VAT in the Digital Age – latest from the European Commission
The European Commission’s “VAT in the Digital Age” initiative is a response to the digitalisation of the economy and the new challenges that this poses to European tax authorities and the EU VAT system. This includes the emergence of new business models in the digital economy, as well as the increased amount of data that tax authorities are able to collect (including current and upcoming digital and e-invoicing reporting requirements and mandates). The European Commission recognises that digitalisation can create opportunities to increase compliance, reduce the VAT Gap and simplify tax compliance and reporting for businesses. This major policy initiative focuses on three topics related to VAT and evolving technologies, digitalisation and new innovative business models, namely:
- Single VAT registration
- Digital Reporting Requirements (DRR) and e-invoicing
- VAT treatment of the platform economy
Study / Report
We are awaiting the publication of a study which is being carried out by an external consultant (Economisti Associati). The study will assess the current situation and the likely impacts of a number of policy options on the three “VAT in the Digital Age” topic areas. It is expected that an Impact Assessment will follow later in the year. A draft version of the report has been received by the European Commission and it is expected to be finalised and released in January 2022. There will also be an IT study undertaken and this will likely be finalised in April 2022.
There will be a Public Consultation on the three “VAT in the Digital Age” topics launched soon. This appears to have been delayed as it was anticipated to launch in November and close towards the end of December 2021. The objective of this public consultation will be to obtain the views of stakeholders on the proposed changes and preference on options being considered.
Virtual Fiscalis workshop
A virtual Fiscalis workshop took place on October 27 - 29, 2021 to discuss the draft report and obtain views on the problems identified and different policy options. The outcome of the workshop will be fed back into the final report. A few high-level headlines and observations from the Fiscalis are:
- 160 people across Government, business, advisers and associations attended
- consensus that maintaining the “status quo” is not an option (i.e. EU member states can’t continue to unilaterally bring in their own local requirements in relation to digital reporting and e-invoicing)
- move towards a single EU Digital Reporting Requirement is favoured
- France and other member states will in the meantime move ahead with their announced B2B e-invoicing mandates
- a key discussion point is: how does the EU move away from single member state requirements to a single EU model?
- whatever the agreed model, it has to be future-proof
- there appears to be backing for the new reporting requirements to apply across segments – established and non-established, domestic and cross-border, and B2B/B2C/B2G. It is easier to have a comprehensive system rather than the added complexity of only applying to certain cases
- likely no need for complete harmonisation
- data confidentiality is important – some Member States in Central and Eastern Europe (CEE) are particularly concerned around personal data that could be shared inadvertently
- recognition that businesses need to have side benefits as well – not just an upside for the tax authorities
- pre-filled VAT returns discussed – if a tax authority now has all the data (depending on the model), to the extent they can, logical to pre-complete VAT returns on behalf of taxpayers
- in relation to the platform economy, may not proceed with large catch-all rules across all platforms and legislation could be initially focused on selected sectors affected by tax leakage e.g. following the new Canadian deemed supplier model for GST on passenger transport.
Group on the Future of VAT – questions for analysis
EU Member States also discussed certain aspects of Digital Reporting Requirements (DRR) and the platform economy topics at the Group of the Future of VAT (GFV) meeting on December 6, 2021. The GFV is an Informal Commission expert group composed of representatives of national tax authorities which aims to provide the European Commission with a forum for consulting experts from Member States on pre-legislative VAT initiatives.
