Tax Talk: EU Commission VAT in the Digital Age Initiative
In December 2022 the EU Commission proposed wide ranging draft legislation amending VAT Directive 2006/112/EC, Council Implementing Regulation EU 282/2011 and Council Regulation on Administrative Cooperation EU 904/2010 as part of the VAT in the Digital Age package.
These far-reaching proposals aim to modernise the EU’s VAT system by promoting harmonised e-invoicing and digital reporting requirements, helping to reduce fraud and VAT loss through non-reporting of VAT, as well as reducing compliance costs for businesses currently having to comply with fragmented reporting requirements across the EU.
It is proposed that the legislation will take effect in phases between 2024-2028, and cover three main areas of VAT policy:
1) Digital Reporting Requirements (DRRs), including e-invoicing
2) The VAT Treatment of the Platform Economy; and
3) The Single place of VAT Registration and One Stop Shop regimes
Digital Reporting Requirements (DRR) and E-invoicing
The DRR will implement real time digital reporting to the local tax authority of standardised information for B2B intra EU transactions. It is intended that this information will feed into the risk analysis systems of EU Member States to help them counter intra community trade VAT fraud, in particular Missing Trader intra community fraud.
Real time transactional reporting under DRR will replace the requirements for suppliers to report intra EU transactions on quarterly or monthly recapitulative statements (commonly known as EC Sales Lists), and for a number of Member States requiring acquisition listings.
Member States will also have the possibility of imposing e-invoicing for domestic transactions. For Member States which introduce e-invoicing and DRR, these national requirements will need to align with the new DRR rules for intra EU transactions.
E-invoicing for intra community supplies
Under the proposals an amended Article 218 of the VAT Directive will create obligatory e-invoicing for all intra community supplies.
The proposals will now grant national authorities the right to mandate e-invoicing for domestic transactions without a specific EU derogation. Given the new mandatory requirement of e-invoicing for intra community transactions, it can be anticipated that different EU jurisdictions will take advantage of this right to introduce requirements for e-invoicing at the domestic level.
In keeping with the aim of real time reporting, the proposals also mandate that e-invoices be issued within two days of the supply occurring where there is an intra community supply subject to the reverse charge by the recipient.
The VAT Treatment of the Platform Economy
Deemed supplier regime
A ‘deemed supplier’ regime will be introduced from 2025 via the addition of a new Article 28a of the VAT Directive for short-term accommodation rental and passenger transport providers within the platform economy.
Under this measure, where the underlying supplier does not charge VAT because they are, for example, under the VAT registration threshold, the platform operator ‘facilitating’ the transaction will be obligated to charge and account for VAT on his deemed supply of accommodation or transport. An amendment to Article 136 of the VAT Directive will mean that the underlying supplier (for example, the accommodation provider) is deemed to be making a (VAT exempt) supply to the platform.
The Single VAT Registration and One Stop Shop
These proposals provide a range of measures intending to ensure harmonised VAT treatment within the EU, reduce opportunities for VAT fraud and mitigate the need for additional VAT registration obligations. It is intended that the proposals will be effective from 2025.
Extension of reverse charge for B2B supplies of goods and services
Currently, a non- established supplier of goods is generally obligated to register for VAT in the territory where a domestic B2B supply of goods takes place (for example, if it procures or stores goods locally for an onwards supply to a business customer). A change to Article 194 makes the application of the reverse charge mechanism mandatory (it is currently only applied in specific member states) where a business receives a domestic supply of goods or services from a non-established supplier, meaning the supplier of the goods or services will not have to register for VAT in that territory.
Extension of the One Stop Shop (OSS) for margin scheme items
Article 14(4) will be modified to extend the definition of intra community distance sales of goods to cover second-hand goods, works of art, collectors’ items and antiques. This will result in the optional application of the OSS simplification scheme to such sales, potentially removing the need for the supplier to register in additional EU jurisdictions.
In conjunction with this measure, to reduce opportunities for VAT avoidance, Article 39a provides that supplies of works of art and antiques without dispatch or transport (or supplies where the dispatch or transport of the goods begins and ends in the same EU jurisdiction) are taxed at the place where the customer is established.
Extension of the deemed supplier rule to marketplaces selling on behalf of EU established traders
Modifications to Article 14a will extend the application of the deemed supplier rule. Under its expanded scope, this rule will now include all supplies of goods within the EU facilitated by an electronic interface, irrespective of where the underlying supplier is established and the status of the purchaser. This further extends the obligations of platform providers to account for VAT on the underlying sale of goods beyond those introduced on 1 July 2021 for imported goods of under €150, to include intra EU B2C sales made by a non-EU established supplier via a marketplace.
OSS to cover most B2C supplies of services for non-EU suppliers
A modification to Article 359 extends the scope of the non-Union OSS to include supplies of services by non-EU businesses to non-taxable persons which reside in the EU. Certain Member States already extend the ‘use and enjoyment’ provisions beyond those applicable to telecommunications and electronically supplied services, and in such cases non-EU B2C suppliers are obligated to account for local VAT on such sales. However, this currently only applies in a minority of instances.
The changes will mean that non-EU established businesses which supply B2C services not currently covered by OSS (for example, legal or accounting services) will be obligated to register for OSS (or alternatively in each EU Member State where such a supply is made), and pay local VAT. This will clearly represent an additional cost for many non-EU professional services businesses in cases where the amount charged to the customer is adversely affected by the addition of VAT.
Expansion of the Import One Stop Shop (IOSS)
The proposals include the mandatory use of the IOSS for B2C imports made via a ‘facilitating’ platform. Currently, whilst the platform provider is required to account for VAT on B2C imports of goods which the platform facilitates, it can choose to do so via a direct VAT registration in the territory of the customer. It must now declare such sales under the IOSS regime where the consignment value is not greater than €150. The existing €150 value limit for the use of IOSS will remain in place.
The draft legislation may be subject to amendments and revisions before being enacted into law. Nevertheless, given the central aims of simplifying VAT compliance, and reducing the VAT Gap and levels of VAT fraud, it can be envisaged that the broad thrust of the legislation will become effective in due course.
If you would like advice and support on any issues raised in this article, please contact Luigi Lungarella or Nadav Shayovitz.