VAT in the Digital Age

The European Commission's legislative proposal on VAT in the Digital Age or ViDA initiative is part of the EU Action Plan for Fair and Simple Taxation. The aim of the initiative is to simplify the VAT system on the one hand and to make it more resistant to fraud as a result of increasing digitalization on the other. The planned changes to the VAT System Directive and other regulations primarily include the introduction of digital reporting requirements in connection with mandatory electronic invoicing, simplifications to the uniform EU VAT registration and extensive changes for the electronic platform economy.

Introduction of digital messages based on electronic invoices

Electronic invoices

The establishment of electronic invoices is to be advanced by the proposals of the European Commission and the implementation is to be simplified for member states and taxable persons. A two-stage implementation of the measure is proposed:

1st stage "Simplification": first, the European Commission plans to adapt the definition of an electronic invoice in the VAT System Directive (VATSystRL) with effect from 2024. Under the new definition, an electronic invoice must be issued and sent in a structured, electronic format. The format must allow for automatic and electronic processing of the invoice.

2nd stage "electronic invoice": With effect from 2028, the VATystRL is to be amended so that all invoices for cross-border supplies and services within the EU must be issued in a structured electronic format (so-called e-invoicing). Invoices in paper form or other formats that do not meet the requirements of a structured electronic format may now only be issued for supplies that are not subject to digital reporting requirements. This includes, in particular, deliveries and services within Germany and to third countries.

Note: It remains to be seen to what extent member states will also adopt national regulations requiring the issuance of invoices in an electronic structured format for transactions not covered by the EU regulation. The coalition agreement of the current German government includes the fight against VAT fraud by means of a uniform nationwide electronic reporting system for the creation, verification and forwarding of invoices. Thus, in view of the coalition agreement, there is certainly an opportunity for the German legislator to regulate invoicing in a structured electronic format for other use cases as well.

Introduction of a digital reporting system

The EU Commission plans to replace the current reporting system of the recapitulative statement (ZM) with a digital reporting obligation system (DMP system) for intra-Community transactions. Such a system is to be introduced by 2028. The planned DMP system will collect information on transactions made more quickly and in better quality. The scope of the DMP system includes all transactions that are currently also to be reported as part of the ZM. In addition, sales with a transfer of tax liability will be recorded.

Key points of the DMP system:

• Information is to be submitted for each turnover. This means that (monthly) collective invoices are no longer permitted.
• Invoices for sales to be reported in the DMP system must be issued within two working days after the delivery has been made or the service has been provided. The transmission deadline for these sales is two working days after the invoice is issued or after the date on which the invoice should have been issued.
• Data transmission shall be carried out electronically.
• The means for data transmission are provided by the Member States.
• Data can be transmitted by the taxable person himself or by a third party on his behalf.
• It is planned to transmit all current compulsory invoice data as well as new compulsory invoice elements (bank account to which the invoice payment is to be credited, date of payment, amount of each payment and, in case of invoice modification, the original invoice number).

In addition to the recording of output transactions, the option to collect data on intra-Community acquisitions is to become an obligation for the Member States of the European Union.

Uniform EU VAT Registration

VAT registration abroad is often associated with effort and risks for entrepreneurs. Particularly in e-commerce, goods are often transported back and forth between EU countries without the entrepreneur having any influence, so that VAT registrations are unavoidable.

With its proposal for a directive on Single VAT Registration, the EU Commission aims to ensure that in future entrepreneurs are only required to register in their country of residence.

In order to achieve this goal, it is planned that, as of January 1, 2025, the tax liability for all services provided by an entrepreneur in a country other than his country of residence will be transferred to the recipient of the service, provided that the recipient is registered for VAT purposes in the country in question. The reporting is carried out by the supplying entrepreneur as part of the recapitulative statement, or then from 2028 in the DMP system. This does not apply to services that are subject to margin taxation.

In addition, the one-stop store (OSS) procedure will be extended to the effect that all B2C supplies in the EU can be reported if the underlying supply would otherwise trigger a VAT registration obligation for the supplying trader established in the EU. This includes, in particular, local deliveries within another EU member state as well as deliveries that are due together with an installation in another EU country if the entrepreneur is not registered for VAT purposes in the other member state.

Example: A German entrepreneur delivers goods from a warehouse in Spain to a private customer also resident in Spain. The German entrepreneur is not registered for VAT purposes in Spain. The turnover is to be reported under the OSS procedure.

