VAT in Digital Age (ViDA) Digital Reporting Requirements (II)
6 min. read
We deeply explored VAT in the Digital Age reform in the first article from the ViDA series, published last week. We have made a short walk into memory lane to locate the main drivers behind this broad and complex reform.
We have seen the data that undoubtedly led the EU officials, representatives of business sectors, international trade associations, and many tax experts to pave the way for the new necessary package of tax reforms.
The continuously growing percentage of VAT Gap at the EU level, which is mainly due to outdated compliance-tracking tools for intra-EU transactions, has shown the necessity to develop modern, digital tools which will be developed following the challenges that businesses encounter in the contemporary business environment, as well as to in synchronicity with the automated tax technology tools available, and with great success used in the Global market.
Presented reports and detailed assessments have shown undisputedly the need to change VAT reporting systems within the European Union drastically.
The system in place, with accompanying minor changes, was put in place originally 30 years ago when we had a radically different commerce environment at the EU level and within respected Member States.
When we analyze the official reports that describe the effectiveness of the EC Sales Lists from the year they were implemented to this day, we can see how the usefulness has been losing its momentum.
It is essential to emphasize the importance and effectiveness of the EC sales lists in the modern-technologically advanced commercial world, where this tool, to a large extent, is anachronic, and its effectiveness is continuously decreasing.
The why is pretty straightforward, and it can be simply put in the following manner – the pace and technological advancement of the new business acumen has outgrown this VAT reporting mechanism. The businesses, especially those that aren’t big supporters of compliance, have developed sophisticated methods to “eliminate” the burden of compliance and quickly eliminate the need to operate according to VAT requirements, and through this illicit behavior, boost their profits, distort the competition and contribute to VAT Gap.
The data unequivocally “shouts” that new VAT reporting requirements must be implemented if progress is to be made within the EU.
What are the focal points of the ViDA proposal presented by the European Commission as regards the transformation of the VAT reporting obligations for EU taxpayers?
Tax experts, the ones who have been contracted by the European Commission to carry out the assessments of the leading causes of the EU VAT Gap and how to reduce it, have found that the primary type of transactions in which the accurate reporting of the tax is missing is the Intra-EU B2B transactions. After identifying this type of transaction as the most significant contributor to the growing EU VAT Gap, they have introduced a new type of reporting tool for this type of transaction, with an assurance that in this manner, the VAT Gap will be decreased.
The European Commission’s proposal for the gradual introduction of the mandatory digital reporting requirements for B2B cross-border transactions can be described as highly complex and costly for all participants but also necessary.
From the part of the EC proposal covering the DRR introduction at the EU level, the plan is to implement these noticeable changes gradually.
What is the structure of this particular reform, and what are the focal points of the EC proposal?
The removal of Articles 218 and 232 of the EU VAT Directive. After deleting these articles, the MS can introduce the domestic B2B digital reporting system of choice without requesting mandatory approval from the EU institutions.
The implementation of the uniform EU-wide VAT digital reporting system for intra-EU B2B transactions. This reporting obligation will cover all B2B cross-border EU transactions where the parties are EU-established/resident taxpayers.
The reporting mechanism is the transactional one. This means that the reporting shall be handled on a transactional basis.
The reporting mechanism will be based on E-Invoicing, meaning that the electronic invoice will become the default type of invoice for this category of transactions.
The electronic invoice will be based on the EN 16931 standard.
Exclusively for digital reporting requirements and accompanying operations, the EU will establish Central VIES. This digital platform will operate as the focal point for storing and, to some extent, validating cross-border electronic invoices.
VIES database will be enabled to execute cross-reference data analysis rapidly and with impressive accuracy based on the fact that both supplier and buyer will be obliged to submit the subset of the e-invoice data
Quasi-real-time reporting of the subset of the invoice data with compulsory additional invoice information will be transmitted to the VIES
The convergence in the long term of the already existing digital reporting systems within some Member States with the EU-wide DRR
It is safe to assume that the first pillar on which the ViDA package is based will shake to some degree more than the other two pillars, the waters of the European business environment. The present reporting requirements have been, for a long time, safeguarded by the conformity of the well-known reporting and invoicing system, so the change of this extent could be at the same time too “bold and frightening.”
Logically, due to the broadness of this specific reform, it will probably take the “highest degree” of patience and perseverance of the EU institutions and connected MS institutions to introduce these changes and build the mandatory technological infrastructure that will drive DRR to reap all expected benefits.
The EU-established companies that participate or will participate in the B2B cross-border transactions should start thinking about the complexity of the future changes as regards the reporting requirements, how to tackle them successfully, what technological solutions are out there to help them to become technologically advanced, competitive and before the time comes compliant with the new mandate.
Aleksandar Delic 1stopVAT Indirect Tax Researcher (Global Content)
To learn more about ViDa read our articles series:
