The current EU VAT system for intra-EU trade is almost 30 years old and, despite some recent improvements, has not kept pace with technological advances, the digital economy, changes in business models, or globalisation. On 8 December 2022, the European Commission proposed a series of measures to modernize the EU's Value-Added Tax (VAT) system. The proposal is aimed to make VAT work better for businesses, more resilient to fraud by embracing and promoting digitalization.
The VAT in the Digital Age package takes full advantage of technological and digital advances to deliver on an updated VAT system. In a nutshell, the European Commission has put forward proposals for:
1. A move to real-time digital reporting based on e-invoicing for businesses that operate cross-border in the EU and a harmonised framework for domestic transactions
The new system introduces real-time, transaction-based digital reporting for VAT purposes, based on e-invoicing. Once operational, the system will give Member States valuable information they need to control cross-border transactions and step up the fight against cross-border VAT fraud, while reducing administrative and compliance costs for businesses. To make the best use of this data for VAT control and anti-fraud purposes, Member States will also be equipped with the appropriate administrative cooperation tools.
2. Updated VAT rules for passenger transport and short-term accommodation platforms
Under the new rules, platform economy operators themselves will be deemed responsible for collecting VAT when service providers do not (because they are, for example, a small business not usually required to register for VAT) and for remitting this VAT to tax authorities. This, together with other clarifications, will ensure a uniform approach across all Member States and contribute to a more level playing field between online and traditional accommodation and transport services. It also makes life simpler for SMEs using the platforms as they will no longer need to understand and ensure compliance with VAT rules, often in other Member States.
3. The introduction of a single VAT registration across the EU
Building on the already existing ‘One Stop Shop' model for e-commerce traders, the EU Commission’s proposal will further reduce the circumstances in which businesses that want to sell to consumers in more than one Member State have to register in other Member States. With this reform, traders who operate cross-border can opt to register in only one Member State for their sales to consumers across the EU and for their transfers of goods for storage in other Member States. After registration in one Member State, they will then be able to fulfil their VAT obligations via a single online portal and interact solely with the tax administration of that Member State in one language, even though their sales are EU-wide. Smaller businesses, in particular those who want to scale-up, will benefit from the much simpler administration introduced by the new rules. The proposal also makes it mandatory for online platforms to register for the Import One Stop Shop which will further improve VAT compliance.
Where are we now?
The ViDA proposals are likely to have a big impact for many businesses in the European Union. Currently, the ViDA is going through the consultation and legislative process at the EU level. In this regard, the EU Finance Ministers broadly agree with ViDA proposals. However, a call to delay the proposed timetable on e-invoicing and to further consider the rules on platform reforms was raised. Some EU Member States have also raised questions on the costs of the required IT investment. In July 2023, the EU Parliament called for 2-year delay on the measures.
A final agreement and vote on the measures, their implementation and the timeline thereof is anticipate for the ECOFIN meeting of 17 October 2023. If the current timetable for implementation is kept and the first measure being implemented as of 1 January 2024, this will mean that businesses in the EU will have little time to adapt to the new rules. Although some delays and/or transitory measures are likely, businesses should prepare for the upcoming changes under ViDA.