EU – Council Agrees on the VAT in the Digital Age Reform

The European Union institutions have been working intensively in the last couple of years on modernizing the EU VAT regulatory framework, mainly driven by the external factors that have led to the flourishing of e-commerce businesses and the digital economy. 

The worldwide shift from mainly offline retail channels to online sales, accompanied by the birth of new business models, required the necessary intervention from respective legislators to develop effective, fair, and less bureaucratic measures to govern the economic operators, tax authorities, and all interested stakeholders in these sectors. 

This paved the way for introducing the OSS schemes, a new place of supply rules for cross-border supplies of goods and services, updates of the SMEs schemes, and many other relevant pieces of legislation that are the pillars of the EU VAT landscape. 

The EU Commission made the first formally relevant moves towards the grandiose reform of the EU VAT framework under the VAT in the Digital Age reform in December 2022, so it is almost two years old. The VAT in the Digital Age (ViDA) package represents an abundant proposal to reform the EU VAT system to improve the mechanism for more effective VAT collection. 

The main goal is to reduce the VAT gap at the EU level. Instruments for better tax collection and reporting, such as OSS, have significantly improved results. The Commission proposal is also based on a pragmatic approach that will make the tax compliance challenges for economic operators less costly and more streamlined. It will pave the way for more possibilities to expand their operations with today’s many bureaucratic challenges. 

It was expected that proposals of this extent and importance would not be so readily accepted. As mentioned, it will undoubtedly significantly impact all interested parties. For some economic operators, this will mean less compliance costs, more freedom, and better chances in a highly competitive market. 

For others, it will mean less profit, more compliance costs, a higher level of responsibility, and less maneuverability in handling the taxes. 

After almost two years of continuous debate, the EU Council reached a consensus on the ViDA proposal. On November 5, 2024, the EU Council agreed on one of the most noticeable reforms concerning the EU VAT mechanism in modern times. 

VAT in the Digital Age 

VAT in the Digital Age package is based on the following three pillars: 

Digital Reporting Requirements – the introduction of the mandatory B2B e-invoicing for intra-community transactions and accompanying real-time digital reporting of sales and purchase invoices.

Platform economy – the extension of the deemed supplier rules for short-term accommodation rental platforms and passenger transport platforms.

Single VAT registration – the extension of the OSS schemes and elimination of impeding factors that mandate the obligatory registration of non-registered VAT-taxable persons in the country of supply. 

Timeline and Impact of Adopted Council Proposal 

The Council proposal is based on the three draft laws that should amend the primary EU VAT legislation that regulates the subjects of interest. These are amendments of the EU VAT Directive concerning Council Directive as regards the VAT rules for the digital age, Council Regulation as regards the VAT administrative cooperation arrangements needed for the digital age, and Council Implementing Regulation as regards information requirements for specific VAT schemes.

The Council proposal adopted on November 5, 2024, has many substantial changes compared with the original version submitted by the EU Commission. This type of change demands the necessary consultation with the EU Parliament and later a unanimous vote by the Council on the reconciled version. 

The reconciled and adopted version of the ViDA package will be agreed upon by the end of this year. That means the legislative changes will become effective in the first month of 2025. 

The following lines describe some of the most noticeable changes introduced through adopting VAT in the digital age package. 

Digital Reporting Requirements: 

• Introduction of the mandatory cross-border B2B e-invoicing system for intra-community supplies of goods and services – by 2030; 
• Introduction of mandatory central real-time digital reporting transactional systems for the types mentioned above of transactions on the EU level – by 2030;
• Possibility of EU Member States to introduce domestic B2B digital reporting systems without needing formal permission from the EU Commission;
• Introduction of the E-Invoice as the default type of the invoice;
• Harmonization of domestic digital reporting systems of countries that have introduced or mandated the introduction of the DRR on a national level before January 1, 2024 – harmonization by 2035;
• Elimination of submission of EC Sales Lists – by 2030. 

Platform Economy: 

• Extension of deemed supplier rules to digital platforms operating in the short-term rental accommodation sector and passenger transport industry – by 2028 optional; by 2030, mandatory; 
• Possibility for MS to exclude SMEs from the deemed supplier rules; 
• Clarity on the place of supply rules for facilitation fees and related reporting. 

Single VAT Registration: 

• Extension of the OSS to introduce new types of transactions and movements of merchant’s stock within the EU – by 2028; 
• Extension of Reverse Charge Mechanism – by 2028. 

The Council’s adoption of the VAT in the Digital Age proposals will unquestionably shake the EU VAT regulatory framework. Logically, the implementation of the reform of this size will come gradually. This reform will impact almost all businesses in the digital economy ecosystem. 

The ViDA reform will considerably impact digital platforms, online vendors, SMEs, national tax authorities, tax compliance service providers, digital solution providers, and many more. 

The comfort zone of familiar rules will be shaken, and all impacted stakeholders should start planning how to best prepare for the upcoming reform, which will become effective next year.