e-Invoicing mandates: The European Union
VAT in the Digital Age (ViDA)
VAT in the Digital Age (ViDA) now available in different languages
The European Union finally provided translations of the VAT in the Digital Age proposal for all EU languages, a key milestone in commencing the formal feedback process, which will run until 4 April 2023.
The local language versions of the proposal can all be found here.
The EU Commission (‘EC’) has been looking at ways to modernize and simplify VAT legislation, leveraging digital technology, including e-Invoicing mandates, to improve VAT collection and reduce tax fraud while at the same time seeking to minimize the burden on businesses in terms of maintaining compliance.
The specific objectives of the ViDA initiative include improving tax reporting and unlocking the opportunities provided by digitalization. Some of these changes focus on simplifying VAT registrations for businesses trading in multiple EU jurisdictions, and others will update rules for the platform economy. Most importantly, there are some significant changes proposed with respect to both e-invoicing and e-reporting requirements which we will focus on in this newsletter.
e-Invoicing amendments proposed by ViDA
Firstly, as from 2024, mandatory e-invoicing will become possible without the need for prior EU approval. At present, countries who have chosen to push for e-Invoicing mandates – such as Italy, France, Poland and so on – have had to first obtain a special derogation from the EU VAT Directive.
Member States would be able to switch to e-Invoicing without consulting the EU as long as their invoices comply with the European Norm – the standard for electronic invoices which was developed initially for use in B2G e-invoicing. A further condition is that the issuance and transmission of e-invoices cannot be subject to a prior mandatory authorization or verification by the tax authorities. So what does that mean in practice?
This proposed change would effectively signal the end of the “clearance model” in the EU such as has been implemented in Italy and is widely used in Latin America. Member States, such as Italy, that already have this type of system in place would need to align with the new rules by 1 January 2028 and adapt the existing SdI model to remove the obligation for authorization of invoices by the platform prior to issuance/transmission. This will have significant benefits for businesses who may already be exchanging invoices electronically with key trading partners since it means they should not have to completely change their existing process and will be able to simply setup new flows to meet the government e-Reporting requirements (see below).
Secondly, e-invoicing will ultimately become the de facto standard for almost all invoices rather than an exception. The proposal would see issuance and reception of structured electronic invoices become the default from 1 January 2028.
Member States would need to “opt in”, i.e., seek special derogation from the EU, if they wish to allow paper invoices for certain transactions. Cross-border invoices (B2B intra-EU supplies of goods and services) would always require an e-invoice.
Third, the proposal would redefine e-invoices such that only invoices transmitted and received in a structured electronic format suitable for automated electronic processing will be considered to be electronic invoices. This is proposed to take effect as early as 1 January 2024 and could effectively eliminate the use of hybrid PDF formats such as ZUGFeRD/Factur-X (see our April newsletter for more details about this format).
e-Reporting amendments proposed by ViDA
A major focus of the proposal is around electronic reporting of intra-EU transactions. The e-invoicing obligation described above will facilitate such digital reporting requirements (DRR) and this will replace the current EC sales listings for cross-border transactions within the EU as from 1 January 2028.
The prescribed data for this reporting will need to be transmitted electronically, on a transaction-by-transaction basis, within two working days from the issuance date of the invoice. Member states can either use the existing format referred to as the EN (European Norm or European Standard), although Member States will have the freedom to allow the use of a different format as long as they also allow the use of the EN.
Member States will in turn report the data collected using an enhanced version of the VIES return (the system by which companies today report zero rated intra-EU cross border transactions using the free online VAT Information Exchange System). This centrally reported data will be available for analysis for five years.
While cross-border transactions must be reported, the proposal includes the option for Member States to to introduce digital reporting requirements for other transactions (e.g. domestic supplies of goods and services). To ensure harmonization, any such reporting system will need to be similar to the one described above for Intra-EU transactions.
Member States which have already implemented an e-Reporting system for these transactions will have to adapt them to ensure harmonization with the centralized reporting system by 2028 at the latest.
ViDA – Key takeaways
At this point there is no action, this is in proposal stage and needs to be formally adopted by the European Union as an amendment to the existing EU VAT directive which will take some time.
Assuming the proposal is passed into law, it will begin to introduce some much-needed harmonization around both e-Invoicing and e-Reporting which can only be good news.
OECD: Report published on e-Invoicing / e-Reporting and continuous controls
The OECD have been examining the increasing use of continuous transaction control based systems for VAT reporting in order to see how these fitted with the concepts they had outlined in their previously published “TAX Administration 3.0: The Digital Transformation of Tax Administration“.
A new report has been published which is a summary of discussions between officials from China, Canada, Chile, Hungary and Spain and based on responses from 71 tax administrations about their own current situation and plans.
The report, entitled “Tax Administration 3.0 and Electronic Invoicing – Initial Findings” can be found at the link provided.
EU VAT in the digital age– Detailed reports now available
In our newsletter of February this year we discussed an European Union initiative referred to as “Vat in the digital age”. The main documentation is available here.
The European Commission has now published more detailed related reports:
- Final report. Volume 1, Digital reporting requirements
- Final report. Volume 2, The VAT treatment of the platform economy
- Final report. Volume 3, Single place of VAT registration and import one stop shop
- Final report. Volume 4, Consultation activities
These reports can be downloaded from the links provided above.
Recommendations to the European Commission on e-Invoicing harmonization
On 10 March 2022, the European Parliament (EP) voted in plenary on a Resolution to the Commission’s Action Plan on fair and simple taxation supporting the recovery strategy (2020/2254(INL), and provided several recommendations intended to assist in reducing the costs associated with compliance for taxpayers while increasing transparency and certainty when introducing endeavours to reduce the tax gap.
A clear focus was the potential costs for smaller businesses faced with compliance with requirements in up to 27 different tax systems.
The resolution highlighted the “unprecedented impact and magnitude of the Covid-19 crisis on the economy” and the resultant decrease in tax revenues and increase in government debt.
The recommendations related to the reduction of the tax gap and compliance costs focuses on e-invoicing and e-reporting and includes:
- Promptly establishing a harmonized common standard for e-invoicing across the EU – ideally within fiscal year 2022 – to reduce the cost of the creation of fragmented, disparate and divided systems across the Member States.
- Exploring the possibility of a gradual introduction of obligatory e-invoicing across the Union by 2023, focusing on a significant reduction of costs of compliance, especially for SMEs. Invoice issuance should be administered only via state-operated/certified “system(s)” with full data protection ensured.
- Examining the possibility that such a system would provide tax compliance data/documents for eligible taxpayers, meeting the responsibility for the compliance of these returns, especially – once again – from the point of view of reducing compliance costs and risk for SMEs.
The full text of the resolution can be found here.