Recent Developments: Complex Reporting Requirements in the European Union

Digital tax reporting requirements have arrived and are here to stay.  As the global VAT gap continues to grow (estimated to be as high as half a trillion EUR), countries are increasingly using complex reporting requirements to gain insight into VAT activities.  In this rapidly changing environment, it’s of utmost importance for companies to ensure their digital tax processes are in place and running without errors.  This article provides an overview of some recent reporting developments within the EU that aim to tackle the VAT gap.

How does the EU currently address the VAT gap?

SAF-T

In 2005, the OECD developed a draft Standard Audit File for Tax (SAF-T) with the aim of standardizing the format for electronic exchange of accounting data from organizations to their national tax authority and external auditors.  A handful of countries have implemented SAF-Ts since, the most recent being Norway (mandatory from 2020), Romania (proposed for 2020), and Hungary (proposed for 2021). SAF-T reports, while complex, are still essentially a record-keeping requirement.  However, the implementation of SAF-T has allowed governments to improve efficiency when auditing and to spot fraud more easily; identifying fraud is essential to minimizing the VAT gap.

B2B e-invoicing

Currently, the only EU country that has enacted legislation to allow for mandatory B2B e-invoicing is Italy.  Italy has the largest VAT gap by absolute value in the EU.  This is largely because mandatory B2B e-invoicing requires a derogation from the EU.  However, it looks as if countries plan to follow in Italy’s footsteps, as France recently enacted legislation in their 2020 Finance Bill that extends the B2G e-invoicing obligation in force today to B2B transactions, beginning in 2023.  The plans indicate the French government will seek to have electronic invoices cleared by the tax authority, which is similar to the Italian structure.  It’s also expected that Greece and Spain will soon follow.  Of course, all countries must ask the EU for a derogation.

“Real-Time” reporting

Spain and Hungary both have a version of real-time reporting in place, and both include penalties for non-compliance in the enacted legislation.  These anti-fraud measures have successfully lessened the VAT gap in both countries: Spain now reports compliance rates of more than 90%. It’s possible that countries such as Greece and France might fall back onto a version of this method if obtaining a derogation for B2B e-invoicing isn’t possible.

Online marketplace rules

In a further effort to crack down on VAT fraud and eliminate the VAT gap, from 1 January 2021, electronic marketplaces in all EU Member States must collect and remit VAT on behalf of their suppliers if certain criteria are met.  Some countries, including France, Germany, and Italy, have already enacted identical provisions to the 2021 rules, but with an earlier effective date.  These rules impose an additional reporting requirement for online marketplaces, who must report to the tax authorities on transactions made by third-party sellers on their platforms. 

A glimpse into the future…

Governments in Europe are currently watching Latin American countries enjoy a large reduction in their VAT gap, with reports of Brazil alone increasing tax revenue by $58 billion in a single year after mandating electronic invoicing.  However, EU member states can’t currently follow the exact LatAm route, as there are certain provisions in the EU VAT Directive prohibiting individual member states from enacting pre-clearance models.  The question then becomes: will we see the EU VAT Directive amended, or will countries implement piecemeal solutions while asking for derogations, as we’ve seen in Italy?  At this point, it seems more likely that derogations will be the wave of the future for the following reasons:

• Amending the EU VAT Directive requires unanimous approval from all EU member states;
• The VAT gap problem is concentrated in a handful of countries, which makes unanimous approval less likely; and
• The EU has already published a plan to overhaul its VAT system (the VAT Action Plan), and mandatory B2B e-invoicing is not explicitly included.

Nevertheless, the tax world will be watching the EU closely over the next year to see exactly how its complex reporting requirements reduce the VAT gap, and whether any movement will be made on amending the EU VAT Directive.