and
- Data security and integrity.
- Pillar 2, Platform Economy deemed supplier, still needs high-level agreement. Most of the member states are in agreement, but a few still pushing for optional deemed supplier. Likely delayed for one year until 2026. This pillar shifts VAT collections (deemed supplier) to home and ride sharing platforms and intermediaries. Other discussion points:
- Exemptions for smaller businesses from the digital platform deemed supplier obligations
- Shortening the proposed 45-days rental threshold for the new deemed supplier obligations to 31 days
- Pillar 3, Single VAT Registration, is largely agreed. Again, possible delay from 2025 to 2026. This pillar covers an extension of OSS single VAT return for e-commerce and certain B2B goods movements cross-border movements; and harmonisation of non-resident VAT reverse charge rules. However, the following provisions have been dropped:
- extension of deemed supplier for marketplaces on EU seller trade;
- mandatory IOSS for all consignment imports postponed till 2028 EU Customs Reforms; and
- works of art and second-hand goods.
The EU Parliament’s ECON had voted on 23 October 2023 for a one-year delay to all 3 ViDA pillars. However, this is non-binding but certainly reflects concerns that businesses and tax authorities will not be ready by 2025 for pillars 2 and 3.
16 June: EU Finance Ministers broadly agree with ViDA proposals at ECOFIN
But requests for delays on e-invoicing timetable and more consideration on platform reforms. Questions were also raised on costs of significant IT investment
EU Finance Ministers today provided the European Commission’s proposed VAT in the Digital Age reforms. At the monthly Economic and Financial Affairs Council (ECOFIN) meeting in Luxembourg, the following points were made:
- Digital Reporting Requirements: Broad agreement to harmonise intra-community supplies digital reporting based on structured e-invoicing. However, several concerns:
- A number of states believe that there should be more flexibility for member states on domestic reporting, and limit the convergence of existing or proposed mandatory e-invoicing. Countries like Italy, Poland, Czech Republic, The Netherlands, Estonia and Lithuania felt countries should be able to set their own standards to reflect costs and existing plans. There remains some disagreement over pre-clearance e-invoicing, or at least some basic validation checks.
- Many countries were concerned on the 2028 launch date, including Luxembourg. The costs and development for tax payers and authorities could make this impractical.
- Platform Economy: Most countries supported the proposal to introduce a deemed supplier model to ride and accommodation sharing platforms. However, there are worries on distortion of competition and neutrality – particularly from France and Ireland. Several countries, including Denmark, asked for more marketplace reporting to be considered.
- Extension of OSS:There was near unanimous agreement on this pilar to the one-stop shop VAT return extension and the reverse charge mechanism harmonisation. Some member states, such as Italy and Hungary, commented on the tight deadline of 2025.
Some states have requested 1-year delay on 2028 e-invoicing harmonisation.
ViDA positive feedback from tax payers and EU states; but concerns on ‘very ambitious’ timetable & details
EU member states, parliaments, businesses and sector associations have reviewed the 3-pillar reform in a recently completed public consultation. A number of tax authorities are concerned about meeting the deadlines for IT changes and upgrades as detailed final requirements are not yet available. Typically, at least 18 months’ impelentation preparation is required from agreement (transposition of the VAT Directive changes – which won’t happen until at least the end of 2023). This indicates that some of the timetable will have to moved back – particularly for DRR which is seen as the most impactful pillar of ViDA in terms of number of businesses affected.
- 2025 Single VAT Registration and the OSS extension:
- Many taxpayers and countries are challenging the exclusion of capital goods.
- Some states are questioning the potential disproportionate ‘deemed supplier’ extension on e-commerce platforms for EU-resident sellers goods sales. It is not clear the level of fraud in this area and if this is penalising the platforms with the burden of collecting their sellers’ VAT.
- Like all of the proposed pillars, more work is needed on definitions, for example the position of auction platforms.
- The continuing prohibition of deducting input VAT via the OSS is raised by businesses – although it is well known that member states are against this. Businesses are concerned of the resulting rise in the number of VAT reclaims that will need to be posted if the right to locally VAT register is lost – are the member states’ IT systems robust enough to cope?
- Several business groups request a plan to integrate Intrastat into the OSS regime – challenging – and see DRR below.
- Changing Article 194 reverse charge from current option of member states to impose (‘may’) to an option (‘shall allow’) of the non-resident business to use (or VAT register) is positively received. Although will be complex for businesses to track and correctly report on invoices to avoid costly fines.
- 2025 Platform economy:
- Possibly the pillar facing the widest divergence of opinions with complex business models and the EC’s approach to attempt to tax some but not all of the gig & sharing economy.
- Is it disproportionate to switch VAT obligations to platforms given DAC7 reporting?
- There is a need to narrow the definition of intermediary and ‘platform facilitating’ to prevent many other activities being drawn in. This latter requirement may yet derail the reforms according to some parties given the dynamism of the evolving business models and the risk of creating IT barriers to entry for new platforms
- Lessons should be learned from existing gig & sharing platform deemed supplier implementations, including: Canada; India; the UK; Argentina (New Zealand 2024).
- Selecting only two types of supply, accommodation and ride sharing, may be impractical to implement as many business models include blends of several services and whether the platform knows the taxable status of the underlying supplier.
- Risks over double taxation of platform deemed supplier services and intermediary services.