The Questions for Analysis by the GFV (which was also discussed at the Fiscalis) can be seen as an interesting summary of the current debate and the options available to the Commission, as well as a possible sneak preview of some of the questions that will appear in the public consultation. These include:
- whether system is a Periodic Transaction Control (PTC) or a Continuous Transaction Control (CTC)
- model of PTC i.e. VAT listings or SAF-T
- model of CTC i.e. real-time reporting or e-invoicing
- frequency of the reporting e.g. monthly or quarterly for PTCs, real-time, daily or within a few days for CTCs
- frequency set as a fixed time or a maximum time period e.g. “at the latest X days after the transaction”
- same or different model and design elements for domestic and intra-EU transactions
- transactions to be covered by the DRR i.e. B2B, B2G and B2C, exempted transactions
- whether some transactions be covered by all Member States and others be optional
- role of the customer - reporting of the acquisition / confirmation of the data reported by the supplier / acceptance of the e-invoice
- e-invoicing – clearance or a non-clearance system and whether harmonised model
- what elements of the design should be harmonised and what elements should be left to the discretion of Member States e.g. kind of data, frequency
- whether a “minimum core set” of elements vs a full harmonisation across EU
- whether there is a role for blockchain
- whether all taxpayers should be included under the scope of the DRR or left to Member States to choose specific categories of taxpayers
- which SMEs should be excluded from DRR – whether these should be the same businesses exempted under the new VAT scheme for Small Businesses that will apply from 1 January 2025 or should a different definition/threshold be used
- what benefits could be provided to taxpayers as a result of DRR e.g. pre-filled VAT returns, faster refunds, possibility to view the amounts reported by suppliers/customers
- whether some taxpayer benefits would be across EU or be up to Member States – possible non-binding EU recommendations
whether some existing compliance obligations could be removed if a DRR implemented e.g recapitulative statements removed (EC Sales Lists).
Draft reports and legislative process
The European Parliament’s Committee on Economic and Monetary Affairs (ECON) recently voted on and approved the Draft Report on “The implementation of the 6th VAT Directive: what is the missing part to reduce the EU VAT gap?”. While this is heavily focused on the VAT reduced rates initiative, there is certainly language that reinforces the Commission’s desire to reduce the VAT gap and use digitisation as a major tool to achieve this. The Explanatory Statement states that “This gap can be reduced by simplifying the VAT implementation system and combating fraud, thanks in particular to digitisation, which enables both governments and businesses to take action in real time”. The main report also:
- “Stresses that the VAT gap is chiefly attributable to the ineffectiveness of enforcement and control measures, particularly those against tax evasion and avoidance and aggressive tax planning”; and
- “Notes digitalisation’s potential to reduce compliance costs; maintains that digital innovations are likely to reduce compliance costs and help increase the transparency of commercial transactions; stresses the need to ensure data security and individual and corporate privacy".
The plenary Parliamentary sitting date for this is slated for January 17, 2022.
Of significant interest is the Draft Report on “Fair and simpler taxation supporting the recovery strategy”. The VAT recommendations include some of the key focus areas of VAT in the Digital Age initiative, including:
- to move towards the adoption of a Single EU VAT registration procedure and the Single EU VAT number by 2023
- to set up a harmonised common standard for e-invoicing across the EU without delay and by 2022 to reduce the cost of the creation of fragmented and different systems across the EU Member States
- to explore the possibility of a gradual introduction of obligatory e-invoicing across the EU by 2023, focused on significant reduction of costs of compliance, especially for SMEs. Issuing invoices should be administered only via state-operated/certified system(s) with full data protection ensured
- to examine the possibility that the system will provide a part (or full) tax compliance data/documents for eligible taxpayers, including the responsibility for the compliance of these returns (or parts of them), especially from the point of view of reducing compliance cost and risk for SMEs – by 2023.
In addition, to reduce the VAT gap by one or more of the following initiatives by 2022-2023:
- relaunch the initiative of the definitive regime as the most natural and efficient way to address tax fraud, costing a significantly large yearly loss;
- propose gradually, but promptly, an extension of the existing OSS platform from B2C to B2B, to simplify compliance with VAT obligations and receive data for monitoring and tackling tax fraud
- design and propose online reporting of data for (at least) cross-border Union trade, preferably by using data from e-invoicing (or from an alternative, but keeping the principle that the data must be provided once), including efficient and highly secure centralised/decentralised data processing for detection of fraud. The data will replace all existing reporting requirements in this area and cause the overall costs of compliance to be reduced, notably for SMEs.
We will be following the above dossier very closely. The vote by ECON is scheduled for January 13, 2022, with an indicative plenary sitting date of February 14, 2022.
Proposals/draft VAT legislation is expected to be released in the European Parliament’s 2nd Semester in early Q3/2022. The new changes could take effect as early as 2023/24.
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