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What is VAT in the Digital Age?

Although VAT itself isn’t changing, existing VAT frameworks and systems are well overdue for modernisation, especially in light of how digital acceleration is changing how we do business.

Cue VAT in the Digital Age (ViDA).

ViDA is an initiative set up by the EU commission to modernise VAT systems. The aim is to make VAT process more straightforward and secure through a standardisation framework, simplifying global tax processes. ViDA applies to any businesses seeking to do business within EU countries, regardless of whether they’re based in the EU or not.

What is the impact of digitalisation on VAT?

The digital economy is growing at an exponential rate, and legislation needs to keep up with these technological developments. At this moment in time, digital products and services are subject to VAT. This includes things like software (SaaS), streaming services, e-books, and so on.

However, existing VAT systems complicates regulating VAT on digital products and services. Throw in digital business models like e-commerce retailers, marketplaces, and cross-border transactions on these types of non-physical products, and doing business gets more complex.

What does ViDA aim to achieve?

ViDA’s objective is to establish a standardisation of VAT regulations for EU member states, making the compliance process more efficient and straightforward to navigate. These regulations will extend to any company that wants to do business in the EU, regardless if they are a member state or not. The overall goal of ViDA is to reduce the complexity of VAT, streamlining global business.

What are the changes in VAT legislation under ViDA?

Here’s a run-down of new VAT requirements and regulations, which will supersede current VAT legislation for EU member states:

• New e-invoicing rules to support real-time transactional data.
• New rules on what a ‘deemed supplier’ is in the platform economy. In this updated legislation, the marketplace/platform operator, rather than the supplier using the platform, is responsible for charging and collecting VAT.
• Single VAT registration. This aims to simplify VAT across the EU, and will be especially beneficial for businesses operating across multiple jurisdictions. Business will have access to a centralised platform to report all VAT data. This is known as the import one-stop-shop (IOSS) scheme.

What is the timeline for implementation?

The VAT in the Digital Age timeline is split up into different phases of implementation. Here's what has already happened to-date:

• Dec 2022: ViDA proposal published by European Commission.
• Jan 2024: Mandatory e-invoicing no longer needs EU approval.

Here are upcoming milestones and deadlines, as well as key business dates:

• 2028: Digital Reporting Requirements (DRR) will be mandatory for intra-community sales (between EU member state), but remain optional for domestic sales. This data will need to be sent to a central VAT Information Exchange System (VIES) database, replacing recapitulative statements.
• 2030: Projected date for everyone doing business in EU member states to adopt e-invoicing. This includes submitting e-invoices that are compliant with the European Standard (EN16931).
• 2035: All existing domestic VAT reporting systems in EU member states must be in-line with ViDA standards.
   

What is the EU Commission's role in ViDA?

The EU Commission has had a significant role in getting VAT in the Digital Age off the ground. This has included:

• Defining what ViDA is, what it should include, and how it should be fairly applied to relevant businesses and stakeholders.
• Overseeing how ViDA can be effectively implemented.
• Understanding and presenting solutions to any cross-border transaction hurdles
• Promoting transparency for the entire ViDA framework, including the whos, whats, whys and whens.

So far, the EU Commission has:

• Worked on proposal developments for ViDA.
• Presented legislative amendments. These VAT in the Digital Age directives include updating the VAT Directive (2006/112/EC), the Council Implementing Regulation (EU 282/2011), and The Council Regulation on Administrative Cooperation (EU 904/2010).
• Undertaken public consultations around VAT in the Digital Age across the EU.
• Undertaken impact assessments for ViDA.

The ongoing plans for ViDA as mapped out by the EU Commission is to make VAT more efficient and standardised.
 

What is the ViDA's impact on EU member states?

The impact of ViDA on different EU member states will vary based on their existing VAT legislation and the move to standardise VAT regulations across the EU. Although the goal here is to harmonise and simplify VAT, there are a few challenges that the implementation of ViDA will inevitably bring. This includes:

• The roll out of new technology needed for ViDA compliance. This may include upfront costs for new digital financial systems, training and skill gaps, as well as potential security concerns.
• Domestic legislative changes needed to maintain EU membership.
• Challenges balancing domestic and EU requirements. Not only will EU member states need to amend domestic laws, but will also ensure that any new technology adoption meets EU privacy laws.

The solutions to the above challenges all come down to training, education, and the effective implementation of transition management. Learn how you can prepare your organisation for ViDA.

If your business is going to be impacted by ViDA’s e-invoicing regulations, maintain compliance by:

• Assessing your current invoicing processes. See if these be compliant with the new e-invoicing regulations. If not, it’s time to research, plan, and prepare.
• Optimising or implementing your VAT compliance software. We recommend investigating this as part of your preparation to translation in ViDA. Automated software will help with varying rates and rules across different jurisdictions.
• Preparing for the implementation costs of new financial systems. Think of them as a key investment. Ensuring your VAT reporting is correct will help save money down the road, as the risk of getting it wrong could end up being far more costly.

Want a more in-depth guide? We have resources to help you prepare for ViDA.

What are the key legal directives and compliance measures?

VAT Compliance in the Digital Age is set to have a big shake up, with digital reporting requirements have now changed in lieu of technological updates. This includes real-time reporting and electronic invoicing. But how is it being written into EU law?

Here are the updated directives impacted by ViDA:

• VAT Directive (2006/112/EC)
• Council Implementing Regulation (282/2011)
• Council Regulation on Administrative Cooperation (904/2010)
• E-invoicing Directive (2014/55/EU)
• Implementing Decision (2017/1870)

Now, a key question regarding these new directives is whether there will be any enforcement mechanisms or penalties. So far, we don’t have any information on what these are. We’ll need to wait for the final version of ViDA to learn what these will be.

What are the business implications of ViDA?

As we’ve alluded to throughout this guide, ViDA is not only good for tax authorities and governments, but has been designed to benefit businesses too. Here’s why:

• Improved record keeping as a result of real-time data requirements. This will mean businesses will have paper trials that are easier to track, as well as reducing the risk of errors as everything will be digital and automated.
• Improved financial operational processes. Using automated VAT compliance tools will save time and resources. Accounts Payable will be thanking you!
• Single VAT registration makes selling to EU member states a whole lot easier. Current VAT processes are complex and convoluted, and this will mean far less paperwork for everyone involved.
• Cross-border transactions will be a whole lot easier with a simpler VAT process, for both EU state members and non-EU state members wishing to trade with them.