Across Europe, tax authorities are taking significant steps towards digitizing value-added tax collection. VAT is by far the most significant indirect tax for nearly all the world’s trading nations, contributing over 30% of all public revenue. VAT as a tax method essentially turns private companies into tax collectors. Traditionally, this leaves them responsible for assessing and applying extremely complex rules about where tax is payable, and how much—which is why we tend to see gaps between expected revenue and actual revenue collected.
Given current global economic turbulence, closing Europe’s VAT gap—actually more of a yawning VAT chasm—has become a priority for tax authorities. The latest data available show this grew during the pandemic, representing an EU-wide VAT gap of around 11%. This is the main reason behind digital VAT reforms, which significantly enhance tax authorities’ visibility into the transactions happening on their territory.
Authorities also benefit from the granular, up-to-the-minute economic data that comes with digital VAT reforms. This can help when creating policy or deciding on highly targeted economic interventions, like those we saw during the Covid-19 pandemic, and are likely to see again as governments grapple with inflation.
With this in mind, let’s examine three digital VAT trends taking Europe by storm.
Trend 1—The Rise of Continuous Transaction Controls
Continuous transaction controls (CTCs) require businesses to submit transactional data to a platform designed by their tax administration, in real time or near real time. This concept is not new—it started in Latin America back in the early 2000s. In Europe, the rollout of CTCs has been more gradual than in other regions due to pre-existing tax enforcement infrastructure and e-audit advances. Italy and Spain have led the way, with Poland and France also recently embarking on their CTC journey.
It’s worth noting that there is no standard European model for this. Each tax authority can, under EU rules, set up its own regime, so they can vary significantly. However, the basic four-step principle remains the same:
- The process starts with the supplier sending the invoice in a specified format to the tax authority or licensed state agents. This typically includes a form of authentication of both the supplier and integrity controls on the invoice data. The tax administration may either return an approval code or actually send the invoice to the buyer.
- The invoice is sent to the buyer using a method required or allowed by the law.
- On receiving the invoice from the supplier, the buyer is often obliged or encouraged to do a final compliance check with the tax authority. If the tax administration platform sends the invoice to the buyer, formal compliance of the invoice is implicit.
- If step three above is performed, the tax authority or state agent will return an OK/Not OK response.
Given the political focus on the digital transformation of European economies, we can expect a further uptick in countries implementing CTCs in the coming years.
Trend 2—The Growing Prominence of SAF-T
This one is not strictly European. SAF-T (Standard Audit File-Tax) is an international standard for the electronic reporting of accounting data from businesses to tax authorities or external auditors.
SAF-T is also nothing new. The Organisation for Economic Cooperation and Development’s Committee on Fiscal Affairs first created the standard back in 2005. However, what warrants its inclusion in this list is that more European countries are implementing the standard—Romania in 2022, with others such as Denmark, Bulgaria and Hungary in various stages of development with their plans for SAF-T. It is likely that the emergence of “big data” technologies has catalyzed this recent SAF-T revolution.
SAF-T enhances how tax administrations audit for both direct and indirect taxes, with a standard audit file. This alleviates the need for tax authorities to visit businesses to physically extract and review wide-ranging corporate data. Instead, businesses are expected to produce the data in a standard machine-exploitable format with detailed transaction information rather than aggregated data.
The SAF-T guideline is intentionally flexible, allowing governments to freely adapt it to suit audit systems or use it as a basis for pre-filling tax declarations. The flexibility also extends to the data format and method of data disclosure.
Trend 3—Supply Chain Crackdowns
To lower costs and streamline operations, more businesses are turning to supply chain globalization and automation. However, many enterprises overlook the impact of indirect taxes like VAT, which are assessed by the countries in which they operate.
The vast majority of trading economies levy a form of VAT, and each does so with its own set of rules for compliance and reporting. VAT is levied at each stage in the supply chain and is typically due on all goods and services. Applied correctly, it should be cost neutral for most businesses. In the EU, VAT is levied on four types of taxable transactions or events—supply of goods, supply of services, intra-community acquisition of goods, and import of goods.
Businesses must consider the impact of VAT compliance when building their supply chain strategy. Those that disregard it can face serious consequences that disrupt operations and cash flow.
In part thanks to the increasing digitalization of VAT reporting, European governments are renewing their focus on fixing supply chain VAT errors and clamping down on fraud. An example of this is the 2020 Quick Fixes legislation introduced by the European Commission. This addresses some of the issues around the inconsistent application of existing rules, including the proof of transport needed to apply for an intra EU delivery exemption.
What do These Trends Mean for Multinational Businesses?
With many tax authorities set to make changes to VAT compliance and reporting, the path ahead for multinational businesses is fraught with uncertainty. This applies to EU businesses trading within the bloc.
To prepare themselves, businesses should be working to digitize their internal processes and organizational structures around tax compliance and reporting. This is the best way to ensure resilience going forward.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Christiaan van der Valk is VP Strategy and Regulatory at Sovos.
The author may be contacted at: firstname.lastname@example.org