On 15 July 2020, the European Commission (EC) adopted a new Tax Package, intended to increase tax compliance while reducing administrative burden on businesses. The Tax Package contains a number of proposals related to VAT, of which three in particular stand out:
- A single EU VAT registration for taxpayers;
- Modernized VAT reporting obligations; and
- Facilitated tracking of cross-border transactions.
All three proposals are in line with recent attempts by the EC to overhaul and modernize the EU’s VAT system, and all three could have far-reaching implications for EU taxpayers.
Simplified VAT registration
In 2016, the EC published an “Action Plan on VAT,” and introduced a “One-Stop-Shop” mechanism for cross-border e-commerce. Under this arrangement, taxpayers making cross-border sales of goods and services, usually online, could make use of a single platform in a single Member State (the “One-Stop-Shop”) to remit VAT on these sales. In principle, this simplifies the registration and reporting obligations for these taxpayers. The new Tax Package goes even further. The One-Stop-Shop mechanism is comprehensive, but not all-encompassing: for certain supplies, taxpayers must still register in the Member State of destination even if they’re not established there. The Commission’s new proposal of a single EU VAT Registration would eliminate this requirement, further simplifying cross-border commerce. Work on this initiative is scheduled to start in 2022.
Modernized VAT reporting
Member States increasingly use technology to improve the breadth and speed of their VAT reporting processes. Spain, Hungary, and Italy have all enacted “real-time” reporting or e-invoicing mandates, while numerous other jurisdictions require submission of Standard Audit Files for Tax (SAF-Ts). The EC recognizes this trend while noting the disparate burden it causes on businesses engaging in cross-border trade. To address this burden, the Commission wants to modernize VAT reporting, with a particular focus on intra-EU transactions. Of note, the new VAT Package states there will be further examination of “the need to expand e-invoicing.” Currently, mandatory business-to-business [B2B] e-invoicing can only be implemented under a derogation from the EU VAT Directive; if this restriction is loosened, it could have enormous implications for businesses. An impact assessment is scheduled for 2022.
Combatting cross-border fraud
One of the EC’s stated goals for the new Tax Package is to reduce the amount of cross-border VAT fraud, which was estimated at EUR 50 billion in 2017. The effort to modernize VAT reporting is one solution. Another method that the Commission sets out is strengthening Eurofisc, a mechanism for Member States to enhance administrative cooperation. The new Tax Package encourages Member States to invest resources into Eurofisc to facilitate responses to new fraud patterns. “Eurofisc 2.0” is tentatively scheduled for 2023.
Impact on businesses
One of the stated goals for the new Tax Package is to simplify VAT compliance for EU taxpayers. While this may ultimately be the case, taxpayers in the short term are likely to face new logistical obligations associated with the new or enhanced programs listed above. A simplified EU registration would be a new requirement for any impacted business; modernized VAT reporting could result in an enormous expansion of the type and volume of data businesses are required to remit to tax authorities; and the continuing focus on reducing cross-border VAT fraud could result in new controls on cross-border trade. With implementation only a few years away, businesses who wish to remain compliant must continue to monitor these developments and ensure that the tax systems they use are constantly up to date.