International tax

Important EU VAT reforms gain support by the member states as well as by the European Parliament

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The EU plans ambitious reforms to further harmonize the rules of VAT determination and compliance in the EU. Will it succeed to achieve consensus and support from EU member states for its proposals?
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French Presidency of the EU plans to push for harmonized B2B e-invoicing across the EU. German new government aims to implement an electronic reporting system. Various other Member States (e.g. Ireland and Sweden) are discussing possibilities to harmonize digital reporting requirements in the EU. On 10 March 2022, the European Parliament voted in favour of harmonising pan-EU e-invoicing and the adoption of the EU definitive VAT system.

Background

Businesses trading across EU or placing their inventory in various EU member states, have to register for VAT in all member states where they hold stock or have intra-EU supplies or acquisitions. This is costly and leads to inefficiencies. In addition, several member states have introduced their own e-invoicing or (near) real-time transaction reporting systems (hereafter also referred to as ‘DRRs’). At least 13 EU countries have an e-invoicing system or plan to implement one. While e-invoicing has helped countries to reduce a VAT gap, differences between DRRs from country to country can make it difficult for businesses (especially SMEs who operate cross border) to keep up. DRRs are not always easy to comply with as businesses have to submit data in real time or near-real time about their transactions. Complying with all those systems and differing EU rules is costly for businesses operating internationally.

The European Commission (EC) plans ambitious reforms to harmonize the rules of VAT determination and compliance in the EU but will it succeed to achieve consensus and required support for its proposals?

Tax Package

EC presented its Tax Package in July 2020. It includes 25 VAT and other tax reforms, including: extension of the OSS return, gig and sharing economy reforms; review of financial services exemption.

A number of these reforms will go forward under the EU VAT in the Digital Age program adding to EU e-commerce VAT package of July 2021, and other EU VAT reforms in progress (e.g. EU definitive VAT system planned for 2022).

EC Consultation / Survey

In January 2022, the EC initiated consultation in three areas (see more details below). The deadline has been extended to 5 May. The survey consists of more than 40 questions, most of which ask contributors to rate the statements or options. You can reach the survey through the following link: EU Survey - Survey (europa.eu).

The main areas of reform where the opinion of the public is asked are as follows:

  • Digital Reporting Requirements (DDRs);
  • Extension of OSS single VAT registration to all B2C and B2B; and
  • Harmonizing VAT treatment of the platform economy - gig and sharing marketplaces.

The term Digital Reporting Requirements (DDRs) has been introduced by the EC and includes various types of transactional reporting requirements such as SAF-T (Standard Audit File for Tax) and real-time reporting (i.e. submitting invoice level detail to the tax authority either on the same day or within a few days) and mandatory e-invoicing requirements.

The EC aims to find out whether it should keep the status quo with some non-legislative interventions (i.e. non-binding guidelines from the EC) or push for a full harmonization of VAT reporting requirements. Full harmonization would mean member states with existing systems would have to ensure their interoperability and midterm convergence to the harmonized EU system.

Legislative proposals expected already in October 2022

EC announced that roadmaps and impact assessments will be provided with opportunities to comment and proposed Directive amendments to enacted reforms will follow in Q3 of 2022 after public consultations. New rules are aimed to be enacted by the end of 2023 or in early 2024.

The main areas of reform are as follows:

DDRs

The EC is considering various options for harmonized DDRs:

1. Harmonized data storing requirements - requiring taxpayers to record data about their VAT transactions in a standard digital format, which tax authorities can access upon request;

2. Harmonized DRRs, which consists of two sub-options depending from for which transactions the harmonization is achieved:

  • 2A. Harmonizing DRRs for intra-EU transactions
    • The introduction of an EU DRR for intra-EU transactions;
    • Recapitulative statements removed;
    • DDRs remain optional for domestic transactions;
    • New DRRs will conform to the EU DRR;
    • Existing DRRs will ensure interoperability, then converge in the medium-term.
  • 2B. Harmonizing DRRs for all transactions
    • The introduction of an EU DRR for both intra-EU and domestic transactions;
    • Recapitulative statements removed;
    • Existing DRRs will ensure interoperability, then converge in the medium-term.

