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VAT in the Digital Age: EU Commission publishes proposal for comprehensive reforms (part 2)

On 8 December 2022, the EU Commission published its long-awaited proposal for a reform to modernise VAT legislation as part of the "VAT in the Digital Age" (ViDA) initiative. The proposed new rules, which are scheduled to be phased in between 2024 and 2028, will affect almost any company, irrespective of its sector or business model. The proposed changes will have far-reaching consequences, and their implementation requires long-term planning. 

In our latest post, we presented an overview of the proposed measures and addressed the new digital reporting requirements and the proposed mandatory e-invoicing system. Further areas that will be affected by ViDA are discussed below.


New deemed supplier regime for platform economy

The European Commission believes that there is no level playing field between traditional suppliers and service providers active in the Sharing Economy, in particular in the passenger transport and short-term accommodation rental sectors.

In view of this, a new deemed supplier regime for VAT purposes is proposed to be introduced for platforms operating in these sectors with effect from 1 January 2025. Under this regime, entrepreneurs that facilitate the supply of short-term accommodation rental or passenger transport services through the use of an electronic interface such as a platform, a portal or similar means will in future be deemed to have received and supplied those services themselves. This means that, where the underlying supplier does not charge VAT because they are, for example, a natural person or they make use of the special scheme for small enterprises, the platform will be required to charge VAT on the underlying supply to the customer and account for such VAT. 

These amendments will result in increased prices for such services, which is in line with the EU Commission's goal of reducing assumed distortions of competition in these sectors. 


Single VAT Registration

The proposed Directive also aims at reducing scenarios where entrepreneurs engaged in cross-border transactions are required to register for VAT purposes in another EU member state outside their country of domicile. The aim is to achieve a single VAT registration for affected businesses in the member state in which they are established, thereby reducing their administrative costs related to foreign VAT registrations. 

A number of measures are proposed for this purpose, which are to be introduced with effect from 1 January 2025.

In particular, the One-Stop Shop (OSS)/Import One-Stop Shop (IOSS) system, which has been applicable to certain distance sales of goods and other supplies since 1 July 2021, is envisaged to be expanded to include additional supplies and services. Consequently, intra-Community transfers of a company's own goods for instance could be reported under the OSS procedure, which is not possible at present. This would remove the need for companies to register for VAT purposes in all EU member states to which goods of the relevant company are dispatched. Furthermore, the IOSS system is proposed to be applied on a mandatory basis. 

In addition, the rules for the reverse charge mechanism, whereby a business as recipient of supplies is obliged to account for the VAT due, have been significantly expanded. With effect from 1 January 2025, the recipient of the supplies is generally to be liable for tax on all cross-border supplies (i.e. supplies of goods or services) if the supplying entrepreneur is not established in the country of destination but the recipient of the supplies is registered there for VAT purposes.

Finally, the currently existing deemed supplier regime for online platforms with a connection to third countries is envisaged to be expanded to cover all corresponding supplies within the EU.


Outlook and need for action 

The implementation of the proposed rules requires the consent of all EU member states to the draft Directive. We understand that the EU Commission already discussed its proposal for reforms with the member states and no fundamental objections have been raised so far. Accordingly, the Commission is confident to obtain consent by the member states in the course of 2023, given that initial changes are to take effect as early as on 1 January 2024.

The new rules will affect almost any company, irrespective of its sector or business model. The proposed changes will have far-reaching consequences, and their implementation requires anticipatory planning. Mandatory e-invoicing and transaction-related digital reporting requirements in particular trigger the need for comprehensive adjustments to be made to IT systems. 


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