European Commission Starts a Consultation on VAT in the Digital Age Initiative

On January 20, 2022, the European Commission launched a public consultation on the VAT in the Digital Age initiative. The feedback will be accepted from January 20 to February 17, 2022; the consultation itself will last from January 21 to April 15, 2022. The objectives of the initiative are to ensure the proper functioning of the EU single market and protect the financial and economic interests of the Member States by combating VAT fraud and establishing tax neutrality.

Prerequisites

The issue of VAT fraud committed during cross-border sales of goods and services in the EU is an impactful one. A significant part of losses for businesses due to this reason is estimated in the range of EUR 40-60 billion. Moreover, the VAT system has become increasingly complex and outdated for modern digital reality. Thus, in its Action Plan for Fair and Simple Taxation supporting the recovery of business during COVID-19, the Commission announced a legislative package “VAT in the Digital Age” for 2022, aiming at the overall modernization and harmonization of the system.

The Action Plan, adopted in 2020, includes 25 initiatives in total. It is aimed at simplifying tax rules and removing unnecessary administrative burdens for businesses in the single market to contribute to the business environment and enhance competitiveness.

Goals

To achieve the general outcome of tax equality and overcoming VAT fraud, the following steps will be developed:

• making compliance with VAT rules easier for EU businesses, particularly those working in the digital economy and those carrying out cross-border trade;
• laying down a framework which helps tax administrations to fight VAT fraud, in particular MTIC(Missing Trader Intra Community) fraud;
• preventing regulatory failure and market fragmentation;
• ensuring fairer treatment of both traditional and platform economies.

Structure

The legislative framework needs to include responses to risks associated with VAT. To do this, three following issues must be paid special attention to:

1. Digital reporting requirements and e-invoicing.Member States introduce controlling procedures for digital processes in their domestic law in various ways. This lack of coordination creates new compliance burdens for businesses operating in different Member States and increases the risk of fragmentation, which affects the single market. The current rules do also provide for obligatory use of e-invoicing, so this measure is offered at either transnational or both transnational and national levels. There is also an option of mandatory record keeping thatwill require taxpayers to maintain transactional data in a pre-determined format and provide information only upon request.
2. VAT treatment of the platform economy.One of the key challenges for current-day VAT regulation is to establish fair taxation of both online and traditional economic transactions and a uniform approach to the application of the VAT rules regarding the provider, nature of services, place of supply and reporting on various platforms.
3. Single VAT registration in the EU.An OSS (one-stop-shop) model allows businesses to avoid multiple VAT registrations in the EU for cross-border transactions. However, specific types of cross-border transactions cannot apply it (e.g. supplies with installation, e-mobility). Therefore, there is a call for iimprovements to the IOSS (import one-stop shop, which concerns imports from outside the EU) model.

Expected Results and Stakeholders

While this measure may take a longer period of time to implement, it is nevertheless necessary to create an IT infrastructure for digital reporting. However, the eventual creation of such a structure will create transparency and remove numerous tax burdens from EU businesses.

For the VAT treatment of the platform economy, the increased obligations and associated burden will be limited to platforms and businesses providing services facilitated by the use of a platform, especially in transportation and accommodation.

Traditional service providers would benefit from more equal conditions of work. Single VAT registration in the EU will allow lower compliance costs, especially in specific economic sectors such as the installation and assembly of goods, supplies of gas, electricity, heat or cooling energy and e-mobility, where the need for multiple VAT numbers is common under the current system.

The public consultation expects to receive comments and suggestions from general public, as well as key stakeholders: business federations, SMEs, trade associations, companies, Pan-European and national service providers, platform, e-commerce and cross-border operators, postal operators and express carriers, international organizations, e-invoicing providers, national tax and customs authorities, brokers, practitioners and tax advisers.

Following the consultation period and analysis of proposals received, the Commission plans to consider and adopt the initiative in the third quarter of 2022.

Sources:

Page of the EC’s “VAT in the Digital Age” Initiative

Action Plan for Fair and Simple Taxation

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