Navigating VAT in the Digital Age – How Should Businesses Prepare?

By Mariana Príncipe, Senior Director/Head of Compliance, VAT Compliance, Consulting and Recovery, Ryan 

In response to the pressing challenges posed by the digitalisation of the economy, the European Commission unveiled its ambitious VAT reform proposal known as VAT in the Digital Age (ViDA) on December 8, 2022.

With the implementation period spanning from 2024 to 2028, the primary objectives of the ViDA reform is twofold: to modernise and optimise the European Union’s (EU) VAT system and to fortify the system against fraud through embracing digitalisation.

The reform aims to simplify VAT obligations and reduce costs for businesses and EU Tax Administrations handling the high volume of data generated from the digital economy. This shift will enable businesses to focus on more strategic functions, leading to cost savings, efficient handling of VAT reporting obligations, and reducing the EU’s VAT gap.

The second goal of this reform responds to reports indicating a staggering €93 billion loss in VAT revenues for Member States in 2020, approximately one-quarter of this amount attributed to fraud related to intra-EU trade. To address this, ViDA introduces real-time digital reporting for VAT purposes through e-invoicing, which provides Member States with crucial information to combat VAT fraud, especially carousel fraud. This shift to e-invoicing is projected to reduce VAT fraud by up to €11 billion annually and decrease administrative and compliance costs for EU traders by €4.1 billion per year over the next decade. Additionally, ViDA establishes a framework for national digital reporting systems within Member States, fostering convergence and coordination across the EU while offering flexibility for those wishing to establish domestic digital reporting systems in the future.

Overall, the introduction of the ViDA reform is expected to pave the way for a more resilient and efficient VAT system in the Digital Age. This initiative promises to have a transformative impact on businesses and anti-fraud measures across the European Union. But what exactly do these new measures entail? Let’s delve deeper.

Proposed New Measures

Digital Reporting Requirements

Digital Reporting Requirements (DRRs) means that all businesses undertaking intra-EU B2B supplies will be required to issue and receive e-invoices and report these transactions within two days of issuing the invoice. DRRs can be divided in Periodic Transaction Controls, like the Standard Audit File for Tax (SAF-T), and a Continuous Transaction Controls, which mean real-time reporting or mandatory e-invoicing. This requirement means that businesses will be aligned issuing e-invoices according to EU standard EN16931.

Platform Economy 

Platform economy operators, as short-term accommodation rentals and passenger transport services, will play a more substantial role in VAT compliance collecting and remitting VAT to the tax authorities where their suppliers do not.

Single VAT Registration

This will allow companies to only register once across all EU countries reducing the burden and administrative issues of having to file in each country independently. To achieve this goal, an extension of the reverse charge mechanism from Article 194 of the VAT Directive is proposed. The OSS scheme for e-commerce is expanding to cover domestic sales of goods from non-established suppliers to consumers, along with other B2C supplies. Additionally, a new OSS regime for cross-border transfers of own goods is being introduced.

The proposal also makes it mandatory for online platforms to register for the IOSS, which will further improve VAT compliance.

How Should Businesses Be Preparing? 

The ViDA proposal outlines a transformative vision for VAT and reflects the European Commission’s palpable commitment to enhancing tax revenues, mitigating VAT fraud risks, and modernising the VAT system. Forward-thinking businesses must prepare strategically to navigate the upcoming changes. To prepare effectively, businesses need to have a comprehensive understanding of their presence and transactions in EU countries. This requires them to closely monitor their supply chains and establishment statuses. It is also crucial to be aware of diverse changes and requirements in each EU country, so businesses can proactively collect and track pertinent information. Additionally, businesses should carefully review proposed changes, analyse their impacts on various facets, and integrate them into day-to-day operations. This requires advance planning for necessary adjustments in internal systems or seeking third-party support to meet compliance deadlines set by different tax authorities.

Adapting to new obligations, particularly in the areas of e-invoicing and digital reporting, can be challenging for SMEs. The journey towards digitalisation promises long-term efficiencies, but businesses may face short-term challenges because of phased implementation affecting B2G, B2C, and B2B transactions across different countries. Compliance in each country may require a patchwork of partners, which could lead to difficulties and additional costs for businesses.

To alleviate these challenges, companies can benefit from dedicated support teams, capable of navigating the multifaceted impacts of the reform, spanning VAT compliance, consulting, and reclaims across the EU and beyond. 

In short, the ViDA reform is a complex process that will involve various stakeholders, including businesses, tax advisors, and tax authorities. Each stakeholder will have a unique role in ensuring the success of the reform. Businesses must plan and prepare for the changes, while tax advisors should address any questions or concerns related to the implementation of e-invoicing and digital reporting processes. The European Commission and tax authorities in the EU countries should provide clear guidelines and instructions to facilitate the harmonisation of the VAT system reform. A collaborative approach between all stakeholders is critical to ensure a smooth transition. 

Is the “Right” Technology the Silver Bullet?

It is crucial for businesses to consider the ViDA proposal in their digital evolution plans to avoid lagging behind and facing challenges in staying competitive when the proposal takes effect. In fact, predictions suggest that by 2025, almost 80% of organisations worldwide will have to switch to electronic invoicing to comply with VAT regulations or as a necessity of their business partners. Simply put, keeping pace with the VAT system reform will enable companies to be competitive in the global market.

Businesses that do not comply with these regulations risk losing their ability to conduct transactions in the EU. Businesses currently unable to keep up with the latest tax laws using their current technology should take steps to become compliant to avoid penalties. This includes ensuring that e-invoices are sent in the correct digital format and that invoices received are processed according to strict regulations. To do this, companies should consider implementing an ERP (Enterprise Resource Planning) or transaction management application that is capable of handling compliant electronic invoice delivery, receipt, processing, and archiving.

This article also appeared on Finance Derivative.