An EU VAT System Fit for the Digital Age? The Reform Proposals (Part 2)

On Dec. 8, 2022, 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. If unanimously adopted by all member states, the proposed reforms will be phased in between 2024 and 2028.

Part 2 of this article examines the single place of VAT registration, and comments on changes to the recently introduced Import One-Stop Shop that ViDA proposes.

Single VAT Registration

Current Situation

Nearly all EU member states have implemented tax registration and collection thresholds that exempt businesses with turnover below these thresholds from collecting VAT. However, these thresholds typically apply to resident businesses, meaning that a business established abroad is required to register as soon as it performs the first taxable transaction in another EU country. The obligation to register applies even if the business does not have any physical presence in the country or it is not required to remit any tax to the tax administration (i.e., in situations where the tax chargeable and deductible are equal).

Once a business has registered for VAT in a particular country, it is subject to local tax compliance obligations which can place a significant financial and administrative burden, particularly for small and medium-sized businesses.

The EU VAT law provides two mechanisms to avoid VAT registrations abroad: the reverse charge and One-Stop Shop. Reverse charge applies to business-to-business sales and means that VAT liability is shifted to the purchaser of the goods or services. While it is obligatory for most intra-EU B2B services, member states do not have to apply it to services, such as admission to events, passenger transport, restaurant services, services connected with immovable property or short-term hiring of means of transport.

The OSS applies to intra-EU business-to-consumer services and distance sales of goods. It allows businesses to register and report all eligible intra-EU B2C sales in one member state. While the OSS scope is relatively broad, it cannot be applied to transactions such as supplies of goods with installation and assembly, supplies of gas and electricity, or supplies of goods by a vendor participating in an exhibition, trade fair, or similar event. Similarly, sales of goods made by suppliers not established in the member state where the transport of goods begins and ends are excluded from the OSS as they are classified as domestic.

Another situation that triggers foreign registration obligations and is covered by neither reverse charge nor OSS is a cross-border transfer of own goods (excluding call-off stock). Such a transfer is treated as a supply in the member state of departure and as a taxable acquisition in the member state of arrival. The owner of the goods is required to register in the arrival country for the purposes of reporting the acquisition.

Proposal

The proposal on the single place of VAT registration seeks to reduce the number of situations in which businesses are obliged to register in a member state where they are not established. Avoiding the need for multiple registrations will be achieved by:

• Expanding the OSS;
• Introducing a new OSS regime for transfers of own goods to other member states;
• Expanding the scope of mandatory reverse charge; and
• Expanding the scope of the deemed supplier rule for platform operators.

The existing OSS regimes will be expanded to cover the following scenarios: B2C sales of goods made by suppliers not established in the member state where the transport of goods begins and ends or the goods are located at the time of the sale; supplies of goods with installation and assembly; supplies of gas, electricity, heat, and cooling energy; and supplies of goods on board ships, aircraft and trains.

The new simplification scheme for cross-border transfers of own goods will allow businesses to report these transactions in one member state, irrespective of the country from where the goods are transported. Intra-EU acquisitions of goods by businesses applying this scheme will be exempt, eliminating the need to register in the member state of the arrival. However, any input tax deductions will have to be claimed via the refund procedures or domestic VAT returns.

Mandatory reverse charge will be extended to all B2B supplies of goods and services by businesses not established in the country where VAT is due to businesses identified for VAT purposes in that country.

Finally, the deemed supplier rule, which is currently limited to supplies of goods owned by non-EU sellers, will apply to all supplies of goods within the EU, irrespective of the status of the purchaser and the location of the supplier. This measure will shift the tax collection obligation to the platform operator and reduce the cost of doing business for EU sellers. The proposed rules on the single place of registration are expected to take effect in 2025.

Evaluation

Foreign VAT registrations are considered one of the burdensome VAT compliance obligations and some businesses are even prepared to make their supply chains more inefficient or to forgo business opportunities to avoid them. Obtaining a VAT registration in another member state costs at least 1,200 euros ($1,270), and the annual compliance costs range between 2,400 and 8,000 euros. A further extension of the OSS scope to cover more B2C supplies is therefore a welcome step in reducing the VAT administrative burden related to cross-border trade.

It seems reasonable that the proposal did not include B2B supplies within the OSS scope but instead opted for expanding reverse charge. Businesses engaged in intra-EU B2B trade are less concerned about the cost of foreign registrations, as these allow them to deduct input VAT incurred in other countries. An OSS registration does not permit input VAT deductions. If the OSS was extended to B2B sales, businesses would need to claim input VAT via a separate refund procedure.

The existence of two parallel procedures (one for reporting and one for refunds) in combination with cash flow disadvantages resulting from the need to pre-finance VAT, would create a very inefficient system. An ideal solution would be to include a deduction mechanism into the OSS, but this does not seem politically feasible at the moment.

Import One-Stop Shop

The Import One-Stop Shop is a special regime to simplify the declaration and payment of VAT for distance sales of goods imported in consignments not exceeding 150 euros. Under the IOSS, the seller collects VAT at the time of the sale, and no tax is due at the border when the goods arrive in the EU. As the IOSS is believed to be an efficient way to reduce non-compliance on distance sales of goods from third countries, the European Commission was considering two policy options to expand its scope and use—eliminating the 150-euro threshold and making the IOSS mandatory.

Opening the IOSS to high-value goods would bring limited benefits to businesses, as goods above the value of 150 euros still need to be processed for customs purposes. As distance sales of imported high-value goods make up only 10% to 20% of B2C e-commerce in the EU and are less prone to fraud than low-value consignments, there was little need for immediate regulatory action. The European Commission has decided not to eliminate the current 150-euro threshold in the immediate future but may consider doing so as part of future changes to customs processes.

Making the IOSS mandatory would improve the level playing field for e-commerce sellers as sellers who have not opted in for the IOSS are able to list products at lower prices (excluding VAT which will be paid by customers upon delivery) while those who use the IOSS must include VAT in their listed prices. However, it would not on its own resolve issues related to fraud, as illicit traders would still be able to undervalue parcels while using the IOSS. Given the moderate benefits, the European Commission has proposed to make the IOSS mandatory only for platforms facilitating sales of low-value imported goods.

Next Steps

The European Commission has unveiled a very ambitious plan to make the VAT system fit for the digital age. The draft directive and regulations must be formally adopted by the Council of the European Union and the European Parliament under the ordinary legislative procedure in order to take effect. Given that unanimous approval by all member states is required to enact new VAT legislation, it is still not clear whether the proposed directive will become law in its current shape.

The most controversial part of the proposal is the new digital reporting requirement, which will be quite costly to implement. According to the European Commission estimates, businesses will have to spend 11.3 billion euros, and tax authorities 2.2 billion euros, to comply with the new rules. However, as the ViDA will generate a lot of extra VAT revenue (the DRR—11 billion euros, VAT collection obligations for transport and accommodation platforms—6.5 billion euros) member states may be willing to approve the proposed changes, given the current difficult macroeconomic situation.

If member states succeed in reaching unanimous consensus, they will still have to wait a few years for the revenue benefits to materialize as the new rules for platforms will not go live before 2025, and the DRR will take effect in 2028.

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.