- A limited number of respondents questioned why a 45-day limit on accommodation rental to determine the threshold for deemed supplier. Perhaps a 30 or even 15-day rental period to be comparable with a hotel rental.
- The proposed requirement for platforms to charge VAT if their underlying supplier does not provide a VAT number is challenged. This would raise questions about the communication of this and likely errors.
- Several businesses question the inclusion of sales of second-hand goods currently taxed on the margin scheme.
- 2024-28 Digital Reporting Requirements:
- Whilst supportive of the DRR objectives – efficiency and anti-fraud – of the package, many parties are concerned about the short timetables and associated costs. Particularly for the smallest of enterprises and how it may discourage intra-community trade.
- There were some calls for a phased implementation of e-invoicing and digital reporting, see France’s 2-year plan, for enterprise, medium and then small businesses.
- The 2024 proposed withdrawal of the requirement for member states to seek EC approval to introduce e-invoice regimes is well received. However, the are many concerns that such as early move – ahead of the 2028 harmonisation changes (see below) – would open-up a period of legislative uncertainty and rush by some to implement costly unharmonised regimes.
- 3.1 e-Invoicing
- The requirement for all businesses to be able to accept their suppliers’ e-invoices (removal of Article 232) for domestic transactions from January 2024. This is an extremely short notice period, and will heavily favour larger businesses with the resources to adapt. When linked to the Jan 2024 proposed removal of EC permission for member states to request approval to mandate e-invoices, this could create a barrage of new and unharmonised reporting requirements for unprepared businesses of all sizes. There are several requests to delay the change to at least January 2025.
- Is the proposed structured e-invoice CEN standard EN 16931 scope and definition wide enough as a satisfactory format B2B invoices. It will need extensive modifications and extensions to cover the wide range of B2B business models as the standard was developed for B2G.
- Some taxpayers have questioned the prohibiting of PDF digital signature invoices since they have proved effect in the same objectives as structured e-invoices. Others say the popular existing EDI standards (e.g. the UN’s EANCOM and SAP IDoc) not being allowed would create major costs for small businesses.
- Taxpayers welcome the EC prohibiting Italian or (proposed) Polish e-invoice pre-clearance requirements. However, they feel some basic validation checks on e-invoices would be welcome to avoid disputes and delays on the exchange of e-invoices between parties. Some suggested a registering and validation in the member state of issuance. This must however be carefully defined to ensure harmonisation and help businesses plan around their ERP’s and natural systems. This would include definitions around ‘substantive’ and ‘formal’ data controls
- Inclusion on e-invoices of IBAN payment details will be problematic as data often not available or a single bank account number. It may also be questionable if payment information is required to identify VAT fraud – the main objective of the obligation. And why is the payment date required?
- 3.2 Digital reporting
- Widespread concern for the 2-day reporting timetable for digital reporting of Intra-Community Supplies from 2028. Most contributors repeated that this is unrealistic for supplies received. Many point out that this would be shorter than natural systems (EPR’s and Accounts Payable routines) work and would undermine businesses’ controls over purchasing and cash flows. In addition, the deadline should start from booking into ledger, and not receipt. It is highly likely that the EC will have to amend this proposal – two weeks at least seems the popular request.
- More clarifications and justifications are required for which transactions are within digital reporting:
- Only intra-EU goods and services?
- Position of distance sales? Most B2C cross-border transactions do not require invoices or e-invoices – what would be the digital reporting process
- Why is it necessary to include the domestic reverse charge transactions?
- Position of cross-border transactions performed by parties resident in the same territory. Would the transaction be reporting in new digital reporting AND domestic reporting?
- What is the position of non-EU providers of services? Are the completely exempted from DRR – its seems unclear given the place of supply
- Ending summary invoices, a very common simplification for process for millions of invoices. Whilst recognising the need for transactional-level DRR reporting, many taxpayers pointed out that this removal will create huge increase in reporting obligations and costs, plus exposing them to multiple errors.
- A clash on the 2028 DRR implementation with SAP’s replacement of its widely used ECC system for S4/HANA – affecting thousands of taxpayers.
- Submissions mentioned more thought is needed on contested invoices – where the supplier and customer disagree – and VAT return reporting implications.
- Some feedback suggested in the interests of data security and confidentiality, a more basic set of data could be adopted for DRR to easily identify missing trader fraud:
- data on invoice number;
- each parties’ VAT numbers;
- reason for tax exemption; and
- total amount.
- Multiple requests to limit the ability of domestic tax authorities to introduce divergent e-invoicing and digital reporting regimes, and so promote reuse of technologies and reporting processes.
- Related to the above point, several taxpayers suggested imposing the same ICS digital reporting to domestic regimes to ensure full harmonisation and consistent approach.
- To help accelerate adoption of DRR, tax authorities could consider incentives for taxpayers:
- Faster credit repayments
- VAT bad debt relief
- Direct Tax accelerated write-offs on associated investment
VAT in the Digital Age original timetable
2023 – Member states agreement
- Three-month public consultation by EC lasting until 5 May 2023 (see above)
- 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.
- EC’s ‘VAT Expert Group’ meets early October and may discuss any modifications from the above consultations
- 8 December 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 – taxpayers must be able to accept suppliers’ ICS e-invoices (now delayed)
- Quick fixes to existing e-commerce VAT rules and processes
- 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.