It was widely expected that when the finance ministers of the EU convened last week that we’d receive news of a political agreement on the VAT in the Digital Age (ViDA) proposal. Unfortunately, due to the objections of one member state around the platform rules, this did not happen. Now, the official move forward date of ViDA has been put on hold while these concerns are worked through amongst the membership. However, the Belgian presidency reiterated its commitment to maintaining the proposal as a unified package and aims to secure an agreement before the end of its presidency in June 2024, in which case the timelines of the proposal will still hold.
The business of legislation is nonlinear, nor is it ever as clean as many of us would like. However, make no mistake about it. VIDA is coming and it will change the EU VAT landscape forever. A positive indicator of this was that fact that two of the three ViDA pillars were accepted with unanimity. As unanimous consent is required on all parts, none of the proposals can proceed until a compromise solution is found, but I have no doubt that we will arrive at this point in the near future.
Why am I so confident?
ViDA is good for everyone. Despite some minor objections here and there and some positioning by some members of the EU, they understand that ViDA is a critical tool in creating efficiencies of scale in the EU’s VAT system. To better prepare for the modern economy, it is incumbent on governments to reduce complexity for businesses and encourage cross-border commerce throughout the EU.
The reason why ViDA was first introduced was to foster a more collaborative business culture and that the EU could ensure the accurate capture of tax revenues its members are legally owed. The proposal consisted of three parts that tackle VAT fraud, support businesses and promote digitalization. All of these elements are still vital needs of the EU community and why I believe that a workable solution will be agreed to soon. At this point, I am confident that the proposed target dates can still be met.
Remind me, what is VAT in the Digital Age?
Simply put, ViDA is a proposal that will enable EU countries to use technology to improve the current VAT system and better prevent fraud. The updates include facilitation of e-invoicing, introduction of mandatory digital reporting requirements of cross-border transactions and legal mechanisms to facilitate cross-border business and compliance. When enacted, this will mean significant changes to how you operate in these countries.
As expected, changes of this size and scope are generating a lot of questions among businesses that conduct operations in the EU. Everything from process costs to technology needs is being evaluated as more information on ViDA becomes available.
My colleagues and I have written extensively about the benefits of ViDA and what the proposal means for both the EU and its respective business communities. I encourage you to follow our experts routinely for the latest developments as timeliness can shift often without warning.
Frequently asked questions regarding VAT in the Digital Age
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 2030. 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 mandatory e-invoicing as soon as the ViDA package gets adopted, which may well be during this year. 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.
The other two pillars of ViDA, mainly relating to VAT rules for platform operators who facilitate short-term accommodation rentals and passenger transport services, and simplifying VAT registrations in the EU, will both take effect as of 1 July 2027.
Q: Is there likely to be a grace period for businesses to adjust and comply?
A: The ViDA proposal aims for a reasonable approach to allow businesses to get their systems and processes ready for the impact of ViDA, but the fact remains that as soon as the package enters into force, member states are free to introduce mandatory e-invoicing without any derogative approval from the EU. Even though member states have the ambition of rolling out their mandates in a responsible manner, 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 VAT in the Digital Age proposal will drive a number of potentially challenging modifications to business processes, including 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.
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