“VAT In The Digital Age”

Small and medium-sized enterprises (SMEs) play a vital role in the European Union (EU) economy, driving innovation, employment, and economic growth. These enterprises form the backbone of the EU’s business landscape, comprising 99% of all businesses in the region and accounting for more than half of Europe’s GDP. SMEs employ around 100 million people across various sectors, contributing to reducing unemployment rates and fostering social stability. They often exhibit a higher level of flexibility and adaptability compared to larger corporations, allowing them to respond quickly to market changes and create new job positions as needed. Many successful startups and disruptive companies have emerged from the SME sector, driving technological advancements and shaping industries.

Recognizing the importance of SMEs, the EU has implemented various measures to facilitate their growth and success. These include various simplification regimes in the area of value added tax (VAT). While it is essential to have targeted measures specifically tailored for SMEs, it is equally crucial to approach general legislation with the SME perspective in mind. SMEs often face unique challenges when it comes to implementing new tax laws and managing tax compliance. These challenges are primarily rooted in limited resources and the complexities of tax regulations.

The European Commission introduced the ”VAT in the Digital Age” (ViDA) proposals on December 8, 2022. These proposals aim to modernize the EU VAT system, enhance its resilience against fraud, and make it more business-friendly by harnessing the opportunities presented by digitalization. The reform package encompasses three key aspects: (1) the implementation of digital real-time reporting through e-invoicing, (2) changes in the VAT treatment of the platform economy, and (3) the introduction of a single VAT registration system, which reduces the need for businesses engaged in cross-border operations to register in multiple member states. While numerous measures within the proposals will benefit SMEs, it is important to note that some measures may lead to increased compliance costs and potential disruptions to their commercial practices. The European Commission estimates that businesses will have to spend nearly €11.3 billion to comply with the new reporting rules. In June 2023, the European Parliament suggested a number of amendments to the proposed legislation. The Parliament’s opinion is non-binding but is required before EU countries can finalize the reform, which they must do unanimously.

Single VAT registration

The ViDA proposals aim to reduce the requirement for businesses involved in cross-border operations to register in multiple member states. This objective will be achieved by introducing the option for businesses to apply reverse charge to all intra-EU business-to-business (B2B) sales and by expanding the One-Stop Shop (OSS), which allows businesses to register and report all eligible intra-EU business-to-consumer (B2C) sales in one member state. The expanded OSS will include cross-border inventory transfers and domestic sales of goods by businesses that are not established in the country where the supply takes place. The European Commission estimates that these measures will result in cost savings of EUR 7 billion for SMEs in terms of registration and administration expenses between 2023 and 2032.

While the OSS system reduces the compliance burden by providing a mechanism for declaring and paying VAT, it is important to note that businesses must still possess knowledge of the local VAT rules in order to determine their tax liability in other member states. Additionally, the OSS does not allow for the deduction of input VAT on expenses incurred abroad. Businesses will still have to go through separate lengthy refund procedures to claim tax refunds. Given the complexity and potential disparities among national regulations, businesses may encounter difficulties with the refund process and may require assistance from tax advisors. The parallel processes of declarations and refunds require businesses using OSS to pre-finance VAT, resulting in cash flow disadvantages. The absence of an input VAT deduction mechanism within the OSS may prompt businesses to opt for multiple local VAT registrations. However, introducing such a mechanism would involve one member state making decisions about payments to businesses from another country’s budget, thereby raising political feasibility concerns.

The application of OSS regimes to B2C sales necessitates a quick identification of the customer status (whether they are a business or a consumer). Currently, the verification of a customer’s VAT number relies on the VAT Information Exchange System (VIES) database. However, this portal has its limitations. It frequently experiences periods of “downtime” due to high usage or maintenance. To ensure efficient and reliable verification of VAT numbers, it is essential for VIES to support bulk validation, real-time updates, and minimize downtime. Unfortunately, there are no plans in place to upgrade the existing VIES system to meet these additional demands.

