VAT in the Digital Age: EU Commission publishes proposal for comprehensive reforms (part 1)
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The rules on cross-border trading of the current VAT system in the European Union are almost 30 years old. As a result of the technological transformation and the dynamic development of digital business models, including complex cross-border transaction types, the VAT taxation principles applicable in this field have reached their limits. In this context, the EU Commission assumes that the member states lost EUR 93 billion in VAT revenues in 2020, a significant part of which is stated to be attributable to fraudulent structures linked to intra-EU trade.
In view of this background, the "VAT in the Digital Age" initiative aims to adjust the EU VAT system to better accommodate the challenges and opportunities of digitalisation, promote cross-border electronic trade, strengthen the fight against VAT fraud and reduce the administrative burden for businesses and tax administrations.
Meanwhile, on 8 December 2022, the EU Commission presented its long-awaited proposal regarding the related planned amendments of the VAT System Directive (2006/112/EC), the VAT Implementing Regulation (No. 282/2011) and the Regulation on administrative cooperation and combating fraud in the field of value added tax (No. 904/2010).
Overview of proposed measures
The proposal for a Directive provides for measures in three fields:
- Introduction of transaction-related digital reporting requirements and mandatory use of electronic invoicing (e-invoicing) for cross-border transactions;
- New rules for the VAT treatment of platform-based business models, in particular for short-term accommodation rental and passenger transport services;
- Measures to strengthen Single VAT Registration within the EU, inter alia by expanding the existing One-Stop Shop (OSS) system.
Digital reporting requirements and e-invoicing
So far, paper invoices and electronic invoices are deemed equivalent under applicable law. Moreover, under current legislation the issuance of electronic invoices requires the acceptance of the recipient.
The proposed Directive now aims for e-invoicing to become the default system for the issuance of invoices in cross-border B2B transactions.
As a first step, the Directive's definition of an electronic invoice is proposed to be adjusted and unified with effect from 1 January 2024. According to this adjustment, electronic invoices must be issued and transmitted in a structured electronic format, which allows for their automatic and electronic processing. In addition, the existing requirement of acceptance by the recipient of the invoice will be eliminated.
E-invoicing is to become mandatory for cross-border B2B transactions within the EU from 1 January 2028. The period within which such invoices must be issued will be limited to only two working days from the time of supply. Furthermore, new data elements (e.g. identification of the bank account in which the payment for the invoice will be credited, the agreed dates and amounts of each payment related to a concrete transaction, and, in the case of an amended invoice, the identification of the initial invoice) will be required in addition to the existing set of mandatory elements of an invoice.
Simultaneously with the mandatory e-invoicing system, a new digital reporting system (DRR system, "Digital Reporting Requirements") is proposed to be introduced. The aim of the new reporting system is to provide information on transactions in almost real-time to the tax administration and foster the use of electronic invoices. Consequently, the proposal also provides that it will no longer be possible to issue summary invoices (i.e. invoices which detail several separate supplies of goods or services performed at different times during a calendar month and charged on a consolidated basis as at the end of the relevant month). Intra-Community transactions must be reported by the taxable person, using transaction-based electronic reporting, two working days after the issuance of the invoice, or after the date the invoice should have been issued. The new DRR system is envisaged to replace the existing system of recapitulative statements.
In an additional blog post, we will address the new rules for the VAT treatment of platform-based business models as well as Single VAT Registration in more detail, and present a brief outline of the need for businesses to take action, which results from the initiative.