The European Commission’s  “VAT in the Digital Age” proposal brings significant modifications to the VAT treatment of the platform economy related to the operators in the short-term accommodation (max. of 45 days) and passenger transport services.

VAT treatment of the platform economy

It is worth mentioning that the ‘VAT treatment of the platform economy’ only relates to the supply of certain services via a platform. There are also a set of e-commerce rules related to the supply of goods via platforms.

The rise of the platform economy business model has triggered new challenges for the VAT system. As per the view of the EU Commission, one of these problems is VAT inequality that can be experienced if we look at:

We can better understand the EU view of the distortion of the competition if we look at the European Commission’s Impact Assessment report. The report outlines the growing importance of the platform economy in VAT collection and explains the studies conducted to ascertain where the EU Commission needs to take action.

In terms of numbers, the value of VAT revenue from the digital platform ecosystem is estimated at about EUR 25.7 billion per year for the Member States, i.e. 2.6 percent of total VAT revenue.

Scale of platform economy operation, by sectors (EU27, EUR billion, 2019)

 

Sector Revenue of digital platforms (EU27) Revenue of digital providers (EU27) Ecosystem Value (EU 27)
Accomodation 6.3 36.9 43.2
Transportation 7.2 31 38.2
E-commerce 16.6 93.8 110.4

Source: Extract from Commission Staff Working Document Impact Assessment Report, pag. 26

 

The total value of VAT revenue includes EUR 3.7 billion related to accommodation services and EUR 3.1 billion related to transportation services.

In these two sectors, private individuals and small businesses (i.e. underlying suppliers) can provide their VAT-free services (i.e. they do not account for any VAT) via a platform. With the economies of scale and network effect, these businesses can be in direct competition with traditional VAT-registered suppliers.

Taking into account the supporting study, the number of underlying suppliers who are not registered for VAT, can be up to 70%, depending on the type of platform.

For example, in the accommodation sector, over 50% of users of a particular accommodation platform specifically access the platform’s offering over a traditional hotel.  In Europe, the cost of accommodation offered via the accommodation platform can be, on average, some 8% to 17% cheaper than a regional hotel’s average daily rate.

In the view of the European Commission this means a distortion of competition between the same services offered via different channels.

The VAT treatment of the facilitation service

Clarifying the nature of services provided by the platform was the most supported intervention across different stakeholders.

In some Member States the treatment of the facilitation service charged by the platform is regarded as an electronically supplied service, whilst in others it is regarded as an intermediary service.

This is relevant because it can lead to different places of supply, which can lead to double or non-taxation. Therefore, clarification of these rules is necessary.

According to the proposal, the facilitation service (where the term “facilitation” extends to include short-term accommodation and passenger transport services) provided by a platform should be regarded as an intermediary service (Article 46a amending Directive 2006/112/EC). This allows for a uniform application of the place of supply rules for the facilitation service.

While this has no impact on the existing rules when the supply is carried out on a B2B basis, the same cannot be said about B2C supplies. Under this scenario, the place of supply will be where the underlying transactions takes place.

How will the VAT in the Digital Age proposal change the status quo?

According to the European Commission, the main issue with the platform economy is the inadequacy of the current VAT legal framework to ensure a level playing field with traditional businesses, specifically in the transport and accommodation sectors. Supplies made by small underlying suppliers via a platform are not taxed and the facilitation services made by platforms are taxed differently in different Member States. This leads to difficulties for the platforms, suppliers, and Member States.

Introducing a deemed supplier model will solve these issues, by which platforms will account for the VAT on the underlying supply where no VAT is charged by the supplier. This model ensures equal treatment between the digital and offline sectors of short-term accommodation rental and passenger transport.

In addition, clarifications will be given on the treatment of the facilitation service to allow for a uniform application of the place of supply rules, and steps will be taken to harmonise the transmission of information from the platform to the Member States.

In terms of timing, the proposed rules on the platform economy will take effect in 2025. This is a short period to put in place all needed changes to be compliant and it requires the platforms to begin looking into it as soon as possible.

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The European Commission has announced its long-awaited proposal for legislative changes in relation to the VAT in the Digital Age (ViDA) initiative. This is one of the most important developments in the history of European VAT, and affects not only European businesses, but also non-EU companies whose businesses trade with the EU.

The proposal requires amending the VAT Directive 2006/112, its Implementing Regulation 282/2011, and Regulation 904/2010 on Administrative Cooperation on the combat of fraud in the field of VAT. They cover three distinct areas:

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

This regulatory change proposal will still need formal adoption by the Council of the European Union and the European Parliament under ordinary legislative procedures before it can come into force. In tax matters such as these, the process requires unanimity among all Member States.

This blog focuses on VAT digital reporting obligations and e-invoicing, whereas future updates from Sovos will address the other two areas.

VAT digital reporting obligations and e-invoicing – an overview

Intra-EU B2B transaction data will need reporting to a central database:

Digital reporting requirements for domestic transactions will remain optional:

Changes will be made to facilitate and align e-invoicing:

“Transmission” will not be regulated:

The European Commission has, at this stage, chosen not to propose regulation regarding the transmission channel of the reported data to the tax authorities. This is currently left to Member States to decide on.

The reason for this decision is likely because it’s a technical issue, and that the discussion would have slowed down the process of publishing this proposal. The European Commission also appears ambiguous about whether it would want to regulate this in the future.

What does the future of VAT in the Digital Age look like?

Many countries primed to introduce continuous transaction controls (CTCs) have been waiting for EU regulators to provide an answer to what rules the individual Member State will need to abide by. It remains to be seen whether this proposal will embolden these Member States to move ahead with plans, despite the non-final status of the proposal. It’s noteworthy that Germany filed for a derogation from the current VAT Directive to be able to mandate e-invoicing just a few days before the original date that the Commission had planned to publish this proposal – 16 November 2022.

Speak to our tax experts to understand how these proposed changes will affect your company.