Just a few months ago, the European Commission released a proposed package of changes aimed at updating the current VAT and e-invoicing legislation. The proposal, known as ViDA – VAT in the Digital Age, is awaiting approval by the Council of the European Union, a step that is expected in the coming months. You can still submit feedback to the Commission: The deadline for submitting comments, which was initially set for the beginning of February, has been extended to April, but further extension cannot be ruled out.
Among the various changes and novelties foreshadowed by the new version of the rule, today we intend to focus on the new obligations related to issuing electronic invoices and the mandate related to e-reporting, which provides for the electronic and structured submission of information regarding intra-Community transactions. These obligations are scheduled to come into force in 2028.
So, let’s take a look at these new processes to understand what they consist of, what they will entail for businesses, and how they will work operationally, based on the information provided by the Commission so far.
The context of the EU proposal – VAT In the Digital Age
The proposal stems from the need to remedy a number of situations encountered in recent years, which have made it clear that the current European VAT and invoicing legislation is outdated and no longer suitable for the current economic environment.
In fact, the current VAT directive is now about 30 years old and does not keep up with the new economic models that have emerged in recent years thanks to countless possibilities generated by new technologies: e-commerce, platform economies, the gig-economy just to name a few.
Moreover, the presence of a fragmented regulatory framework and extremely varied e-invoicing and e-reporting systems in different European countries results in high compliance and administration costs for businesses.
According to estimates by the European Commission, there was around €93 billion in uncollected VAT in 2020, mostly related to so-called carousel fraud (Missing Trader Intra-Community fraud), in the context of intra-Community transactions. In fact, current European provisions do not allow for timely monitoring of such transactions, which fosters a breeding ground for this type of tax offense.
The strategy developed by the Commission to deal with these critical issues includes, among other things, involves:
- updating invoicing provisions in order to encourage the introduction of electronic invoices in all member states in the most harmonized way possible through the introduction of certain mandates;
- the introduction of a requirement regarding the declaration of information on intra-Community transactions, to be made digitally and thus in the form of e-reporting.
Electronic invoicing starts in 2028
Needless to say, when it comes to electronic invoicing, the situation in Europe is still extremely varied. On the one hand, there is no widespread mandate, so for some countries, e-invoicing is mandatory only for B2G transactions. In some countries, e-invoicing is planned for the B2B sector in the short term, while in other countries, there are no obligations at all. We talked about this in an in-depth article dedicated to the obligations planned from 2023.
Added to this is the fact that the e-invoicing systems currently in use are extremely varied and different from each other, in terms of formats, processes, and infrastructure. Today, a company that operates in several European countries has to manage compliance with different e-invoicing regulations and systems, requiring a significant impact in terms of economics and expertise.
This is set to change in part in the near future through the following steps:
- as early as 2024, it will no longer be necessary for member states to request a derogation from the European Union in order to introduce the e-invoicing mandate on their territory. This will remove a bureaucratic barrier to the adoption of e-invoicing that EU countries, starting with Italy, have had to interface so far;
- also starting in 2024, it will no longer be necessary to obtain the buyer’s prior consent to receive invoices in electronic format;
- starting in 2028, on the other hand, electronic invoices will become the default mode to be used, while it will only be possible to issue paper invoices in special cases that will have to be defined by individual countries.
The reform also has the merit of clarifying, once and for all, that “electronic invoice” means only invoices processed in structured formats, such as XML-based formats. (Renewed Article 217 of the proposed reform of Directive 2006/112/EC)
In addition, it is also stipulated that when implementing e-invoicing systems, it will be necessary to refer to formats that comply with European standard EN16391, such as UBL 2.1 and CII, or at least those formats that ensure interoperability.
Finally, the implementation by member states of new invoicing systems based on the pre-clearance model, which provide for prior control of electronic invoices by the tax authority, will not be allowed.
These measures are aimed not only at encouraging the adoption of e-invoicing by EU states, but above all at ensuring that the process takes place in a way that creates systems that are as interoperable and uniform as possible in order to avoid unnecessary burdens on businesses.
Mandatory e-Reporting for intra-EU transactions: what it’s all about
The year 2028 is also when it will become mandatory to report information data on intra-EU transactions (business-to-consumer transactions, however, still remain excluded). This obligation will take the form of a declaration in electronic format, so in effect, it will be a digital reporting obligation, or e-reporting.
To understand the impact of this change, it’s worth mentioning that the reporting of data on these transactions is currently done only by suppliers and with very deferred timeframes, both for issuing invoices and for transmitting the declaration. In addition, to date, this declaration is of a summary type, that is, it contains references to several transactions related to the same month.
This approach means that it is not possible to comprehensively monitor such transactions and related VAT compliance on the part of taxpayers.
What are Digital Reporting Requirements
The introduction of the e-reporting mandate, on the other hand, establishes a set of requirements—Digital Reporting Requirements (DRR)—which stipulate the following:
- the information should be sent in a structured format that complies with the EN 16391 standard, although the Commission will need to provide further details on this;
- the reporting must be done in near-real time, that is, within 2 days of the issue of the invoices in question. This stringent timeframe is intended to quickly detect potential fraud or tax malfeasance situations;
- it will no longer be possible to make recapitulative statements instead, reporting will have to be made on a transaction-by-transaction basis;
- the data to be reported, which is a subset of the information already on the invoice, will be determined at the Union level, and member states will not be allowed to request additional information;
- finally, the e-reporting requirement will apply to both suppliers and buyers: this will allow cross-checks against the data received to ensure more timely controls and minimize fraud.
New centralized VIES, how it will work
We will devote the last part of this article to the system and infrastructure required to manage this new e-reporting mandate.
Specifically, the proposal calls for the creation of a centralized system, VIES (VAT Information Exchange System), from the current version.
Each EU country will have to set up a national system that is capable of collecting data in a structured format from taxpayers and then transmitting it to VIES. Member states, of course, will also be responsible for the veracity and accuracy of the data transmitted.
VIES, therefore, will have the following functions:
- collect the data acquired in compliance with the Digital Reporting Requirements;
- process the data and enrich it with other data, including those allocated on other systems capable of communicating with VIES under interoperability;
- data will be kept on the system for 5 years, and then deleted;
- VIES will provide access to authorized officials from individual member states or supranational monitoring bodies such as Eurofisc, for purposes of VAT compliance monitoring and tax fraud prevention.
The technical and operational details of the new system will need to be clarified in the near future. In addition, individual member states will also need to put the infrastructure for handling the e-reporting requirements in place and share it with taxpayers and providers in order to prepare for the 2028 deadline.
The European Commission has estimated that the measures introduced by the proposal for VAT In the Digital Age will bring in extra revenue in the amount of €111 billion over 2023-2032 in terms of VAT collected. Much of this revenue is expected to come from the introduction of Digital Reporting Requirements and the related obligation to use electronic invoicing.