ViDA - VAT in the Digital Age: Digitalization of VAT in the EU

After almost two years, the EU Council has reached an agreement on the “VAT in the Digital Age” legislative package. This paves the way for the Europe-wide amendment of VAT law. The package is intended to take account of the digital transformation, marking an important step towards improving the EU's competitiveness. Specifically, the package consists of just five articles, which may seem few, but carries significant impact.

Member States permitted to introduce e-invoicing

Electronic invoicing is set to become the new standard in future. To this end, e-invoicing will be made mandatory in principle. In contrast to the original draft, Member States can - under conditions to be determined by them - introduce the obligation for e-invoicing in their territory immediately after the ViDA package comes into force. In Germany, e-invoicing will be introduced on January 1, 2025, as we have already pointed out here and here.

Supply chain fiction will also be applicable for B2B transactions

The supply chain fiction, already applicable to B2C for sales via online trading platforms (in Germany, Section 3 (3a), VAT Act/UStG) will also be extended to B2B transactions (taxable persons and non-taxable legal entities). This change will apply from January 1, 2027 at the latest.

Supply chain fiction now for short-term accommodation & passenger transportation services

In addition to online trading platforms, online platforms for short-term accommodation (max. 30 nights, e.g. Airbnb) and passenger transportation (e.g. Uber) will also be affected. Here, too, a chain of supply fiction will apply in the future, i.e. the platforms will be treated as if the service had been provided directly to them and from the platform to the end customer. This means that there is a fictitious chain of services, for example, from the cab driver to the platform, which in turn (fictitiously) provides the service to the end customer.

Currently, many online providers of short-term accommodation rentals and passenger transportation do not pay VAT. As a result, large amounts of VAT are not collected and there is sometimes unfair competition between traditional accommodation and transportation providers and those operating via platforms. Due to the fiction of the supply chain, platforms are now obliged to collect VAT directly from the customer and pay it to the tax authorities.

This regulation was politically controversial and can be applied from July 1, 2028 at the earliest and from January 1, 2030 at the latest, whereby the Member States can define exceptions (e.g. for SMEs). This regulation does not apply to travel agencies.

Introduction of uniform VAT registration

The One Stop Shop (OSS) scheme will also be extended. To further reduce the need for multiple VAT registrations, additional measures have been taken to extend the scope of the so-called One Stop Shop, according to which only a single VAT registration should be required in the Union. The objective of a single VAT registration in the Union is also served by the provisions for the mandatory application of the reverse charge mechanism for the Member States. Member States currently still have a wide-ranging right of choice in this respect, which will now be restricted. The regulations will gradually come into force on January 1, 2027 and July 1, 2028.

Abolition of the consignment stock regulation

As the OSS simplification regulation for intra-company transfers of goods is comprehensive and includes cross-border movements of goods, it is logical to gradually abolish the (considered to be impractical) consignment stock regulations. An end date of June 30, 2028 has been set, after which no new consignment stock regulations can be applied. As a 12-month period applies for the transfer of ownership of these items to the intended buyer, the regulation will effectively expire on June 30, 2029.

Introduction of the e-invoice and digital reporting obligation

In order to improve the collection of tax on cross-border transactions (in particular to combat fraud) and to end the existing fragmentation resulting from the different reporting systems in the Member States, Union rules have been laid down for digital reporting obligations. Currently, every few months tax authorities request companies to submit recapitulative statements to their national tax authorities of the goods and services they have sold to companies in other EU Member States that are subject to tax there. This creates a loophole for fraudsters: they can exploit the difficulties authorities have in quickly detecting suspicious or fraudulent transactions as the data is incomplete and not available in real time. For this reason, a digital real-time reporting system for VAT purposes is to be set up using electronic invoices. The e-invoice is therefore the starting point for digital reporting.

In principle, the regulations will come into effect on July 1, 2030, but the national systems for mandatory reporting must be made interoperable by 2035 at the latest.

To assess the effectiveness of the digital reporting obligations, the Commission will prepare a report evaluating the impact of e-invoicing and intra-EU and national digital reporting obligations on the effectiveness of VAT collection, the reduction of the VAT gap and the implementation and compliance costs for taxable persons and tax administrations.

Summary

All in all, ViDA presents very exciting changes that will hopefully take digitalization in the EU a big step forward. In any case, numerous new legal issues will arise. In addition to the legal aspects, the technical implementation will also be a major challenge.

In our year-end seminar, we will discuss these changes in more detail.