An EU VAT System Fit for the Digital Age? The Reform Proposals (Part 1)

On Dec. 8, the European Commission unveiled the biggest value-added tax reform package of this century. The long-awaited proposals on ”VAT in the Digital Age,” consisting of one directive and two regulations, will introduce a tax collection obligation for platforms operating in the short-term accommodation rental and passenger transport sectors, expand the scope of the One-Stop Shop, and introduce new tax compliance obligations for intra-EU trade.

For the first time in the history of the EU VAT system, all intra-EU cross-border business-to-business sales will be subject to mandatory e-invoicing and near real-time reporting, with businesses having to spend nearly 11.3 billion euros ($11.9 billion) to comply with the new rules. If unanimously adopted by all member states, the proposed reforms will be phased in between 2024 and 2028.

This two-part article examines the three main topics covered by the ViDA package—single place of VAT registration, platform economy, digital reporting requirements—and comments on changes to the recently introduced IOSS that it proposes.

Digital Reporting Requirement

Current Situation

The current EU VAT system for intra-EU trade is complex, and susceptible to fraud because it allows purchasing goods VAT-free in other member states. It is estimated that cross-border VAT fraud causes an annual tax revenue loss of around 50 billion euros. Past attempts by the European Commission to launch an in-depth reform of the VAT system failed because of the unanimity requirement for approving new legislation.

When it became clear that the current inefficiencies would remain in place for the foreseeable future, member states turned to digital VAT reporting as a means to reduce VAT fraud, requiring businesses to provide the details of their transactions in varying country-specific formats and with different frequencies.

Twelve member states require VAT-registered businesses to report transactional data to the tax administration either in real-time or periodically. In 2019, Italy was the first EU country to implement the invoice clearance model, and now more than five countries are following its example. Poland and France have already obtained the authorization of the European Commission to make e-invoicing mandatory in 2024. The e-invoicing implementation timelines in Slovakia, Belgium, Spain, and Germany are still to be confirmed. This increasing fragmentation of the EU tax compliance landscape makes it difficult and expensive for companies to do business in multiple EU countries.

Proposal

Under the proposal, electronic invoicing will become the default system for the issuance of invoices in the EU. The current definition of an electronic invoice will be changed to clarify that such an invoice must have a structured format—i.e., PDFs will no longer be regarded as e-invoices. Businesses will be allowed to issue electronic invoices according to the European e-invoicing standard (EN16931) for all transactions, and the requirement of customer acceptance for e-invoicing will be dropped.

The proposal also mentions new data elements to be added to the mandatory invoice content (seller’s bank account information and the date of payment) so that tax administrations have more insight into financial flows.

All businesses will be required to issue e-invoices for B2B sales of goods or services to customers in other EU member states. However, the European Commission does not intend to implement an invoice clearance model. Businesses will not be required to send e-invoices to the tax administration for approval but only to report certain invoice data no later than two working days after issuing the invoice. The tax administration will share these data with other member states by transmitting it to the European Commission’s new central database. 

This new digital reporting requirement will take effect in 2028, replacing recapitulative statements (also known as EC Sales Lists or VIES reports), as these have proven to be an ineffective tool to tackle VAT fraud in intra-EU cross-border sales.

Member states wishing to implement digital reporting requirements for domestic sales will have to ensure that these will conform to the new DRR. For member states where transactional reporting requirements are already in place, alignment with the new standard must be ensured by 2028.  Member states that want to introduce mandatory e-invoicing for domestic sales will be allowed to do so without the need to request permission from the European Commission. However, they must ensure that the system will be compatible with that for intra-EU trade.

Evaluation

The proposed directive increases the tax compliance burden for cross-border traders who will have to issue e-invoices for all intra-EU B2B sales and report them to the tax administration within two days. As businesses will not be required to send the entire e-invoice, but only some data elements to the tax administration, it is not entirely clear why e-invoicing will be made mandatory for everyone. A pure reporting obligation would be sufficient to achieve the objective of providing the tax administration with more granular data.

The obligation to issue e-invoices may be particularly burdensome for small businesses established in countries where e-invoicing will not be required for domestic sales.

It is questionable whether implementing more administrative obligations for the existing inefficient VAT system for intra-EU trade is the right way forward, as it will not remove any of its design flaws. The European Commission tried to tackle the underlying system problems some years ago when it proposed a definitive VAT system (under which intra-EU B2B sales of goods would be taxed in the customer country and reported via the OSS). However, there was not enough trust among member states to move this proposal forward.

