VAT in the Digital Age – conclusions of the European Commission's DDR study
The European Commission has released the final report from the public consultation on "VAT in the Digital Age" that was launched in 2020. This initiative seeks to examine the existing VAT framework for digital services and adapt it for the digital era and new business models.
The consultation requested input from interested parties on how digital technology might be utilized to help Member States fight VAT fraud, as well as for the benefit of enterprises. It also asked whether the current VAT regulations have been updated for the digital age. The European Commission is seeking views on the reporting requirements for value-added tax (VAT), e-invoicing, the VAT treatment of the platform economy, and the adoption of a single EU VAT register.
DDR or Digital Reporting Requirements
The first part of the study concerns the requirements for digital reporting of tax information. Any obligation for VAT taxpayers to submit data periodically or continuously in digital form, including through mandatory electronic invoicing, to the tax authority.
There are several different types of communication models that can be classified according to how often information is exchanged and what type of data is being communicated. The main distinction in VAT reporting types comes from the frequency of reporting.
- Periodic Transaction Controls (PTC) involve reporting transaction data to the tax authorities at regular intervals. In the European Union, this model refers to value-added tax (VAT) listing systems and reporting through the Standard Audit File for Tax (SAF-T) system.
- Continuous Transaction Controls (CTC) is a system where transaction data is submitted electronically to the tax authorities before, during, or shortly after the actual exchange of the data between the parties. CTCs typically feature real-time reporting mechanisms and electronic invoicing that may or may not be subject to validation.
There are four types of electronic VAT forms in the European Union, based on the frequency and data requirements.
Based on PTC’s
- VAT Listing: VAT Listing is the obligation imposed on taxpayers to submit VAT transactional data according to a national format.
- SAF-T: SAF-T (Standard Audit File for Tax) is a file type based on the XML standard that is used internationally for the electronic exchange of tax information. This file collects reliable information that allows the tax authority or an external auditor to detect any anomaly in a company's accounting quickly.
Based on CTC’s
- Real-time reporting: Real-time reporting is the obligation of taxpayers to transmit transaction data shortly after the invoice is issued. The required data can be extracted from the invoice, but it is not necessary to transmit the invoice itself to the tax authority.
- e-Invoicing: e-Invoicing is a compliance system that requires taxpayers to issue a structured electronic invoice for VAT purposes. The e-invoice, or a set of data from it, must be transmitted to the tax authority, prior to its issuance, as it takes place, or shortly thereafter. The taxpayer may send the e-invoice directly to its customers and share it with the tax authority. Alternatively, the taxpayer may have to go through the tax authority first, either to obtain prior authorization or use a central IT platform, which, in turn, delivers the e-invoice to the customer.
Currently, in the European Union, 12 countries have already introduced some form of mandatory electronic tax reporting. But only three countries have adopted real-time CTC models: Spain (SII), Hungary (RTIR), and Italy.
The EU estimates annual net benefits of EUR 8 million in those member states where some form of electronic VAT reporting has been implemented.
Analysis of the Situation
The existence of national models and the lack of EU regulation on electronic tax reporting leads, on the one hand, to market fragmentation resulting in legal uncertainty and, on the other hand, to a high administrative burden for companies operating across borders.
The study compares data from tax authorities before and after the introduction of DDR and concludes that the effectiveness of tax control activities has increased.
Regardless of the type of electronic reporting introduced in the Member States, the consultation concluded that it has improved risk analysis and fraud identification. This is achieved through automatic cross-checking of data and matching of information between trading partners.
With the modernization of the requirements for the VAT return, the following goals are pursued:
- Ensure a more agile and detailed exchange of VAT information on intra-Community transactions.
- To optimize the mechanisms in national transactions.
- Better use of technology in the fight against fraud.
Improvements in tax control activities, together with a boost in taxpayer compliance and a reduction in errors and omissions, led to a significant positive effect of DDRs on VAT revenues. According to the various models and econometric specifications, the increase in VAT revenues over the period 2014-2019 was estimated at between €19 billion and €28 billion in the Member States that have introduced a CRR in this period. This corresponds to an annual increase in VAT revenue of between 2.6% and 3.5% and an equivalent increase in VAT rates of between 0.6 and 0.8 percentage points.
The additional costs to the tax authorities were a fraction of the benefits achieved. Annualized implementation costs were estimated at between €0.6 and 1.1 million for the VAT listing and PAS-T systems, between €4.5 and 16.5 million for real-time requirements, and €25 million for invoicing. Most of the costs consisted of IT installation costs and ongoing costs accounted for between 5% and 20% of total capital expenditure.