Indirect tax 

EU member states fail to reach agreement on VAT in the Digital Age proposal

On 14 May 2024, during a meeting of the Economic and Financial Affairs Council (ECOFIN) the 27 EU member states discussed the VAT in the Digital Age (ViDA) proposal to reach an agreement, but this was not achieved. 

The European Commission released its initial proposal for the ViDA package on 8 December 2022, and the text has been subject to discussions between member states since then. On 9 May 2024, the EU Council revealed the revised text that was to be the basis for the agreement. The draft is a compromise text developed by the Belgian presidency, that takes into account different viewpoints expressed over the last one and a half years and differs in many aspects from the original proposal.

The ViDA proposal contains the European Commission’s ambitious vision for how VAT reporting should embrace digital opportunities, recommends changes to the VAT rules applicable to the platform economy and e-commerce, and presents steps to improve and extend the existing schemes reducing the VAT compliance burden for businesses through a single VAT registration in the EU. The updated latest text of the amending Directive on can be found here:

The ViDA proposal contains three main pillars on the European Commission’s ambitious vision for a more future proof VAT system in this Digital Age. These pillars are:

• Pillar 1 - how VAT reporting should embrace digital opportunities (DRR)
• Pillar 2 - recommended changes to the VAT rules applicable to the platform economy and e-commerce
• Pillar 3 - present steps to improve and extend the existing schemes reducing the VAT compliance burden for businesses through a single VAT registration in the EU. 

In the texts of the package (i.e., doc. 9681/24 (amending Directive), doc. 9683/24 (amending Regulation) and doc. 9684/24 (amending Implementing Regulation)), the implementation dates for all three pillars of the proposal have been postponed by some EU Member States, so that tax payers and tax authorities have sufficient time for implementation. As there is no consensus, the negotiations will continue. This will mainly focus on the second pillar regarding the platform economy, as Estonia did not agree with these rules.

Disagreement stemming from the platform economy pillar

Estonia mainly opposed the current proposal, owing to concerns related to the new deemed supplier regime applicable to parts of the platform economy. This pillar of the ViDA proposal aims to introduce new responsibilities for VAT collection on platforms facilitating short-term accommodation rentals and passenger transport.

According to the latest version of the proposal, by July 2027, platforms were to assume VAT liability as a “deemed supplier” for specific supplies of short-term accommodation rental (up to 30 days) and passenger transport by road. However, member states would be granted significant flexibility to tailor the deemed supplier regime based on their respective market conditions in these sectors.

The Estonian minister of finance raised three primary concerns regarding the new deemed supplier regime:

• The new rules deviate from the general VAT principle that allows a supplier to deduct VAT if the service provided is VAT taxable. Under the deemed supplier regime, platforms would apply VAT on services offered by non-taxable persons, who cannot deduct VAT.
• The implementation of the new rules is anticipated to impose additional costs on small and medium-sized enterprises (SMEs) and consumers.
• The regime would create a new distortion of competition between providers offering services through a platform and those operating independently.

Estonia proposed making the new deemed supplier rules optional (an opt-in), allowing member states to choose whether or not to implement them in their national VAT legislation. However, this suggestion was not supported in the assembly. 

The Belgian presidency is returning to the negotiation table to seek a compromise before their presidency ends on 30 June 2024. A new potential agreement likely will be targeted for consideration at the next ECOFIN meeting scheduled for 21 June 2024. 

The elements of the ViDA proposal agreed include the following key changes, based on the draft agreement text published on 8 May 2024.

Pillar 1: Digital reporting requirements (DRR)

The aspect of the ViDA reform that would affect most businesses is the DRR pillar. The proposal would introduce real-time digital reporting based on structured e-invoicing for businesses that operate cross-border in the EU, feeding into a central tax data warehouse, and also take a step towards a harmonised e-invoicing and e-reporting framework for domestic transactions. 

