COVID Side Effect: More VAT E-Compliance Rules

The Digital Transformation of VAT Returns

What a difference a dozen years make. Twelve years ago, nearly all European Union (EU) companies submitted their VAT returns on paper. Today, EU countries require VAT returns to be filed digitally—and some EU Member States are looking to implement e-compliance requirements in response to the budget deficits caused by COVID-19.

What is E-Compliance?

When I use the term “e-compliance,” I’m referring to the electronic real-time, or near real-time, exchange of transactional data between business and government for the purposes of continuous transaction control by tax administrations and the monitoring of EU VAT compliance.

That’s a relatively broad definition, so it’s important to keep in mind that individual countries have implemented, or are considering implementing, more specific sets of rules that typically adhere to one of the following models: periodic transaction detail reporting; near real-time reporting; real-time reporting; central invoice token; and central invoice clearance.

Requirements within E-Compliance Rules

The specific requirements within each set of e-compliance rules differ; yet, all of these approaches share a few important characteristics:

1. The volume and specificity of data required by VAT e-compliance rules greatly exceeds what is shared in a traditional VAT return;
2. The possibility of prefilled VAT returns can enhance the ease and efficiency of the submission process for businesses; but
3. E-compliance gives tax administrations access to large amounts of transactional data, which empowers those authorities to raise more—and much more detailed—questions about companies’ tax management decisions and changes (in other words, the ease and efficiency of e-compliance comes with a potentially high price tag for businesses).

Implications of COVID-19 on E-Compliance

The desire to reduce the size of the VAT gap—the difference between expected VAT revenues and VAT revenues that were actually collected—initially stimulated the adoption of e-compliance mandates. That drive to adopt e-compliance has become far more important today given the magnitude of budget deficits caused by the COVID-19 pandemic. Among all of the options available to finance rising deficits, implementing new or more rigid rules designed to limit fraud and increase VAT compliance appear far more politically viable than alternatives such as implementing new tax categories or raising existing VAT rates.

These economic conditions explain why VAT e-compliance and the large volumes of transactional data those rules deliver to tax administrations “may become the new gold to combat tax evasion,” according to the Billentis report The E-Invoicing Journey.

The Takeaway for Tax Leaders

That said, VAT e-compliance also poses some substantial challenges to tax departments, which is why tax leaders will find value in keeping tabs on new requirements as they arise.