On January 21, 2022 the Commission the first phase of a public consultation: “VAT in the digital age”. During this phase European Commission searches for input for an impact assessment. The period during which input can be given for the impact assessment runs from January 20, 2022 until February 17, 2022 (midnight Brussels time).
Political context
VAT is a major source of revenue for Member States’ budgets, representing approximately 7% of GDP and an important own resource for the EU. In 2019, the EU-27 VAT revenue amounted to over one trillion euro, but revenue loss was estimated at EUR 134 billion. A significant part of this loss consists of fraud, in particular missing trader intra-community (MTIC) fraud, estimated in the range of EUR 40-60 billion. The VAT system is not only prone to fraud, but has also become increasingly complex and burdensome for businesses. These 30-year-old VAT rules are not adapted to doing business in the digital age, thus calling for reflection on how technology can be used to reduce administrative burdens and related costs for businesses and at the same time fight tax fraud.
n its action Plan for fair and simple taxation supporting the recovery, the Commission announced a legislative package – VAT in the digital age – for 2022. The action plan aims to modernise VAT reporting obligations and facilitate e-invoicing, update the VAT rules for the platform economy and move to having a single VAT registration in the EU.
Problem(s) the initiative aims to tackle
The digital economy and the development of new business models create new challenges for tax administrations. The legislative framework is unable to deal properly with the new digital reality and is prone to fraud. To address these issues, three areas have been highlighted:
1. Digital reporting requirements, including e-invoicing
Many Member States, pressed by the magnitude and importance of losing revenue when they need it the most to support the economy and recover after the COVID pandemic, are introducing different digital reporting obligations domestically. This uncoordinated growth in reporting obligations creates substantial new compliance burdens for businesses operating in different Member States and increases the risk of fragmentation, hindering the operation of the single market. The current rules do also not allow for the mandatory use of e-invoicing.
2. VAT treatment of the platform economy
Current VAT rules are ill-equipped to deal with the challenges of the platform economy, e.g. ensuring fair taxation of both online and traditional economic transactions, and ensuring Member States take a uniform approach to the application of the VAT rules regarding the provider, nature of services, place of supply and reporting in the light of the divergent and evolving business models.
3. Single VAT registration in the EU
The newly introduced OSS (one-stop-shop) allows businesses to avoid multiple VAT registrations in the EU for cross-border transactions. However, specific types of cross-border transactions still fall outside of its remit (e.g. supplies with installation, e-mobility). Improvements to the IOSS (import one-stop shop, covering imports from outside the EU) are also needed to further strengthen VAT compliance in relation to imported goods.
More information on the public consultation “VAT in the digital age” as well as the link via which can give input can be found here.
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