VAT in the Digital Age: The Questions Everyone is Asking Answered

6 Frequently Asked Questions:

For more perspective on how ViDA is likely to impact your business, please review some of the more frequently asked questions I have received to this point.

Q: When will businesses likely begin to see an impact from ViDA? 

A: The VAT in the Digital Age proposal suite published by the European Commission encompasses several areas of Value Added tax (VAT) law. Strictly speaking, the concrete impact of ViDA will hit different businesses at different times between 2024 and 2028. That latter date applies to the ViDA proposals for mandatory electronic invoicing and digital reporting for so-called intra-Community transactions, which represents less than 20% of all EU transactions. Much more importantly though, ViDA proposes to remove current restrictions for EU countries to introduce domestic CTC schemes already on 31 December 2023. This means that, most likely, EU countries that do not have such regimes yet will likely accelerate the introduction of mandatory e-invoicing and real-time reporting already in the next couple of years. If one realizes that many EU countries had already announced initiatives in this direction, or even started their rollout, it is easy to see how the net effect of this provision will be an intensification of the current wave of new CTC mandates to prepare for in the very short term.

Q: Is there likely to be a grace period for businesses to adjust and comply?

A: Yes, the EU will certainly take a reasonable approach to allow businesses to get their systems and processes ready for the impact of ViDA. That said, companies like Sovos that have lived through CTC mandates in many countries for almost two decades around the world now know that no grace period is ever long enough to allow a business to adopt a relaxed attitude. Many businesses gravely underestimate the work that needs to be done to ensure data quality, and the long adaptation cycles for their different business applications to incorporate the data and process changes required for real-time reporting and e-invoicing. And the introduction of changes of this magnitude to business and administrative processes is never without challenges on both sides of the equation – businesses will make mistakes that may take time to fix, and this only gets harder as governments do the same thing on their side in parallel under the pressure of political deadlines.

Q: What new technology demands can we expect businesses to face?

A: While often the reporting processes that need to be put in place so as to meet specific transmission protocols, authentication, and document exchange orchestration always get a lot of attention, businesses should be equally wary of the impact of CTC mandates generated or modified by ViDA on their upstream processes and data. Many businesses have multiple ERP systems, multiple billing systems, accounts payable systems etc. for different lines or business or trading partner categories. Most of these systems process invoice data on a paper or PDF invoice under current law in clunky manual or semi-automated ways that cannot easily be ‘upgraded’ to handle the data completeness and quality requirements of a stringent e-invoicing and e-reporting regime. Beyond the headlines about mandatory e-invoicing and real-time reporting, the fine print of the ViDA proposal will drive a number of potentially challenging modifications to business processes. These can range from the removal of taxpayers’ ability to use summary invoices to the introduction of several new mandatory fields on an invoice, to the very definition of what constitutes an invoice which will require billions of PDF invoices in the European Union to be converted to machine-readable formats. What complicates matters is that CTC initiatives and ViDA only tell a part of the story: EU businesses must also meet a growing number of business-to-government e-invoicing requirements, and many governments are planning to extend the requirements for invoicing public sector customers to the business-to-business sphere. This means that businesses must increasingly use software and service providers that can guarantee compliance with frameworks and laws that add up to a need for a complete rethink of invoicing processes and systems throughout most businesses.

Q: What business processes are likely to be impacted as part of the new regulations?

A: All invoicing and related processes will be impacted. This includes any accounts payable and accounts receivable process and the associated information systems that support them – all these need to be reviewed against this backdrop and readied for the digitization paradigm shift that will come on the back of ViDA.

Q: Can businesses expect their current technology partnerships to work for the new standards?

A: Companies that currently use EDI systems, procure-to-pay or accounts payable automation software of SaaS services, customer communications management, order-to-cash, electronic billing presentment and payment solutions etc. must ask themselves how those platforms will handle the new requirements for e-invoicing and e-reporting under ViDA and associated regulatory initiatives. These vendors, which specialize in business process optimization, typically have little experience with this specific area of compliance. Most of them are not set up to anticipate and address in a timely manner the tens or hundreds of changes that typically follow the initial rollout of a CTC regime in any jurisdiction. We advise businesses to contact their enterprise software vendors and service providers already now to ask these questions – are they aware of these changes, and what is their plan to keep you compliant?

Q: How will cross-border transactions be impacted?

A: Cross-border transactions between EU countries will be subject to a new real-time reporting regime that replaces the current requirement for a recapitulative statement. The actual reporting will be done on a transactional basis to each member state, and member states will report this information to a central European Commission database. In addition to these digital reporting sections of ViDA, intra-EU cross-border transactions are also affected by other parts of the proposal in other ways. For example, quite far-reaching changes are foreseen to remove administrative burdens for businesses moving their own stock between EU countries. Furthermore, the so-called Import One Stop Shop (I-OSS) for cross-border remote sales of low-value goods to EU consumers will become mandatory, which will impact e-commerce sellers and platforms in e.g., the US and China.