EU VAT Reforms Trade Short-Term Business Costs for Future Benefit (1)

The European Commission’s value-added tax reform proposals, known as VAT in the Digital Age, or ViDA, had stalled due to opposition by Estonia. The country raised concerns with the proposed rules imposing VAT on certain platform operators that facilitate supplies of short-term accommodation or passenger transport.

But the latest ViDA update addressed Estonia’s concerns, and today the country lifted its opposition. Finance ministers could formally approve the proposals in November. If implemented, the reforms could add short-term compliance burdens—but also potential long-term benefits—for businesses that provide services in the EU.

The ViDA reform proposals, introduced in 2022, aim to further modernize the EU’s VAT system to reduce the VAT gap—the difference between the amount of revenue expected to be collected and the amount actually collected.

ViDA is based on three pillars. The first involves the use of e-invoicing and real time digital reporting for cross-border transactions. Under the proposals, this pillar would be further expanded to align with domestic e-invoicing and digital reporting.

The second pillar would make the operator of a platform liable for VAT on certain supplies of short-term accommodation and passenger transport that are made via the relevant platform. This measure is directed toward supplies made by small businesses and individuals that aren’t registered for VAT. In addition to connecting the suppliers and customers, the platform operators typically provide services such as collecting payments and invoicing (on behalf of the supplier).

The third pillar is the introduction of a single VAT registration through the expansion of the existing “one-stop shop” and “import one-stop shop” systems. This aims to allow businesses that operate in multiple EU states to have one registration in only one jurisdiction. The ultimate goal is to allow such businesses to report VAT on all supplies made across multiple jurisdictions through a single online portal.

We expect these reforms to have a profound impact on businesses that operate or trade in multiple EU states. The compulsory use of e-invoicing and real-time digital reporting for cross-border transactions likely would necessitate the introduction of new or updated systems for many businesses.

Although the changes may result in large upfront system implementation costs, the new systems are also likely to provide some non-VAT related efficiencies and benefits. Over time, those benefits may outweigh the initial costs. This is particularly true for certain multinationals suffering from significant costs of fragmentation due to a lack of harmonization of digital reporting requirements across the EU.

The expansion of the one-stop shop frameworks to allow a single VAT registration, and reporting of supplies across the entire EU, could further reduce compliance costs.

Businesses located outside the EU who are considering providing goods or services to multiple EU jurisdictions may require assistance to ensure compliance. In some instances, this may involve using a local EU-based distributor. Alternatively, it may involve engaging service providers who can provide the tools, support, or infrastructure for making supplies in a VAT-compliant member.

Any business proposing to operate a platform to facilitate supplies between non-VAT-registered businesses and consumers needs to be aware that the operator may be liable for VAT on supplies made via that platform.

While the proposed rules for platform operators target supplies of short-term accommodation and passenger transport, those rules could be expanded in the future to capture other supplies made through platforms. Platform operators should ensure their platform rules clarify that the operator can deduct and withhold VAT from payments received on behalf of suppliers if VAT is applicable.

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

Matthew Cridland is partner in K&L Gates’ Sydney office and a member of the tax practice who advises clients on indirect taxes, including goods and services tax, stamp duty, land tax, payroll tax, wine equalization tax, luxury car tax, customs duty, and excise.

Marion Zeller is counsel in K&L Gates’ Luxembourg office and a member of the tax practice with experience in advising on direct and indirect tax matters to institutional investors, private equity houses, and alternative investment funds.

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(Updates with reporting that Estonia lifted its opposition to the EU’s ViDA proposals.)