Significant changes coming in the “VAT in the Digital Age” package, including real-time digital reporting
On 8 December 2022, the European Commission released its long-awaited proposals to modernise the VAT rules in the EU, collectively known as the “VAT in the Digital Age” (ViDA) package. Measures in the package, which include a Directive and Implementing Regulations, are designed to make the VAT system more effective for businesses, ensure that member states are able to capture VAT revenue, be more resilient to fraud by embracing digitalisation, address challenges that have arisen in the context of the digital and platform economy and minimise the need for multiple VAT registrations. Among the proposed measures are the introduction of mandatory electronic invoicing, a shift from traditional methods of compliance to real-time sharing of transaction-based data, an extension of the “deemed supplier” rule and single VAT registration. The proposals are extensive and will give rise to considerable administrative obligations for businesses.
The ViDA proposals will now be discussed by the EU member states and ultimately will require their unanimous approval to become law. If approved, the measures will apply as from 2025 or 2028.
The ViDA consists of three key pillars:
- Real-time digital reporting system based on e-invoicing;
- Updated rules for the platform economy; and
- Single VAT registration for businesses selling to consumers in the EU.
Digital reporting and e-invoicing
To address the concerns and repercussions of missing trader VAT fraud and to close the “VAT gap” (i.e., which refers to lost or unreported VAT revenue), mandatory electronic invoicing and real-time digital reporting will be introduced with effect from 1 January 2028. The main features of the proposals are:
- A real-time standardised digital reporting requirement (DRR) for intra-Community B2B supplies will be introduced, which will provide member states with critical information on transactions needed to tackle VAT fraud.
- Electronic invoices will be the mandatory default system for all B2B intra-Community supplies (see below for paper invoices).
- Invoices for intra-Community B2B supplies or supplies to which the reverse charge rule applies (including the extended reverse charge rule, see below) will have to be issued within two business days after a taxable supply takes place, with information on the transaction reported to the relevant tax authorities. Additional data will have to be included in the invoice (e.g., bank account to which payment will be credited, relevant dates, payment amounts, etc.) to ensure that the tax authorities have access to all necessary information.
- A new DRR system (a new central VIES system) for intra-Community B2B transactions will be set up to provide information on a transaction-by-transaction-basis. This information will feed into the risk analysis systems of the member states to help them counter VAT fraud. The information for the digital reporting system will have to be transmitted by taxable persons within two business days after the issuance of the invoice to their domestic tax authorities. If the data is not transmitted or does not contain the correct information, the exemption with credit/zero-rating for intra-Community supplies will not be able to be applied.
- The information collected by member states must be transmitted within one day after the collection to the central VIES system and will remain available in the system for five years.
- Other features/points to note:
- Member states will not be allowed to impose any additional reporting obligations on transactions that are covered by the DRR. In cases where the reverse charge rule applies, a tax representative appointed as the one liable for payment of VAT and in case of intra-Community acquisitions, the person liable for these transactions (e.g. the tax representative), will have to submit the data.
- It will no longer be possible to issue summary invoices.
- The requirement to submit recapitulative statements will be abolished, since the DRR for intra-Community transactions will cover the same transactions/data, but quicker.
- Member states will be permitted to introduce or maintain a DRR system for other transactions (e.g., domestic supplies) in line with the proposed harmonised reporting system used for intra-Community B2B supplies outlined above.
- Paper invoices will be allowed only where member states authorise their use. However, paper invoices will not be used for intra-Community B2B supplies within scope of the DRR system. The authorisation for a recipient to issue an electronic invoice will be removed from the VAT directive (the latter change will apply as from 1 January 2024).
- Taxable persons will be allowed to issue e-invoices according to the European Standard (the standard adopted by the Commission’s Implementing Regulation 2017/1870), which will apply as from 1 January 2024.
- EU member states will be allowed to require businesses to issue electronic invoices starting from 1 January 2024 provided the format of the invoice is in compliance with EU standards. No advance validation or acceptance of invoices will be required. Member states (e.g., Italy) that already operate an e-invoicing regime may continue the regime until 1 January 2028, but they must align their systems to the new rules as from that date.
Unless otherwise indicated, the above rules are proposed to apply as from 1 January 2028.
The Commission has made a choice for e-invoicing and near real-time reporting of intra-Community B2B supplies, while harmonising the rules for member states that want to apply a similar system for domestic supplies. While harmonisation is to be welcomed because of the current fragmentation of rules, the reporting requirements will place an additional burden on businesses and it is questionable whether businesses will be able to issue invoices within two business days. In our view, the Commission will have a difficult time obtaining unanimity for this proposal, as it will have to convince both member states that already have a DRR system in place and those that do not yet have such a system (and may not want one) to accept the harmonised system.
The main features of the proposals relating to the platform economy are as follows:
- The “deemed supplier” rule, which has applied to digital platforms and marketplaces selling goods since 1 July 2021, will be extended to apply to platform operators in the short-term accommodation rental and passenger transport sectors in situations where the underlying supplier does not charge VAT (e.g., because the supplier is a nontaxable person or it uses the exemption for small businesses). The proposed rules aim to level the playing field between platforms offering services and other traditional suppliers that are taxable persons and platforms and nontaxable suppliers. Under the proposals, platform operators in the short-term accommodation rental and passenger transport sectors will be required to charge and account for VAT on transactions where the underlying supplier does not charge VAT. The platform operator will be deemed to make the supplies to customers and to receive the supplies from the supplier.
- The underlying supplier’s supply to the platform will be regarded as an exempt supply without a right to deduct VAT.
- The supply by a platform for which it is a deemed supplier will be taxed and will not affect the platform’s right to a VAT deduction.