Lastly, SMEs may encounter complexity in managing multiple OSS registrations as there are currently three distinct OSS schemes for EU VAT obligations: Import OSS, OSS Union, and OSS Non-Union. Streamlining the number of OSS schemes from three to one would simplify tax returns and associated procedures for each scheme. The European Parliament has recommended consolidating these schemes into a single portal that facilitates the reporting of all supplies.

Digital reporting and e-invoicing

Member states are currently implementing various country-specific reporting and invoicing requirements as a means to combat VAT fraud and enhance tax collection. Complying with these requirements can be daunting for SMEs with limited expertise and resources, potentially impeding their ability to seize opportunities in foreign markets. If member states continue with their divergent approaches, we will end up having 27 different solutions to the same problem and substantial barriers to cross-border trade.

The ViDA proposal aims to harmonize e-invoicing and e-reporting rules across the EU, aiming to prevent further fragmentation of the tax compliance landscape. Starting from January 1, 2028, e-invoices that comply with the EU standard EN16931 will become mandatory for cross-border intra-EU B2B sales of goods or services. These e-invoices must be issued within two working days after the supply occurs. Additionally, businesses will be required to report specific invoice data no later than two working days after issuing the invoice. However, already as of 2024, member states will have the discretion to require all businesses to issue electronic invoices complying with the EU standard, and the recipient’s acceptance will no longer be necessary for the use of e-invoices. The extent to which domestic transactions will become subject to mandatory B2B e-invoicing will depend on the rules set by each individual member state.

Understanding and implementing new tax requirements can be a complex and time-consuming process that demands specialized knowledge and expertise. SMEs often lack dedicated tax departments or have limited access to professional tax advice, making it challenging to navigate tax compliance effectively. Given the relatively tight implementation schedule of the original ViDA proposal, SMEs may struggle to adapt their systems to new tax regulations within such a short timeframe. From 2024 onward, SMEs may receive invoices in electronic formats that they are unable to process and as from 2028 EN16931 will be the only acceptable invoice format for cross-border sales. Recognizing this issue, the European Parliament recommended postponing the implementation deadlines by one or two years, accompanied by a progressive implementation schedule. This strategy aims to ensure that there is ample capacity among qualified personnel to effectively implement the necessary changes and provides SMEs with adequate time to adapt their software accordingly. Furthermore, the Parliament put forth a proposal stating that until e-invoicing becomes compulsory for cross-border sales, the utilization of electronic invoices should necessitate recipient acceptance when the recipient is not established in the member state where electronic invoicing is mandated.

The goal of the ViDA proposal to harmonize e-invoicing and digital reporting in the EU is commendable. However, even if the European Commission successfully establishes uniform e-invoicing and reporting obligations for cross-border sales, the fate of existing domestic tax compliance obligations, such as SAF-T and real-time reporting, remains uncertain. According to the ViDA proposal, member states with domestic requirements for electronic invoicing or real-time reporting will need to ensure their practices align with the new EU-wide requirements by January 1, 2028. Assessing the alignment and predicting the outcome of this analysis is challenging. Moreover, the European Parliament proposed some amendments that advocate for member states to retain the ability to impose additional e-invoicing and reporting obligations that they deem necessary for the proper functioning of their tax systems. The Parliament also suggested making the EU digital reporting requirement flexible enough to accommodate variations in the domestic reporting obligations.

While the ViDA proposal aims to standardize invoice formats across the EU, it fails to address transmission protocols and technical specifications for the actual data transmission to tax administration systems. As each member state develops its own real-time reporting technology for cross-border supplies, businesses may face increased compliance costs and potential timing challenges. The associated implementation costs can be substantial. For SMEs operating in countries where e-invoicing is not mandatory for domestic sales, the obligation to adopt e-invoicing for cross-border transactions introduces additional complexity.

