VAT in the Digital Age (ViDA): new EU rules are out!

On 8 December 2022, the European Commission published its new EU VAT proposals in the framework of the VAT in the Digital Age initiative. In this and our upcoming blogs, we go deeper into the reason why this initiative was needed and what the new proposals effectively entail.

According to a OECD study prepared in 2020 , indirect tax revenues play an important role in OECD countries’ state budgeting. The study highlights that since the mid-1980s, value added tax (VAT) has become the main consumption tax both in terms of revenue and geographical coverage. Many developing countries have introduced a VAT system during the last two decades to replace lost revenues from trade taxes following trade liberalization. Some 170 countries operate a VAT system today, which according to the study, is more than twice as many as 25 years ago. VAT raises approximately a fifth of total tax revenues in the OECD and worldwide.

The evolution of VAT as an increasingly important source of tax revenues for countries around the world, and its application to an increasingly large share of the world’s economic activity, have raised its importance in the global tax policy debate. The global spread of VAT coincided with the rapid expansion of the international trade in goods and services in an increasingly globalized economy. Most international trade is now subject to VAT, and the interaction of national VAT regimes can potentially have a major impact in either facilitating or distorting trade. 

As indirect tax is a key state budget resource, reducing the revenue losses from VAT non-compliance remains a key challenge and a priority for most countries. Many tax administrations carry out research to estimate their country’s VAT compliance gap, i.e. the revenue loss from VAT fraud, non-compliance and bankruptcies. The VAT gap in the European Union alone was estimated at EUR 134 billion for the 28 European Member States for 2019 and at EUR 93 billion for 2020 (source: latest VAT gap report prepared in 2021/2022¹). 

In the European Union, the recent and still ongoing, digital transformation journey of the VAT system started in 2015 with the introduction of the mini-one-stop-shop (“MOSS”) returns on B2C electronic services to provide businesses with a single VAT return filing solution on certain transactions. As a next chapter in 2020, the European Commission published its strategic framework and formulated the next steps in the so-called Action plan for a fair and simple taxation supporting the recovery strategy working paper: 2020_tax_package_tax_action_plan_en.pdf (europa.eu).

The Tax Action Plan of 2020 determines 25 initiatives of the European Commission with a planned implementation timeline from 2020 until 2024, outlining the Action Plan for a fair and simple taxation supporting the recovery strategy and presenting a number of upcoming initiatives in the field of direct and indirect taxation. The list of all the 25 initiatives is available under the following link of the European commission: 2020_tax_package_tax_action_plan_annex_en.pdf (europa.eu)

A number of the changes in the Action Plan were incorporated into the VAT in the Digital Age program. The goal of this initiative was to understand how tax authorities can use technology to fight tax fraud and benefit businesses, and whether the current VAT rules are adapted to doing business in the digital age.

On 8 December 2022, the European Commission published its legislative proposals in all the three areas. The key points are the following:

1. New Digital Reporting requirements (DRR) are to be enacted gradually from 2025 to 2028.The new system introduces an e-Invoicing based real-time digital reporting for VAT purposes for business that operate cross-border in the EU by also eliminating the current European Sales Listing reporting obligations.  Throughout this implementation phase, businesses need to manage the existing digital reporting landscape and establish a digital strategy to be prepared for transition without disruptions.
   
   
2. Clarifications and modifications to the existing One-Stop-Shop (OSS). The new rules, to be effective as of the 2025, include among others the extension of the intra-Community distance sale of goods definition to cover work of arts, second-hand and collector’s item; inclusion of all supplies of goods within the EU facilitated by an electronic interface in the deemed supplier regime; extension of deemed supplier rule to cover certain transfers of own goods that are facilitated via an electronic interface. Furthermore, all business-to-consumer supplies of services, supplied within the European Union by taxable persons established outside the European Union, fall within the scope of the non-Union scheme, and not only supplies of services to Union established consumers.
   In summary, it will no longer be required for any EU business selling to consumers in another member state or to non-EU businesses selling services to EU consumers to operate more than one single VAT registration. They can fulfil their VAT obligation in one language, via a single online portal. 
   
   
3. The import one stop shop (IOSS) scheme in this proposal will be mandatory for platforms facilitating as deemed supplier certain distance sales of imported goods. This scope extension further decreases the need for multiple VAT registration in the EU.
    
4. To level the playing field in the short-term accommodation and passenger transport industry, the deemed supplier VAT obligations will be extended to platforms operating in these sectors. A tax exemption will apply to anyone offering short-term accommodation or passenger transportation on a marketplace. Consequently, the business operating the marketplace will be accounting for, charge and pay VAT as a deemed seller.

The overall saving of administrative cost currently borne by taxpayers is estimated at EUR 51 billion over a 10-year period between 2023 and 2032. The total cost of implementation for businesses and national administrations is estimated at EUR 13.5 billion for the same period. 

In the coming days and weeks, we will publish more details on the content of each of these legislative proposals in separate expert blogs. Stay tuned and sign up to our KPMG tax newsletter here so you don’t miss out on it!