EU: New draft of EU VAT reform (VAT in the Digital Age (ViDA))

The European Commission (EC) on 8 May 2024 published an updated draft of the “Value Added Tax (VAT) in the Digital Age (ViDA)” package, which, if adopted, would amend the EU VAT rules in the following three areas:

• Expand the VAT digital platform rules to platforms facilitating the provision of passenger transport and short-term accommodation
• Expand the single VAT registration and compliance mechanism under the One Stop Shop (OSS)
• Introduce a new real time digital reporting system based on electronic invoicing (e-invoicing) for businesses that operate cross-border in the EU

The EC initially proposed the VIDA package on 8 December 2022 (read TaxNewsFlash). Since then, member states have discussed the proposal at an EU level to take into consideration various concerns (e.g., some member states have already implemented e-invoicing mandates). The updated draft therefore reflects thus a compromise of the different positions and, in certain areas, significantly amends the initial proposal. The Economic and Financial Affairs Council (ECOFIN), which is made up of the economic and finance ministers from all EU member states, will discuss the updated proposal on 14 May 2024 and may reach political agreement. Once such political agreement is reached, the proposal should be formally approved.

14 May 2024 update The ECOFIN discussed the proposal but did not achieve political agreement as one member state still disagrees on the expansion of the VAT digital platform rules. However, as the Belgian presidency of the Council of the European Union would still like to finalize this proposal before the end of its term on 30 June, it is likely that the topic may be discussed again at the next ECOFIN meeting on 21 June 2024.

If adopted as proposed, the new digital platform and single VAT registration rules would enter into force on 1 July 2027 (1 January 2025 in the initial proposal), with certain technical provisions being effective 1 January 2026. The e-invoicing and digital reporting rules would however only be effective 1 July 2030 (1 January 2028 in the initial proposal).

Expansion of the VAT digital platform rules

In the EU, digital platforms such as marketplaces facilitating the sale of digital services and certain goods to final consumers are deemed to perform a buy-sell of the digital services/goods, thus taking over the liability to collect and remit VAT on such sales to final consumers (B2C).

The updated proposal states that effective from 1 July 2027, platforms facilitating short-term accommodation rentals or passenger transport services via an electronic interface are considered to have received and sold those services themselves, unless the service provider has provided their VAT identification number (VAT ID) and declared they will charge any VAT due. Member states can require that the platforms validate the VAT IDs they receive.

Short-term accommodation rental services in this context refer to the uninterrupted rental of accommodation to the same person for a maximum of 30 nights. Such short-term rental would be considered similar to the hotel industry and would thus be subject to rules set by each member state. Member states are required to inform the VAT Committee about their national laws related to these criteria, conditions, and limitations before 1 July 2027. The EC will then compile and publish a comprehensive list by 31 December 2027, detailing the criteria, conditions, and limitations set by each member state.

Unlike the initial proposal, the updated proposal provides that member states can choose to exclude short-term accommodation rentals and road passenger transport services, which are made under the special mechanism for small enterprises, from the deemed seller rules. In such a situation, the proposal includes specific record-keeping and retention requirements. For more information on the special mechanism for small enterprises, read TaxNewsFlash.

The updated proposal would further clarify that facilitation services provided to final consumers would be sourced to the member state when the underlying transaction is taxable. This new sourcing provision would not be limited to platforms facilitating the sale of short-term accommodation and passenger transport services.

Finally, the initial ViDA proposal considered expanding the deemed buy-sell rules to marketplaces facilitating the sale of EU established vendors as currently marketplaces are only liable for sales of goods within the EU facilitated for non-EU vendors. This initial proposal is no longer included in the compromise text.

KPMG observation While the proposal has been limited to platforms facilitating the sale of accommodation and passenger transport, the clarification regarding the sourcing of B2C digital intermediation services would impact all marketplaces (including those facilitating the sale of goods) that charge facilitation services to customers. Moreover, the opt-out regime available to Member States for transactions performed by vendors subject to the SME regime could create additional complexities for platforms as they will have to apply the conditions laid out by the individual Member States.

Expansion of the single VAT registration mechanism

In the EU, historically, taxpayers were required to register for VAT in each member state where they performed taxable sales and were liable to collect VAT. However, in 2015, the EU introduced a simplification mechanism, the One Stop Shop (OSS), applicable to providers/digital platforms of B2C digital services. This allows taxpayers to register in one member state and declare the VAT owed across the EU in a single EU-wide return. This mechanism was expanded in 2021 to all remote B2C sales services and certain B2C sales of goods to be reported under this mechanism.

According to the updated draft, effective from 1 July 2027, the OSS would be expanded to:

• Transfers of own goods between member states. Such transactions are currently considered a taxable transaction for EU VAT purposes, thus requiring the taxpayer moving such goods between member states to register in multiple jurisdictions, unless a specific exemption applies
• B2C sales of goods with installation or assembly; sales of goods on board ships, aircrafts or trains; and sales of gas, electricity, heating and cooling by taxpayers who are not established in the member state of consumption
• Domestic B2C sales of goods by taxpayers who are not established in the member state of consumption
• Certain zero-rated transactions (e.g., sales of goods and services inter alia under diplomatic, consular arrangements and to certain other international bodies)

The initial proposal also included in the scope of the expanded OSS mechanism, sales subject to the margin scheme (e.g., second-hand goods, works of art). This initial proposal is no longer included in the compromise text.

