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Europe May Be Heading Towards Standardized Digital VAT Reporting

Nov. 23, 2022, 8:00 AM

Europe is experiencing a quiet revolution. Digital value-added tax reforms are sweeping the continent to make VAT reporting more frequent and granular. Continuous transaction controls, or CTCs, are giving tax authorities greater visibility into transactions and enabling them to close longstanding VAT gaps.

Why now? The imperative to prevent VAT fraud and misreporting is clearer than ever, given the current inflationary pressures facing EU economies and loans taken out during the pandemic now starting to rack up interest.

It is interesting that in Germany there is not yet a mandatory e-invoicing system or a similar scheme to the UK’s Making Tax Digital. However, what we can see is that changes have been in discussion since the end of 2021. The German government has also recently asked the European Commission for a derogation in order to introduce mandatory e-invoicing. This request is in line with the requirements per the draft directive (VAT in the Digital Age) based on the EN-16931 e-invoicing standard. At the time of writing, there is no confirmation of dates for the introduction.

What Is the Case for Standardization?

Currently, there is no pan-European model for CTCs. Instead, individual member states are free to design and implement their own systems—or choose not to engage in VAT digitization at all. But will this laissez-faire approach last? Or will the European Commission look to harmonize digital tax reporting processes across the bloc?

The benefits of standardized digital VAT reporting are clear. First, it makes it much easier for tax authorities to “follow the money” and prevent cross-border money laundering.

Second, adopting a standardized approach would enable frictionless trade across Europe—reducing administration and bureaucracy for multinational businesses. Perhaps more crucially, it also would make European countries a more attractive trading partner for other global economies, such as the US, China, and the UK, by removing unnecessary complexity involved in the import/export process.

From a UK standpoint, a standardized approach to digital VAT reporting could have some unexpected beneficiaries, in the form of UK exporters. Since Brexit, language barriers, customs duties, and differing technology rules have made exporting from the UK to the EU more difficult, so much so that many UK businesses have simply stopped trying. This is highlighted by the latest figures from the UK’s Office for Budget Responsibility, which show that in the fourth quarter of 2021, goods exported to the EU fell 9% compared to 2019 levels.

However, standardization might not be welcomed by all parties. Many EU member states, such as Poland, Italy and Hungary, already have invested heavily in their own systems and may be reluctant to make yet more changes to bring them in line with their neighbors’ systems.

What CTC Models Could Work?

So, the case for standardizing CTCs is clear. But the European Commission still has plenty of decisions to make as it chooses which model to implement and how to deploy it across all 27 EU member states.

To understand the different options available, let’s compare two major EU economies that have already started their CTC journeys.

Italy was something of a European pioneer in e-invoicing. It was the first EU country to introduce a clearance e-invoicing model back in 2014, starting with business-to-government e-invoicing, before extending its mandatory CTC system to cover business-to-business invoices and some business-to-consumer transactions in 2019. Since then, the system has continued to be fine-tuned to increase revenue and further close the VAT gap.

France started its CTC journey relatively recently. B2G invoicing is already compulsory in the country, but, from July 2024 to January 2026, France will also implement mandatory B2B e-invoicing. All domestic B2B invoices and invoice lifecycle status updates will be transmitted through a central platform or via connected service providers. To complement this and combat fraud, data not received as part of the mandatory e-invoicing process will be subject to obligatory e-reporting—including B2C invoices and cross-border B2B invoices.

Rather than just following Italy’s lead, French legislators looked further afield to Mexico as a model for their CTC system. They also took inspiration from popular models to encourage interoperability among service providers in public procurement for more complex invoice flows.

There are advantages and drawbacks to both approaches. For instance, most experts agree that the French system is more likely to detect fraud effectively, as it demands more granular data.

At the same time, others have praised Italy’s decision to opt for a single central e-invoicing platform (the Sistema di Interscambio), which it offers to businesses free of charge. In contrast, in France, a public platform will coexist with certified private service providers that may be chosen by businesses that need more flexibility. This complexity was designed to balance free e-invoicing for small companies with the need for larger ones to customize their processes—whether this strikes the right balance only the future will show.

France’s decision not to fully harmonize its CTC system with Italy’s has caused consternation in some parties. Many in the Italian government expected such a close trading partner and EU neighbor to adopt a more closely aligned system, particularly since the European Commission’s VAT in the Digital Age report cited Italy as a case study for adopting CTCs.

The French approach of combining mandatory e-invoicing with a complementary e-reporting obligation certainly looks fit for purpose for closing the EU’s VAT gap.

It should also be noted that countries all over the EU, including Spain, Belgium, and Poland, are all in the process of introducing slightly different flavors of e-invoicing or transactional reporting for VAT purposes. Whichever route the European Commission chooses, it must act quickly to establish some clarity on harmonization and avoid further divergence between countries.

But what about Europe’s second largest economy, which now sits outside the EU? Though UK tax authorities have not shown much interest in embracing CTCs so far, the UK reported an estimated VAT gap of around £9 billion ($10.6 billion) in the tax year 2020-2021. Though recent Making Tax Digital reforms will go some way to closing this gap, implementing CTCs in future is an obvious choice. Finding “lost” VAT revenue could prove crucial to funding initiatives to stimulate much-needed economic growth or plugging holes in the country’s struggling National Health Service.

As the closest and largest trading bloc, it would make sense for the UK to harmonize any future e-invoicing or e-reporting mandate with the EU. However, the UK could also potentially look at harmonizing with other jurisdictions such as the US and Australia, which have put more emphasis on providing facilitating frameworks for automated data exchange among supply chains rather than focusing on short-term fiscal benefits alone.

What’s Next?

So, what’s next for VAT digitization in Europe? Though the direction of travel is clear, we need to understand how this would work in practice in terms of standardization of e-invoicing—a topic discussed on Nov. 3, 2022, by the European Commission at the OpenPeppol general meeting in Brussels—and e-reporting requirements.

It is expected that the European Commission will publish its proposals on VAT in the Digital Age on Dec. 7, 2022, and this will include a proposal on a harmonized common standard for e-invoicing across the EU and on digital reporting requirements.

For businesses, that rely on certainty to thrive, the best way to ensure resilience is to start looking at how to digitize internal processes around tax compliance and reporting as soon as possible.

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

Luca Clivati is Senior Consulting Manager for Indirect Tax at Sovos.

The author may be contacted at: luca.clivati@sovos.com