Other invoicing changes

The ViDA proposal goes beyond transitioning from paper to electronic invoices. It also introduces several other changes, including the elimination of summary invoices, strict deadlines for invoice issuance and reporting, and the inclusion of additional elements on invoices, such as a single bank account number and payment due date.

The removal of summary invoices poses challenges for SMEs that prefer consolidating their transactions into one summary invoice instead of issuing multiple separate invoices. Without the option for summary invoices, businesses will need to generate a larger number of invoices, leading to increased processing and potential errors.

The proposed deadlines for issuing and reporting e-invoices are remarkably short. Under the current proposal, businesses will be required to issue e-invoices for cross-border supplies within two days after the supply takes place. This represents a significant departure from the existing system, where businesses have until the 15th day of the following month to issue their invoices. The two-day time limit may present challenges, especially for SMEs with limited capacity and resources. For instance, if the person responsible for bookkeeping is on holiday and there is no replacement available, meeting the deadline becomes even more difficult. Professional firms that typically report chargeable hours on a weekly basis may find it challenging to issue invoices within two days after the chargeable event. Consequently, this short deadline will likely result in a higher number of provisional invoices that require subsequent corrections, leading to an overall increase in the number of invoices that need to be reported.

The short deadline for invoice issuance gives rise to an additional concern concerning the divergent legal systems among member states. When it comes to the sale of goods, invoices are required to be issued within two working days after “the right to dispose of goods as the owner” is transferred to the purchaser. However, member states have different interpretations of this requirement, such as varying perspectives on the time of delivery or transfer of risk. While the proposal mandates issuing invoices within two working days, it does not specify which country’s working days should be taken into account. The need for clarification is paramount, considering the variations in legal terms and public holidays across the EU.

Imposing a two-day reporting window for acquisitions presents some practical challenges. It is common practice to review invoices before booking them, and conducting a meaningful invoice check within two days is not feasible. The reporting deadline should be based on the date of invoice acceptance rather than receipt.

The ViDA proposal states that invoices should include the payment due date and a bank account number for payment. However, it is unclear how these requirements will effectively combat VAT fraud. Moreover, these regulations could complicate current commercial practices. In typical business relationships, the recipient already has the supplier’s IBAN number stored in their master data, based on an initial contractual agreement. Consequently, they do not rely on the IBAN number provided on the invoice for payment. SMEs often have multiple bank accounts for invoice payments, as their financing is commonly distributed among several banks. Requiring a specific due date on invoices would effectively prohibit the widespread practice of referencing contractual agreements, such as payment “within 30 days after receipt of invoice.”

In conclusion, the two-day deadlines for e-invoicing and reporting, the elimination of summary invoices, and the need to display additional data on invoices would require many businesses to modify their finance processes to comply with VAT legislation. Recognizing this issue, the European Parliament recommended extending the deadline for the issuance of an invoice for cross-border transactions and the deadline for invoice reporting, as well as allowing summary invoices for transactions covering a period of up to one month. Additionally, the requirement to display a bank account number and payment due date was proposed to be dropped.

Conclusion

SMEs are the driving force behind the EU economy, playing a crucial role in job creation, innovation, and regional development. Their agility, innovation, and entrepreneurial spirit make them indispensable for a thriving and resilient European economy. However, SMEs face significant challenges when it comes to implementing new tax laws and managing tax compliance. They must allocate precious time and effort to fulfill tax obligations, diverting resources that could be better utilized for business growth and development. These administrative demands place an additional burden on SMEs, particularly when they are already juggling day-to-day operational responsibilities. Therefore, it is vital that major tax reforms like the ViDA package avoid substantially increasing compliance costs for SMEs and strive to minimize disruptions to their commercial practices. If the ViDA proposals are approved, SMEs will require assistance in establishing the necessary processes for e-invoicing and digital reporting requirements. It is therefore crucial for governments and tax authorities to recognize this and proactively provide targeted support and resources. The contributions made by SMEs in improving the European VAT system should be duly recognized and rewarded.