European Union: European Commission publishes the "VAT in the Digital Age" package

In brief

On 8 December 2022, the European Commission (EC) published the VAT in the Digital Age  proposal (ViDA). ViDA consists of a series of far-reaching VAT measures to modernize the EU's VAT system in order to make it more compatible with today's ways of doing business digitally. At the same time, the EC intends to make the VAT system more resilient to fraud by embracing and promoting digitalization.

In short, the EC proposes to (i) modernize VAT reporting obligations, (ii) address the challenges of the platform economy, and (iii) avoid the need for multiple VAT registrations in the EU. If adopted, these measures will have an impact on companies doing business in and with the EU. At the same time, ViDA provides opportunities for companies to reduce VAT compliance costs.

For ViDA to become effective, the proposal should reach unanimous consent from all 27 EU Member States. If adopted by all Member States, the changes proposed by ViDA will gradually become effective between 1 January 2024 and 1 January 2028.


In more detail

In its impact assessment accompanying the proposal, the EC recognizes that VAT is a major source of revenue for all EU Member States. At the same time, the VAT collection system is sub-optimal and troubled by control issues. In addition, the current VAT declaration and payment mechanisms lead to excessive burdens for taxpayers. Therefore, changes to the current VAT framework are necessary, especially to reduce the so-called VAT gap, i.e., the difference between expected VAT revenues and the VAT actually collected, which is estimated to be approximately EUR 93 billion for 2020.

To reduce the VAT gap and to reduce the VAT compliance costs for businesses, the EC proposes the following three main pillars:

  1. a move to real-time digital reporting based on e-invoicing for businesses that operate cross-border within the EU;
  2. updated VAT legislation for the sharing economy, with special attention paid to passenger transport and short-term accommodation;
  3. avoid the need for multiple VAT registrations in the EU, e.g., by expanding the scope of the One Stop Shop (OSS) and including a simplification measure for the transfer of an entity's own goods.

A move to real-time digital reporting based on e-invoicing for businesses that operate cross-border in the EU

By introducing Digital Reporting Requirements (DRR), the EC aims to shift towards a more real-time transaction-by-transaction reporting-based system for intra-EU transactions. With DRR, businesses doing intra-EU trade will be required to issue e-invoices (whereas currently e-invoicing is optional) within two days of carrying out a VAT taxable supply of goods or services.

Additionally, the current system of sales listings will be replaced by a system whereby taxable persons have to report their intra-EU transactions ultimately two days after the issuance of an invoice (or after an invoice should have been issued). DRR standardizes the information that taxable persons need to submit to the competent authorities for each transaction in an electronic format. Whereas DRR intends to target intra-EU trade, the proposal also gives the option to member states to implement DRR for domestic transactions.

The information on intra-EU trade reported by taxpayers following these changes will be shared between Member States' competent authorities. In this way the competent authorities of each Member State will be better equipped to combat VAT fraud by performing joint analyses.

Updated VAT legislation for the sharing economy, with special attention to passenger transport and short-term accommodation

The EC considers that a level playing field is lacking between traditional service suppliers and service suppliers in the sharing economy, more specifically in the field of passenger transport and short-term accommodation rentals. With ViDA, the EC aims to address this concern by proposing deemed reseller rules for online platforms when they facilitate the supply of such services by certain service suppliers.

Under these deemed reseller rules, the online platforms will become liable for collecting and remitting VAT to the competent authorities in such case. With the deemed reseller rules, the EC in essence intends to abolish the current local VAT registration thresholds for persons offering passenger transport and short-term accommodation rentals via platforms. Jurisdictions such as Canada and New Zealand have introduced or intend to introduce similar deemed reseller rules.

In addition, the scope of the existing deemed reseller rules for online marketplaces facilitating sales of goods will be expanded. Currently, when an online marketplace facilitates the sale of goods located within the EU, that respective online marketplace is only a deemed reseller if the respective seller is a non-EU seller. Under ViDA, all sales of goods located within the EU facilitated by online marketplaces (regardless of the location of the seller), will be captured by the deemed reseller rules, i.e., the marketplace is always considered to be a deemed reseller.

The rules also introduce the obligation for online marketplaces facilitating certain distance sales of imported goods to use the Import OSS to report such supplies.

The expansion of the single VAT registration framework for the EU and changes to the reverse charges mechanism

The ViDA proposal aims to reduce the need for multiple VAT registrations in the EU. In order to achieve this goal the scope of the existing OSS system will be expanded.

Currently, EU VAT legislation already provides for a pan-EU single VAT registration, namely the OSS. The OSS can be used to report and pay VAT due on certain taxable activities in all EU Member States through one single VAT registration.

Under ViDA, for example, intra-EU transfers of an entity's own goods could be reported in the OSS VAT return, which is currently not possible. This eliminates the need for businesses to register for VAT in all EU Member States that own goods are shipped to.

Additionally, the EC introduces a mandatory reverse charge mechanism for domestic supplies carried out by a foreign supplier to a local customer. Currently, the EU VAT directive gives the option to Member States to implement this reverse charge. Under ViDA, Member States will become obliged to implement this reverse charge mechanism, avoiding the need for VAT registrations by non-national companies under certain circumstances.

The ViDA proposal further includes some additional, less prominent changes to EU VAT legislation, which we have not outlined in this alert.

Next Steps

If you want to know more about ViDA and the opportunities it provides for companies doing business in the EU, your local Baker McKenzie contact is able to provide you with tailor-made advice regarding the impact of this proposal on your particular business model.

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