VAT in the Digital Age — Part 2: The Platform Economy and Level Playing Fields

While the e-invoicing mandate in the European Commission’s VAT in the Digital Age (ViDA) proposals warrant immediate scrutiny, other aspects of these sweeping recommendations also require consideration. ViDA also extends to the platform economy. The proposal addresses the ways in which the current VAT framework creates an un-level playing field for traditional VAT-registered suppliers that compete with digital companies, which harness the power of platforms to transact with their customers. 

Here's the issue that ViDA aims to address: Companies – including small businesses or even individuals -- operating within the platform economy, particularly those in the transport and accommodation industries, can provide services via a platform without charging VAT. Due to the economies of scale, these businesses can directly compete with traditional VAT-registered suppliers such as hotels and local passenger transport companies. Under the current VAT legal framework, this arrangement creates something less than a level playing field from a taxation perspective. 

To address this distortion, ViDA proposes to extend the already existing “deemed supplier model” and make the platforms liable for the VAT for all scenarios where the underlying supplier does not charge VAT.  This applies to non-taxable persons, small enterprises and non-EU persons that are not VAT-registered. One of the challenges is that under the current rules, the underlying provider of services (e.g., a person renting out an apartment) may be obliged to collect and remit the correct VAT (if any) to tax authorities. The issue here is that these underlying suppliers may be unaware that they are liable for VAT on the services they offer and as a result are not registered for VAT.  

The proposal intends to ensure that treatment between the digital and traditional sectors of short-term accommodation rental and passenger transport is equal by making the platforms account for VAT. This would establish a fair economic ecosystem in sectors where that is currently sometimes not the case. 

While ViDA is essentially a proposed revision to the EU VAT Directive, it could – if implemented correctly -- streamline e-commerce transactions for businesses of all sizes across the EU. 

That’s a big “if,” of course. While the European Commission appears optimistic that a final agreement can be reached, complete unanimity from EU Member States is required for the proposal to become law.  That’s not easy to obtain as the ViDA proposal is a total package, of which the extension of the deemed supplier rules is only one part. These realities combined with the very real shortcomings that these proposals aim to address, makes it imperative for tax leaders to monitor ViDA’s progress and unexpected detours in the months ahead.