VAT in the Digital Age – Implications of digitalisation for the VAT system in the EU
Need for reform
The current EU rules on value-added tax (VAT) are frequently no longer appropriate for today’s supply relationships and business models in their global and digital forms. In 2020, a so-called Tax Action Plan was approved by the EU Commission with a view to rejuvenating the VAT system. The intention is for the package of changes set out in ViDA, which has now been published, to be implemented from 1.1.2025, although the further timescale for the implementation is still open-ended.
The planned changes are comprehensive so it can be said that the VAT reform will be thorough. The reform package provides for three core elements, namely:
- Single VAT Registration (SVR),
- Extension of applicability of the deemed supplier regime to services and
- Digital Reporting Requirements (DRR) / electronic invoicing.
Single VAT Registration (SVR) will usher in …
Businesses that provide cross-border services, frequently, have to register (several times) for VAT purposes in different EU Member States as a result. The aim of the new rules is to centralise the reporting in the supplying business’ country of domicile of as many business transactions as possible that, currently, would be subject to a registration/reporting requirement in different EU Member States. This pooling should generate both cost and time savings for businesses subject to the reporting requirement and also reduce administrative expenses for the authorities.
As a result, there will be no EU identification number or EU registration. Instead, the centralised reporting will occur via registering in the supplying business’ country of domicile. This system is reminiscent of the One-Stop-Shop scheme (OSS) and there are indeed plans to extend this in the course of the reform because SVR is supposed to cover many more business transactions that would originally have resulted in having to register for VAT in different EU Member States. At the same time, it should also be possible to make use of the so-called Import-One-Stop-Shop (IOSS).
... major procedural changes
The planned changes can be categorised according to the status of the recipient of the supply and we have set them out in the table to provide an enhanced overview (cf. table: Procedural changes under SVR).
Extension of applicability of the deemed supplier regime to services
Electronic platforms are not just trading hubs for goods, but also contact points for service intermediaries. With a view to creating the same competitive conditions for this market in terms of VAT, the new rules aim to extend the applicability, as of 1.1.2025, of the previously described deemed supplier regime to specific services that are provided via electronic interfaces. The services that will then be included are:
- short-term accommodation rental (max. 45 days) via rental portals and
- passenger transport via taxi service portals that is provided by private individuals or small enterprises (that themselves do not charge VAT) and by companies and private individuals who are not domiciled in the EU (but in third countries).
Please note: The new rules should level the playing field here because, contrary to the rules for traditional providers (hotels, etc.), private individuals or even small enterprises that provide accommodation rental or passenger transport services via platforms do not charge VAT.
From a VAT perspective, a service will be deemed to have been provided to the platform. This service will be exempt from VAT without the right to deduct. The platform will be deemed to have sold the service to the customer and the service will fall within the scope of VAT and be liable for VAT (VAT shown on the invoice that is issued). Here, the service that the platform is deemed to have provided will not affect its right to deduct input tax.
Digital Reporting Requirements (DRR) / electronic invoicing
Background – Mandatory e-invoicing
The background to this new provision is the strategy to combat VAT fraud and it will speed up the detection of so-called missing traders in a carousel VAT fraud and, consequently, make it possible to catch them quickly. There will no longer be a requirement to file VAT recapitulative statements (RS) because these will be replaced with a system of digital reporting requirements (so-called DRR system) that will enable standardised and short-term reporting. This will be coupled with mandatory e-invoicing for certain services.
As a first step in implementing this, as of 2024, there will be a new definition in the VAT System Directive as to what constitutes an electronic invoice. According to this, an electronic invoice has to be both issued and sent in a structured electronic format. In step 2, the aim is that, as of 1.1.2028, for all intra-Community supplies (B2B) as well as services that result in a shift in the tax liability, the following will be introduced:
(1) Electronic invoicing obligation – The electronic invoice has to be issued within two working days after the taxable event occurs (i.e. the delivery/performance date is relevant). Then, in conjunction with this …
- … collective invoices, that cover several individual deliveries or services in a particular month will no longer be possible or permitted (please refer to reporting requirement in the DRR System),
- … invoices in PDF format will no longer be acceptable as electronic invoices for VAT purposes. Instead, an electronic invoice will be generated in a structured electronic format that allows for automatic and electronic processing.
Please note: Furthermore, more information will be needed than under the current invoice content requirements, e.g., bank details/IBAN of the supplying enterprise and the payment terms agreement.
The aim is for the individual Member States to allow e-invoices without prior central clearing. To this end, there is an intention to adapt the current EU-wide e-invoicing system to the new planned EU standard.
Please note: The new rules will initially not apply to services that are purely national or related to third countries. However, it remains to be seen whether or not, at the national level, the government will also resort to a structured electronic invoice format for national services. The provision envisaged in the German coalition agreement on invoicing in connection with combating VAT fraud would support this.
(2) Digital reporting obligation via the DRR system – The respective report in the DRR system has to be filed online no later than two working days after the e-invoice is issued. In view of the short reporting period, collective invoices will no longer be possible or permitted.
Please note: It will be possible for a third party to submit the data on behalf of the taxpayer. Another change will be the mandatory reporting of intra-Community acquisitions of goods and services.
The next step for the implementation of the reform will require the unanimous approval of all 27 Member States. At this juncture, it remains to be seen how, when and in what form the implementation of the new rules will be carried out. For businesses that are affected by the new rules, the reform will give rise to advantages in terms of reporting requirements and, in particular, the smaller number of foreign VAT registrations.
Recommendation: First and foremost, however, procedural and systemic adjustments will be necessary, in particular, in the area of e-invoicing. To prepare for this, we would recommend monitoring developments and carefully examining your own business transactions and processes with respect to any adjustments that might be needed.