The European Commission’s proposal, planned for several months and known as ViDA – VAT in the Digital Age, finally saw the light of day on December 8, 2022. The long-awaited reform is set to have significant impacts on the activities of European and non-European businesses from the perspective of tax compliance and intra-EU e-reporting, European e-invoicing, and the digitization of processes that are essential to ensure compliance with the new requirements.
The reform, which has been called one of the most ambitious—if not the most ambitious—reform in recent decades, is expected to recover more than €11 billion in value-added tax per year in the EU territory.
Let’s look at what the Commission’s proposed package of changes entails, the rationale behind this set of innovations, and the dates that organizations must keep in mind.
Since this is a proposal, there will be an 8-week public consultation period, expiring early in February, during which the various stakeholders will have the opportunity to ask questions, get clarifications, and give suggestions. At the end of this period, we will then have the final text of the reforms although, since it has already been widely discussed and shared, any changes will probably be kept to a minimum.
The reasons for the reform
As we have mentioned, this package of reforms had been in the air for some time because of the need to update the European VAT Directive (Directive 2006/112/EC) in order to keep up with the major changes that have occurred since it was first enacted in 2006. Just think of the spread of e-commerce platforms and the impact they have had on businesses, transactions, and tax compliance management.
One of the first goals the European Commission aims to achieve with the reforms, however, is to counter the phenomena related to tax fraud, evasion, and avoidance. According to some estimates, in 2020 alone, the European Union would have lost as much as €93 billion in uncollected VAT. A considerable part of tax fraud, moreover, would be attributable to intra-EU transactions, so-called fraud – carousel.
This is why one of the key points of the proposal concerns the introduction of an obligation to transmit data of intra-EU transactions to a centralized system at the EU level, a true e-reporting obligation. In fact, underlying the proposal is the belief, or rather, the realization that the digitization of processes and transactions is now an essential tool for facilitating both monitoring activities by the relevant authorities and for making it easier for businesses of all kinds to comply with requirements.
In order to implement its objectives, the EU Commission has planned a package of reforms that involve action on three different pieces of legislation, as well as the production of the necessary implementing acts. Thus, proposals are made to amend:
- Directive 2006/ 112/ EC (the so-called VAT Directive);
- Regulation 282/2011;
- Regulation 904/2010.
VAT in the Digital Age (ViDA), the 3 key points of the EU proposal
The proposal is based on three key elements:
- The introduction of a digital reporting system, or e-reporting, to enable Union-wide monitoring of intra-EU transaction data.
Digital reporting, which will become mandatory, will be based on electronic invoicing according to the European standard. Through special implementing acts, the European Union will have to clarify the technical details of the system and how national systems will interact with the centralized system that will be implemented. As the proposal stands, while each member state will be able to optionally decide whether and how to implement the e-invoice or a CTC (Continuous Transaction Control) model, at the cross-border level, the European e-invoice becomes an increasingly concrete reality;
- Single VAT registration, to make it easier for businesses to meet their VAT obligations without having to register in each of the countries in which they transact, and thus without having to comply with each other’s compliance requirements. Through this innovation, companies will only be able to register once and fulfill their obligations through a single portal and in a single language. This should also generate savings for the benefit of companies, especially SMEs, in terms of administrative and registration costs: savings that are estimated to amount to nearly €9 billion over a 10-year period;
- The updating of VAT rules for platform operators. This amendment refers to operators who run platforms related to short rentals and the passenger transport sector, within the tourism sector, for example. At present, many of these transactions remain outside of VAT compliance, effectively causing inequalities among the economic operators involved and generating an undue advantage for some of the operators who use such platforms. Under the changes contained in the reform, the platforms in question will be required to ensure that VAT is paid where it is due, if operators do not comply themselves. This measure is expected to allow the recovery of €6 billion in VAT per year, according to proposed estimates.
The European electronic invoice will be easier for States to adopt
Those listed are the three main changes contained in the reform proposal, which are bound to generate significant impacts. But the maneuver is extremely complex and contains several additional changes that are necessary to enable a smooth transition to the new regime.
For example, it should be noted that the proposal also includes some changes aimed at facilitating the adoption of the electronic invoice within individual States. In fact, we repeat: while e-invoicing is likely to be implemented at the level of intra-community transactions, it will still be optional (and not mandatory) for individual states in terms of fulfilling digital reporting obligations at the EU level.
Specifically, in almost all European states where there is no obligation, sending an electronic invoice is currently subject to the consent of the recipient, who can then also refuse to receive it and demand a paper or PDF invoice. According to the proposal, from 2025, member states will be free to remove this clause, thus eliminating the need for suppliers to obtain consent from their customers for e-invoicing.
Most importantly, the proposal also deletes Article 232 of the VAT Directive, which currently requires states to request a specific derogation from the European Union in order to be able to introduce the e-invoicing mandate in B2B and B2C relationships. This is the same derogation procedure that Italy, France, and Poland, for example, have had to comply with. With the deletion, this constraint will also be removed, and member States will therefore be able to introduce the mandatory electronic invoice without having to seek any prior authorization from the European Union. Instead, the e-invoice will be considered the default invoicing mode to be adopted, based on the amendment of Article 218 of the same directive.
The calendar of new obligations
As we can see, the planned changes will have a great impact, and we have only highlighted the main changes in this article. In light of this, and given that compliance with the new requirements will require substantial technological and procedural adjustments to member states and stakeholders, the introduction of the changes will be gradual and progressive.
First, member states will have to take steps to enact the necessary measures and regulations to transpose the amendments—this phase must be completed between the end of 2023 and the beginning of 2024.
Then, starting in 2025 and by 2030, the various requirements related to intra-EU digital reporting, single VAT registration, and new rules for platforms will gradually come into effect.
European invoice: the expected results
As we have mentioned, one of the main expected results is the recovery of VAT, thanks to the support that these digital process-based measures can provide in combating tax evasion and fraud. It is estimated that these measures will result in €111 billion in VAT being added to the Union’s coffers over 10 years.
In addition, the savings for SMEs in terms of the costs of ensuring tax compliance have already been mentioned, as measures such as single VAT registration will reduce the burden on businesses in this respect.
In addition, the measures will help to increase and facilitate communication between the national systems already in use, encouraging interoperability and also facilitating the adoption of electronic invoicing and e-reporting systems for states that have not yet implemented such systems.
