The EU’s VAT in the Digital Age Directive- Ten things to look out for

After months of debate, and a three week delay, the European Commission is set to formally announce its proposed legislative changes in relation to digital reporting requirements and e-invoicing on December 7, 2022.  

This will be in the form of a draft Directive that will need to be formally adopted by the Council of the European Union and the European Parliament under the ordinary legislative procedures. 

While we look forward to the detail in the draft Directive and further announcements from the European Commission, we have set out below 10 key e-invoicing and digital reporting changes to anticipate and look out for under the VAT in the Digital Age (ViDA) initiative:

Digital Reporting

1. New harmonised Digital Reporting for intra-EU B2B cross-border supplies
A new pan-EU Digital Reporting Requirement will be introduced for intra-EU B2B cross-border transactions. All taxpayers will be covered by this new reporting requirement, with no thresholds or exemptions (including non-resident and microbusinesses). This will involve the real-time reporting of a subset of e-invoice data by both the supplier and the customer.
Taxpayers will submit the required transactional data to the relevant national tax authority. Tax authorities will then share data with other member states by reporting it to the European Commission’s new central database. This decentralised model is similar to how the current VAT Information Exchange System (VIES) database works today.

2. End of EC Sales Lists
'Recapitulative statements' (also known as EC Sales Lists and VIES reports) filing requirements will be removed and replaced by the new Digital Reporting requirement. We will therefore see the existing periodic summary of intra-EU sales by customer replaced with real-time (or close to real-time) transactional level digital reporting by both parties.

3. EU Member States will have option to implement digital reporting for domestic transactions
Individual EU countries will be able to choose whether to implement digital reporting for domestic transactions, but this will not be obligatory under the Directive. However, if countries are introducing new digital reporting requirements domestically, they will need to conform to the new Digital Reporting requirements. This will mean that if a member state wants to introduce a domestic digital reporting requirement, it will also need to mandate domestic e-invoicing, with a subset of the e-invoice data reported by businesses.

4. Existing digital reporting requirements will need to ensure interoperability before converging to meet the new EU requirements
Current local country digital reporting and e-reporting requirements (e.g RITR in Hungary and the SII in Spain) will need to ensure interoperability with the new EU digital reporting requirements in the short-term, before fully converging in the medium-term to the full requirements.  

5. EU standard for e-invoicing (EN16931) will be used for digital reporting
The required data elements and reporting format for the new intra-EU digital reporting will be based on EN16931, the existing European e-invoicing standard. Therefore, the required data to be reported both cross-border and domestically, could be a subset of data from e-invoices. However, this does not mean that the European Commission will mandate e-invoicing across the EU, but instead attempt to remove many of the barriers of adopting e-invoicing for both countries and businesses, and where e-invoicing is used, there should be synergies relating to the data and format required for digital reporting.  

Digital reporting will be decentralised but shared at a European Union level 
Taxpayers will submit the required transactional data to the relevant national tax authority. Tax authorities will then share data with other member states by reporting it to the European Commission’s new central database. This decentralised model is similar to how the current VAT Information Exchange System (VIES) database works today.

E-invoicing

6. Formal definition of an e-invoice in EU VAT Directive will change
Currently, an electronic invoice is defined in the VAT Directive as an invoice that contains the information required in the Directive and has been issued and received in any electronic format. This definition is quite broad and generic. Going forward, this definition will be changed to specifically make clear that an e-invoice must have structured data i.e., a standard PDF will not be considered an e-invoice.

7. E-Invoicing will be mandatory for B2B intra-EU supplies
All businesses will be mandated to issue e-invoices for intra-community supplies of goods or services to customers in other EU member states. The invoice data will need to be in a structured form and meet the European e-invoicing standard. This will apply to every business in all EU member states, regardless of whether e-invoicing has been introduced locally for domestic sales.

8. Removal of need for customer to agree to accept e-invoices
Currently the customer i.e., the recipient of the invoice, must agree to accept an e-invoice from the supplier. This so-called “buyer consent” requirement will be removed, allowing businesses to freely adopt e-invoicing, even where there is no formal e-invoicing mandate in the country.

9. EU member states will be allowed to introduce mandatory e-invoicing without a formal derogation
At present, where an EU member state wishes to introduce mandatory e-invoicing, it must formally request a derogation from the European Commission (i.e., permission to deviate away from the VAT Directive). This normally involves the country setting out the main reason for introducing mandatory e-invoicing e.g., tax fraud and closing the VAT Gap, and the European Commission will typically approve with specific conditions and timeframe. This is how Italy was able to introduce mandatory B2B e-invoicing and how Poland and France will in 2024. However, going forward, it will be proposed that no prior permission will be required, and this is likely to be replaced by a mere need to notify the Commission of the intended plans.

10. European e-invoicing standard to be accepted across Europe for B2B e-invoicing
It will be proposed to scale the European e-invoicing standard (EN16931) from its current main use for public procurement (B2G) to wider adoption for B2B. This does not mean that individual countries cannot have other formats and standards, however EN16931 would become an acceptable option that businesses could use. There is a synergy here with the new cross-border digital reporting requirements as the data will be provided in this same format. 

Timeline for proposed changes

The above e-invoicing changes are seen as "quick wins" and we therefore expect a shorter timeframe for implementation and adoption, and these should go-live once the draft Directive is formally adopted. However, given the system changes required for the new Digital Reporting Requirements, this will likely take several years to implement and go-live. 

Area of Reform Likely date
E-Invoicing 01 January 2025
Digital Reporting 01 January 2028

It is however likely that more European countries will push forward with new e-invoicing mandates in the meantime and will follow Germany in requesting a derrogation for mandatory e-invoicing which is compliant with the new ViDA requirements. The proposed changes will likely remove many of the barriers faced by both individual European countries and by businesses in relation to adopting e-invoicing. These proposed changes will also ensure that e-invoicing remains the clear direction of travel for tax authorities in Europe, but at the same time trying to remove the current fragmentation in the e-invoicing and digital reporting “wild west,” by moving to harmonised digital reporting, increased interoperability and allowing a more scalable and strategic approach to meeting these requirements by using the European e-invoicing standard.  

Avalara will be hosting a live webinar on VAT in the Digital Age, providing an initial overview, commentary, and insights on the proposed changes when the eagerly anticipated draft Directive is finally released. Of course, e-invoicing and digital reporting is just one of three workstreams that the VAT in the Digital Age initiative and draft Directive will address, together with the Single VAT return for trading in the EU and the VAT treatment of the Platform Economy. 

The devil will be in the detail and there is still a lot of interpretation, analysis, debate, discussion, and legislative process to follow – however, with apologies to Coldplay’s, "Viva La ViDA", this is a bold initiative by the European Commission that will impact every single business in the EU and beyond. 

Get in touch now and speak to one of our VAT and e-invoicing experts to see how Avalara can assist with e-invoicing and digital reporting in over 60 countries.

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