VAT in the Digital Age: Updates from the Latest ECOFIN Meeting on 14 May 2024

The Three Pillars of the ViDA Project

With the ViDA project, the Commission has formulated several proposals to modify the EU VAT system to adapt it to the challenges of new transactions in the digital age, while simultaneously reducing both the administrative burdens for taxable persons and the VAT gap in the EU budget, making the system more efficient for businesses in intra-EU transactions.

The reform package proposed by the EU Commission aims to address the loss of EU VAT revenue (as an own resource that contributed approximately 20 billion EUR to the EU budget in 2022), estimated in the 2023 VAT Gap report to be a total of 61 billion EUR in VAT revenues in 2021 (93 billion EUR in losses in 2020), a significant portion of which is due to intra-EU fraud.

The proposals of the EU Commission, contained in COM (2022) 701, 703, and 704 and detailed in the respective reports (see https://taxation-customs.ec.europa.eu/value-added-tax-vat/vat-digital-age_enwww), concern the modification and implementation of the VAT Directive 2006/112, Regulation 904/2010 (regarding administrative cooperation arrangements necessary for VAT in the digital age), and Regulation 282/2011 (implementing the VAT Directive), respectively.

The timeline for the reforms (the three pillars), barring further extensions, anticipates a gradual implementation starting from 2027.

One of the significant objectives is to “enhance the control of intra-Union transactions, given the limited or nonexistent usefulness of INTRASTAT models” (see COM (2022) 701, page 5, notes 21 and 22, regarding “recapitulative statements”) where the VAT Directive 2006/112 “only requires them for outgoing sales or services, while comprehensive lists for incoming transactions were adopted only by certain states, including Italy” (see R. Rizzardi, "VAT in the Digital Age: What the New EU Directive Scheme Envisions" in Quotidianopiù of 14.5.2024, on this journal).

The reform package pursues three main objectives (pillars) specifically related to:

1. the introduction of the so-called Digital Reporting Requirements (DRR) as common standard requirements for all EU VAT entities, for the electronic transmission of information on VAT transactions, along with the obligation of electronic invoicing for all intra-EU B2B transactions;
2. enhancing the role of digital platform operators facilitating transactions through the use of an electronic interface, such as a virtual marketplace, platform, portal, or similar means, particularly concerning VAT entities providing passenger transport services and short-term accommodation, ultimately ensuring these entities collect and remit VAT on the transactions they facilitate;
3. VAT registration with a single EU-wide VAT number, the so-called Single VAT Registration (SVR), along with improving both the One-Stop Shop (OSS) and Import One-Stop Shop (IOSS) systems and expanding the application of the reverse charge mechanism for B2B transactions, to reduce instances of VAT registration in other Member States.

Communications for VAT purposes and digital communication obligations

Regarding the first pillar, the Commission acknowledges the outdated nature of the VAT direttivo in this regard, which “dates from the 1970s and, as such, the default reporting requirements are not digital”, while also observing a global trend towards shifting from traditional VAT compliance to real-time sharing of data for individual transactions with tax authorities (e.g., through the use of electronic invoicing). The VAT directive “represents a significant barrier towards digitalisation” since it requires Member States to obtain a specific derogation if they wish to adopt digital communication obligations.

At the same time, the Member States that have obtained such derogations have demonstrated a reduction in the VAT gap in VAT collection, as evidenced by the emblematic cases of Portugal, which introduced "e-invoicing" in 2012, as well as Italy with the gradual introduction of e-invoicing since 2008 and the general obligation since 2019.

Given the wide margin of discretion left to Member States by the VAT directive to introduce accounting obligations they deem necessary to ensure the accurate collection of VAT and to prevent evasion, it is observed that digital communication obligations vary significantly from one Member State to another. Consequently, electronic invoicing is presented in different formats and models in individual countries, depending on their respective laws and technological infrastructures.