 

Centralized vs non-centralized clearance

It is also being discussed which path to follow, i.e. whether to introduce a centralized clearance system or a non-centralized system.
Member states have implemented diverse VAT reporting rules and requirements across the EU.
Italy introduced e-invoicing with centralized clearance a few years ago. Several countries such as Hungary have introduced e-invoicing with non-centralized clearance and near-real-time reporting.
Several other countries (e.g. Poland, Spain and Greece) are planning to implement their own e-invoicing systems.

Germany and France plan to implement a common e-invoicing standard

A new version of the French-German e-invoicing standard has just been released – the Factur-X / ZUGFeRD. This standard has been developed through cooperation between France’s National Forum for Electronic Invoices and Electronic Public Contracts (FNFE-MPE) and Germany’s Forum Elektronische Rechnung Deutschland (FeRD). This is a first example that a common standard has been developed for use by more than one member state and hopefully more harmonization and co-operation follows.

Single EU VAT registration

EC plans to introduce a single pan-EU VAT return to reduce the number of VAT registrations for businesses operating across EU. This would cover cross-border B2C cases where the OSS does not apply, and some or all B2B goods’ transactions. EC plans to allow stock transfers to be reported in a so-called OSS 2.0. return. Domestic sales from distribution hubs could be reported in this OSS 2.0. return. Draft proposals would be published in Q3 of 2022 (after public consultations) for implementation at the end of 2023 or the begin of 2024.

VAT treatment of the platform economy

EC is looking at ways how EU Member states could adapt their tax systems to reflect the new role taken on by Electronic Interfaces (EIs) - platforms and marketplaces which have enabled millions of private individuals to provide services and goods for the first time. It looks at possibilities how the EU VAT Directive could be modified to capture the new dynamics created by the gig and sharing economies, as well as part of the e-commerce for goods’ sector not yet addressed by other EU VAT reforms. The EC wishes to:

  • provide certainty on the tax liabilities for this new sector for providers, users and EIs to prevent double taxation;
  • keep compliance efficient and light to reduce the burden and costs for taxpayers and tax authorities alike;
  • level the playing field for the traditional economy; and
  • protect MS’ tax bases, avoid non-taxation.

This work is being coordinated with the OECD.

The European Parliament voted in favour of VAT reform

The European Parliament (EP) passed on 10 March the resolution, which support most importantly the following changes in the EU.

Implementing the definitive EU VAT system

The resolution urges the European Council to adopt as soon as possible the proposal on a definitive VAT system that highlights the principle of taxation in the country of destination, based on a proposal of 25 May 2018 to amend the VAT Directive. It stresses the need to move to a definitive VAT system based on the principle of taxation in the country of destination; urges the Council to adopt, as soon as possible, the proposal of 25 May 2018.

It supports design and propose a standard for online reporting of data for (in the first instance) cross-border EU trade, preferably by using data from e-invoicing (or from an alternative, but keeping the principle that the data must be provided only 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.

Harmonizing of E-invoicing and digital reporting

The EP calls on the EC to:

  • Set-up a harmonised common standard for e-invoicing across the Union without delay and by 2022 to reduce the cost of the creation of fragmented, different system across the Member States.
  • Establish the role of e-invoicing in real-time reporting.
  • Explore the possibility of a gradual introduction of obligatory e-invoicing across the Union by 2023, focusing on a 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.
  • Analyse and investigate the possibilities of using technology, for example AI and different software, by applying it to real or near realtime VAT reporting in B2B transactions, while taking into consideration data protection and confidentiality.

EP notes that the best result will be achieved if the data analysis tools are introduced and implemented within the single market or the standards for such reporting are set across the Union simultaneously.

The EP calls on the EC to present concrete proposals to promote a quicker system of exchange of information on intra-EU VAT transactions and to make it interoperable with national mechanisms.

Single VAT return

The EP:

  • takes note of the willingness of the EC to propose, for 2022/2023, an amendment to the VAT Directive with a view to further expanding the scope of the VAT One-Stop Shop (OSS) and calls on the EC to explore how to expand the scope of the OSS; and
  • supports the idea of expanding the scope of the OSS, invites the Commission to assess how to broaden the scope of the OSS to encompass a wider range of services, especially with regard to all B2C transactions of goods and the transfer of own-stock, allowing companies to only register for VAT in one country; welcomes the proposal of a single VAT registration.