Domestic DRR

As from the date of entry into force of the proposal (20 days after its publication in the Official Journal of the European Union), member states would have the option to introduce mandatory business-to-business (B2B) and business-to-consumer (B2C) e-invoicing without the need to obtain a derogation from the European Commission. 

Compared to the original proposal, a less prescriptive framework would operate until 2030. For example, member states would be able to:

• Implement hard/closed clearance models, where the e-invoice is subject to prior mandatory authorisation or verification by tax authorities; and
• Have flexibility over the format, which would not be limited to the EU standard, provided interoperability with the EU standard is ensured, and also over technical requirements that the member state wishes to implement. 

Member states that had already implemented a form of DRR prior to 1 January 2024 (e.g., Italy) or that had received a derogation before that date (e.g., France, Germany, Poland, and Romania), should align with the EU standards by 2035 for self-supplies and supplies of goods and services made between taxable persons within their territory.  

Intra-EU DRR

By 1 July 2030, e-invoicing would become mandatory for all intra-EU supplies of goods and services, combined with real-time reporting of the data included on the e-invoice to the national tax authorities. As a general rule, both the issuer and the recipient of the invoice would need to report the invoice data to their respective national tax authority, although member states would be able to opt out of the mandatory reporting for the recipient of the invoice (i.e., the customer) which is perceived as a particularly challenging obligation for businesses. 

The timeframe to issue e-invoices for intra-EU DRR would be extended to 10 days (compared to two days in the initial proposal) and the reporting deadlines for invoicing data would be as follows:

• Real-time for supplier: at the time the invoice is issued or should have been issued;
• Near-real time in case of self-billing: no later than five days from the date the invoice is issued or should have been issued; and
• Near-real time for the recipient: no later than five days as from the date the invoice is received.

The existing recapitulative statements would be abolished by the time that these new rules come into force. 

Other key changes to invoicing rules

The draft agreement text introduces the notion of “hybrid invoices,” which combine data embedded in a structured format and data embedded in an unstructured, human-readable format (PDF). These invoices would also be considered as e-invoices provided the invoices include all the data to be reported in a structured format.

The specific EU-wide definition of an e-invoice would only come into effect as from 1 July 2030.  

The draft agreement text also foresees that member states could make the availability of an e-invoice a requirement for the deduction of VAT for operations covered by a domestic DRR.

The option to issue summary invoices would be retained, despite the intent to eliminate it in the initial proposal. These invoices would need to be issued by the 10th day of the month following the period to which the transactions relate.

Pillar 2: Platform economy

ViDA would also impose new liabilities for VAT collection on platforms facilitating specific services. As from 1 July 2027, platforms would become liable for VAT as the “deemed supplier” for certain supplies of short-term accommodation rental (30 days maximum) and passenger transport by road. No such liability would exist where the underlying provider has supplied the platform with a VAT registration number and has declared that they will charge any VAT due on that supply. There would, however, be scope for individual member states to provide an exception to the deemed supplier rule where the underlying provider is a VAT exempt SME or (for accommodation) to allow exemption of these services. As mentioned, it is the new deemed supplier regime that resulted in the lack of agreement.

The current version of the text also clarifies that businesses operating under the special VAT scheme for travel agents (the Tour Operators’ Margin Scheme (TOMS)) would not be subject to the deemed supplier rules for platform services.

A smaller but not insignificant change for platforms concerns the place of taxation of facilitation fees charged to consumers (B2C), which as from 1 July 2027 would be taxed where the underlying supply of goods or services takes place, rather than in the member state where the customer is established. 

Another change that may increase the VAT complexity for platforms is envisaged in respect of the data retention obligations for electronic interfaces, where a systematic transmission of records (data sharing) to individual member states is proposed as a possible future step.

Pillar 3: Single VAT registration

Part of the ViDA initiative is also to improve and extend existing schemes to reduce the registration burden for businesses carrying out transactions in member states in which they are not established, namely the One Stop Shop (OSS), Import One Stop Shop (IOSS), and the reverse charge mechanism. As from 1 July 2027, there would be a number of changes to these schemes. 

