Interviews, insight & analysis on digital media & marketing

VAT in the Digital Age: How revolutionary will the EU’s new plan for VAT be?

By Peter Boerhof, Senior Director VAT, at Vertex Inc.

In December last year, the European Commission unveiled one of the biggest VAT reform proposals of the 21st Century. Titled VAT in the Digital Age, or ViDA, the three-part proposal aims to take a hardened stance on VAT fraud, along with improving VAT efficiency through real-time reporting and e-invoicing. Add to this a significant extension of VAT liabilities for businesses in the ‘platform economy’, and a reduced admin burden through single VAT registration, and the proposal could result in major modernisation for ecommerce businesses. Considering most of the current VAT system is several decades old, ViDA is a timely proposal, and one which will ensure taxation catches up with digitisation.

To get a better understanding of how the proposal will impact ecommerce businesses selling both to and within the EU, we explore the three pillars of the new grand plan (VAT reporting obligations and e-invoicing; VAT treatment of the platform economy; and single EU VAT registration).

First, the proposal aims to modernise the way VAT is collected in the EU by introducing mandatory e-invoicing for some transactions and making it optional for others. This system would require businesses, both vendors and recipients, to submit a subset of their VAT invoice data electronically to the tax authorities of the member state where that business is established, or VAT registered. This would be based on e-invoicing in compliance with the EU regulation on electronic invoicing in public procurement (2014/55/EU).

The second part of the proposal is to change the way VAT is treated in the platform economy. In essence, ViDA intends to challenge the status quo for how these businesses calculate and process their VAT obligations, particularly those in the transport and accommodation sectors. If they are a private individual or small business they can provide VAT-free services via a platform. However, due to the economies of scale, these businesses can fall into direct competition with traditional VAT-registered suppliers such as hotels and passenger transport companies. The impact of this is that the current VAT legal framework potentially distorts a level playing field. What the proposal intends to do is to introduce a deemed supplier model which will address these issues. This would ensure that there is an equal economic ecosystem established with the local hotel and passenger transport sector.

In addition to this, the proposal significantly expands marketplace liability by including almost all intra-EU transactions, independent of establishment of the underlying vendor or type of customer.

The final part of the proposal is aimed at reducing the VAT compliance burden for businesses in the EU. As of January 1 2025, several changes to ecommerce rules and a single VAT registration will be put into effect. The existing Union One Stop Shop (OSS) scheme will be extended to include B2C domestic supplies of goods in an EU member state where the supplier does not have a VAT identification number.

Additionally, a new OSS scheme will be introduced for intra-EU movements of own stock and the Import One Stop Shop (IOSS) scheme, for the importation of low-value consignments into the EU, which will be mandatory for marketplace operators.

Digital transformation today, not tomorrow

If implemented correctly, ViDA has the potential to streamline ecommerce transactions for businesses across the EU. However, the question if and when the proposal will become a reality remains to be seen, as unanimity from member states is required for the proposal to become law.

But, to comply with the suggested new rules, businesses will need to invest in new technologies to optimise their financial processes. From VAT compliance software that can calculate VAT for multiple EU jurisdictions, to systems which accurately identify the location of customers to charge the appropriate VAT rate, or systems that can report VAT-relevant information in real-time, investing in the right and appropriate tax technology is essential. If they don’t, businesses run the risk of non-compliance, resulting in hefty fines, audit failures and reputational damage: a recipe for disaster for their growth ambitions.