Electronic Invoice: European Digital Communication System for VAT Purposes

Digital communication for VAT purposes: what's new?

After almost three years of negotiations, the EU Council has reached an agreement on the so-called VIDA package, or VAT in the digital age, aimed at launching new measures that will adapt EU rules on value added tax to the digital age. This regulation will address electronic invoices and real-time data communication, as well as activities carried out via digital platforms, with the ultimate aim of combating VAT fraud and supporting businesses by promoting digitalisation.

The agreement reached by Ecofin on 5 November 2024 represents a truly epochal turning point for the VIDA system. It consists of three acts – a directive, a regulation and an implementing regulation – which together introduce changes to three different aspects of the VAT system.

In essence, the new rules:

• will make VAT communication obligations for cross-border transactions completely digital by 2030;
• require online platforms to pay VAT on short-term accommodation rental services and passenger transport services in most cases where individual service providers do not charge VAT;
• improve and expand online VAT one-stop shops so that businesses do not have to carry out costly VAT registrations in each Member State in which they operate.

As regards digital VAT reporting, we first need to take a step back.

Currently, businesses are required, every few months, to submit to their national tax authorities "recapitular statements" of goods and services sold to businesses in other EU Member States that are taxable in those Member States. This gives fraudsters enough time to exploit the difficulty for authorities to quickly identify suspicious or fraudulent transactions, as the data is incomplete and not available in real time. The Council has now agreed that a system of real-time digital VAT reporting through electronic invoices will be put in place.

Companies will issue electronic invoices for cross-border business-to-business transactions and automatically communicate the data to their tax administration. This will build on the existing European standard on electronic invoicing in public procurement. National tax administrations will share data through a new IT system that can provide suspicious activity analysis.

A framework at national level will ensure the quality of data included in electronic invoices, with flexibility for Member States as to how this framework will operate.

This will give Member States rapid access to comprehensive information on cross-border transactions that they can use to fight VAT fraud.

The Council agreed that the EU system should be introduced in 2030 and that all existing national systems should become interoperable with the EU system by 2035.

Electronic invoicing will become the default system

In order to facilitate business relations not only between companies located in the various EU states, but also to ensure better cooperation, including speed, between the various financial administrations, electronic invoicing will be extended to all EU states.

In fact, to facilitate the automation of the communication process for both taxable persons and tax administrations, the transactions to be communicated to tax administrations should be documented electronically. The use of electronic invoicing should become the default system for issuing invoices.

Thus, the effectiveness of national digital communication systems could be compromised if taxable persons did not comply with the obligation to issue electronic invoices for transactions subject to the communication obligation. In the light of the digitalisation of economic transactions and exchanges and in view of the objectives envisaged for the digitalisation of VAT, also in order to ensure a more effective fight against fraud, Member States should be allowed to provide that the possession of an electronic invoice issued in accordance with the rule laid down in the VAT Directive becomes a substantive condition for being able to deduct or recover VAT due or paid.

Accordingly, the definition of electronic invoice will only cover electronic invoices issued, transmitted and processed in a structured electronic format allowing for their automatic and electronic processing. The obligation to use a structured format should concern at least the data to be communicated. Therefore, hybrid invoices, which combine data embedded in a structured format and data embedded in an unstructured and human-readable format, should fall within this definition if they include all the data to be communicated in a structured format.

In order for the VAT communication system to be implemented efficiently, it is necessary that the information reaches the tax administration without delay. Therefore, the deadline for issuing an invoice for cross-border transactions should be set at ten days from the date of the chargeable event. The electronic invoice should facilitate the automated transmission to the tax administration of the data necessary for control purposes. To this end, the electronic invoice should contain all the data to be transmitted to the tax administration under the digital communication obligations in a structured format.