B2C supplies on board means of transport (e.g. ships or aircraft) as well as the supply of gas, electricity, heating and cooling can then also be reported under the OSS procedure.

In addition to B2C supplies, the OSS reporting of intra-Community shipments is also envisaged from 01.01.2025. Until now, an intra-Community transfer usually triggers registration obligations in the country of destination for the transferring entrepreneur to report the resulting intra-Community acquisition. This also applies if an offsetting input tax deduction results in no VAT being owed overall.

By reporting in the OSS procedure, the registration obligations do not apply. The corresponding intra-Community acquisition is also exempt from VAT. Capital goods and goods not entitled to full input tax deduction are excluded from the proposal.

The simplification rule for consignment warehouses, which was applied for the first time in 2020, will be abolished as of Dec. 31, 2025, under the proposed directive. Already after Dec. 31, 2024, no goods can be placed in storage using the consignment warehouse rule.

Note: Despite the abolition of the simplification rule, the implementation of the aforementioned proposals should not result in a registration obligation due to the storage and subsequent local delivery.

The intra-Community transfer to a consignment warehouse can be reported under the OSS procedure. The VAT for the local supply upon withdrawal from the consignment warehouse will be owed by the recipient of the service.

Changes for platform operators

The previously existing supply chain fiction for online platforms with a third country connection will be expanded. Currently, in cases where a trader based in a third country sells goods to European B2C customers via an EU online marketplace, a chain transaction is assumed between the trader, the platform operator and the customer. The fiction of series transaction is also applied to imports of goods up to a value of 150 euros.

Thus, there is a fictitious delivery by the merchant to the platform operator and a delivery by the platform operator to the customer. In this case, the fictitious delivery of the merchant to the platform is VAT-exempt. The delivery from the platform operator to the customer, on the other hand, is subject to regular taxation.

The draft directive provides for the supply chain fiction to be extended to all deliveries within the EU involving a platform from 01.01.2025. This concerns both deliveries to business and private customers. Thus, the responsibility for the VAT assessment of the deliveries and the associated (registration) obligations will be transferred to the platform. In return, the current problem of recognizing cases in which the supply chain fiction is applied is eliminated for the platform operators, since all deliveries are processed within the framework of a fictitious chain transaction.

In addition, intra-Community movement in the context of platforms is also considered as a supply from the trader to the platform operator and from the platform operator back to the trader. The moving supply is to be attributed to the supply of the platform operator and thus to be taxed regularly. The supply of the trader, on the other hand, is exempt from VAT. This does not apply to the intra-Community transfer of capital goods and goods that do not qualify for full input tax deduction.

Online marketplaces that are based in an EU member state and exclusively support deliveries that take place within that country are also excluded from the supply chain fiction.

According to the EU Commission's proposal, the supply chain fiction will also apply to accommodation and passenger transport platforms from 01.01.2025. The background to this is that providers of accommodation or transport services often do not owe VAT on the rental or transport, as they are either not entrepreneurs or can make use of the small business regulation. As a result, such services can be offered more cheaply than by competing companies in the hotel or cab industry, whose services are generally subject to VAT.

If the provider is a non-entrepreneur or small entrepreneur, a fictitious service chain is assumed. Services provided by the platform to customers are then subject to regular taxation and are generally subject to VAT. The services provided by the provider of the accommodation or transportation to the platform, on the other hand, are exempt from VAT. The providers of the services are not entitled to deduct input tax in this respect.

If the service chain is not applied, the platform operator will have to provide evidence of the supplier's entrepreneurial status. This evidence must be recorded and kept for ten years.

Outlook

The EU Commission's proposals must now be examined by the individual EU member states. All EU member states must agree to the draft directive before the regulations can be implemented. It remains to be seen in what form and in what time frame the regulations can be introduced. What is certain is that the European VAT system will continue to develop over the next few years.

The planned changes are likely to affect a large number of companies and lead to extensive adjustments to processes and systems. In addition, the first implementation steps are already planned in less than a year. For this reason, it is important to keep an eye on developments and prepare for any necessary changes in good time.

We will be happy to keep you informed about developments in the field of digital sales tax and to support you in the implementation that may be necessary in practice at a later date.

If you are interested in information, workshops and a targeted exchange on the topic of "VAT in the Digital Age", simply send us an e-mail with your contact details to vida@ebnerstolz.de.