i

The Future of VAT. An Analysis of the European Commission’s Fiscalis Workshop meeting

Progress

Real-time reporting, Continuous Transaction Controls (CTC), Transaction based reporting (TBR). Whatever you want to call it, it’s a hot topic! We recently saw many countries implementing such systems, with France being the latest European Union (EU) Member State to decide so. Furthermore, real-time reporting is also high on the agenda of the European Commission (EC) as one could have read in July’s Tax Package.[1] The publication of the results of the latest Fiscalis[2] workshop makes this even more clear. In this publication the EC shares the outcome of the discussion regarding real-time reporting (called TBR in the document). In the following we will guide you through the most important details of the published document and show you how summitto can help to tackle the problems that were signaled during the Fiscalis Workshop.

Fiscalis Workshop Results

During the workshop, both business and governmental representatives from all over the EU came together to discuss the latest trend of the VAT world: real-time reporting. The discussions resulted in ‘several elements for the design of a harmonised system’. In the following we will analyse the most relevant of those elements.

Proportionality and security

Both businesses and tax authorities agree: Real-time reporting

‘implies the submission by businesses of massive amounts of data to the tax administration. These data are difficult to process for tax administrations and some of them highly sensitive for businesses. Therefore, the data required cannot go beyond what is necessary for risk analysis and control purposes and must comply with the GDPR’.

Indeed, the data that is provided should be proportional given the goal of tackling VAT fraud. For example, to be able to get to the fraudsters, the tax authority does not need a description of the goods.

Summitto even goes one step further. By making use of modern cryptography our real-time reporting system is able to achieve the same results as any other real-time reporting system, without revealing individual invoice data to tax authorities.[3] This approach provides a maximum security to the tax authority’s fraud detection system and will therefore protect businesses from data exposure. The exposure of invoice data could be very harmful to businesses as invoices contain pricing information. When pricing information is leaked it might become public that company A is charging different prices to company B than to company C, which could damage the client-relationship. Having said that, we still allow comprehensive analysis for the tax administration on the flow of VAT.

Responsibility for the storage of data

As discussed above, tax authorities should be very careful with storing invoice data as the exposure of such data could harm the economy. And as was discussed during the workshop:

‘Tax administrations could be held responsible in case their systems are hacked and data is stolen or leaked.’

This could indeed be a very problematic situation. Therefore, we decided not to store any data in the first place as we explained above. In our system, the taxpayer itself will always remain the owner of the data and thus the one responsible for the data.

Harmonisation

For real-time reporting in the EU, there are two types of transactions that require harmonisations: (1) intra-Community transactions and (2) domestic transactions.

Currently there is no real-time reporting system for intra-Community transactions. For the registration of intra-Community transactions the VAT Information Exchange System (VIES) is used where companies need to provide monthly, quarterly or annual returns. One of the outcomes of the discussion during the Fiscalis workshop was that

‘There is a preference for a harmonised [real-time reporting] system regarding intra-Community transactions. The VIES system should be revised accordingly in order to coordinate and avoid duplicates in data sharing.’

So, this could mean a real-time VIES system, where intra-Community transactions will be reported at the invoice level. This topic will be investigated further by the EC in the near future.

For domestic transactions, representatives of EU business associations made clear that they

‘are in favor of harmonisation.’

However, the tax authorities

‘seem to lean towards a standardisation and coordination of the features of the systems already implemented.’

This position of the tax authorities probably originates from the fact that several Member States already implemented some form of a real-time reporting system as we have shown in a previous blog post. It would be very costly to force those Member States to implement yet another real-time reporting system, while they actually took an effort to not only increase their own VAT revenue, but also that of the EU.[4]

Therefore, it would be more logical to push for harmonisation of the future implementations of real-time reporting, whilst trying to achieve interoperability for existing systems. This was also one of the outcomes of the workshop:

‘Further, it was highlighted that it was necessary to act as soon as possible, in order to avoid that Member States implement new systems or continue developing the existing non-harmonized ones. That would increase the divergences among Member States and the costs incurred by both business and tax administrations, jeopardising the attempts to harmonise these obligations.’