In addition, the ViDA proposal would expand the requirement for the purchaser to self-assess VAT under the reverse charge mechanism. VAT is typically charged by the seller of goods or services, but under certain circumstances, the recipient of the transaction may be required to account for the VAT owed and the deductible VAT in the same return. In this respect, the ViDA proposal would mandate the application of this mechanism when vendors are not established or identified for VAT purposes in the member state where the VAT is due and the recipient is identified for VAT purposes. These sales would then need to be reported through a recapitulative statement. Member states would also be allowed to apply the reverse charge mechanism to sales by non-established vendors to any customer, regardless of their status, subject to the conditions laid out by the member state.

Finally, the ViDA proposal would introduce technical amendments such as with respect to when VAT is reportable in an OSS return, when and how amendments of the OSS return can be made, and repeal the call-off stock simplification as it would become obsolete with the implementation of the OSS regime for transfers of own goods.

KPMG observation The expansion of the OSS mechanism combined with the expansion of the reverse charge mechanism could have a significant impact on businesses with EU supply chains as these new rules provide an opportunity for reducing their VAT compliance footprint. However, planning may be required taking into consideration domestic rules to avoid any potential VAT leakage. For instance, in member states where only owners of imported goods are allowed to recover import VAT, a VAT deregistration could result in a VAT cost if that member state does not refund VAT to non-EU businesses.

Introduction of mandatory e-invoicing and digital reporting

Effective from the entry into force of the ViDA package, member states would have the authority to mandate taxpayers established in their territory to use e-invoicing for domestic transactions, without needing to request approval from the EU.

From 1 July 2030, e-invoicing and digital reporting would become mandatory for the following transactions:

• Intra-EU sales of goods
• Intra-EU acquisitions of goods, except transfers of own goods (member states may opt out of this requirement)
• Taxable sales of goods and services for which the customer is liable under the reverse charge mechanism
• Taxable purchases of goods and services for which the customer is liable under the reverse charge mechanism (member states may opt out of this requirement)

Regarding the EU e-invoicing requirement, the updated proposal specifies that e-invoices must comply with the EU standard as per Directive 2014/55/EU. For transactions not subject to the EU mandate (e.g., domestic transactions), member states may accept other formats. In addition, e-invoices should be issued within 10 days of the chargeable event for the transactions in scope of the EU mandate (two days in the initial proposal). This timeline is shorter than the current requirement to issue valid VAT invoices within 15 days of the end of the month following that in which the chargeable event occurs.

The new digital reporting requirement would replace the current requirement to file recapitulative statement. Once this new reporting obligation becomes effective, the draft proposes that taxpayers would be required to submit it to their tax authority by the following deadlines:

• For sales, at the time of invoice for transactions when the seller issues the invoice or five days after the invoice issuance for sales when the buyer issues invoices
• For purchases, five days after the invoice issuance for intra-community acquisitions and purchases subject to the reverse charge mechanism

Member states would also be permitted to implement digital reporting requirements for business-to-business (B2B) transactions not falling under the EU mandate made by resident taxpayers or nonresidents registered for VAT purposes (e.g., domestic sales). In this case, the updated proposal includes general harmonization language with the EU requirement (e.g., timing of the data transmission and that member states must allow transmission of the data in compliance with the EU e-invoicing standard). Member states that have opted for this additional reporting would also be permitted to entitle taxpayers to deduct VAT on purchases only if they hold a valid e-invoice. Currently, the possession of a valid VAT invoice is not considered a substantial requirement to deduct VAT. Therefore, this new option would significantly change the EU VAT credit mechanism.

By 31 March 2033, the EC would be required to present an interim evaluation report on the e-invoicing and digital reporting requirements to the European Council.

KPMG observation Of the three pillars of the ViDA proposal, the new e-invoicing and digital reporting requirement is the most significant for businesses operating in the EU. Businesses will need to review their VAT footprint (taking into consideration the OSS expansion) and map the transactions they perform to determine their new EU e-invoicing and digital reporting obligations. To comply with the mandates, businesses will further need to ensure that their systems include all the required data and that they can comply with the short data transmission timeframe. Finally, they will have to understand how mandatory e-invoicing and digital reporting systems that are currently being implemented in individual EU member states interact with the new EU requirements as the updated proposal only mandates a uniform e-invoicing standard for transactions in scope of the new requirement but not for other transactions (e.g., domestic B2B transactions).

 

For more information, contact a KPMG tax professional:

Philippe Stephanny | philippestephanny@kpmg.com

Ramon Frias | ramonfrias@kpmg.com

Chinedu Nwachukwu | chinedunwachukwu@kpmg.com