The EU unveils new proposal for VAT in the Digital Age
On December 8, 2022, the European Commission published a new EU Value-Added Tax (VAT) proposal for its “VAT in the Digital Age” initiative for the 2025-2028 timeframe. This proposed series of measures aims to modernize and make the VAT system work better for businesses. They are also intended to address challenges with VAT raised by the development of the platform economy and make businesses more resilient to fraud by embracing and promoting digitalization.
The three major objectives of the package are:
- Modernizing VAT reporting obligations by introducing Digital Reporting Requirements (“DRR”) which will standardize the information that needs to be submitted by taxable persons or businesses on each transaction to the tax authorities in an electronic format. At the same time, it will impose the use of e-invoicing for cross-border transactions.
- Addressing the challenges of the platform economy by updating the VAT rules applicable to the platform economy when they facilitate the supply of short-term accommodation rental or passenger transport services.
- Avoiding the need for multiple VAT registrations in the EU by introducing Single VAT Registration (“SVR”). This will be achieved by improving and expanding the existing system of One-Stop Shop (“OSS”) and Import One-Stop Shop (“IOSS”), and reversing the charge mechanism in order to minimize the instances for which a taxable person is required to register in another EU member country.
The proposed rules also apply to non-EU-based suppliers of digital-age services and products.
Digital Reporting Requirements
Digital Reporting Requirements (“DRR”) will be introduced to replace the old system of compliance, moving towards real-time sharing of transactions-based data with tax administrations and significantly and effectively tackling VAT fraud. Under the current reporting system of recapitulative statements, which provides only aggregate data for each taxable person instead of transaction-by-transaction data, it will be much easier for the tax authorities to discover VAT fraud in a timely manner. Consequently, non-EU-based suppliers of goods and services to EU-based consumers and businesses will have to consider the impact of e-invoicing rules and requirements. Article 222 of the proposal specifically states that such e-invoices need to be issued within two days after the chargeable event takes place, including supplies by non-established taxable persons (e.g., U.S.-based businesses that use the so-called reverse charge mechanism).
Short-term rentals and passenger transport
This aspect of the package is focused on the perceived unfair competition between private providers of short-term accommodation (typically not charging VAT) and hotels which are obliged to charge the applicable VAT and similarly the service offerings of private suppliers of passenger transport versus the professional enterprises providing transport services. Typically, private suppliers use an electronic platform to engage with their customers. The proposal aims to resolve issues of unfair competition by introducing a deemed supplier model by which platforms will account for the VAT on the underlying supply where no VAT is charged by the supplier, thereby ensuring equal tax treatment between the two different service offerings.
VAT registration requirements
The last element of the proposal relates to the VAT registration requirements in the EU and is a continuation of the e-commerce package that entered into application on July 1, 2021. Under these rules commonly referred to as One-Stop Shop (“OSS”) and Import One-Stop Shop (“IOSS”), providers of services and goods where consumers order online directly from suppliers in other member states and non-EU countries will have the option to register in one EU country and combine all EU sales within one tax return to submit collected VAT. The package introduced will extend the use of the OSS and IOSS schemes as certain supplies of goods and services remain subject to burdensome VAT accounting requirements. An extension of the scope of the OSS and IOSS will ensure a further decrease in the need for multiple VAT registrations and subsequent VAT returns in the EU.
As this package was only introduced in December 2022 with a gradual introduction of the new rules between 2025 and 2028 in EU countries, BPM will over the next few months provide regular and more detailed updates on the progress made by the individual countries to incorporate the changes in their respective VAT regulations.
No impact on DAC 7
The 2025-2028 timeline for these new rules will not affect the introduction of DAC 7 as of January 1, 2023. Under DAC 7, digital platforms will be required to collect and verify information on users and report that information to local tax authorities. The first deadline to report for the year 2023 is January 31, 2024. The DAC 7 legislation applies to both EU and non-EU-based digital platforms which are defined as entities that use software to connect sellers and purchasers for the purposes of a relevant activity. Relevant activities include the rental of immovable property, rental of a mode of transportation, personal services and sale of goods. The type of information to be collected by the digital platform operator relates to financial data with regard to the reportable sellers including name and address, tax ID number, VAT number (if applicable) and/or property information, and payments related to such properties.
Contact us or speak with your BPM tax representative for more information or a deeper discussion of these new EU rules.