In the report on the ViDA project (par. 1), the Commission acknowledges that “The resulting fragmentation in the regulatory framework brings additional compliance costs for businesses that operate in different Member States, and therefore have to comply with varying local requirements, and creates barriers within the single market”.

To this end, a Union-wide standard will be defined for all Member States for the collection of all data, regardless of the management systems and technological infrastructures of individual Member States, and for the issuance of an invoice that complies with the parameters of the new art. 217 of the VAT Directive, for which “electronic invoice shall mean an invoice that contains the information required by this Directive, and which has been issued, transmitted and received in a structured electronic format which allows for its automatic and electronic processing”.

The standard European e-invoice will become the default system for issuing invoices, while paper invoices will only be usable with prior authorization from the individual Member State, pursuant to the new art. 218, whereby “2. Member States may impose the obligation to issue electronic invoices. Member States imposing this obligation shall allow for the issuance of electronic invoices which comply with the European standard on electronic invoicing and the list of its syntaxes pursuant to Directive 2014/55/EU…”.

Regarding “recapitulative statements ” (INTRASTAT), it is reiterated that these provide “only provide aggregated data for each taxable person, and not transaction-by-transaction data” not allowing a “data from supplies to be cross-matched with that of acquisitions, as the VAT Directive leaves the reporting of intra-Community acquisitions optional for Member States and fewer than half of the Member States have introduced this obligation” (see the italian case).

This pillar requires simultaneous modification of the rules of administrative cooperation between states, as identified by Reg. 904/2010, given the limited accuracy of the current methods of collecting and exchanging data (dating back to 1993) between EU Member States (the recapitulative statements and the VAT Information Exchange System - VIES), through an update of the “the way cross-border transactions within the single market are reported for VAT purposes to make use of well-established technology and address VAT fraud”.

To this end, the Commission's regulation draft proposes the introduction of a central VIES system (see the new artt. from 24 octies to 24 quaterdecies of Regulation 904/2010) together with the necessary IT infrastructure to regulate the new exchanges.

VAT Treatment Applicable to the Platform Economy

Article 2 of the proposed amendment to the VAT Directive introduces numerous innovations, including the new regime of the “deemed supplier” in the sectors of short-term accommodation rentals and passenger transport through the new art. 28-a, or concerning the supply of goods made in the EU by a taxable person, through the use of an electronic interface such as a virtual marketplace, platform, portal, or similar means, as per the new art.14a, in addition to the new artt. 46a, 135 par. 3, 136b, 172a, 242a, and 306 of the VAT Directive.

This is to address the disparity in VAT application for certain types of transactions, notably those carried out by electronic platforms related to short-term accommodation services and passenger transport, by extending the obligation to collect and remit the tax to the platform.

This, by express provision of the new art. 28a, is defined as the “deemed supplier ” stipulating that “a taxable person who facilitates, through the use of an electronic interface such as a platform, portal, or similar means, the supply of short-term accommodation rental … or passenger transport, shall be deemed to have received and supplied those services themselves”.

In this way, if the indirect supplier does not apply VAT because, for example, they are an individual or benefit from the special regime for small businesses, the VAT on the underlying service is applied and declared by the platform (see in this regard the arguments of the EU Court in C-695/20 on the relationship between art. 28 of the VAT Directive and art. 9a of its implementing regulation, regarding the presumption that identifies the intermediary as the taxable person liable for tax collection and payment of VAT).

Regarding short-term accommodation services, an absolute presumption is introduced (art. 135, new par. 3), according to which the provision of such services is considered similar to hotel accommodation and, therefore, cannot be exempt from VAT.

The provision states that “The uninterrupted rental of accommodation for a maximum of 45 days with or without the provision of other ancillary services shall be regarded as having a similar function to the hotel sector”, with the consequent application of VAT (see the tax rate provided for the hotel sector in n. 120 of Table A, attached to DPR 633/1972), regardless of the management of fewer than four apartments, as provided for in art. 1, par. 595, Law 178/2000, which recognizes the tax regime “only in case of intended short-term rental of no more than four apartments for each tax period”.