However, there was no clear idea of how these systems could be harmonised. In one of our latest blog posts we discussed this topic further and proposed a BRIDGE to make TX++ interoperable with any existing real-time reporting system, such as the Hungarian real-time reporting system that will be extended soon to also include intra-Community transactions.[5]

In the light of this harmonisation it will be interesting to follow the development of the research project “VAT in the Digital Age” commissioned by DG TAXUD. This project will assess

‘the current situation [of EU VAT] and the likely impacts of a number of policy options (to be refined and further detailed) on three topics related to VAT and the evolving technologies, digitalisation, and innovative business models.’

These topics are:

  • Digital Reporting (yet another name for real-time reporting!) and e-invoicing;
  • The VAT treatment of the platform economy;
  • Single EU identification number, and aspects related to the import One-Stop Shop and the low-value threshold, with a particular focus on SMEs.
E-invoicing and automation

Often e-invoicing is mentioned together with real-time reporting, this is also apparent in the research project mentioned above and was also implied during the Fiscalis workshop. There it was argued that

‘e-invoicing could be necessary in case of real time reporting.’

This is actually not the case, e-invoicing is not necessary for real-time reporting. Summitto’s real-time reporting system does not require e-invoicing and even allows companies that do not make use of a bookkeeping software or an ERP system to be compliant. It is all a matter of protocol definitions and implementation, ours for example gives tax administration the option to choose.

However, we very much encourage coupling the implementation of a real-time reporting system with mandatory e-invoicing because it will provide businesses many benefits. This was also concluded by the attendees of the workshop:

‘E-invoicing should play a role in reporting. It would likely lead businesses and tax administrations to structure their processes and activities in an automated way’.

Costs

During the workshop the costs were also discussed:

‘The main costs for taxpayers of a [real-time reporting] system are the implementation and maintenance of the IT systems, the training of the staff, the time required to submit the data and the possibility to face more requirements for information due to the appearance of mismatches. These costs could be mitigated in case the systems are harmonised, the necessary software is provided for free and the process to submit the data is as automated as possible.’

Indeed, the highest costs for the implementation of such systems come at the beginning. However, once all preparations are done, many business processes that previously were completed manually can then become automated. This can result in significant time, and thus cost, savings. When zooming in on summitto’s solution, our solution even comes with additional benefits for businesses. Because taxpayers will be able to prove that they have uploaded their invoices to the tax authority for tax purposes, they can reuse their data to e.g. automate audits or even give real-time access to their revenue data to investors. But most importantly buying “off-the-shelf” software is more economical for tax administrations, so focusing on a system that is already developed and ready to go does not only reduce costs but also increase reliability and maintainability.

Conclusion

As big fans of real-time reporting systems, we were pleased to read the outcome of the Fiscalis workshop. The most important conclusion we can draw from the analysis of the outcomes are that future real-time reporting systems (1) should be proportional and secure, (2) should allow for harmonisation and interoperability throughout the EU, (3) need to be able to support e-invoicing, (4) should come with low costs for taxpayers. Summitto’s solution is able to tackle all of the issues listed above and even comes with some additional benefits for businesses because it would allow them to reuse their data for a wide variety of financial services. To conclude, the Fiscalis workshop proves once again that real-time reporting will play a pivotal role in the (near) future of VAT and the EC is taking excellent steps forward in this regard. Still, during the workshop there remained some questions unanswered. In our next blog post we will zoom in on those questions.

[1] https://ec.europa.eu/taxation_customs/general-information-taxation/eu-tax-policy-strategy/package-fair-and-simple-taxation_en

[2] Fiscalis is an EU cooperation programme. It enables national tax administrations to create and exchange information and expertise.

[3] If you want to learn more about how this is done on a technical level, please have a look at our blogpost: https://blog.summitto.com/posts/invoice_fingerprints/

[4] If you want to learn more about how this is done on a technical level, please have a look at our blogpost: https://blog.summitto.com/posts/invoice_fingerprints/

[5] https://sovos.com/blog/2020/11/26/hungary-expands-real-time-vat-controls/

@Photo by Lindsay Henwood on Unsplash