VAT in the Digital Age

Written by Per Gustafsson | Sep 29, 2024 4:46:25 PM

The EU's VAT directive will be upgraded and adapted to today's digital age. Member states have approved the proposal to make e-invoicing mandatory for all cross-border trade within the EU. The reform will begin in 2030 and is expected to be completed within a five-year period.
The European Commission has proposed to introduce digital reporting requirements for cross-border transactions within the EU in December 2022. The basis for the reporting system will be an e-invoice with an EU-wide standard. The recommendation is that the same type of reporting obligation is also introduced nationally.

The proposal, known as ViDA (VAT In The Digital Age), has been discussed extensively in the EU and revised several times through various compromises. Two thirds of the reform has been approved. Approval of the final part could come late in the fall of 2024.
During the EU's rotating presidencies, the original content has been continuously tweaked. In the fall of 2023, when Spain held the presidency, so many objections were met that for a while it looked hopeful. For example, the possibility of collective invoicing was retained and the reporting deadline was extended from two to ten working days.

But despite all the changes, there was no unanimous agreement on the proposal.
At the end of 2024, Belgium took over the presidency. Despite their best efforts, the Belgians did not make much progress during their six months at the helm. On two main areas, simple VAT registration and digital reporting requirements and e-invoicing, agreement was reached in May, but on the third leg of the package, which concerns the platform economy, Estonia has opposed the current wording. Estonia resents the mandatory requirement for platforms to account for VAT to third parties. Despite the opposition being met with a compromise to exempt small and medium-sized enterprises, the Baltic Member State has stuck to its 'no' vote, using its veto power at three ECOFIN meetings in close succession.
ECOFIN meetings are the meeting place for EU finance ministers. Under the current Hungarian presidency, the next ECOFIN meeting is scheduled for either October or November 2024.

This is the purpose of VAT In Digital Age

An EU directive on a common system of value added tax (VAT) has been in place since 2006, but as the years have passed and digital developments have progressed, its content has become outdated and partially out of date to be applied to current conditions.
For this reason, the European Commission has taken the initiative to modernize the current VAT rules, taking into account the benefits offered by digital technologies. The upgrade has been preceded by preparatory work that took almost two years to complete.
The final proposals were presented on December 8, 2022 and have been packaged under the title VAT in the Digital Age (ViDA). In essence, the intention is to create a simple and fair taxation and to leverage the digital solutions available to fight tax fraud, reduce the VAT gap in the EU and adapt cross-border trade to today's data-dominated society.

Three main areas

The objectives of the proposed changes are essentially three:

Modernize and digitalize VAT reporting
The VAT reporting obligation will be modernized by introducing digital reporting for cross-border transactions between EU Member States. In the ViDA report, the renewal of VAT reporting is referred to asDigital Reporting Requirements (DRR). Reporting will be based on mandatory e-invoices. In other words, the information that taxable persons must provide on each transaction to the tax administration is standardized in an electronic format. Within two days of the invoice being issued, the transaction must be reported to the tax authority through a system to be provided by Member States. The tax administration must then transmit the information within one day to a central unit, the VAT Information Exchange System (VIES), for which the Commission is responsible.
Updating the VAT rules for the platform economy
The Commission argues that the so-called platform economy - and specifically short-term rental of accommodation and passenger transport provided on websites and apps - is unduly favored because they are interfaces that, under the current VAT system, allow individuals and businesses to sell services without VAT. To ensure equal treatment of the platform economy and the traditional economy, the Commission considers that the VAT rules need to be clarified. The proposal is to make the provider of the electronic platform responsible for collecting and paying VAT when the seller does not do so on the grounds that he is a private individual or that his annual turnover is so small that he is exempt.

Introduce a single point of registration for VAT
The need for multiple VAT registrations within the EU should be avoided. Instead, it is a matter of improving and equipping the existing model - the VAT One Stop Shop (OSS) - with a single point of contact. The solution, according to the Commission, is to extend the possibility to account for VAT in another EU country through declarations submitted electronically via the company's country of establishment. In this context, it is proposed that B2B customers should be able to use reverse charge in cases where sales are made to a member state where the supplier is not established.

Abolition of the collective invoice

If the proposed digital reporting requirement is introduced , the collective invoice will be completely abolished for both EU and national trade. An important goal in the change process is that the system used remains fast and uncomplicated. In a collective invoice, the supplier is allowed to collect many items sold over a long period of time in a single invoice. This creates an inertia in payment. An easy-to-understand example, taken from the everyday life of many, is the parking companies and the apps used to register a parking time. If the amount for the current parking is deemed too small, it is deferred and combined with the next charge.
The consequence of real-time reporting is that collective invoices will no longer be possible. The Commission's extensive documentation describes this point in the following formal wording: "In order to ensure that taxable persons will not be dependent on the consent of the recipient to issue an electronic invoice, Article 232 of the VAT Directive is deleted."

Further reading:
GENA fears ViDA is losing its purpose
Authorities want to see mandatory e-invoicing

The VAT in the Digital Age package of proposals is divided into three parts requiring changes to EU legislation: the VAT Directive, the Council Implementing Regulation and the Council Regulation on Administrative Work.

The Implementing Regulation, which deals with the formulation of the information requirements for certain VAT schemes, is binding in its entirety and directly applicable throughout the EU. The amendments must be transposed into the national legislation of the Member States by December 31, 2024 and become applicable as of January 1, 2025.
According to the Swedish Ministry of Finance, the amendments to the VAT Directive do not make any difference for Sweden. Our VAT Act covers the proposed revisions and requires no change in Swedish legislation.

The Council Regulation on administrative cooperation emphasizes the importance of using well-established techniques to tackle VAT fraud. The current method of collecting aggregated data through recapitulative statements has been used since the introduction of the single market in 1993 and is no longer fit for purpose. The intention is now to replace the recapitulative statements with transaction-based reporting obligations. This, in turn, requires an IT structure that allows for a functional exchange between EU countries. The package of proposals from the European Commission puts a stronger focus on digitalization through the following measures:

There will be a requirement for digital reporting, thereby standardizing the information that taxable persons must provide on each transaction to the tax authorities in electronic format.
With the above requirements, e-invoicing will become mandatory for cross-border transactions within the EU.
A central electronic VAT information system called the VAT Information Exchange System (VIES) will be set up. The system will allow Member States to transmit VAT information that they store at national level. However, it will only be accessible to authorized officials designated by each EU country to check the correct application of VAT legislation. The data in VIES will be stored for a period of five years.
Member States that already have national reporting systems in place will have to adapt them to the common EU standard that will be established in the future.
Member States will be enabled to introduce mandatory e-invoicing for national business-to-business (B2B) transactions according to the same European standard as for cross-border e-invoicing.

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