VAT system fit for digital age now within reach
The forthcoming reform of the VAT system is intended to improve the efficiency, fairness, and collection of tax and reduce VAT fraud. The European Commission is currently preparing concrete proposals on digital reporting, the application of VAT to web interfaces, and the extension of the one-stop-shop (OSS) scheme to all supplies of goods and services to end consumers and to supplies of goods business-to-business.
The first reform aims to introduce harmonised digital reporting requirements across all EU member states. In this respect, the European Commission (EC) carried out research into what data can be collected and how it can be shared between tax authorities to help build on the VIES system and generate reliable real-time transaction data to provide immediate alerts on VAT fraud. Several scenarios are in play, ranging from partial to full harmonisation and offering options with periodic (e.g., monthly) reporting or real-time online recording of transactions. Under partial harmonisation, intra-community transactions with goods and services would be uniformly reported, while the reporting of local transactions would be up to the individual member states. This option seems to be generally preferred by the member states. In its first phase, data collection and their integration in the EU will focus on business-to-business transactions (B2B). The EC hopes to present legislation amending the EU VAT Directive by the end of 2022. Implementation should take place in 2024 or 2025.
The second reform seeks to modify the VAT Directive to capture the new dynamics created by the sharing and gig economy (a flexible economy based on short-term contracts) that currently enables millions of private individuals to provide services and goods. The adjustment would include the imposition of full VAT obligations on deemed suppliers of electronic interfaces (platforms and marketplaces) by extending the notional supplier mechanism (a platform in its capacity as a notional supplier for VAT purposes) to multiple supplies that take place via platforms. The reform also considers the need to ensure the stability and transparency of tax obligations for providers, users, and electronic interfaces (platforms and marketplaces), while at the same time seeking to avoid double taxation. This should include rules that are efficient and simple to comply with to reduce the administrative burden and costs for both taxpayers and tax authorities. Finally, the EC aims to level the playing field with the traditional economy.
As part of the third reform, the EC is preparing to publish a draft amendment to the VAT Directive in the autumn, extending the one-stop-shop (OSS) scheme to all remaining cross-border transactions for end consumers and some or all cross-border supplies of goods business-to-business (B2B transactions). The aim is to reduce the burden of VAT registration and reporting for foreign non-residents, increase tax revenues, and support the development of the single market. We have written about this change in previous issues of the Update.