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Update on the EU VAT on the Digital Age recent consultation paper

Indirect Tax Matters - September 2022

The EU, increasingly looking to explore further digitalisation options in the indirect tax space, have recently published a report based on the VAT in the Digital Age study carried out for the European Commission. This report covered the current position of, and the impacts of possible policy initiatives, in the following areas:

  1. Digital Reporting Requirements (DRRs), which deals with VAT reporting aspects like SAF-T and mandatory E-invoicing.
  2. The VAT Treatment of the Platform Economy, which focuses on certain VAT points that arise from the proliferation of large online platforms that have arisen in areas like E-commerce, Transport and Advertising.
  3. A Single EU VAT Registration and Import One Stop Shop.

1. Digital Reporting Requirements

According to the paper, as of September 2021, 12 Member States have introduced DRRs. The report found that the implementation of the current DRRs had a significant positive benefit on VAT revenue, with the corresponding additional costs for the Tax Authorities being relatively small. However, for the taxpayer, the introduction of these DRRs did increase compliance costs with scope for improved automation in back-office processes. One of the key issues raised is the apparent lack of harmonisation across the EU on the implementation of digital reporting. This is clear when one compares the introduction of Real Time Reporting systems across the EU, as none of the systems could be said to be fully aligned.

The paper explores future policy options, with quantitative analyse showing that E-invoicing ranks first as a suggested DRR solution under a potential EU DRR harmonisation measure in the future. It was identified as the option that provided:

  • More additional services to taxpayers, in particular the pre-filing of VAT returns and the removal of recapitulative statements
  • A reduction in administration Costs
  • Environmental benefits
  • Business automation potential and future-proofness of the tax system

As the E-invoicing solution may be the preferred solution at an EU-wide level, we would recommend that taxpayers continuously consider upgrading their ERP systems or better utilising the functionality of their existing systems. Ideally, they should also ensure that they have an E-invoicing function to future-proof their VAT compliance obligations, even if the business is not currently operating in a country covered by mandatory E-Invoicing obligations. Furthermore, the EU has confirmed that the implementation of a harmonised EU DRR should confer with the “one-in-one-out principle”, which seeks to offset any new burdens from new legislation by reducing existing burdens in the same policy areas to limit any negative impact of an EU DRR.

2. VAT Treatment of the Platform Economy

The report identifies that there are 11 operators with digital platforms that receive revenue of more than €1 billion per year within the EU27, with these 11 platforms generating 81 per cent of the total revenue generated across the EU27 in 2019. The largest percentage of revenue comes from the E-commerce sector.

The Commission has identified the following VAT-related issues being raised by the growth of the Platform Economy in the report:

  1. The taxable person status of the provider
  2. The nature of the facilitation services offered and the resulting place of supply
  3. The interaction with special VAT schemes for SMEs
  4. The deduction of input VAT
  5. The definition of consideration

Additionally, platforms are also subject to increased administrative burdens, such as the collection and payment of VAT on sales in line with the VAT e-Commerce Package, and collection and verification of tax information under DAC7. Furthermore, the report identified three general problem areas, arising across the EU in relation to platforms:

  1. Unclear and non-harmonised EU VAT rules
  2. Difficulties in enforcing VAT compliance
  3. Lack of VAT equality and neutrality

Based on the above, several potential future policy options were analysed, which can be broadly broken up into two different groups status quo with applied interventions, where the EU clarifies the nature of services provided by the platform (and consequently the place of supply), the relaxation of considering a provider as a taxable person and a streamlining of recordkeeping obligations, with the second option being the introduction of a deemed supplier role for digital platforms.

The report found that the first option would have a clear positive impact on platform operators by reducing administrative burdens and legislative uncertainties and increasing the harmonisation of the single market. It would also be expected to have a limited positive benefit for VAT revenue, but it may also result in a slight re-distribution of VAT revenue.

Under the second option, the digital platform is treated as a deemed supplier, which could lead to a significant increase in VAT revenues depending on the magnitude of changes introduced as it could bring transactions within the scope of VAT, which are currently treated as exempt or outside of scope under existing EU VAT rules. Furthermore, given the scale of these platforms, there should be a reduction in the number of taxpayers being required to pay over output VAT liabilities as the platform would be required to do so, potentially leading to a more efficient compliance system. However, VAT compliance costs for taxpayers may increase given that more transactions will be within the VAT net and it could be legislatively complex.

3. Single place of VAT Registration in the EU and Import One-Stop Shop

While the introduction of the Import One-Stop Shop has reduced the requirements for some traders to hold multiple VAT registrations, there are still situations where businesses are obliged to obtain and hold more than one VAT registration.

The report concluded that one solution could be the extension of the One Stop Shop to domestic supplies of goods B2C by non-established businesses. This solution would reduce the administrative requirements for some taxpayers by potentially removing the need for a business to register in multiple EU jurisdictions in order to account for output VAT on supplies to private customers. Therefore, we would expect the EU VAT unit to keep a close eye on the success of the Import One-Stop Shop, and it seems natural that it may be eventually extended.

The update released offers a detailed overview of the different options being explored at the EU level to further modernise the single market VAT regime using the digital solutions available. However, it is clear that while there are preferred approaches, there are more radical options available that may be considered in the future depending on the policy direction taken. Questions such as - ‘Will VAT revenue maximisation be the goal or will administrative simplicity win out?’ are likely to be considered by decision-makers while making such key choices, but it appears the “one-in-one-out principle” is likely to dictate what is implemented at a harmonised EU level. On a local level, while we understand that Irish Revenue is reviewing the different options available to them, we would not expect any sweeping changes in the short run. Instead, we would expect them to take a methodical and consultative approach in the near future while exploring different options.

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