New proposal from the European Commission to modernize the VAT system (Part II)

This is a continuation of the last week’s blog: Analysis of electronic invoicing in Europe: the EU measure to curb tax fraud (Part I)

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The European Commission has proposed a series of measures to modernize and make the EU value added tax (VAT) system work better for business and more resilient against fraud by embracing and fostering digitalisation. .

The proposal intended to address the challenges posed, in the field of VAT, by the development of the platform economy.

Member States lost €93 billion in VAT revenue in 2020, according to the latest VAT Gap figures. Conservative estimates indicate that a quarter of the missing revenue can be directly attributed to VAT fraud related to intra-EU trade.

These losses are clearly detrimental to public finances in general at a time when Member States are tightening their budgets to deal with the social and economic effects of the recent rises in energy prices and Russia’s war of aggression against Ukraine.

In addition, VAT regimes in the EU can continue to be burdensome for businesses, especially SMEs, and other businesses that have activities or want to expand across borders.

The key actions proposed will make it easier for Member States to collect up to an additional €18 billion in VAT revenue annually, while helping businesses, including SMEs, to grow.

• Move to real-time digital notification based on electronic invoicing for companies with cross-border activities in the EU.

The new system introduces a real-time digital notification for VAT purposes based on electronic invoicing, which will provide Member States with the valuable information they need to step up the fight against VAT fraud, especially cascading fraud.

The move to e-invoicing will help reduce VAT fraud by up to €11 billion per year and reduce administrative and compliance costs for EU merchants by more than €4.1 billion per year over the next ten years .

It will also ensure the convergence of existing national systems across the EU and pave the way for Member States wishing to set up national digital notification systems for domestic trade in the coming years.

• Update of the VAT rules in relation to passenger transport and short-term accommodation platforms

Under the new rules, platform economy operators in those sectors will be responsible for collecting and remitting VAT to tax authorities when service providers do not, for example because they are small businesses or individual providers.

Along with other clarifications, this will result in a uniform approach across all Member States and will contribute to a more level playing field between traditional accommodation and short-term transport services and those online. It will also make life easier for SMEs, which would otherwise have to understand and comply with VAT rules in all Member States where they do business.

• Introduction of a single registration for VAT purposes throughout the EU

Building on the existing “VAT One Stop Shop” model for online shopping businesses, this proposal will allow businesses selling to consumers in another Member State to register once for VAT throughout the EU and comply with its obligations in the matter through a single online portal in a single language.

It is estimated that this measure could save companies, especially SMEs, around €8.7 billion in administrative and registration costs over ten years. Other measures to improve VAT collection include making the “single import window” mandatory for certain platforms that facilitate sales to consumers in the EU.

Next steps

The package of proposals presented takes the form of amendments to three pieces of EU legislation:

• Directive 2006/112/EC on VAT,
• Council Implementing Regulation (EU) 282/2011 and
• Regulation (EU) 904/ 2010 of the Council on administrative cooperation.

Legislative proposals will be submitted to the Council for approval and to the European Parliament and the Economic and Social Committee for consultation.