“The next few years will surely be a challenge,” wrote Chief Tax Officer Nico Sciberras, in a recent LinkedIn post, reacting to the new VAT system of the European Union (EU).
The EU’s recent agreement on the VAT in the Digital Age (ViDA) package marks a significant shift in how VAT will be managed across member states.
The Economic and Financial Affairs Council (ECOFIN) within the Council of the EU reached a political agreement on 5th November (today) that sets out three primary pillars aimed at modernising the EU's VAT system.
Mr Sciberras expressed a mix of pride and apprehension about the arduous journey leading to the unanimous consensus among the EU’s 27 member states.
“I cannot help but reminisce the long road leading to the latest texts... countless trips to Brussels, intensive full-day Council Meetings... long days and nights reviewing compromise texts,” he reflected.
Despite the progress, he emphasised that “unfortunately we cannot afford to stop to catch our breath! We must now ensure to work intensively toward achieving the goals set out by this ambitious package”.
According to the 2023 VAT Gap Report, EU countries experienced a loss of €99 billion in VAT revenues in 2020. Conservative estimates indicate that around a quarter of these lost revenues can be directly attributed to VAT fraud related to intra-EU trade.
Additionally, the current VAT framework in the EU can remain cumbersome for businesses, particularly SMEs, scale-ups, and companies engaged in cross-border operations.
The three primary pillars of ViDA:
Real-time digital reporting
The new system introduces real-time digital reporting for cross-border trade, based on e-invoicing.
It will provide Member States with essential information to bolster the fight against VAT fraud, particularly carousel fraud. This change is expected to reduce VAT fraud by up to €11 billion annually and cut administrative and compliance costs for EU traders by more than €4.1 billion per year over the next decade, according to an EU commission page on ViDA.
The system also sets the groundwork for the convergence of existing national systems across the EU and supports Member States that want to implement national digital reporting for domestic trade.
Updated rules for the platform economy
Under the new regulations, platforms facilitating services in the passenger transport and short-term accommodation sectors will become responsible for collecting and remitting VAT when their users do not, such as when providers are small businesses or individuals.
This change aims to create a uniform approach across the EU, level the playing field between online and traditional service providers and simplify compliance for SMEs that currently face complex VAT rules in different EU countries.
Currently, in the EU, digital platforms such as Airbnb and Uber play a role in facilitating transactions for short-term accommodation and passenger transport services but are not generally obligated to directly collect and remit VAT.
Instead, the responsibility for VAT compliance typically rests with the individual service providers (e.g., hosts or drivers), provided they meet the VAT registration thresholds in their specific countries.
This arrangement often results in inconsistent VAT collection and poses challenges for enforcement, particularly with smaller operators who might not meet the registration requirements or may be unaware of their VAT obligations.
Single VAT registration
Building on the existing ‘VAT One Stop Shop’ (OSS) model for e-commerce, the proposals extend the ability for more businesses selling to consumers in other EU countries to meet their VAT obligations through an online portal in a single country.
This also includes making the ‘Import One Stop Shop’ (IOSS) mandatory for certain platforms facilitating sales by non-EU-based sellers to EU consumers.
A double-edged sword for compliance
These measures aim to align VAT rules with the digital economy and create a more uniform and efficient tax system across the EU. The requirement for platforms to act as "deemed suppliers" represents a significant shift from the current framework, consolidating VAT collection with fewer, larger entities.
This change is expected to improve compliance and reduce tax gaps, especially in areas where monitoring individual service providers is challenging.
However, as Mr Sciberras pointed out, the path to full implementation will be complex and require significant efforts from both national tax administrations and businesses.
While the package promises to boost VAT revenues and curb fraud, the true challenge will be in how efficiently member states and businesses adapt to these new obligations.