The most significant simplification in this part of the ViDA package is that it would allow businesses to declare cross-border transfers of own goods under a single VAT number (OSS) regime, eliminating the need for VAT registration where inventory is stored. This regime could be used in combination with the Union One Stop Shop (UOSS) for subsequent B2C supplies from those inventories, but it could also be used as a standalone measure to simplify the reporting of cross-border transfers, particularly taking into account the additional real-time reporting obligations that would result from the intra-EU DRR as from 2030.

The UOSS would be available to cover all B2C supplies of goods and services made by a business, including domestic supplies of goods, as from 1 July 2027. In the short term, a temporary rule would be introduced to bring cross-border electric vehicle charging in a B2C context under UOSS as from 1 January 2026.

Finally, member states would be required to implement a domestic reverse charge mechanism for non-established suppliers. This means that if a supplier is not established or VAT registered in the member state, VAT responsibility shifts to the registered recipient. While non-established suppliers who are VAT registered in the member state of taxation are normally not caught by the domestic reverse charge, member states have the option to apply a stricter reverse charge mechanism to all cases involving supplies from non-established taxable persons (such as the regimes that already exist in Belgium, France, and the Netherlands). 

One proposed change that would have been particularly relevant for marketplaces and platforms but does not feature in the draft agreement is the extension of the deemed supplier regime to sales facilitated for EU established underlying suppliers or B2B sales.

Implications for businesses

If an agreement is reached during the next ECOFIN meeting on 21 June 2024, the most significant impact for businesses likely would result from the DRR, where one of the primary objectives of the proposal—namely the aim to harmonise the e-invoicing and DRR framework for domestic and intra-EU transactions—is not expected to be fully realised to the extent initially proposed. Consequently, businesses operating across multiple member states will still need to navigate the complexity of the varied models and invest in diverse IT implementations to fulfill these obligations.

Notwithstanding the delay the eventual complete removal of Art. 232 VAT Directive, as pertaining to the removal of recipient acceptance of structured e-invoices, accordingly businesses must in any case be prepared to accept e-invoices, already ahead of ViDA, when a domestic regime is introduced by a member state. Member states now will have the option to introduce mandatory B2B and B2C e-invoicing, without the need for a derogation from the European Commission, which could leave businesses with minimal time to prepare and basically the complex landscape and varieties that exist today in place. The trend seems to be therefore that current mandates will remain and sufficient time and resources are needed to efficiently prepare IT systems and processes in more countries and eventually throughout the whole EU as this will have a significant impact on the way business is carried out in the EU. 

It remains to be seen whether third-party e-invoicing service providers will need to become accredited as well. This has not been addressed specifically and the proposed amended texts do not mention this aspect but it definitely has not been wiped from the table either. It seems to us that the more content rich software providers and the ones that aim and aspire to become accredited will be the ones that may have an advantage considering the lack of full harmonization. 

The EC have justified the implementation of the ViDA proposal with the anticipated cost benefits that will arise from the automation necessary to facilitate the requirements. Whilst this volatile landscape can appear intimidating it is imperative that businesses strategize, centralize and where possible leverage best practices, technology and achieve synergies from the various mandates to maximise potential ROI. 

Businesses must proactively prepare by gaining a clear understanding of their footprint and transactions, both AP and AR side, as well as their systems architectures and consider a software supplier that is able to handle these complexities, is agile to dela with constant changes and has a good awareness of the interplay between the regulation and data requirements. This will enable them to develop an implementation roadmap for DRR readiness with a focus on priority countries. The time to act is already there given local mandates already in place or that are upcoming like Belgium, Poland, Romania, Germany, France, Spain etc. By 2030 a further push from EU DRR from cross border transactions means a full scale application and VAT going digital.

We have to await the final agreement possibly in June 2024 of the next Ecofin meeting for a definitive verdict but it seems to us that the DRR part will likely not undergo many changes. 

Contacts

If you have any questions concerning the items in this alert, please contact your usual tax consultants or the below Deloitte contacts.