Indirect tax is an accelerator for added value in finance
The European Commission published its proposal for ‘VAT in the Digital Age’ on 8 December 2022, in which it defines the core elements of European VAT that will be modernised in the coming years. This proposal goes hand in hand with a global tendency by which governments are obliging companies to issue and receive electronic invoices in a standardised format, often also linked to a new digital reporting obligation. What’s coming will bring about profound changes to the finance and tax process at every organisation. To be prepared, we strongly recommend that all CFOs incorporate this into their finance strategy and planning for the future.
The European Commission’s proposals contain a number of detailed changes to the current European VAT legislation, which, if adopted, will come into effect at different points between 1 January 2024 and 1 January 2028. The reason for this reform is twofold. After 30 years, even the Commission has admitted that the VAT laws are outdated. The proposals it has made are an attempt to modernise the VAT system and align it with today’s economic context. In addition, the Commission wishes to fight VAT fraud and increase the VAT revenues of the EU Member States by digitising the invoicing and reporting process. At the same time, it hopes to significantly reduce the burden of administration and VAT compliance.
THE THREE MAIN PROPOSALS:
- Platform economy: new VAT collection obligations imposed on platforms facilitating short-term rentals of accommodation and passenger transport (e.g., Uber, Airbnb), as well as an extension to the existing “deemed supply” rule for online marketplaces to all types of goods transactions.
- Single VAT registration: based on the existing one-stop-shop model for e-commerce companies, this proposal encapsulates the Commission’s wish to limit VAT registrations for companies with activities in several EU Member States, reducing them to a single VAT registration in the country of residence.
- E-invoicing and digital reporting: new digital reporting obligations for intra-EU supplies of goods and services, with transactional and (almost) real-time data transfer based on structured electronic invoicing (see below).
E-invoicing and digital reporting
The principle with the most widespread impact on companies is bound to be the one concerning e-invoicing and digital reporting. It will be obligatory to issue an electronic invoice in a structured format for every transaction between European VAT taxable persons, no more than two days after the transaction has taken place. A PDF sent by email will no longer be possible.
The data in this electronic invoice must also be reported (almost) immediately to the VAT authority, which in turn must forward the data to a central EU database where it can be consulted by the authorities in all the EU Member States. In practice, this means that no later than five days after the transaction has taken place, the authorities in 27 Member States will be able to view this information and analyse it (using automated tools).
Today we still see many companies issuing invoices on paper without paying much attention to whether the invoice is also correct from a VAT perspective. Internal checks usually only happen when the VAT return is being prepared, which often leads to manual adjustments before the VAT return is actually submitted. The risks of such an approach are limited, since the VAT administration does not carry out an inspection until two or three years later.
It goes without saying, of course, that this kind of approach will not be without risk in the future. The tax authorities will have all the relevant information at their disposal on a near real-time basis and can carry out fully automated, targeted inspections.
As a CFO, the focus in the future should be much more on issuing and processing the invoice immediately with the correct VAT treatment. It seems that automatic tax code determination in the ERP system and subsequent reporting will become little short of a necessity.
Moreover, this new obligation is not limited to intra-EU transactions. Some time ago, the Belgian Minister of Finance also announced the introduction of an obligatory e-invoicing mandate for local B2B transactions, possibly linked to a new reporting obligation. However, it is important to note that EU Member States wishing to introduce such a mandate for local transactions will have to comply with a framework provided in the European Commission’s proposal. This should ensure harmonisation between the EU Member States. What is certain is that this is on the horizon for every VAT payer. It’s coming, so as a CFO, you need to be prepared for it. Don’t just ignore it and hope it will go away.
Strategy and solutions
These new obligations will have widespread impact and affect not only the finance department but almost the entire organisation. That means IT, sales, purchase, legal, and so on. We have noticed, though, that the finance team are usually the ones leading the way so that implementation goes smoothly.
It is becoming important for the CFO to define a strategy to deal with this new reality and prepare the organisation for this transformation. In the first instance, it is important to map out the various obligations so that your decision about which solution is most suitable for your organisation is as well founded as possible.
Various ERP systems (e.g., SAP) are already able to issue e-invoices in the correct format, as long as you have the necessary additional licences. However, we have noted that implementation can put pressure on the internal IT team, resulting in the need for an external implementer and hence in increasing costs. Even when it comes to changes in the regulations, you will usually be responsible for implementing them in the system yourself. In practice, this is not always possible within the permitted timeframe.
We see companies relying on e-invoicing service providers as an alternative. There are already a considerable number of players on the market, and this number is expected to increase in the years to come.
In fact, there are a number of smaller players on the market that focus on one country and obligation. There are also several larger players that offer a global e-invoicing solution and thus support multiple countries and obligations. In practice, these providers work in a similar way: a data connection is made with the ERP/accounting package and the service provider converts the data into the format required in the relevant country.
These service providers help you to issue an electronic invoice in the right format, but of course that does not necessarily mean it is correct. Every CFO should be taking this opportunity to re-evaluate and, where possible, automate the way in which VAT determination and the subsequent reporting of purchase and sales invoices is done. This will allow you to face the VAT inspections of the future, which will probably be automated, with peace of mind.
Opportunities
At Deloitte, we strongly believe that the entire process from VAT determination, issuing and sending the e-invoice to correctly reporting the invoice in a VAT return can and should be fully automated. This is why we are working on our own solution with a data specialist, which is intended to relieve the burden on companies in all these areas.
The structured data that will be available as a result of this new obligation also opens up prospects for companies to carry out extensive data analyses. That means things like extensive and detailed management reporting, transfer pricing reports, reconciliations, etc. Hence this obligation can be an accelerator for more added value in finance.