- Other features:
- A record-keeping obligation will apply where the platform is not a deemed supplier for short-term accommodation rental or passenger transport services. Records will have to be retained for 10 years regardless of whether the platform is a deemed supplier.
- Facilitation services provided by a platform to a supplier operating on the platform will be regarded as an intermediary service if the recipient of the supply is a nontaxable person.
- A short-term accommodation rental will be regarded as taxable if it is rented out for a maximum of 45 days with or without the provision of ancillary services. Such a rental will be regarded as having a function similar to the hotel sector.
- For supplies falling outside the deemed supplier model, the platform will need to keep records for both B2B and B2C supplies.
These rules are proposed to be applicable as from 1 January 2025.
The “deeming” provisions were expected to be extended to cover transactions in the sharing economy, but the Commission decided to limit them to the short-term accommodation rental and passenger transport sectors. However, if the deeming provision is successful, it likely will eventually be extended to other sectors.
VAT taxation without the underlying supplier being entitled to a deduction would seem to violate the neutrality principle, but as the proposed rules effectively allow an opt-out for taxpayers by applying for a VAT identification number and waiving the small business exemption, this should be acceptable. We expect the Commission will have less difficulty convincing EU member states to agree to these proposals as member states will receive more revenue under the measures.
Single VAT registration
The VAT rules relating to e-commerce that came into effect on 1 July 2021 (for prior coverage, see the article in the June 2021 issue of Indirect Tax News) have alleviated the registration burden for businesses carrying out transactions in member states in which they are not established and created other efficiencies and modernisations to the VAT system. One such efficiency was the expansion of the scope of the One-Stop Shop (OSS) to cover all cross-border supplies of services to private consumers in the EU, as well as all intra-Community distance sales of goods. Under the OSS, businesses can maintain a single VAT registration rather than having to register in each member state in which they make supplies. However, supplies that do not fall within the scope of the 2021 e-commerce package still give rise to VAT compliance burdens and costs that create barriers within the single market.
The proposed directive contains the following measures to address these issues:
- A mandatory reverse charge will apply to all intra-Community B2B supplies of goods and services where the supplier is not established in the member state in which the VAT is due but the purchaser/recipient is VAT-registered in that member state. The reverse charge will not apply where goods are supplied under a margin scheme.
- The OSS scheme for e-commerce will be further expanded to cover B2C supplies of goods, including domestic supplies, installation or assembly supplies, supplies of goods on ships, aircraft or trains, and supplies of gas, electricity, heating and cooling. This will allow businesses to avoid multiple VAT registrations in each member state in which the supplies are made.
- Platforms will be the deemed supplier for all supplies of goods within the EU that are facilitated by the platform, that is, platforms will be presumed to have received and supplied the goods. The extension includes B2C supplies of goods within the EU by EU businesses operating on the platform, as well as B2B supplies. Platforms that are established in one EU member state and only facilitate domestic supplies in that member state will not fall within the scope of the deeming provision.
- Platforms will become the deemed supplier for transfers of own goods by sellers if they facilitate the transfer of those goods and the goods are not capital goods or goods in relation to which there is not a full entitlement to a VAT deduction.
- In all cases where the platform is a deemed supplier, records will have to be maintained about the suppliers whose sales the platform has facilitated. This includes the name, postal address and electronic address or website of the supplier, its VAT ID or tax ID number and bank account. The idea underlying this recordkeeping requirement seems to be the reconciliation of the information with CESOP (the Central Electronic System of Payment Information, an EU database for payment information provided by payment service providers) (see the Netherlands article and the Slovak Republic article in this issue.
- Use of the I-OSS will be mandatory for platforms, with the EUR 150 threshold maintained for now.
- The transfer of own goods for which a platform is not the deemed supplier will be reported under a new special optional OSS scheme for the transfer of own goods. Capital goods and goods for which there is not a full entitlement to VAT deduction, however, will not be able to be reported under the special scheme. If the special scheme is used, the intra-Community acquisition of such goods will be exempt with credit/zero-rated in the member state to which the goods are dispatched or transported. A five-year record-keeping provision will apply. Call-off stock arrangements that were introduced in 2020 will be abolished. EU member states will not be allowed to use such arrangements after 31 December 2024, but goods can continue to be supplied under the regime through 31 December 2025.
- Second-hand goods supplied under the margin schemes, works of arts, collector’s items and antiques will be subject to the distance selling rules making them subject to VAT in the member state of arrival of the goods. If works of art or antiques are not transported or dispatched or the transport starts and ends in the same member state, the supply will be subject to VAT where the customer is established, has its permanent address or usually resides.
The rules are proposed to be applicable as from 1 January 2025.
Extension of the reverse charge and the OSS will be welcomed by businesses that can avoid multiple VAT registrations, as well as the related administrative and cost burdens. It should be noted that supplies covered by the new reverse charge rule will also be covered by the DRR as from 1 January 2028. The extension of the deeming provision for platforms comes as a surprise and we have doubts about the proportionality of such a measure, in particular as regards B2B supplies and smaller platforms. The success of the e-commerce changes in 2021 seems to be the reason for this extension. It is unfortunate that transfers of own goods will still have to be declared, but the OSS does make this process easier. Businesses will need to comply with the rules to avoid penalties or exclusion from the scheme.
The proposed rules are extensive and complex and will take some time to fully digest. As noted above, the proposals must be unanimously approved by all EU member states (which will be challenging) to become effective, which means they will be subject to robust debate during 2023 and possibly further revised. However, affected businesses should begin to familiarise themselves with the measures to enable them to assess the likely impact on their business. In particular, on the digital reporting and e-invoicing side, the new requirements will place an additional burden on businesses, which should review the extent to which existing systems will be able to cope with the new e-invoicing (both issuing and receiving e-invoices) and DRR under the proposals.