VAT in the Digital Age: Mandatory E-invoicing in the EU

This blog was last updated on November 13, 2023

The European Commission (EC)’s action plan for fair and simple taxation – ’VAT in the Digital Age’- continues to progress. After a public consultation process, the EC has published Final Reports discussing the best options for the European market to fight tax fraud and benefit businesses with the use of technology.

The areas covered are:

1. VAT reporting obligations and e-invoicing
2. VAT treatment of the platform economy
3. Single EU VAT registration

The EC is expected to propose legislative amendments in the VAT Directive this autumn.

Conclusions on VAT reporting and e-invoicing pillar

The report focusing on VAT reporting and e-invoicing evaluates ‘Digital Reporting Requirements (DRR)’. This is any obligation for VAT taxable persons to periodically or continuously submit transaction data digitally to the tax authority, e.g. by use of SAF-T, VAT listing, real-time reporting or e-invoicing.

According to the report, the best policy choice would be the introduction of a DRR in the form of an EU-wide continuous transaction controls (CTC) e-invoicing system covering both intra-EU and domestic transactions. Member States with an existing e-invoicing system would be able to keep this in the short term via a standstill clause, provided they ensure interoperability with the new EU system. However, in the medium term of five to ten years, national e-invoicing systems would be required to converge to the EU system.

An EU-wide CTC e-invoicing system

The report clearly favours the policy option of a full EU harmonisation through a CTC e-invoicing system, meaning the invoice will be submitted to the authorities before or after issuance. The harmonisation focus seems to be primarily on form, with a suggestion of an EU-wide common protocol and format. Whereas important decisions regarding architecture risk being left to the Member States include whether the system will be clearance or simply reporting, whether to leverage an existing domestic B2G platform and the periodicity of the reporting etc. The only requirement on Member States seems to be accepting issued and transmitted e-invoices based on a common protocol and format.

The report suggests aligning the scope of requirements and excluding non-registered taxable persons and those covered by the SME VAT scheme. In the short term, only B2B and B2G transactions are covered, with B2C transactions remaining out of scope.

Finally, the report suggests that to ease the burden on businesses Member States must consider a number of measures such as jointly removing other reporting obligations, providing pre-filled VAT returns, supporting the investment in business automation (especially for SMEs) and providing public support to the adoption of the IT compliance systems

How this will be jointly coordinated isn’t discussed but it doesn’t sound like the EC expects such measures to be harmonised by the EU.

Future expectations

Although the report concludes implementing an EU-wide mandatory e-invoicing system is the best and most future-proof measure, how to design an effective e-invoicing system is not explained in the report and doesn’t seem to be in scope for harmonisation.

However, the design of the e-invoicing system may have an important impact on fiscal and economic results. As the independent expert report ʻNext Generation Model Decentralized CTC and Exchange’ (supported by EESPA, openPEPPOL and other key stakeholder groups) describes, the greatest benefits can only be realised when an e-invoicing system allows businesses to automate other processes as well as invoicing.

It’s a welcome start that the Commission is aiming for an EU-wide CTC e-invoicing scheme. It remains to be seen how effective this harmonisation will be. When Europe’s politicians return from this year’s summer break, we’ll start to gain more insight into the overall feasibility of the Commission’s views.

As a vendor that has implemented CTC and VAT compliance solutions around the world for several decades now, our desire would be for the debate to go beyond interoperability on a data level, so that Europe can take bold steps towards a future that preserves supply chain automation and technological innovation.