The representatives of the European Commission submitted last December official proposals to change pivotal VAT legislation as a necessary step towards one of the most extensive reforms in the last 30 years regarding indirect taxation within the Single Market.
Let’s make a short stop and walk through the first practical steps made during the first semester of 2022 by the tax professionals who paved the way for the future legislative moves handled by the European Commission.
At the beginning of March 2022, tax experts contracted by the European Commission participated in drafting highly elaborated and detailed reports regarding all three pillars upon which the EU VAT reform is based.
These reports have been prepared in every detail, capturing all pivotal points that have led to the necessity of enforcing one of the most significant reforms of indirect taxation at the EU level. Behind the description of the mandatory steps to be made as regards the changes in the present legislative framework, a large piece of the report has been devoted to practical explanations supported by graphics and visible data capturing the information of the last decades, which directly shows why there is a need to move forward with the reforms.
The final reports cover three subjects, which as such are pillars upon which the VAT reform is based:
- The Digital Reporting Requirements;
- Single VAT Registration;
- The Platform Economy.
With the final reports at hand, the representatives of the EC have initiated the preparation of the proposals for the European Council, which will flag the way towards the necessary changes.
After months of deliberation and open dialogue with representatives from different sectors, the European Commission has prepared and submitted three legislative proposals before the Council.
These three proposals, the “amendments” of the present legal acts, are mandatory because they focus on the most critical pieces of legislation regarding subjects of VAT at the EU level within the scope of future changes.
The Commission has presented before the Council the following drafts:
- Proposal for a Council Directive amending Directive 2006/112/EC as regards VAT rules for the digital age;
- Proposal for a Council Regulation amending Regulation(EU) No 904/2010 as regards the VAT administrative cooperation arrangements needed for the digital age;
- Proposal for Council Implementing Regulation amending Implementing Regulation(EU) No 282/2011 as regards information requirements for specific VAT schemes.
What are the main reasons pushing the European institutions to make reforms of this magnitude?
It plausibly can be agreed that the answer to this question cannot be expressed in a simple and easily understandable manner. It could be tried to be simplified through the categorization of factors that have altogether contributed to the necessity to make these moves :
- The continuous money drainage from the EU budget thanks to shocking reports of the EU VAT Gap;
- Thirty years old rules which cannot follow and combat the indirect taxation of the modern world;
- Digitalization and technological breakthroughs in every aspect of business operations( obviously directly affecting the methods of how tax is calculated, charged, remitted, and trailed);
- Modern business models that have surpassed the present legislative framework;
- Urge to simplify VAT management for businesses as well as MS tax authorities.
After various studies and assessments guided by the vision of how to implement reform of this magnitude, gradually and continuously, in a harmonies manner so both the businesses and Member State authorities would be able to follow the pace, the EU institutions and associations of experts have seen that the best case scenario would be to divide changes into three pillars(based on the covered subject matters).
The three pillars upon which the ViDA reform is based are:
- Reform of the VAT reporting requirements, which led to the introduction of Digital Reporting Requirements;
- Simplification and expansion of already existing VAT registration schemes leading toward Single VAT registration;
- Introduction of deemed supplier model for Platform Economy players.
If someone asks the tax professional, please share in a simplistic manner, in a few words, what these pillars are and what points the reform touches, one could share it in the following:
When it comes to the Digital Reporting Requirements:
- Introduction of the modern system of tax reporting at the EU level based on a real-time subset of invoice data reporting as a “sort” of replacement for the “old” type of data reporting based on the EC Sales list model;
- Implementation of the Electronic Invoice obligation as the mandatory commercial/fiscal document, the one which will replace traditional paper-based, scanned, and PDF invoices;
- DRR mandate will cover the reporting of B2B cross-border transactions.
When it comes to the introduction of a Single point of VAT registration:
- Expansion of the coverage of OSS schemes;
- Simplification of VAT registration for non-established businesses when it comes to the movement of own stock from one MS to another;
- Extension of reverse charge mechanism.
As regards the third pillar, the Platform Economy:
- The introduction of the Deemed Supplier liability for the Digital Marketplaces operating within the short-term accommodation rental sector and the ones used within the passenger transport business;
- Uniform approach when it comes to the definition of the type of service that the Platform supplies to the underlying supplier.
The broadness that will be covered through the implementation of the ViDA reform will have a significant impact on most of the businesses operating within the European Single Market. Even though, as it comes with reforms of this magnitude, the implementation of changes will be enacted gradually, the businesses operating cross-border should take seriously into consideration the preparation for the changes, which could probably be enforced starting from 2024.
Aleksandar Delic
1stopVAT Indirect Tax Researcher (Global Content)