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Will The EU Succeed in Making VAT Compliance Easier?

April 7, 2022, 7:00 AM

Businesses operating across the EU are struggling with differing value-added tax (VAT) administrative requirements and the VAT compliance obligations in place in EU member states.

Businesses trading across the EU or placing their inventory in member states have to register for VAT in all member states where they hold stock or have intra-EU supplies or acquisitions. This is costly and leads to inefficiencies. In addition, several member states have introduced their own electronic invoicing, or e-invoicing, systems and/or electronic data communication, according to their tax authorities’ digital reporting requirements).

Complying with all the various systems and differing EU rules is costly for businesses operating internationally.

EU Tax Package

As a response to the need for reform in the tax field, the European Commission presented its Tax Package in July 2020. It contains 25 VAT and other tax reforms, including extension of the VAT One-Stop Shop (OSS) return, and gig and sharing economy reforms—adapting the VAT framework to the platform economy.

A number of these reforms will go forward under the EU VAT in the Digital Age program, adding to the EU VAT e-commerce package of July 2021, and other EU VAT reforms in progress. For example, the EU definitive VAT system is planned for 2022, but no consensus has yet been achieved among member states.

Other areas where developments are expected in 2022/2023 are:

  • single EU VAT registration;
  • modernizing VAT reporting obligations, use of e-invoicing and new technologies;
  • more consistent determination of tax residence (fixed establishment for VAT);
  • reinforcing verification of cross-border transactions; and
  • review of financial services exemption.

The European Commission has announced that roadmaps and impact assessments will be provided, with opportunities to comment in early 2022, and proposed VAT Directive amendments to enacted reforms will follow in Q3 of 2022, after public consultations. The Commission aims to enact new rules by the end of 2023 or in early 2024.

Developments in EU Member States

Recently, several EU member states have adopted, or are considering or planning to introduce, their own e-invoicing/digital reporting requirements.

• E-invoicing planned in France from 2024

The business-to-business (B2B) e-invoicing and the electronic communication of certain data to the tax authorities (e-reporting) will be mandatory from:

  • July 1, 2024 for large enterprises (enterprises with more than 5,000 employees and either a 12-month turnover exceeding 1.5 billion euros ($1.66 billion) or a balance sheet exceeding 2 billion euros);
  • Jan. 1, 2025 for intermediate enterprises; and
  • Jan. 1, 2026 for small and medium-sized enterprises (enterprises with less than 250 employees and either a 12-month turnover not exceeding 50 million euros or a balance sheet not exceeding 43 million euros).

• Ireland to consult on a VAT e-invoicing and digital reporting system

The Irish revenue office plans to launch a study of VAT e-invoicing/digital reporting and how to modernize VAT reporting. The revenue office has stated that it will look into a number of formats that are utilized in other countries, including e-invoicing, real-time reporting, and SAF-T (Standard Audit File for Tax). The aim is to highlight VAT Directive changes planned for 2022 and to be implemented by 2024 or later.

• Sweden is evaluating options for digitalizing VAT-related processes

Sweden is evaluating developments within the e-invoicing and transaction-based reporting space. Against the background of the VAT in the Digital Age initiative by the European Commission, the Swedish Tax Agency (Skatteverket) has initiated a study of how digitalizing VAT processes can bring benefits to tax authorities and businesses—for example, by reducing VAT fraud and minimizing the administrative burden for companies.

• Germany and France to implement a common e-invoicing standard

One of the German federal government’s objectives is to implement a uniform national electronic reporting system as soon as possible, which will be used for issuing, verification, and forwarding of invoices. This means implementing an e-invoicing system that issues invoices based on invoice data uploaded, forwards these invoices to customers, and runs background check routines.

A new version of the French-German e-invoicing standard has been released—the Factur-X/ZUGFeRD. This standard has been developed through cooperation between France’s National Forum for Electronic Invoices and Electronic Public Contracts (FNFE-MPE) and Germany’s Forum Elektronische Rechnung Deutschland (FeRD). This is a first example where a common standard has been developed for use by more than one member state and hopefully more harmonization and co-operation will follow.

Provided there is EU-wide coordination, these are positive developments. Ideally, there must be no more isolated solutions. However, because many EU member states have already implemented their own systems, implementing an EU-wide harmonized e-invoicing/digital reporting system would initially involve a major conversion effort. However, this could be worthwhile for tax authorities and businesses.

EC Consultation/Survey—Have your Say!

In January 2022, the European Commission initiated consultation in three areas (see more details about these below). All parties have the possibility to submit their views until May 5, 2022. The survey, which can be accessed here, consists of more than 40 questions, most of which ask contributors to rate the statements or options.

The main areas of reform where the opinion of the public is invited are:

  • recommendations on real-time live reporting and e-invoicing;
  • extension of OSS single VAT registration to all B2B and B2C (business-to-consumer) transactions; and
  • harmonizing VAT treatment of the platform economy—gig and sharing marketplaces.

E-invoicing and Transaction-Based Reporting

The European Commission is looking into various ways of regulating digital reporting requirements and some formalized ways of sharing information such as the recapitulative statements (EU sales listings and EU purchase listings). It is alternatively looking at harmonizing e-invoicing standards across the member states.

The Commission is looking at four options for transaction-based reporting:

  • Status quo—transaction data stored by the taxpayer. The Commission would publish a non-binding recommendation providing a common design for reporting obligations across the EU;
  • Non-harmonized digital reporting requirements. Member states would no longer have to ask for an explicit derogation for introducing mandatory e-invoicing for B2B transactions;
  • Harmonized standard data storing requirements. Taxpayers would be required to record data about their VAT transactions in a standard digital format (i.e., SAF-T format developed by the OECD), which tax authorities can access upon request;
  • Harmonized digital reporting requirements, which consists of two options depending on the transaction.
    • One option is harmonizing digital reporting requirements for intra-EU transactions
      • an EU digital reporting requirement for intra-EU transactions will be introduced
      • recapitulative statements will be removed
      • digital reporting requirements will be optional for domestic transactions
      • new digital reporting requirements will conform to the EU requirements
      • existing digital reporting requirements will ensure interoperability, then converge in the medium term
    • The second option is harmonizing digital reporting requirements for all transactions
      • an EU digital reporting requirement for both intra-EU and domestic transactions will be introduced
      • recapitulative statements will be removed
      • interoperability between existing digital reporting requirements will be ensured, then converging them in the medium term.

The Commission is also looking at harmonizing e-invoicing standards across the member states. Two major options exist—an Italian-style centralized, or a non-centralized, clearance of the e-invoicing systems.

Single EU VAT Registration

Following the July 1, 2021 introduction of the OSS and Import One-Stop Shop (IOSS) returns, the European Commission is looking at whether these can be extended to cover more B2C and all/any B2B transactions to reduce the VAT registration and reporting burden.

The Commission plans to introduce a single pan-EU VAT return to reduce the number of VAT registrations for businesses operating across the EU. This would cover cross-border B2C cases where the OSS does not apply, and some or all B2B goods transactions. The Commission plans to allow stock transfers to be reported in a so-called OSS 2.0. return. Domestic sales from distribution hubs could be reported in the OSS 2.0. return.

The Commission is also considering keeping the VAT registrations for businesses only in the countries where they are established, and the taxable sales in other EU member states could be reported in an EU-wide OSS return for both B2C and B2B transactions.

VAT Treatment of the Platform Economy

The “platform economy” is the term used to describe a multi-sided model of transactions, where there are at least three parties involved. The role of the platforms—electronic interfaces (EIs)—and marketplaces is to facilitate the connection between two distinct but interdependent sets of users who interact typically via electronic means. An EI/platform usually charges a fee for the facilitation of the transaction. It does not possess any of the assets on offer nor usually provide the services via its own staff.

The European Commission is looking at ways in which EU member states could adapt their tax systems to reflect the new role taken on by EIs/platforms which have enabled millions of private individuals to provide services and goods for the first time. It is considering how the EU VAT Directive should be modified to capture the new dynamics created by the gig and sharing economies, as well as that part of e-commerce in the goods sector not yet addressed by other EU VAT reforms.

The Commission wishes to:

  • provide certainty on the tax liabilities for this new sector for providers, users and EIs, to prevent double taxation;
  • keep compliance efficient and light to reduce the burden and costs for taxpayers and tax authorities;
  • provide a level playing field for the traditional economy; and
  • protect member states’ tax bases, and avoid non-taxation.

Recent EU Developments

The European Commission is certainly considering ambitious reforms to harmonize the rules of VAT compliance in the EU. Everyone involved in VAT advice/compliance, or businesses needing to collect VAT, is interested what the policy options will be and whether the Commission will succeed in achieving the necessary consensus and support from the EU member states.

Reforms which would further harmonize EU VAT compliance processes and legal definitions would definitely be beneficial to all businesses operating cross-border across the EU who are struggling with differing administrative requirements and VAT compliance obligations in various member states.

However, the concern is that the EU is already too late in its efforts and that member states, having invested considerable money and time in implementing their own e-invoicing/digital reporting solutions, may not support the EU-wide harmonized digital reporting systems because of the additional costs involved in converging with them.

The positive news, however, is that the French Presidency of the Council of the European Union held a conference on Feb. 10, 2022 to discuss harmonizing rules for e-invoicing throughout the EU and apparently plans to push for harmonized B2B e-invoicing requirements across the EU. As mentioned above, France has already set the statutory timeline for its implementation of the B2B e-invoicing, between July 1, 2024 and Jan. 1, 2026.

Many countries have also begun internal consultations and evaluation in e-invoicing and transaction-based reporting.

European Parliament Backs VAT Reforms

On Feb. 16, 2022, the European Parliament voted in favor of harmonizing pan-EU e-invoicing and expanding the scope of the VAT OSS.

The European Parliament calls for a move towards charging VAT on intra-EU movements of goods based on the destination country. The move to the definitive VAT system means that businesses need to report and pay the VAT of all the EU member states where they have (cross-border) B2B sales instead of splitting the EU cross-border movement of goods into two different transactions—an exempt intra-Community supply in the member state of departure of the goods, and an intra-Community acquisition taxed in the member state of destination.

In order to ease VAT compliance for businesses operating cross-border in the EU and make it possible for them to report VAT of all the various EU member states of destination of their goods, the move to the definitive VAT system needs to be accompanied by harmonizing pan-EU e-invoicing systems and expanding the OSS.

Let’s hope that it is not late to achieve more efficient EU VAT compliance rules.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Aiki Kuldkepp is Senior Manager, Tax, with Grant Thornton Netherlands.

The author may be contacted at: