It’s been more than a few years since Romania first toyed with the idea of introducing a SAF-T obligation to combat its ever-growing VAT gap. Year after year, businesses wondered what the status of this new tax mandate was, with the ANAF continuously promising to give details soon. Well, the time is now.

What is SAF-T?

The Organization for Economic Co-operation and Development (OECD) introduced the Standard Audit File for Tax (SAF-T) in 2005. The goal of the SAF-T digital VAT return is to provide auditors access to reliable accounting data in an easily readable format. Companies can export information from their accounting systems (invoices, payments, general ledger journals in addition to master files).

As a result, audits should be more efficient and effective based on the standardized format set by the OECD. As countries can require a different format for capturing data, no two country implementations of SAF-T are exactly the same.

How is Romania implementing their SAF-T?

From 1 January 2022, the new Romania SAF-T mandate comes into effect for large taxpayers. The digital VAT return submissions are via XML with over 800 fields.

It appears Romania is looking to follow the format prescribed by the OECD (SAF-T OECD Scheme version 2.0 – OECD standard format). The technical specifications have been released and can be found on the ANAF portal.

The documents which are available include:

Now that the specifications are available, Romania will soon move into the testing phase of implementation; where taxpayers can take advantage of submitting test data to the ANAF. This is in order to become familiar with the process, understand the requirements, and if necessary, adjust their ERP systems. As a result, this should ensure full compliance for January. Details on how to participate in the test phase are forthcoming and will be available on the portal once finalized.

What’s next?

Sources close to the Romania SAF-T implementation project indicated the hope is to eliminate certain declarations. To possibly provide pre-filled returns based on SAF-T information once the project is in full swing. This would align with the pre-population trend that is slowly making its way across the EU; with Italy, Spain, and Hungary paving the way for pre-populated VAT returns.

Take Action

Get in touch to discuss your Romania SAF-T compliance requirements. To find out more about what we believe the future holds, download VAT Trends: Toward Continuous Transaction Controls or see this overview on VAT Compliance in Romania.

The Turkish Revenue Administration (TRA) has published updated guidelines on the cancellation and objection of e-fatura and e-arsiv invoice. Two different guidelines are updated: guidelines on the notification of cancellation and objection of e-fatura and guidelines on the notification of cancellation and objection of e-arsiv.

The updated guidelines inform taxable persons about the new procedures for objection against an issued e-fatura and e-arsiv invoice. And how this must be notified to the TRA. Due to changes in the objection procedure, the e-arsiv schema has also changed. There has not yet been a change in the e-fatura schema, however it could also change in the near future. The updated guidelines state that the TRA platform can be used to notify the TRA about objection requests made against an issued e-fatura and e-arsiv invoice.

Why are the updated guidelines important?

From July 2021, electronically issued documents won’t be mentioned in the so called ‘BA and BS forms’. The BA and BS forms are generated to periodically report issued or received invoices when a total invoice amount is 5.000 TRY or more. All limited liability and joint stock companies are obliged to create and submit the forms to the TRA even if they don’t have any invoices to report.

The TRA recently published a new provision stating that electronically issued documents will not be shown in BA and BS forms and instead will be reported directly to the TRA in the clearance (e-fatura) and reporting(e-arsiv) process. Considering that the TRA receives the invoice data for electronically issued invoices in real-time, relieving taxpayers from reporting invoices through BA and BS forms creates a more efficient system in which the relevant data will be collected only once from taxpayers.

At its current stage, e-documents won’t be mentioned in these forms. However, in order for the TRA to have accurate invoice data about each taxpayer, it needs to be notified which are the final invoices and disregard any objected or cancelled documents when evaluating taxpayer data.

Although the cancellation process is already performed through the TRA platform for basic e-fatura and e-arsiv, objection requests are made externally (through a notary, registered letter or registered e-mail system), meaning the TRA does not have visibility of all objections. There could therefore be a risk that the TRA considers a cancelled document (due to objection) as issued which could result in discrepancies between the taxpayer records and the data that the TRA considers relevant for tax collection.

Therefore, taxpayers must now notify the TRA about objection requests to avoid any discrepancies between their records and BA and BS forms. The final goal of this application is that the BA and BS forms will be completely auto populated by the TRA in future.

How will the new process work?

According to the Turkish Commercial Code, any objections or cancellation requests must be made within eight days. Suppliers and buyers can raise an objection request which must be made externally (through a notary, registered letter or registered e-mail system) and registered in the TRA system.

For e-arsiv application, there are two ways for suppliers to notify the TRA about the objection request. They can either use the e-arsiv schema (automated) or register the request in the TRA portal. Buyers can see this request on the TRA platform and may respond, although they are not obliged to. Because e-self-employment receipts are also reported through e-arsiv application, the same objection rules apply.

For e-fatura, since there is no change in the schema, it is not possible for suppliers or buyers to notify the TRA using e-fatura schema. Currently, they can only notify the TRA about e-fatura objections through the TRA platform. Taxpayers can also respond to objection requests only through the platform.

What’s next?

The TRA has taken a step towards the digitalization of cancellation and objection requests. However, there is still not an automated way to perform these actions. Before the digitized objection process becomes reality in the country, the authorities must take a more sophisticated approach towards automating the process as well as introducing or amending applicable legislation.

Take Action

Get in touch to find out how Sovos tax compliance software can help you meet your e-transformation and e-document requirements in Turkey.

An amendment in the General Communiqué No. 509 has announced healthcare service providers and taxpayers providing medical supplies and medicines or active substances must use the e-invoice application from 1 July 2021.

The mandated scope for transition to e-invoice and e-arşiv invoice applications in the healthcare industry

Published in the Official Gazette the implementation will cover healthcare service providers who have signed contracts with the Social Security Institution (SSI) and all taxpayers providing medicines and active substances and medical supplies.

This includes:

The transition process to e-invoice and e-arşiv invoice applications in the healthcare industry

Within this scope, organisations must use the e-invoice application as of 1 July. Organisations signing contracts with SSI after this date must use e-invoice prior to their issue of invoices to SSI.

From 1 January 2020 all organisations included in the e-invoice application scope have to apply the e-arşiv invoice on the date of e-invoice application. Any healthcare organisations included in the amendment will then have to apply the e-arşiv invoice on 1 July.

What are the benefits of e-invoice and e-arşiv invoice transition to the healthcare industry?

The digitisation process will minimise physical contact, a significant benefit following the Covid-19 outbreak. Furthermore, organisations will no longer have to prepare or store physical documents as they are stored electronically.

For organisations that issue invoices to SSI, transactions such as payment terms will become faster and more efficient via the e-invoice and e-arşiv invoice applications. In addition to the transfer of all invoice-related processes to the digital environment.

Organisations that carry out the e-issuance process via the TRA Portal or via a third-party integrator will benefit from easy access to documents, improved efficiency, and business continuity as a result.

Take Action

Get in touch to find out how Sovos tax compliance software can help you meet your e-transformation and e-document requirements in Turkey.

Italy postpones e-document legislation until 2022. In September 2020, Italy introduced major changes to the country’s rules on the creation and preservation of electronic documents. These new requirements were expected to be enforced on 7 June 2021 however the Agency for Digital Italy (AGID) has now decided to postpone the introduction of the new rules until 1 January 2022.

The new ‘Guidelines for the creation, management, and preservation of electronic documents’ (“Guidelines”) regulate different aspects of an electronic document. By following the Guidelines, businesses benefit from the presumption that their electronic documents will provide full evidence in court.

The postponement of the introduction of the Guidelines is a reaction from the AGID to claims of local organizations who have particularly expressed concern about the obligation to associate metadata with e-documents. The Guidelines set forth an extensive list of metadata fields for keeping alongside e-documents in a way that will enable interoperability.

Metadata requirements modified

In addition to delaying the introduction of the new e-document legislation, the AGID has also modified metadata requirements. They included new pieces of metadata and changing the description of some fields. The AGID has also corrected references – especially to standards – and rephrased statements to clarify some obligations.

The updated Guidelines and their corresponding Appendices are available on the AGID website.

Take Action

Get in touch to discuss e-invoicing requirements in Italy.

This blog is an excerpt from Sovos’ Annual VAT Trends report. Please click here to download your complimentary copy in full.

VAT requirements and their relative importance for businesses have changed significantly in recent years. For data that is transactional in nature, the overall VAT trend is clearly toward various forms of continuous transaction controls (CTCs).

The first steps toward this radically different mode of enforcement, known as the “clearance model”, began in Latin America in the early 2000s. Other emerging economies, such as Turkey, followed suit a decade later. And today, many countries in the Latin American region now have stable CTC systems where a significant amount of the data required for VAT enforcement is based on invoices. Other key data is harvested and pre-approved directly at the time of the transaction.

Common clearance system features

There are several high-level features and processes that many clearance systems have in common.

However, many variations exist on this reference model in practice; many countries with a clearance system have implemented extensions and variations on these “standard” processes:

1. OK TO ISSUE: Typically, the process starts with the supplier sending the invoice in a specified format to the tax authorities or a state agent licensed to act on its behalf. This invoice is ordinarily signed with a secret private key corresponding to a public certificate issued to the supplier.

2. OK/NOT OK: The tax authority or state agent (for example, an accredited or licensed operator) will typically verify the signed supplier invoice and clear it by registering it under a unique identification number in its internal platform. In some countries, a proof of clearance is returned, which can be as simple as a unique transaction ID, possibly with a timestamp. In some cases, it’s digitally signed by the tax authority/state agent. The proof of clearance may be detached from the invoice or added to it.

3. VALID: Upon receipt of the invoice, the buyer is often obligated or encouraged to check with the tax authority or its agent that the invoice received was issued in compliance with applicable requirements. In general, the buyer usually handles integrity and authenticity control using crypto tools, also used to verify a signed proof of clearance. In other cases, the tax authority or agent completes the clearance check online.

4. OK/NOT OK: If the buyer has used an online system to perform the validation described in the previous step, the tax authority or state agent will re-turn an OK/not OK response to the buyer.

The first “clearance” implementations were in countries like Chile, Mexico and Brazil between 2000 and 2010. They were inspired by this high-level process template. Countries that subsequently introduced similar systems, in Latin America and worldwide, take greater liberties with this basic process model.

Global expansion of CTCs

Europe and other countries passed through a stage allowing original VAT invoices to be electronic. This is without changing the basics of the VAT law enforcement model. This phase of voluntary e-invoicing without process re-engineering is “post audit” e-invoicing. The moment a tax administration audit comes into play is post-transaction. In a post audit system, the tax authority has no operational role in the invoicing process. It relies heavily on periodic reports transmitted by the taxpayer.

Largely due to the staggering improvements in revenue collection and economic transparency demonstrated by countries with existing CTC regimes, countries in Europe, Asia and Africa have also started moving away from post audit regulation to adopting CTC-inspired approaches.

Many EU Member States, for example, are moving toward CTCs not by imposing “clearance” e-invoicing but by making existing VAT reporting processes more granular and more frequent via CTC reporting. These countries will eventually adopt requirements for real-time or near-real-time invoice transmission. This is as well as electronic transmission of other transaction and accounting data to the tax authority. However, it’s not a foregone conclusion that they’ll all take these regimes to the extreme of invoice clearance.

CTC reporting from a purely technical perspective often looks like clearance e-invoicing, but these regimes are separate from invoicing rules. In addition, they don’t necessarily require the invoice as exchanged between the supplier and the buyer to be electronic.

The impact of CTCs on business

The VAT trend towards CTCs is obvious, but situations in individual countries and regions remain fluid. It’s important to align your company with local expertise that understands the nuances of your business and what regulations and rules you’re subject to.

Take Action

Start by downloading the full Trends Report here or contact us

On 22 March 2021 the EU Council approved DAC7, which establishes EU-wide rules meant to improve administrative cooperation in taxation. In addition, the Directive addresses additional challenges posed by a growing digital platform economy.

What is DAC7?

In 2011, the EU adopted Directive 2011/16/EU on administrative cooperation in the field of taxation in the EU (‘DAC’). The aim of the Directive is to establish a system for secure cooperation between EU countries’ national tax authorities. The Directive also sets out the rules and procedures EU countries must apply when exchanging information for tax purposes. DAC7 is the seventh set of amendments to the Directive.

What are the new rules under DAC7?

The new DAC7 tax rules will require digital platforms to report the income earned by sellers on their platforms to EU tax authorities. As a result, reportable activities will include:

Reportable information will include tax identification numbers, VAT registration numbers, in addition to other demographic information for sellers. The new rules extend the scope of automatic exchange of information among EU tax officials to the information reported by the digital platform operators.

The object of these new rules is to address the challenges posed by an ever-expanding global digital platform economy. Each year, more and more individuals and businesses use digital platforms to sell goods or provide services. Sales made online have become an even larger share of total global sales in the last year due to the COVID-19 pandemic.

Income earned through these digital platforms is often unreported and tax is not paid, which causes loss of tax revenue for Member States and gives an unfair advantage to suppliers on digital platforms over their traditional business competitors. The new amendments should address these issues, enabling national tax authorities to detect income earned through digital platforms and determine the relevant tax obligations.

Other rules included within the amendments will improve the exchange of information and cooperation between Member States’ tax authorities. It will now be easier than ever to obtain information on groups of taxpayers. Lastly, the new rules set up a framework for authorities of two or more Member States to conduct joint audits.

When will DAC7 apply?

The new DAC7 tax rules will apply to digital platforms operating both inside and outside the EU from 1 January 2023. The framework for authorities of two or more Member States to conduct joint audits will be operational by 2024 at the latest.

Take Action

Get in touch with our experts to discuss your EU tax requirements. To find out more about what we believe the future holds, download VAT Trends: Toward Continuous Transaction Controls.

Update: 25 August 2023 by Carolina Silva

Croatia to Introduce E-Invoicing and CTC Reporting System

According to official sources from the Ministry of Finance, the Croatian tax authority will introduce a decentralised e-invoicing model alongside a continuous transaction control (CTC) real-time reporting system of invoice data to the tax authority. This move is part of the Fiscalization 2.0 project the authority announced earlier this year.

This is the outcome of a recent project where the tax authority analysed CTC clearance and reporting systems from multiple jurisdictions within the EU – i.e. Spain, France, Italy and Hungary – which all have the common purpose of combating VAT fraud. Further examination of the efficacy of such systems revealed that these procedures are successful in this fight and increase VAT revenue.

Upcoming obligations in Croatia

According to recent news, there will be a phased implementation of two obligations:

These are two independent obligations for taxpayers and take place separately.

Trading parties will issue and exchange e-invoices and, in parallel, each party will deliver certain invoice data to the fiscalization system within a two-day deadline. The e-invoicing process and data reporting to the fiscalization system can both be performed through service provider access points.

Companies will not perform the e-invoice exchange through a centralised platform but through access points; they can outsource their e-invoicing and real-time reporting processes to service provider access points. To this end, the tax authority will make a directory of access points available.

The Croatian tax authority will use data obtained from the fiscalization of invoices to simplify and facilitate the existing VAT reporting obligations (i.e. forms, records and tax returns), ultimately replacing some of the current returns. Measures proposed are:

What is next?

The proposed system should be implemented by the end of 2024, giving time for the necessary adjustments of the current legal framework to be made and for publishing further CTC documentation and specifications before the implementation begins.

Need help preparing for these upcoming changes in Croatia? Sovos can help.

 

Update: 13 February 2023 by Carolina Silva

Croatia’s Proposed CTC System

The Croatian Tax Administration has announced a new project called “Fiscalization 2.0”, which would implement a broad CTC system that combines e-reporting, mandatory e-invoicing, e-archiving and e-bookkeeping obligations.

Fiscalization 2.0

Fiscalization 2.0 seems to be an extension of Croatia’s current fiscalization system for cash transactions, called online fiscalization. The government is looking at other CTC systems in Europe, and specifically mandatory B2B e-invoicing, as the vehicle to achieve business automation and tax autonomation in the Croatian economy.

Based on the announcement, it is not clear yet what form of CTC system may be implemented and what the requirements will be.

Croatia’s proposed measures are:

The project should be implemented by the end of 2024, giving the authorities enough time to produce necessary CTC legislation and documentation and prepare businesses to comply with the new requirements.

What is next?

Expect the Croatian Tax Administration to publish further documentation and specifications before implementation.

Currently, the tax administration is forming working groups to jointly study the best practices and find the right solutions for the new CTC system. Additionally, the tax authority is conducting a survey on the current state of e-invoicing in the country and expectations for the future.

For more information on Croatia’s evolving fiscalization system, speak to our expert team.

 

Update: 8 April 2021 by Joanna Hysi

Croatia was one of the first countries in the world to introduce a real-time reporting system for cash transactions to the tax authority. Known as the online fiscalization system, new requirements have been introduced to improve tax controls for cash transactions.

Croatia’s online fiscalization system

The system aims to combat retailer fraud by providing the tax authority with visibility of cash transactions in real-time and encouraging citizens to play a part in tax controls by validating the fiscal receipt through the tax authority’s web application.

Previously, the online fiscalization system required issuers to send invoice data to the tax authority for approval and include a unique invoice identifier code (JIR) provided by the tax authority in the final receipt issued to the customer. Registration of the sale could be verified by entering the JIR code through the tax authority’s web application.

What’s new for Croatia’s online fiscalization system?

The government has introduced a new requirement for fiscal receipts to make citizen participation easier and increase the level of control of tax records and evidence.

As of 1 January 2021 a QR code must be included in fiscalized receipts for cash transactions. Consumers can now validate their receipts by entering the JIR via the web application or by scanning the QR code.

As part of the tax reform, a new procedure for fiscalization of sales via self-service devices came into force on 1 January 2021.

To implement the fiscalization procedure via self-service devices, the taxpayer must enable the use of software for electronic signing of sales messages and provide internet connection for electronic data exchange with the tax administration.

When implementing the fiscalization of self-service devices only the sale is fiscalized and sent to the tax administration, no invoice is issued to the customer.

Secondary legislation specifying the process and measures for data security and exchange has still not been published despite the requirement having gone live, but is expected in the near term.

Take Action

To learn more about European VAT compliance download our eBook. Follow us on LinkedIn and Twitter to keep up-to-date with regulatory news and updates.

VAT accounts for 15-40% of all public revenue globally. We estimate that the global VAT gap – i.e. lost VAT revenue due to errors and fraud – could be as high as half a trillion Euros. The GDP of countries like Norway, Austria or Nigeria are at a similar level and this VAT gap is big enough to significantly impact the economy of many countries. For this reason, tax authorities globally are taking steps to boost lost revenue through VAT digitization.

Up until recently, VAT requirements have traditionally followed three broad categories.

1. Invoice and storage requirements

At a high level, the requirements that apply during the processing of business transactions break down into requirements related to:

2. Periodic reporting requirements

These are reports for business transaction data in summary or aggregate form or full data from individual invoices. Historically such reporting requirements have often been monthly, with certain less-common reports being quarterly or yearly.

3. Audit requirements

These occur when, during the mandatory retention period for invoices and other records and books, which is typically seven to ten years, a tax authority request access to such records to assess their correspondence to reports.

The trend toward continuous transaction controls (CTCs)

The requirement types listed above, and their relative importance for both business and tax authorities, have changed significantly in recent years. The overall trend is clearly toward various forms of CTCs.

This radically different mode of enforcement, known as the “clearance model” began in Latin America over 15 years ago. Other emerging economies, like Turkey, followed a decade later. Many countries in Latin America now have stable CTC systems where a large amount of the data required for VAT enforcement is based on invoices and other key data is harvested (and often pre-approved) directly at the time of the transaction.

Europe and other countries went through a stage where original VAT invoices could be electronic without changing the basics of the VAT law enforcement model. This phase of voluntary e-invoicing without process re-engineering is often known as “post-audit” e-invoicing. In a post-audit system, the tax authority has no operational role in the invoicing process relying heavily on periodic reports transmitted by the taxpayer. Being able to demonstrate the integrity and authenticity of e-invoices from the moment of issuance until the end of the mandatory storage period is key for trading partners in post audit regimes.

Largely due to the staggering improvements in revenue collection and economic transparency from countries with existing CTC regimes, countries in Europe, Asia and Africa have also started adopting similar schemes. This rapid adoption of CTCs in many additional countries doesn’t follow the same simple path of quick migration of the early adopters. In fact, as the trend spreads around the world, it’s becoming increasingly clear there will be many different models adding to the complexity and challenges faced by multinational companies today.

Take Action on VAT Digitization

Download VAT Trends: Toward Continuous Transaction Controls to read more about the ever changing VAT landscape, VAT digitization and how global companies can prepare.

Given the complexity of international VAT and the potential risk, pitfalls and associated costs, finance directors face a predicament. Unlike direct taxes, which tend to be retrospectively determined, VAT is effectively calculated in real-time. It’s linked to various aspects of the supply chain. If the related transaction has incorrect VAT calculations or erroneous codes, these errors can result in unintended financial consequences. These include fines, loss of the right to deduct input VAT etc.

For most finance departments their first and only involvement with VAT is when they are processing sales or purchase invoices. In the absence of a customer purchase order, there is often little, or no appreciation of what sales invoices are coming through until they need raising. However this may be too late. The transaction completing crystalises the VAT liability and the taxpayer cannot make any retrospective changes.

Incoterms and VAT

One component of VAT determination for goods is an understanding of if they are moving across a border and if yes, who is responsible for moving them – supplier or customer.

Within international trade the Incoterms issued by the International Chamber of Commerce are used to determine which party has responsibility for which aspect of the movement.

Within the EU the Incoterm used doesn’t determine the correct VAT treatment of a movement of goods. Although it can help to understand the intention of the parties. Most contracts for the supply of goods within the EU do, nevertheless, mention incoterms. In many cases contracts quote “Delivery Duty Paid” (DDP) even though it is often inappropriate. If a French company sells goods DDP to a German customer then the incoterm implies that the French supplier is responsible for all taxes due on the delivery. But if this is a B2B transaction, meeting the exemption conditions, then it’s the German customer who accounts for the acquisition tax.

While the UK was a member of the EU, incoterms weren’t really relevant for VAT. It also had little impact on the ability to move goods within the EU. It also had little impact on the need for EU VAT registrations since in many cases the customer would account for acquisition tax.

Unintended Consequences

But now, post-Brexit, UK companies may have “DDP” contracts with EU customers where there are potentially unintended consequences:

Renegotiate Incoterms

Now the only possible course of action is to renegotiate incoterms. This will take time and will only work if the goods haven’t already been delivered.

If the goods have been delivered but the required VAT registration is not in place there is the possibility of penalties and interest for late registration and late payment of VAT.

Automation can help here. A tax engine can process order information and determine the correct tax code. This is when placing the order and not when raising the invoice.

If this gives an unintended result, there may be time to renegotiate the incoterms or arrange the relevant VAT registration.

Take Action

Need help reviewing your VAT position and contracts post-Brexit? Find out how Sovos can help your business simplify VAT determination for every transaction, in any jurisdiction.

It’s good to see light at the end of the tunnel. Nonetheless, it’s too little, too late for many smaller – but also plenty of larger – companies. Thousands couldn’t weather the storm because they were particularly dependent on human contact. Others were affected disproportionally simply because COVID-19 hit them just as they traversed a difficult period in their life cycle. As we see the first successes of anti-COVID-19 vaccines, businesses and markets are gaining confidence that by the last quarter of 2021, countries will be back at a new cruising speed. With a few notable exceptions, many of the world’s strongest economies will take years to recover from the aftermath.

Internet to the rescue – but flaws remain

As with all crises, the past year has accentuated weaknesses and accelerated failures. Whilst it must be acknowledged that the COVID-19 crisis would have been far worse without the internet and the current state of technology adoption worldwide, remaining pockets of legacy processes where companies were lagging in their digital transformation have become highlighted as employees struggled to balance health concerns with the imperative to keep things running in deserted offices and data centers.

One area where inefficiencies have been exposed is on-premises software. Many companies have started adopting cloud-based software to support different categories of workflows and connections with trading partners; however, many larger companies have been reluctant to move core enterprise systems – such as ERPs, logistics or reservation systems – to the cloud. The reason behind this reluctance is often that legacy systems have been highly customized. Whilst many enterprise software vendors offer public-cloud versions that present many benefits over on-premises deployment in theory, the practical challenges of adapting organizations and processes to ‘canned’ workflows designed around standard best practices have often outweighed them.

Another set of challenges are more intricate. Manual processes still dominate in order and invoice management across companies of all sizes globally. Where workflow software allows accounting personnel to access the system remotely, approvals and postings could be managed from home offices, but the prevalence of paper in many vendor and customer relationships still required people to manage scanning, printing, and mailing or – yes – faxing key documents from offices with limited access.

These problems will be harder to overcome, as expensive industrial-strength machines for the processing of paper documents cannot easily be put in home offices. The answer to this challenge doesn’t lie in creative ways to convert people’s kitchens into scan or print centers, but in finally taking the big leap towards end-to-end data integration.

The good, the bad and the ugly of tax as an automation driver

Interestingly, if COVID-19 isn’t enough of a reason to take that automation leap, businesses can expect a helping hand from tax administrations. Many countries had already started large-scale programs to push continuous transaction controls (CTCs). Such as mandatory real-time clearance of digital invoices. The current global health crisis is pushing tax administrations to accelerate these programs. We have seen announcements of plans towards such compulsory e-invoicing or digital reporting of accounting data in countries like France, Jordan and Saudi Arabia. In addition to several countries including Poland and Slovakia who stated their intent to follow in the footsteps of countries in Latin America and also European frontrunners like Italy and Turkey. Even in Germany, which has long resisted the call of CTCs, a significant political party has proposed decisive action in this direction.

These initiatives are still often motivated by the need to close tax gaps. However the need for resilience in revenue collection is clearly another driver. Also, examples from countries like Brazil have shown that CTCs massively improve governments’ ability to track and monitor the economic effects of a crisis down to the smallest sectoral detail. This gives them granular data that can be used for surgical fiscal policy intervention to guide the most severely affected activities through a crisis.

With all circumstances conspiring to give businesses a reason to get across that last mile towards full automation – the interface between their and their trading partners’ sales and purchasing operations – you would think that companies are now putting plans in place to get ready for a fully digital, much more resilient set of processes and organizational structures.

Unfortunately, the way that CTC mandates get rolled out and the way that companies respond to them have historically rather slowed down investment in business process automation and the adoption of modern cloud-based enterprise software.

CTC mandates are unbelievably diverse, ranging from a full online second set of accounting books to be maintained through – among other things – additional classification of supplies in the government-hosted system in Greece, to a completely different setup including service providers and transaction payment reporting being designed in France. Representatives from China are talking about blockchain-based invoicing controls, whilst countries like Poland and Saudi Arabia prepare for centralized, government-run invoice exchange networks. Mandate deadlines tend to be too short, and tax administrations make countless structural adjustments – each typically also with short deadlines and only available in local language – during implementation periods and for years thereafter.

Tax administrations could however claim with some legitimacy that deadlines are always too short, almost regardless of how much transition time taxpayers are granted, because many businesses structurally prepare too late. The global trend towards CTCs, SAF-T and similar mandates has been apparent to companies for years, yet many are ill-prepared; particularly many multinational businesses continue to consider that VAT compliance is a matter to be resolved by local subsidiaries, which step by step creates a massive web of localized procedures which rather than corresponding to corporate best practices were designed by tax administration offices.

Creating a virtuous circle towards tax automation during Covid-19

Which brings us back to why companies aren’t adopting flashy new releases of enterprise software packages in public cloud mode. Or further automating their trading partner exchanges, more quickly. All parties in this equation want the same thing. That is seamless and secure sharing of relevant data among businesses, and between businesses and tax administrations. However kneejerk reactions to regulatory mandates by businesses, and lack of tax administrations’ familiarity with modern enterprise systems, are creating the opposite effect. Companies panic-fix local mandates without a sufficient understanding of the impact of their decisions. Neither on their future ability to innovate and standardize. The enterprise resources come first to put systems in place post-haste. They then manage the problems stemming from adopting a patchwork of local tax-driven financial and physical supply chain data integration approaches. This comes from IT budgets that then don’t get spent on proper automation.

Several things can break this vicious circle. Businesses should change their way of addressing these VAT digitization changes as revolutionary rather than evolutionary. By being well informed and well prepared, it is possible to adopt a strategic approach to take advantage of CTC mandates rather than suffer from them. Tax administrations must do their part by adopting existing good practices in designing, implementing, and operating digital platforms for mandatory business data interchange purposes. The ICC CTC Principles are an excellent way to give the world economy that much-needed immunity boost, allowing businesses and governments to improve resilience while freeing up resources locked up in inefficient manual business and tax compliance processes.

Take Action

To find out more about what we believe the future holds, download VAT Trends: Toward Continuous Transaction Controls and follow us on LinkedIn and Twitter to keep up-to-date with regulatory news and other updates.

The EU introduces the E-Commerce VAT Package and OSS on 1 July 2021. The previous delay from 1 January 2021 was due to the COVID-19 pandemic. COVID-19 is far from resolved with many Member States still suffering significantly with wide-ranging restrictions in place in many countries.

Regardless, the European Commission’s current plan is to press ahead with the implementation of the package. The package has the potential to generate significant additional tax revenues. The EU Commission estimates an additional €7 billion of tax revenue for Member States annually.

Combine this with the significant shift to online purchasing by consumers as a result of the various lockdowns in place and a further delay would perpetuate the benefit of low value consignment relief (LVCR) that sellers of goods delivered from outside the EU enjoy. This relieves low value imports from VAT whereas currently a local supplier must account for VAT irrespective of the value of the goods. The introduction of the new package removes LVCR on 1 July 1 2021.

Removal of low value consignment relief (LCVR)

LVCR has recently been removed by the UK Government so that all imports into Great Britain are now liable to VAT, with suppliers and deemed suppliers being liable to register and account for VAT for B2C sales where the goods are below £135.

The EU equivalent scheme will provide a mechanism for suppliers and deemed suppliers to be able to account for VAT in a single Member State for imports below €150 via the Import One Stop Shop (iOSS). Other versions of the One Stop Shop (OSS) will also be available for intra-EU distance sales of goods and cross border B2C supplies of services by EU companies (Union OSS) and supplies of B2C services by non-EU suppliers (non-Union OSS).

Will businesses be ready for the EU E-Commerce VAT Package changes?

There is concern around the preparedness of both Member States and businesses for the e-commerce VAT package changes. The European Commission released some guidance in the form of explanatory notes and a customs guide. However many questions remain unanswered.

The final piece in the puzzle from the Commission is the guide to the OSS. This will update the current guide to the Mini One Stop Shop to reflect the upcoming changes the e-commerce package will bring. In addition to covering crucial issues such as registration, returns and payment. The OSS guide release date is uncertain and time is running out.

At a Member State level, there is continuing evidence that not all tax authorities are ready for the change. The Dutch government is introducing emergency measures to be ready in time.  It appears that its system will involve manual intervention by the tax authority which is far from ideal.

Additionally, the German customs authorities recently announced that the new electronic customs declaration for goods below €150 will not be operational until 1 January 2022. However it’s not entirely clear what impact this will have on iOSS being available in Germany.

Simplification for Businesses

It’s clear that the new OSS mechanisms will provide a simplification for businesses. As a result of allowing VAT to be accounted for in a single Member State. However, there are complexities that businesses need to fully consider. Businesses need to ensure that OSS is the right solution for them, and they are compliant with the rules.

The requirement to display the VAT paid by the customer before completing the order will require systems changes. This poses a challenge for many businesses at a time when many are already dealing with the trials of COVID-19, and in many cases Brexit. Add in the record keeping requirements and it’s clear that the simplification is not simple.

Failing to comply

Failure to comply with the rules can result in exclusion from the schemes. Consequently, business will need to register for VAT in all Member States where VAT is due. For e-commerce businesses currently registered for VAT in all Member States as a result of distance selling this would be a return to the current arrangements. However it’s likely that choosing to opt-in to OSS would cancel existing registrations in many countries. So there would be an additional cost and administrative burden in reinstating them.

For smaller businesses, removal from the scheme will be a significant increase in compliance costs. They are likely to currently only hold a registration in a small number of additional countries in addition to their home Member State. The new place of supply rules for intra-EU supplies of B2C goods don’t apply for certain EU established businesses. Those whose sales of intra-EU supplies of B2C goods and electronically supplied services are below €10,000. However many will exceed this, which will significantly increase their compliance burden in choosing not to use OSS.

Businesses therefore need to fully consider the impact of the new rules and determine whether OSS is right for them and if so, how they will ensure compliance with the rules. Additional guidance from the European Commission and tax authorities is urgently required given that a further delay seems unlikely.

Take Action

Get in touch to find out how we can help. In addition, watch our on-demand webinar to understand more about OSS and the upcoming EU VAT e-commerce package changes.

The basic principle of value added tax (VAT) is that the government gets a percentage of the value that is added at each step of an economic chain, which ends with the consumption of the goods or services by an individual. While VAT is paid by all parties in the chain, including the end customer, only businesses can deduct their input tax. For this reason, VAT requirements concerning invoices generally only apply between businesses.

Many governments use invoices as primary evidence in determining “indirect” taxes owed to them by companies. VAT is by far the most significant indirect tax for nearly all the world’s trading nations. Broadly speaking, it contributes over 30% of all public revenue. VAT as a tax method essentially turns private companies into tax collectors. The role of assessing the tax is critical which is why these taxes are sometimes referred to as “self-assessment taxes”.

The VAT Gap

VAT depends on companies meeting public law obligations as an integral part of their sales, purchasing and general business operations. The dependency on companies to process and report VAT makes it necessary for tax authorities to audit or otherwise control business transactions. But despite such audits, fraud and malpractice often cause governments to collect significantly less VAT than they should. The difference between the expected VAT revenue and the amount actually collected is the VAT gap.

In Europe, that VAT gap amounts to approximately €140 billion every year, according to the latest report from the European Commission. This amount equates to a loss of 11% of the expected VAT revenue across the EU. Globally, we estimate VAT due but not collected by governments because of errors and fraud could be as high as half a trillion EUR. This is comparable to the GDP of countries like Norway, Austria or Nigeria.

The VAT gap represents some 15-30% of VAT that should be collected worldwide. And these figures would certainly be much higher if lost tax revenue from unregistered business activity is added as the numbers only include bona fide, registered business activity.

Governments across the globe are enacting complex new policies to enforce VAT mandates. Through these mandates, they obtain unprecedented insight into economic data and close revenue gaps. Tax authorities are steadfast in their commitment to closing the VAT gap and will use all the tools at their disposal to collect revenue owed. This holds especially true in the aftermath of COVID-19 when governments epxect to face significant budget shortfalls.

VAT challenges and the cost of non-compliance

To close the VAT gap, countries are pushing tax authorities to comply with VAT requirements. As a result, they’re enforcing different legal consequences for irregularities. The consequences on noncompliance with VAT requirements can be huge. Most companies therefore want to be as certain as possible that they can quickly and easily prove their VAT compliance to avoid risks including:

At a time when the requirements from tax authorities globally are only set to increase, it’s clear that businesses need to be aware of the compliance challenges they face and prepare for what lies ahead.

Download VAT Trends: Toward Continuous Transaction Controls for a comprehensive look at the VAT regulatory landscape

The UK entered into a new relationship with the EU on 1 January 2021. The Transition Period ended and the EU-UK Trade and Cooperation Agreement (TCA) came into force. The UK fully implemented this into law but applied on a provisional basis by the EU. The European Parliament needs to ratify it. This is due by 28 February 2021. However there is a potential to extend this deadline.

However, irrespective of the status of the TCA, there have been a number of changes which have affected how goods move between Great Britain and the EU. It’s important to distinguish between Great Britain and the UK. This is because of the Northern Ireland Protocol which means that EU VAT rules continue to apply in Northern Ireland.

Even businesses that have carefully prepared are finding it challenging to navigate the new system.

There are a number of key factors that need to be considered.

1. Make sure an appropriate Economic Operators Registration and Identification (EORI) number is in place

An EORI number is essential for communicating with the customs authorities. So it is a must have for importing or exporting goods from the EU. Also from GB and Northern Ireland. A GB EORI is required for importing and exporting from Great Britain with an XI EORI required for Northern Ireland. It is only possible to have a single EU EORI and as the XI EORI is treated as an EU EORI number, the authorities in some Member States are cancelling EORIs issued in their country.

2. Make sure a customs agent is in place

In both the EU and the UK, non-established businesses will need an indirect representative for customs purposes. There is a shortage and demand is high so it’s essential that appropriate arrangements are in place in advance of imports and exports taking place.

3. Determine if TCA or other Free Trade Agreement (FTA) applies

The TCA was heralded as the solution to all problems, but it only applies in specific circumstances and the origin of the goods is key. This is a new area for many businesses and the rules can be complex so need to be fully considered.

4. Determine rate of duty if TCA or FTA does not apply

If the TCA or another FTA does not apply, it will be necessary to determine the rate of duty that will apply. The EU continues to apply the Common Customs Tariff but the UK introduced a new Global Tariff which applies from 1 January 2021 that needs to be considered.

5. Determine how to account for import VAT

The UK introduced postponed import VAT accounting which allows accounting for import VAT on the VAT return. This is not compulsory but provides a valuable cashflow benefit if applied. It has to be claimed when the customs declaration is submitted so appropriate instructions will have to be given to whoever is submitting the declaration.

The position varies around the EU. Not all Member States are offering postponed accounting and where it is available, the conditions for its use vary. It’s therefore essential to consider this to maximise cashflow.

There are many challenges to trading between the EU and the UK and goods can no longer move freely as they need to clear customs. Planning is therefore essential to ensure that goods can reach their destination without delay and commercial relationships do not suffer. Once the goods have reached their destination, it is necessary to consider the subsequent VAT treatment which needs to be done on a country by country basis especially for B2B supplies as rules can vary.

Take action

Keen to know how Brexit and the EU-UK Trade Cooperation Agreement will impact your VAT compliance obligations? Download our Brexit and VAT whitepaper or watch our recent webinar Brexit and VAT: Protect your valuable supply chains and minimise costly disruptions to find out more

There is a plethora of misinformation and misconceptions surrounding Brexit and tax. The aim of this blog is to dispel such myths and clear up any confusion. We will dig deeper into news stories to explain the facts and keep you informed.

Brexit Myth 1 – Brexit’s unique taxation regime for EU imports

The story:

Immediately following the end of the transition period and the beginning of Brexit, the UK launched a ‘unique taxation regime’. This is in respect of importing goods for sale to private individuals.

A Dutch bike company posted an article on its website inviting readers to contact their elected representative in the UK. They asked them to complain about the new tax changes that prevented them from selling to UK customers.

This was picked up by several media outlets including the BBC “EU firms refuse UK deliveries over Brexit tax changes.”

The facts:

Sellers established outside the UK charge UK VAT to private individuals where the shipment value is less than £135. As stated in a change to UK VAT law introduced on 1 January 2021.

The intention is to protect UK businesses from cheap foreign imports and to increase the tax take. The abolishment of ‘low value consignment relief’ (LVCR) achieved this. Ensuring payment of VAT on the real value of the goods.

For example, last year I could have gone on to Amazon to buy cycle parts. I might find that an EU cycle company would charge me £18 for a spare part. However, the same parts from a supplier in South East Asia might cost me £15.

This is because EU cycle parts companies must charge EU VAT (either NL or UK). Whereas the supplier outside of the EU could use Low Value Consignment Relief (LVCR) to legally bypass the payment of VAT. Some suppliers exploited this relief further by declaring that goods worth £30 were only worth £15. An example of fraudulent application of the LVCR.

But the decision to abolish LVCR is not a ’unique taxation regime’ launched by the UK. It already exists in several other countries including Australia, Norway and Switzerland and will soon be introduced by the EU.

EU vendors complained for years about unfair competition and the EU was also concerned by the loss of VAT revenue.

Taking this into account the EU launched a consultation period. The result was the E-Commerce VAT Package. It requires VAT payment by the vendor when importing goods into the EU and sold to private individuals; where the goods value is less than €150. The abolishment of LVCR is also part of this package.

The EU delayed the package, originally due for implementation on 1 January 2021, until 1 July 2021. As can be seen from the above, this will create similar issues as currently mentioned by some EU suppliers. They will, ironically, be the beneficiaries of this ‘unique taxation regime’. These suppliers will no longer face unfair price competition from suppliers outside of the EU.

The UK identified the same issues of unfair competition and tax leakage. On 1 January 2021 introduced legislation requiring vendors to account for VAT when importing goods with a value below £135 and sold to private individuals.

It is a fact that additional costs will incur in respect of customs formalities when importing goods into both the UK and the EU.

Brexit Myth 2 – UK goods shipped to the EU now liable for additional VAT charges

The story:

New rules mean goods shipped to EU countries are now liable for VAT when they enter the single market. A story appeared in Yahoo Finance with the headline “£34bn Brexit bill pushes companies to the brink”, where a tax reclaim company had estimated that levies could add £34bn ($47m) to the cost of UK trade with the EU.

The predication is that new post-Brexit VAT rules are adding billions of pounds to operating costs with import VAT. Possibly as high as 27%, imposed as a cost.

Darren Jones MP, the chair of the Commons’ Business, Energy and Industrial Strategy Select Committee, described the increased costs as a “kick in the teeth” for businesses and asked for the government to intervene.

But the £34bn ‘cost’ is just a myth.

The facts:

Any business importing goods into the EU need to pay import VAT on the relevant value. After importing the goods into the EU, they will normally be sold and be subject to local VAT – as is the case when importing goods into the UK and sold locally.

VAT is a neutral tax for business. So there is no real possibility of UK companies losing £34bn (or any VAT at all) if they act appropriately.

For example, a UK business imports goods into Germany from Great Britain and then sells them. Normally there is a requirement for the UK company to obtain a German VAT number and charge German VAT to its customer. It then offsets the import VAT it has paid against the output VAT it charges and remits the balance to the German tax authority.

When goods are imported ready for sale the import value is the same as the sales value. So, if a UK company imports goods worth €10,000 into Germany where no duty is applicable it will pay import VAT of €1,900. It will then sell these goods for €10,000 and charge €1,900 of output VAT. The import VAT is offset against the output VAT meaning all import VAT is fully recovered. There will, of course, be professional costs incurred in dealing with the German tax authority.

There are now 27 EU Member States and the VAT rules are not unified. It’s therefore possible that a UK business could incur import VAT and not have the requirement to charge output VAT so that offset isn’t possible.

In this case there is a refund mechanism to enable the UK company to recover the import VAT. Once again, there is a cost associated with this. However, Member States can refuse to accept a claim so that the import VAT is a real cost.

In short, import VAT is not a £34bn cost if businesses manage their affairs efficiently and compliantly. Changing incoterms so that the customer is the importer would solve all these problems. A full and thorough analysis of the position would enable UK businesses to recover import VAT and remain compliant, thereby reducing the possibility of penalties.

Similar principles apply to sales to private individuals. UK companies making such sales should also be able to benefit from the principle of tax neutrality if they act appropriately.

Take Action

Keen to know how Brexit will impact your VAT compliance? Download our recent webinar Brexit and VAT: Protect your valuable supply chains and minimise costly disruptions to find out more.

The EU-UK Trade and Co-operation Agreement (TCA) was finally agreed on 24 December 2020. A week before the end of the transition period. Fully implemented into UK law, but the TCA remains provisional. It needs to be ratified in the European Parliament. Therefore it applies on a provisional basis until 28 February 2021.

The TCA covers several areas in addition to trade between the EU and UK dealing with investment, competition, State aid, maintaining a level playing field, fisheries and data protection. It was some of these areas that proved to be the most difficult to resolve during the negotiations.

How is the TCA different to the Customs Union?

The TCA provides for trade in goods between the UK and the EU to be on a zero tariff, zero quota basis. However, only if the goods meet the appropriate rules of origin. This reflects the reality that the TCA is not a replacement for the Customs Union. The Customs Union meant that once goods were in free circulation in the EU, they could move from one Member State to another without further payment of customs duty.

The TCA is different, and the origin of the goods is key. There are specific rules on determining origin and a system of self-certification is in place. For example, if goods are of Chinese origin, they won’t be covered by the TCA. So would be subject to whatever rate of customs duty applies in the EU when exported from Great Britain to the EU. This is in addition to customs duty that would apply in the UK based on the UK Global Tariff unless there was the application of an appropriate suspensive relief on arrival into the UK.

Mutual Assistance Provisions

The TCA also covers mutual assistance around VAT. These mutual assistance provisions may have an impact on the requirement for UK companies to appoint a fiscal representative in those countries where it’s required. However, until Member States formally change their requirements, it’s important that businesses meet their legal obligations as they currently stand.

Failure to appoint a fiscal representative when required may result in penalties imposed for not trading compliantly. In some cases could interrupt commercial transactions to the detriment of both the company and its customers.

The mutual assistance provisions may also have an impact on the requirement for UK companies to appoint an intermediary for the purposes of the Import One Stop Shop (IOSS). IOSS is proposed for implementation on 1 July 2021. The EU has a mutual assistance agreement with Norway. This means that Norwegian companies don’t need to appoint an intermediary for the purposes of IOSS. It’s hoped that the EU will extend this to companies in Great Britain.

VAT Position of Trade Between UK and EU

The VAT position of trade between the UK and the EU was largely known before the TCA was signed and is therefore not significantly impacted by the TCA. It was the UK ceasing to be a Member State and leaving the EU VAT area which determined the changes.

As a result, many businesses were able to take proactive action rather than awaiting the finalisation of the TCA. If a business did not take action to ensure ongoing VAT compliance, it’s essential to take the appropriate steps now. Furthermore, if businesses had a Brexit action plan, it is imperative that it’s implemented fully to remove risk.

The presence of a Customs border between the UK and EU means that goods cannot flow freely as they did in the past. Taking the appropriate steps to allow the goods to move is not the end of the story. Ensuring VAT compliance once the goods have arrived in the EU is essential. As is recognising that not all Member States have the same requirements.

Take Action

All businesses should review their current trading arrangements. Business need to ensure they are compliant and also that they’re trading in the most efficient way.

Keen to know how Brexit will impact your VAT compliance obligations? Download our Brexit and VAT whitepaper or watch our recent webinar Brexit and VAT: Protect your valuable supply chains and minimise costly disruptions to find out more.

Technology can help businesses and governments measure and mitigate the impact of Covid-19. With further waves and recessions biting, technology offers an unparalleled opportunity for governments and business alike to gain a clearer picture of the current panorama. Digital tax returns and real-time or near-real time reporting offer up-to-date financial insight and many tax authorities are pressing ahead with digitisation plans.

Damage assessment and mitigation

The most powerful tool to harness amid economic strife and the most difficult to wield is clarity. Technology can offer this amidst Covid-19.

Technological developments and adoption of digitised processes offer an opportunity to measure tax lost at a macro level. Those nations already implementing continuous transaction controls (CTCs) are at an advantage having insight into lost revenue in the crisis. This year’s events highlighted the benefits of having a panoramic and timely digital view of a nation’s economic health, with economic recovery contingent on access to granular data.

Within Latin America, leading the way in terms of digitising compliance, highly detailed COVID-19 impact analysis reports have been published at key points during the crisis as a result of access to in-line invoice data for all transactions in their economies. The immediacy and quality of this data, and because it covers all or a very large proportion of a country’s economy, is a real game changer.

The trend towards CTCs was set before the pandemic, but the tendency has been catalysed faster than previously thought possible. Though the advantages of CTCs were evident before, with EY predicting that a full economic recovery isn’t achievable until 2024 at the earliest, they offer an unrivalled mechanism for businesses and governments to monitor the situation.

Ongoing health check

The benefits of digitalisation are more significant since ongoing and dynamic assessments are recognised as essential tools to inform government and business decision making. Firms submitting their actual invoice data from business transactions instead of summary returns directly to government platforms (B2G) in real or near-to-real-time, rather than periodically, can instantly view their outgoings; in turn, governments can gauge the macro picture based on overall VAT loss more accurately using digital means.

The advantages of a live dashboard that reveals the evolution of supply and demand are clear. In real-time tracks stock movements, imports/exports and price fluctuations. Having insight into these and many other data points allows a level of analysis into the minutiae of deep subcategories of goods and services offered and sold in an economy and provides clearer visibility for businesses and governments. This kind of data can dispel uncertainty, allowing companies and authorities alike to cut through risks and identify opportunities linked with policy and investment decisions.

Overall, if countries could see the loss in real-time, they can also track changing behaviours and market size, rather than relying on informed guesses without robust data to back up forecasts as currently. After all, to effectively plan for later scenarios, it’s key to understand what’s going on now.

The risk to financial ecosystems

Businesses both small and large are subject to the same rules on evidencing their fiscal activity and financial footprint, and so indirect tax measurement is the crucial indicator of the true damage of these troubling times.

Sophisticated, intricate supply and value chains are all implicated in a complex web, creating intense inter-dependency at all levels. Paramount to successfully surviving in this climate is the ability to monitor developments as they happen. For tax authorities, keeping a close eye on individual digital invoices and other key commercial data allows a forensic and accurate view of how many firms are still afloat. At a wider level, which economies are in serious hot water.

Major VAT discrepancies were already a concern before the crisis and are more so now as consumption tax rate reductions and other fiscal incentives linked with economic inactivity look set to have a devastating impact on both short and medium term revenue collection. Measuring and even reducing the VAT gap will be increasingly important.

Insights through data

Access to data will help unravel the spider’s web of complexities. It provides a better understanding of what the steps both through and out of the recession will be. For business and governments, investing in partnerships that operate across a global landscape will bolster knowledge needed to map out the road to economic recovery. For tax authorities, a clear priority is to understand markets and the impacts on them. This data analysis that keeps pace with developments as they happen is essential.

With whole economies already facing devastating deficit and profit loss from Covid-19, technology must continue to give us the clear vision we need to recover. At a macro level the insights technology can offer are unparalleled. However even on a micro level, individuals can harness data and keep an ongoing record of activity to guide strategic decisions and future investments. With the economic road ahead of many of the world’s economies looking rocky, technology and real-time data offers the potential for a clearer future.

Take Action

To keep up to date with the changing VAT compliance landscape, download VAT Trends: Toward Continuous Transaction Controls. Follow us on LinkedIn and Twitter to keep up with regulatory news and other updates.

We recently launched the 12th Edition of our Annual Trends Report. We put a spotlight on current and near-term legal requirements across regions and VAT compliance domains.  The report, “VAT Trends: Toward Continuous Transaction Controls” is authored by a team of international tax compliance experts and provides a comprehensive look at the regulatory landscape as governments across the globe are enacting complex new policies to enforce VAT mandates, obtain unprecedented insight into economic data and close revenue gaps.

Central to this year’s edition is our focus on four emerging tax mega-trends with potential to drive change in the way multinational businesses approach regulatory reporting and manage tax compliance.

The Four Tax Mega-Trends

The mega-trends include:

  1. Continuous Transaction Controls (CTCs) – Countries with existing CTC regimes are seeing improvements in revenue collection and economic transparency. Now, other countries in Europe, Asia and Africa are moving away from post-audit regulation to adoption of these CTC-inspired approaches.
  2. A shift toward destination taxability for certain cross-border transactions – Cross-border services have historically often escaped VAT collection in the country of the consumer. Due to a large increase of cross-border trade in low-value goods and digital services over the past decade, administrations are taking significant measures to tax such supplies in the country of consumption or destination.
  3. Aggregator liability – With the increase of tax reporting or e-invoicing obligations across different taxpayer categories, tax administrations are increasingly looking for ways to concentrate tax reporting liability in platforms that naturally aggregate large numbers of transactions already.  Ecommerce marketplaces and business transaction management cloud vendors will increasingly be on the hook for sending data from companies on their networks to the government, potentially even inheriting liability for paying their taxes.
  4. E-accounting and e-assessment – Combining CTCs with obligations to synchronize entire accounting ledgers makes onsite audit necessary only in cases showing major anomalies across these rich data sources. Over time, the objective is for VAT returns and other tax reports to be prefilled by the tax administration based on taxpayers’ own, strongly authenticated source system data.

According to Christiaan van der Valk, lead author of the report and vice president of strategy at Sovos, continuous transaction controls have emerged as the primary concern for multinational companies looking to ensure tax compliance despite growing diversity in VAT enforcement approaches. Tax authorities are steadfast in their commitment to closing the VAT gap. As a result they will use all tools at their disposal to collect revenue owed. This holds especially true for the aftermath of COVID-19, when governments are expected to face unprecedented budget shortfalls.

VAT Trends: Toward Continuous Transaction Controls

Beyond the mega-trends, our report includes a major review of country and regional requirement profiles. These profiles provide a snapshot of current and near-term planned legal requirements across the different VAT compliance domains. The report also examines how governments have embraced digital transformation to speed revenue collection, decrease fraud and narrow VAT gaps.

“VAT Trends: Toward Continuous Transaction Controls” is the most comprehensive report of its kind. It provides an objective view of the VAT landscape with unbiased analysis from tax and regulatory experts with years of experience navigating the world’s most complex tax environments. If you are a tax, IT or legal professional working with multi-national companies, we strongly encourage you to download and become familiar with the subject-matter contained within. The pace of change for tax and regulatory environments is accelerating and this report will get you prepared.

The European Union’s VAT E-Commerce Package has been delayed until 1 July 2021. Consequently, in the New Year businesses will have to contend with both Brexit related VAT changes and the impact of the One Stop Shop – amounting to two new set of rules for VAT reporting in 2021.

Treatment of B2C goods and services after 1 July 2021

From 1 July 2021, the EU introduces new rules extending the Mini One Stop Shop (MOSS) to B2C supplies. The rules apply where VAT is due in a Member State other than that in which the supplier is established and intra-EU B2C supplies of goods. These rules are currently available for VAT accounting on B2C sales of Telecommunications, Broadcasting and Electronic Services (TBES). The new system, known as the One Stop Shop (OSS), had an original launch date of 1 January 2021.

How will OSS work?

OSS will abolish current distance selling thresholds. In addition, all intra-EU supplies of B2C TBES services plus intra-EU distance sales of goods will operate under the same €10,000 limit. When this limit is exceeded, VAT will be due in the Member State of delivery. This is regardless of the level of sales in that country. Important to note is that this threshold applies to EU established companies and will not apply to UK businesses.

A single VAT return accounts for Any VAT due can be accounted for via a single VAT return, submitted in the Member State of Identification – the country in which the business is registered for OSS. Any company established in the EU will use the country in which they operate as the Member State of Identification. If there is no business establishment in the EU, then a Member State can be chosen. Provisions also apply to non-EU businesses supplying services in the form of the non-union OSS scheme. OSS is not compulsory – businesses can choose to have a registration in all Member States where VAT is due.

Union scheme – goods dispatched from within the EU

The dispatch of goods from physical locations, such as warehouses in the EU, will continue to be treated as distance selling. If any thresholds are exceeded, VAT will be due in the Member State of delivery.

Consequently, OSS will be available to all sales of goods, regardless of their value. OSS accounts for VAT in the Member State of Identification at the rate in place in the country where VAT is due. That is the Member State of Consumption. Any VAT owed will be paid to the Member State of Identification, and OSS returns must be submitted.

Import OSS (IOSS) – goods dispatched from outside the EU

If the UK is not treated as a Member State at the time in which goods are dispatched from its territory, the sale will not fall under the Distance Selling regime. The goods will be treated in line with their intrinsic value, with differences above and below €150.

Goods imported from third countries or territories to customers in the EU up to an intrinsic value of €150 will be covered by an import scheme. Like the system being implemented in the UK from 1 January 2021. This import scheme accompanies the abolition of the current VAT exemption for goods in small consignments of a value of up to €22. However, if goods have a value above €150, VAT cannot be accounted for under IOSS and a full customs declaration will be needed.

Marketplaces

Goods imported from third territories or third countries in consignments with an intrinsic value of less than €150 using an electronic interface such as a marketplace, platform, portal or similar means, will also be treated differently. This applies to sales via platforms such as Amazon. Under the changes, the platform will be deemed to have received and supplied goods in their own right. Interestingly, it’s irrelevant whether the goods are supplied by EU or non-EU suppliers. The marketplace rules also apply to non-EU sellers supplying goods via a marketplace where the goods are already located in the EU at the time of sale.

What next?

Until the application of the new rules, Member States must transpose the new rules of the VAT Directive. The Directive is already in place into their national legislation. Some Member States already are doing this. Though as yet unconfirmed, many believe OSS could be further delayed. Both the Netherlands and Germany have concerns about preparedness for the July 2021 start date.

For UK businesses, Brexit makes things particularly complex. After the implementation of OSS, UK businesses can make use of the e-commerce package changes. However, during the 6-month delay in 2021, registrations and fiscal representatives could be necessary for a short time. It’s essential businesses plan their supply chain with all the upcoming changes in mind.

Take Action

Get in touch to find out how we can help your business with the new rules.

Keen to know more the EU E-Commerce VAT package and One Stop Shop and impact on your business? Download our recent webinar A Practical Deep Dive into the New EU E-Commerce VAT Rules.