What is the platform economy?
The platform economy is, quite simply, an economic model based on the use of digital platforms that directly connect producers and consumers.
Some examples? Amazon Marketplace, Apple, Meta, Microsoft, Airbnb, Booking, Uber, Deliveroo are just a few of the many names that we could list. These are all company names that we are all familiar with, in some way, as the vanguards of the current economic (but also social) system.
Not to mention, then, a whole undergrowth of start-ups that operate in the same vein, and that could become the big players of the future.
The United States leads the global platform economy market, with 46% of the market, followed by China, with 35% (made up mainly of giants Alibaba and Tencent). On the other hand, Europe holds an 18% share: still, an extremely large share, in terms of absolute value (data from the report “Unlocking the value of the platform economy,” by KPMG).
There are currently more than 500 platform economy players in Europe, present in all member states, that provide a source of income for more than 28 million people (consilium.europa.eu).
Looking at the market as a whole, it is a very large, growing, increasingly branched, and increasingly strategic ecosystem. It’s an ecosystem that has moved at a rapid pace from the very beginning.
As a result, the regulatory environment has always struggled to adapt to this rapidly changing reality.
Something, however, is changing, especially at the European level.
And the turning point is a proposal from the European Commission, known as ViDA – VAT in the Digital Age.
In the next section we will focus on the scope of reforms involved in this proposal.
Then, we’ll narrow our focus on the specific updates related to platform economy operators in Europe: we’ll see which sectors are affected, the deadlines, the rationale behind the proposals, and the expected impacts and benefits.
ViDA – VAT in the Digital Age: the context
Let’s start with a date: December 8, 2022. This is the date of the publication, after a long wait and many complex stages, of the European Commission’s action plan known as ViDA – VAT in the Digital Age.
It lays the foundations for a very ambitious package of reforms that will have a broad and profound impact on the operations and processes of European and non-European businesses.
There are three main key points that emerge from it:
1) It introduces a digital reporting (or e-Reporting) system to enable EU-wide monitoring of intra-EU transaction data.
The digital reporting, which will become mandatory, will be based on the electronic invoice according to European standards. The technical details of the system and how national systems will interact with the centralized system that will be implemented must still be clarified through the appropriate implementing acts.
2) Single EU-wide VAT registration
The goal is to make it easier for businesses to fulfill their VAT obligations without having to register in each of the countries in which they conduct transactions.
So: simplification, time savings, economic savings.
It’s a key piece in the process of integrating Europe’s economic and production ecosystems, which are increasingly interconnected, but not yet sufficiently so.
3) Upgrading VAT rules for platform economy operators in Europe: we’ll focus on this point below.
The stated goals are very ambitious: to recover €111 billion of extra revenue in terms of VAT collected for the decade 2023-2032 (pwc.com).
This is the timeline set for major interventions:
- Starting in 2024, it will no longer be necessary for member states to request derogation from the EU to introduce the e-invoicing mandate on their territory.
- Also from the same year, it will no longer be necessary to obtain the purchaser’s prior consent to receive invoices in electronic format.
- From 2028, electronic invoices will become the default mode to be used; the cases where paper invoices can still be used will be regulated by individual member states. The electronic invoice will still be mandatory for intra-EU transactions.
- And also from 2028, it will become mandatory to report information data on intra-EU transactions (excluding B2C transactions), in the form of digital reporting (or e-reporting).
Having drawn this more general picture about the ViDA action plan, we can proceed by tightening our focus on everything related to the changes and reforms specific to the platform economy in Europe.
The platform economy in Europe: the sectors affected by the reforms proposed in ViDA
First, we want to highlight a very telling fact. According to the final ViDA report (The VAT Treatment of the Platform Economy), the percentage of suppliers in the European Union who use an online platform and are not registered for VAT compliance could exceed 70%.
As is obvious, all of this generates strong disparities, especially for players in sectors that can be considered competing and overlapping.
These disparities are evident for companies doing business in travel, tourist accommodations, and passenger transport.
The stated goal of the European Union, therefore, is to eliminate these disparities, but without getting bogged down in a multitude of obligations and compliance.
In short: fairness, justice, and transparency are meant to be combined with simplification. But also to the opening up of a range of new opportunities, especially for smaller operators who, at present, may find themselves stuck and scattered in the midst of the current regulatory situation that is so uneven and uncommunicative between one state and another.
The updates to the VAT rules for platform economy operators in Europe will, therefore, mainly affect companies that operate platforms related to short rentals and the passenger transport sector, with a specific focus on the tourism sector.
With the changes contained in the reform, the platforms in question will be required to ensure that VAT is paid where due and remitted to the relative authorities in order to ensure uniform treatment.
To have a concrete economic parameter: according to estimates, this measure alone is expected to enable the recovery of €6 billion in VAT per year.
What will change, concretely? And in what time frame?
So, the reforms proposed by the ViDA plan will mainly affect the platform economy sectors related to
tourist accommodations and passenger transport.
Let’s go even deeper and examine some concrete points.
First, a “deemed supplier” scheme will be introduced if a taxable person facilitates the provision of short-term rental accommodation or passenger transport, precisely through the use of a digital interface such as a platform, portal or similar means (new Article 28 Governing Council, 2006/112/EC).
The “deemed supply” rules are applied to facilitate collection of VAT and also to reduce the burden on individual suppliers. VAT compliance is devolved to a single party, namely the platform. These cases, at present, are different and may concern:
- Individual private persons
- Individuals who are not established in the EU or who do not have a VAT number registered in an EU country anyway.
- Entities that fall under special regimes set for small businesses.
The European implementing regulation (282/2011) on these cases will be amended to incorporate the new scenarios introduced by the ViDA proposal, clarifying the criteria that determine the application of the deemed supplier regime.
In addition, here is a further important clarification made by the European Commission: the rental of accommodation for an uninterrupted period of up to a maximum of 45 days will have to be considered, for all intents and purposes, as having a similar function to the hotel sector.
Consequently, this type of transaction will not be exempt from VAT, as is the case, normally, for everything related to the traditional hotel accommodation system.
Warning: At this point there are three actors involved: the seller, the platform, and the customer.
So, how is the process divided for the purpose of VAT collection? In two separate transactions; organized as follows:
1) The underlying seller is considered to have sold the short-term lodging rental or passenger transportation to the platform. This supply is exempt from VAT and without the right of deduction.
2) The platform is deemed to have sold short-term lodging rental or passenger transportation to the customer.
This supply is considered to be an intermediary service, which allows the place-of-supply rules to be applied uniformly. In practice: the platform will be responsible for collecting the VAT due on the sale from the customer and then paying the VAT to the relevant tax authorities. All following the normal regulations as appropriate.
All this, as we have already seen, is to achieve a level playing field between platforms that offer services and other traditional providers in the industry who qualify as taxpayers, without imposing a burden on the underlying sellers operating through the platform.
Let’s close with a point on timing: the reforms related to the platform economy in Europe contained in the ViDA action plan are expected to come into force on January 1, 2025.
For industry players, there is time to provide for adjustments, but it’s better to prepare ahead of time and to continue to monitor it as it evolves in the coming months.