EU VAT reforms: an unfinished journey

With ViDA (VAT in the Digital Age) delayed, EU tax digitalization and harmonization plans for VAT regulations remains elusive. So, how can businesses navigate EU VAT modernization effectively?  

ViDA: revolutionizing VAT, a win-win for governments and businesses  

The European Commission’s VAT in the Digital Age promises to deliver a more streamlined approach to the EU VAT process, registration and reporting. It’s the commission's way of championing centralization and standardization initiatives, offering growth and sustainability advantages for governments, businesses and consumers.   

Improved efficiencies within tax authorities will boost tax revenues for national governments. Businesses, especially SMEs, will welcome simplified access to intra-EU trade and the resulting reduction in tax compliance costs. This will cascade to consumers in the form of more competitive prices, faster delivery times and expanded choice. ViDA is poised to bring about a transformative wave, but not quite yet.   

Challenges for the EU VAT reforms   

The anticipated final agreement by EU Finance Ministers on the 3-pillar reforms did not materialize in 2023 as expected. Now, in the first half of 2024, negotiations resume. However, the decision-making process has been further complicated by the EU Parliament’s ECON advocating for a one-year delay across all three ViDA pillars.   

• Pillar 1 - Digital Reporting Requirements & e-invoicing may be delayed to 2030.   
• Pillar 2 - Platform Economy deemed supplier faces potential postponement to 2026.  
• Pillar 3 - Single VAT Registration could see a shift to 2026.   

So, the timeline has shifted with a new launch period likely spanning from 2025 to 2030. Concerns remain over businesses and tax authorities' readiness for the journey toward EU tax harmonization.   

Just recently Poland announced their National E-Invoicing System (KSeF) has critical errors, with an external audit of the system planned to evaluate functionality. There are general apprehensions that businesses and tax authorities might not be adequately prepared for the EU tax harmonization plans.   

Trade tensions and strengthening the international tax system      

The rest of the world watches with interest and the American Chamber of Commerce (AmCham) has recently shared recommendations emphasizing the importance of avoiding trade tensions and maintaining stability in the international tax system. They’ve also highlighted the importance of designing future policy developments that foster cross-border trade, investment and economic growth.   

AmCham seems keen for Pillars 1 and 2 to be finalized, promoting ease of administration and providing certainty for tax authorities and taxpayers while avoiding double taxation. The Chamber also calls for the adoption of a simplified compliance mechanism to alleviate the administrative burden, stressing the need for ample time for a comprehensive and consistent implementation of international tax rules.   

The recommendations also call for the withdrawal of digital services taxes in countries that have already enacted them, discouraging new digital taxes in the future.   

EU tax harmonization remains non-existent for tax teams   

The delay to harmonization and the simplification it promises makes prioritizing standardized EU VAT processes and automation even more important and valuable. Tax teams must still grapple with the challenges of navigating deadlines, disparate rules and approaches, constant changes and uncertainty.   

Does EU VAT management require tax technology?   

By investing in robust software, processes and procedures, businesses can overcome the admin burden that is common with trading across or with the EU member states. They can manage EU VAT compliance more efficiently throughout multiple countries and avoid the risk of penalties and other financial consequences.    

In this dynamic landscape, tax technology becomes a vital tool to cope with the practical challenges faced by businesses, providing a reliable means to deal with the complex reality of the EU VAT legislation.   

The e-invoicing shift across all EU member states is inevitable  

While the timeline may be uncertain, there is a fundamental transformation in how financial transactions are managed. So, despite the delays in ViDA’s legislative mandates, businesses should persist in adopting technology that supports e-invoicing. Even once the successful introduction of ViDA is achieved for e-invoicing (and its myriad local variations), complete EU VAT harmonization will be unlikely.   

Forward-thinking businesses continue to implement e-invoicing technology. In the near term “continuous transaction controls” (involving real-time validation and monitoring) position businesses to automate compliance risk reduction, streamline EU VAT processes, accelerate payment cycles and simplify cross-border trade.   

By acting now, ahead of legislation, these are the businesses that will begin to reap advantages associated with this digital transformation before the pressure to comply with ViDA kicks in.   

How can tax technology meet ViDA's mandate for EU VAT? 

VAT tax technology is crucial in offering a centralized platform to standardize, optimize and mitigate risks for EU VAT. Through automation, it can actively assist ViDA's mandate in complying with EU VAT regulations.   

It achieves this by streamlining automated VAT calculation for each transaction and maintains comprehensive digital records, irrespective of the multiple tax jurisdictions in the EU.   

With real-time tracking, reporting and timely updates on changes in tax laws, the risk of non-compliance is significantly diminished. This ensures that your VAT consistently complies with the evolving legislative landscape.  

Find out more about ViDA by joining us and ITR (International Tax Review) for our webinar e-invoicing-101: essential ViDA proposals. This covers updates on ViDA’s progress toward consensus, an assessment of the impact of delays on digital reporting requirements and e-invoicing, along with summary of the latest legislative changes concerning e-invoicing.