VAT in the Digital Age — Part 1: EU E-Invoicing Compliance Requirements: When not If

The European Commission’s massive VAT reform proposals unveiled in December raise two big questions for businesses conducting transactions in the EU single market: if and when? Tax leaders within those businesses should look to focus the lion’s share of their energy on the second question. The clock is already ticking. 

VAT in the Digital Age (ViDA), which organizes recommendations into three different categories, marks one of the largest EU attempts at VAT reform in the 21st Century. To get a better understanding of the proposal and the impact it will have on EU trade, this series will explore the three pillars of the EU’s new plan: VAT reporting obligations and e-invoicing compliance, VAT treatment of the platform economy, and single EU VAT registration. 

The reforms related to e-invoicing will be addressed here and deserve immediate attention as they would modernize how transactions and VAT are reported in the EU with a mix of mandatory and optional electronic invoicing, combined with digital and traditional reporting. Many companies, especially platform-based businesses, will need to invest in new tax technologies to comply with upcoming e-invoicing compliance and digital reporting requirements, regardless of how those rules are ultimately finalized. 

This approach would require vendors and recipients to electronically submit their VAT invoice data to the tax authorities of the member state where that business is established or VAT registered. All in accordance with the existing EU Regulation on electronic invoicing in public procurement.

Like any sweeping tax reform proposal, ViDA has its advocates and opponents. Here are key highlights of each position: 

• Pros: Proponents assert that e-invoicing would improve the accuracy and efficiency of VAT collection, reduce compliance costs for businesses, and combat fraud. The use of e-invoicing would eliminate the need for businesses to manually process invoices, reducing compliance costs and the risk of errors. Plus, e-invoicing would make it easier and quicker for tax authorities to match invoices with VAT returns. Therefore, reducing the risk of tax evasion and other forms of fraud.
• Cons: Opponents maintain mandatory e-invoicing would impose a significant burden on small and mid-sized enterprises, which in many cases lack the resources and/or technological capabilities required to meet e-invoicing compliance and digital reporting requirements. There are also concerns that mandatory e-invoicing could increase the administrative burden on tax authorities, which would need to invest in new systems and infrastructure to process and store the increased volume of electronic invoicing data. One could also question whether mandatory e-invoicing would actually reduce the VAT gap, since the mandate only applies to cross-border transactions that are typically not subject to VAT.

These arguments will intensify over the next twenty-four months, which the European Commission has set as the target for the new rules to take effect. Hitting that deadline will be difficult given the intense challenge of achieving political agreement for the proposals among all EU Member States. However, if the current proposals – or some variation of them – do take effect between 2024 and 2028, it would leave companies with little time to get new tax technology and optimised processes in place for the changes in e-invoicing compliance. That is why it is vital for tax leaders to monitor this legislative proposal as it progresses and evolves.

Keep reading for Part 2 of the "VAT in the Digital Age" series.