Bloomberg Tax
Feb. 10, 2023, 8:00 AM

VAT Digitization in Europe and the Role of Tax Technology

James  Buckley
James Buckley

All over Europe, governments are digitizing the collection of indirect taxes such as value-added tax. Spurred on by a looming global recession—and burdened with debt accumulated during the Covid-19 pandemic and energy crisis—their aim is to increase public authorities’ visibility into transactions and collect more revenue by closing longstanding VAT gaps.

In truth, tax digitization instruments like the Standard Audit File for Tax, or SAF-T, and continuous transaction controls. or CTCs, are neither brand new, nor European. For instance, CTCs first emerged in Latin America way back in the early 2000s, with countries like Brazil and Chile now boasting the world’s most advanced CTC regimes. In Europe, the rollout of CTCs has been much more gradual, largely due to pre-existing tax enforcement infrastructure and e-audit advances.

However, tax digitization finally seems to have reached an inflection point on the continent, with countries including Poland, Italy, Hungary, and most recently France investing heavily in e-invoicing mandates. As a result of these developments, the European Commission recently released a revolutionary proposal to make digital invoicing the norm throughout the EU and (near) real-time reporting mandatory for intra-EU transactions.

Outside the EU, it’s also worth noting the UK’s more modest Making Tax Digital initiative, which now requires all VAT-registered businesses to keep digital records of invoices and use software to submit their VAT returns.

You don’t need me to tell you that accountants can be change averse and slow to embrace new technology. But government reforms of tax reporting tend to force their hands. Just look at the recent growth in popularity of online platforms among UK small and medium-sized enterprises as they rushed to comply with Making Tax Digital. As VAT digitization gathers momentum, we can expect to see a similar quiet revolution happening across the continent in the area of tax tech—the software and platforms that support the digitization of tax processes.

The Current State of VAT Digitization

CTC mandates, which require businesses to submit transactional data to a platform designed by their tax administration directly in conjunction with the actual business transaction, are arguably the most significant tax digitization trend taking place in Europe.

Despite the European Commission’s recent VAT in the Digital Age proposals, there’s currently no realistic roadmap towards a pan-European model for implementing CTC mandates. Instead, individual member states will continue to be quite free in their design of CTC systems. This will continue to drive diversity of approach between European countries.

The stark differences between the well-established Italian and nascent French systems are just one example of this. Italy was the first EU country to introduce a clearance e-invoicing model back in 2014, starting with business-to-government e-invoicing, before extending CTCs to cover business-to-business invoices and some business-to-consumer transactions in 2019.

On the other hand, France kicked off its CTC journey relatively recently. B2G invoicing is already compulsory, but from July 2024 to January 2026, mandatory B2B e-invoicing will also come into force. Data not received as part of this process will be subject to obligatory e-reporting, including B2C invoices and cross-border B2B invoices.

Rather than taking Italy’s lead, France chose a delicate mix between centralized invoice processing by the state for run-of-the-mill invoices, and certified private service providers to serve complex enterprise flows. Broadly speaking, this is more similar to the Mexican model than any of those followed in Europe so far.

Clearly, the jury is still out on what type of CTC system produces the most societal benefits. The European Commission appears to prefer a model based on real-time reporting rather than invoice “clearance” by the tax administration, but this topic will certainly be hotly debated in the European Council during 2023.

What Does This Mean for the Tax Tech Space?

With Europe essentially throwing its weight behind the CTC approach to VAT digitization, we’re starting to see a notable increase in activity in the tax tech market, mostly driven by larger international businesses. The reason for this is two-fold. First, multinational businesses must comply with VAT reporting requirements in every country in which they operate. As we’ve seen, with the creation of many divergent CTC mandates, this is becoming more complex than ever.

Second, when governments introduce CTCs and other digital tax reforms, they tend to start with the biggest fish first, such as B2G invoicing, and B2B invoicing for multinationals and larger domestic players. Reforms are then gradually extended deeper into the SME space, typically based on a metric like revenue. The most advanced Latin American regimes have extended e-invoicing to cover all transactions—including B2C—but this is a long way off for Europe.

Among those looking to procure new tax tech, we’re seeing a clear trend towards businesses looking to acquire multiple tax compliance capabilities from a single vendor, including e-invoicing, SAF-T, VAT determination, reporting, and more. There’s also been an uptick in businesses needing to connect their tax tech to business process platforms, such as the procurement systems issued by some European governments.

The imminent threat of the tax administration knowing more about a business than the business itself means that businesses’ tax tech requirements are becoming a lot broader and much more focused on the need to match the tax man’s digital data insights. Interestingly, there are very few tax tech players that can meet all multinational businesses’ needs—particularly in countries such as France, which are rolling out reforms quickly. As a result, we’re seeing a lot of mergers and acquisitions activity in the tax tech space, as well as tax tech providers building partnerships and alliances to enable them to better serve customers.

What’s Next for Tax Tech?

In the UK and Europe, we’re at the beginning of a long tax digitization journey. Looking forward, tax administrations’ seemingly insatiable hunger for fresh, reliable data may cause some short-term teething problems, as businesses work hard to digitize internal processes and structures around tax compliance and reporting.

However, if we take a longer term view, it’s clear that businesses that manage this transition shrewdly will be able to significantly streamline their business processes as well as benefit from advanced insights gleaned from standardized digital data. As the saying goes “no pain, no gain”—and tax digitization is no exception.

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

Author Information

James Buckley is managing director, Europe, with Sovos.

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