The ViDA package did not opt for full harmonization (i.e., uniform e-invoicing and reporting rules in all member states), as this seemed neither legally nor politically feasible. The EU may enact legislation to ensure a proper functioning of the EU Single Market but does not have the competence to legislate over domestic tax compliance procedures. Therefore, the European Commission has opted for partial harmonization: e-invoicing and digital reporting will become mandatory for intra-EU sales but optional for domestic transactions.

Platform Economy

Current Situation

The EU platform economy is estimated to generate 25.7 billion euros in VAT revenue per year. Most VAT is collected in the e-commerce sector (15.2 billion euros), followed by the accommodation services (3.6 billion euros) and the transportation sector (3.2 billion euros).

Despite the large revenue potential of the platform economy, its VAT treatment is still far from clear. One of the main problems is the unclear categorization of platform facilitation services. Do platforms provide digital or intermediary services? The answer to this is relevant in business-to-consumer scenarios, as it determines which country is entitled to collect the tax. For example, if an accommodation platform classifies its facilitation services as intermediary services, they are taxable in the country where the rental property is located. However, if the platforms opts for digital services, the tax revenue will accrue to the country where the landlord is located. In B2B scenarios, it does not matter whether facilitation services are regarded as a digital or intermediary, as both are taxable in the country where the business customer is established.

There are also uncertainties about the VAT status of platform users to which platform facilitation services are provided. Are they businesses or consumers for VAT purposes? The EU VAT law does not provide a clear rule on how a supplier of services (platform) should determine whether its customers (sellers and service providers) are businesses. Another complicating fact is that platform users may not be aware of their obligations to register for VAT.

One of the measures to improve tax compliance in the platform economy is the deemed seller regime. In the EU, platforms may become deemed sellers and be responsible to collect VAT when they facilitate the following B2C transactions: sales of digital services, sales of goods imported from third countries in consignments not exceeding 150 euros, and sales of goods of any value owned by non-EU sellers and located in the EU at the time of the sale.

Proposal

The ViDA package expands the scope of the deemed supplier regime to platforms in the short-term accommodation rental and passenger transport sectors. However, not all transactions within these sectors will be covered by the new regime. The deemed supplier rule will apply if the service provider does not charge VAT because it falls into one of the following categories:

• A person neither established nor registered for VAT in the EU;
• An EU private individual; or
• A member of the group of four—i.e., businesses performing exempt supplies, flat-rate farmers, businesses benefiting from the exemption for small businesses, and non-taxable legal persons.

The deemed supplier rule will not apply to sales by VAT-registered businesses that provide the platform operator with their VAT identification number. Members of the group of four who may have VAT identification numbers in some member states shall not communicate them to the platform operator. However, the platform will not be held liable for failure to collect VAT if it acted on information provided by the service provider and could not have reasonably known that this information was incorrect.

The deemed supplier regime will work as follows. The provision of accommodation or transport services will be split into two deemed supplies: an exempt or out-of-scope supply of services from the service provider to the platform; and a supply from the platform to the customer (taxable according to the general rules). The provision of platform facilitation services will be zero-rated.

The ViDA package provides the long-awaited clarification on the nature of platform facilitation services. Platform facilitation services provided to non-taxable persons will be considered intermediary services and will be supplied in the country where the underlying transaction takes place.

The proposed rules on the platform economy will take effect in 2025. Platform operators will have only two years to prepare for the upcoming changes, which is very little time, given that an extensive adaptation of the existing systems will be required.

Evaluation

It is not surprising that the European Commission has chosen to focus on the accommodation and transport sectors. After e-commerce, they represent the largest markets of the platform economy. They also include business models where service providers, such as drivers and landlords, are often private individuals or their status is difficult to determine. Some non-EU countries, for example Canada and New Zealand, have already enacted tax collection obligations for accommodation and transport platforms.

The clarification on the nature of platform facilitation services and the status of the service provider is a welcome development, as it removes a lot of financial risks for platform operators. A recent case in which Italy contested the application of reverse charge to allegedly non-taxable persons and accused a large accommodation platform operator of tax evasion amounting to 153 million euros shows the risks of unclear and non-harmonized VAT rules.

The proposed reform package does not seek to harmonize fragmented reporting and record-keeping obligations for platform operators in the EU. Although platforms are subject to the reporting and record-keeping requirements mandated by DAC7 and Article 242a of the VAT Directive, several member states have introduced their own compliance obligations.

The fact that certain data must be reported multiple times in many formats significantly increases the compliance burden for platforms operating across the EU. The European Commission has not addressed this topic, as a full review of the record-keeping obligations would extend beyond the scope of VAT law.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

The opinions expressed in this article are those of the author and do not necessarily reflect the views of any organizations with which the author is affiliated.

Author Information

Aleksandra Bal is indirect tax technology and operation lead at Stripe.