ViDA (VAT in the Digital Age) - The European Union Reaches an Agreement on Digital VAT Measures

Under the umbrella of the VAT in the Digital Age (ViDA) project, the European Commission is proposing a series of measures aimed at modernizing the current VAT system in the European Union to combat tax fraud. Among the initiatives, a key focus is the implementation of a new tax reporting system through electronic invoicing between companies.

On November 5, 2024, a major political agreement on the ViDA project was reached, representing a significant step toward modernizing and digitizing the VAT system across the EU. The agreement introduces measures aimed at simplifying and harmonizing VAT processes, fostering efficiency and adaptability in an increasingly digital economy.

The agreement will be resubmitted to the European Parliament for revalidation due to substantial differences between the European Commission's initial proposal and the ECOFIN Council's agreed text. However, this step is expected to be a formality given the extended timeline. Subsequently, the European Council must formally accept the agreement, with initial measures expected to take effect in early 2025.

Revised Implementation Timeline

• 2025 (20 days after ViDA adoption): Approval from the European Commission for domestic e-invoicing will no longer be required.
• January 1, 2027: Updates to the e-commerce package; expansion of OSS to include supplies of electricity, gas, and heat.
• July 1, 2028: Implementation of a single VAT registration (OSS extension to all B2C supplies, stock transfers, and mandatory reverse charge mechanism); optional application of the deemed supplier rule for accommodation and mobility platforms.
• January 1, 2030: Expanded VAT obligations for platforms; mandatory application of the deemed supplier rule for accommodation and mobility platforms.
• July 1, 2030: Mandatory Digital Reporting Requirements (DRR) based on e-invoicing for B2B intra-EU transactions and transactions subject to a mandatory reverse charge; harmonization of domestic e-invoicing systems (excluding those in place before 2024) with EU standards.
• January 1, 2035: Harmonization of domestic e-invoicing systems implemented before 2024 with EU standards.

These reforms respond to the rapid changes in the digital landscape and aim to create a more agile, fair, and transparent tax system across the EU, benefiting both businesses and consumers.

What is the ViDA (VAT in the Digital Age) initiative: Modernizing the VAT system in Europe?

VAT is a very important source of tax revenue for all member states of the European Union, and it represents a significant portion of the EU budget. However, the current VAT regulations are outdated and ineffective, making it difficult to properly control tax compliance and resulting in a significant loss of revenue. The European Commission's 2022 VAT Gap Report estimates that in 2020, approximately 93,000 billion euros in revenue was lost, of which a quarter can be attributed to cross-border transactions.

The European ViDA (VAT in the Digital Age) project is built on three fundamental pillars designed to adapt the VAT system to the challenges of the digital economy and improve its efficiency on a European level:

• Digital Reporting Requirements (DRR): This pillar focuses on implementing e-invoicing and establishing digital reporting systems to facilitate the exchange of tax information between EU countries. The goal is to standardize e-invoicing processes across all member states, promoting greater transparency, efficiency, and a reduction in tax fraud.
• Platform Economy: This pillar addresses challenges related to the platform economy, particularly short-term accommodation rentals and passenger transport services. It aims to enhance the role of digital platforms in VAT collection.
• One-Stop Shop (OSS) for VAT Registration: The third pillar proposes creating a single VAT registration system, enabling businesses to manage their tax obligations throughout the EU with one registration. This simplifies tax administration for companies operating in multiple countries, reducing bureaucracy and compliance costs associated with navigating different tax regulations.

These three pillars are designed to modernize the EU's VAT system, align it with new digital business models, and improve the efficiency and transparency of tax collection.

E-Invoicing and Digital Reporting Requirements (DRR)

Key implementation dates for e-invoicing and DRR

In 2025

• Member states may introduce mandatory e-invoicing for domestic B2B and B2C transactions.
• Prior authorization from the European Commission will no longer be required, provided the measures apply only to taxpayers established within their territory.

From July 1, 2030

• E-invoicing will become mandatory for intra-EU B2B transactions and those subject to the reverse charge mechanism.
• National e-invoicing systems (excluding those established before 2024) will be harmonized with EU standards.
• VAT-registered businesses must issue structured e-invoices in a standard EU format.
• Invoices must be issued within 10 days of the supply of goods or services (or upon payment, if made earlier). This replaces the two-day timeframe initially proposed in the ViDA initiative.

From January 1, 2035

• National e-invoicing systems established before 2024 must be fully harmonized with EU standards.

Platform Economy

Many online accommodation rental and passenger transport services currently do not pay VAT, as they are often provided by individuals or small businesses not required to register for the tax.

Starting January 1, 2030 (or optionally from July 1, 2028)

• The "deemed supplier" rule will be introduced.
• Digital platforms, such as those offering passenger transport or short-term accommodation rentals, will be responsible for collecting and remitting VAT on behalf of providers who do not handle it themselves.
• These platforms will collect VAT directly from customers and remit it to tax authorities.

One-Stop Shop (OSS) for VAT Registration

The current One-Stop Shop system allows businesses to manage VAT for cross-border sales within the EU through a single Member State. However, domestic sales within the same Member State still require additional VAT registrations.

Starting July 1, 2028

• Member States will implement a reverse charge mechanism for non-established suppliers.
• New rules will expand the scope of the One-Stop Shop system to include:
  • B2C sales of products like electricity or gas within a Member State.
  • Stock movements within the EU intended for direct sales to consumers at a later stage.

Who will be affected by the new regulations?

The new system will have implications for both companies that are subject to Value Added Tax and for member states. They will need to transpose the new European measures into their tax systems and take measures to audit electronic invoices between companies.

Objectives of the new European VAT system

The ViDA project is primarily aimed at modernizing the European VAT system and has set itself the following objectives: 

• Guarantee an efficient and fair VAT system for the digital economy.
• Fight against fraud, especially intra-community fraud.
• To ensure the proper functioning of the Internal Market. 
• Simplify and adapt VAT regulations to the new digital reality of the market to facilitate tax compliance and provide greater legal certainty. 
• Optimize tax reporting requirements through digitalization.

Legal Texts

At the legislative level, there are proposed amendments to various legal texts to give effect to the measures. The European Commission has published these proposals to help ensure that the measures are properly implemented.

• Directive 2006/112/EC as regards VAT rules in the digital age.
• Regulation (EU) No. 904/2010 as regards the VAT administrative cooperation scheme necessary for the digital age.
• Implementing Regulation (EU) No. 282/2011 as regards the information requirements applicable to certain VAT schemes.

The legislative proposals will be submitted to the Council for approval, and to the European Parliament and the Economic and Social Committee for consultation.

Benefits of the new European VAT system

• Reduction of tax compliance costs. According to the ViDA report, an estimated saving of 4.3 million euros is expected thanks to pre-filing VAT.
• Savings in handling costs. The EC estimates that 1.9 billion euros will be saved in postal shipments alone. 
• Acceleration of the digital transformation of companies by implementing automation technologies to report business data electronically. 
• Increased efficiency of tax control thanks to improved risk analysis systems.
• Increased tax collection. According to the ViDA report, an estimated collection of between €135 billion to €177 billion.
• Reduction of tax fraud. Obtaining information in real time will make it much more difficult for fraudsters to operate. 
• Faster introduction of digital reporting requirements (DDR) as there is a standardized model at European level.
• Improved cross-border trade as member states have to develop their tax reporting systems to ensure compatibility and interoperability within the Union. 
• Improved environmental impact. The report quantifies that the reduction of carbon emissions would have an economic equivalent of between 0.01 billion and 500 million euros.