One single EU market: towards an interoperable EU VAT system

Interoperability

In previous blog posts we explained how our real-time reporting system (sometimes called CTC system) is able to reduce VAT fraud and close the VAT gap without collecting any actual invoice data. Our system has many similarities to existing real- and near-time reporting systems (after this referred to as a ‘reporting system’), which an increasing number of EU Member States are implementing. We support this development as we believe that reporting has really proved to be an excellent tool to close the VAT gap. Our system comes with additional confidentiality benefits both for businesses and governments by making use of modern cryptography. However, we believe that existing solutions should not be replaced immediately as they are a great step forward in the fight against fraud. In the following we will show how those existing systems can easily be made interoperable with TX++ by building a BRIDGE.

B asic R eporting for I ntra-Community D ocuments and G eneral E xchange

Reporting systems in the EU

Over the last couple of years various EU Member States turned to reporting systems to reduce the VAT gap. Its usage has shown excellent results in the past. For example, multiple countries in Latin America managed to reduce their VAT gap up to 50% thanks to reporting systems.[1] Furthermore, if implemented in the right manner businesses can also benefit from reporting systems as it allows for the automation of certain business processes.

Countries such as Greece, Hungary, Italy and Spain really stepped forward in the fight against the €140 billion VAT gap by implementing reporting systems. Preliminary results are promising. In Italy the time to detect a fraudster was reduced from 18 months to 3 months.[2] Seeing the results of their fellow EU Member States, France also decided to implement mandatory B2B e-invoicing coupled with a reporting system at the earliest in 2023.[3] The government is still investigating in what way the system will be implemented. Here lies the challenge. All countries are implementing reporting systems in different ways, having different standards. Some are asking for invoices whereas others require companies to report their complete books.

This makes it hard to comply for companies that are operating in multiple EU Member States. Think also of the complexity which an auditor faces when they need to review the books reported in various Member States. Therefore, the European Commission is now investigating the possibilities of reporting systems and how to bring all those different systems closer together. In order to reach this goal The European Commission ‘will present a legislative proposal for modernising VAT reporting obligations’ by 2022/2023 as is written in the ‘Package for fair and simple taxation’ published in July 2020. The European Commission wants to ensure ‘quicker, possibly real-time, and more detailed exchange of information on VAT intra-EU transactions’, and at the same time they want to streamline ‘the mechanism that can be applied for domestic transactions’.[4]

This ‘thinking ahead’ by the European Commission is needed, as in the future only more countries will implement a reporting system. In the following we will conceptualise how this streamlining could be carried out and how the EU VAT system could be made interoperable.

How to ensure EU interoperability?

The most straightforward way to ensure EU interoperability would be to agree upon an intra-EU reporting standard between all Member States. However, as there is currently a continuing trend of Member States implementing such systems themselves, this will be extremely hard to achieve. However, there are other ways forward. We believe that TX++ is the most secure way a reporting system could be implemented. It can be used not just by countries which do not have any reporting system in place yet, but existing reporting systems can also hook up to it. Different reporting systems could interoperate by building a new B asic R eporting for I ntra-Community D ocuments and G eneral E xchange (BRIDGE). The EU has a long history of building bridges across cultures and systems, and this BRIDGE would continue this trend. This will not only create an interoperable EU VAT system, it will also result in additional benefits for all EU businesses. Let’s see how this works in practice.

If a Member State with a well-functioning reporting system makes use of the BRIDGE they would immediately be able to exchange data with other Member States according to the TX++ specification. Moreover, it allows internationally operating companies and auditors to request access to companies' registration data via a uniform data format. The required IT changes would be relatively low, as the data that is currently reported to the tax authority can be ‘translated’ to TX++. This will not only enhance the EU Single Market, it will also result in direct benefits for businesses.

We can ensure that even companies which do not enjoy the confidentiality advantages of TX++ can still reuse the data that they reported to the tax authority on a European level. This is a unique advantage of TX++ which allows companies to prove to third parties other than the tax authority that they have actually reported their invoices. This does not mean that this information is publicly available: the owner of the data always has to give permission to this third party. If the company decides to share information with a third party, for example an auditing company, the auditing company can simply cross check the books of their client with the TX++ database by cross checking the fully encrypted invoice fingerprints (read how all data is encrypted here. It would also allow companies to prove that they generated revenues above a certain threshold, or they could even give their investors real-time access to keep them updated on their performance. Making use of this verified financial data can help in a wide variety of situations.

TX++: a confidential reporting system

As our main goal is to reduce the VAT gap, we support existing reporting initiatives. Still, we are passionately trying to show Member States that did not implement any VAT reporting solution yet that TX++ comes with many benefits both for tax authorities and businesses. We have already explained the benefits companies can derive from reusing the encrypted data that they report via TX++, but they will also benefit from this encryption in itself. As no actual invoice data is stored no valuable invoice data can be exposed. Companies therefore don’t have to worry that valuable pricing information becomes publicly available. If pricing information would be exposed this could have dramatic consequences for the customer-client-relationship as companies are often charging different prices to different clients. Furthermore, it can also have consequences for the entire EU economy. If pricing information of an EU company is leaked, non-EU companies could try and go just below the price offered by the EU company and outcompete them. Another reason to implement confidential VAT reporting is that security breaches have a high price as we explained in our blog post ‘The costs of cyber attacks’.

To achieve this goal, we make use of modern cryptography. This allows us to detect fraud without having to see what is stated on the invoice, making it almost impossible to leak any data. After detection, the tax authority can request (similar to an audit today) the invoice data from the owners of the data as only they have the key to decrypt the data. This data is recorded on our system and time-stamped, which makes it impossible to change information after the fact without detection.

Conclusion

Together with many experts in the field of VAT, we see a continuing trend of EU Member States implementing reporting systems to reduce the VAT gap. Recently implemented solutions by Member States show promising results. Therefore, the European Commission is investigating the possibilities regarding such reporting systems as well and mostly to streamline existing and future systems. We hope to help the European Commission in their endeavors by allowing countries that do not want to implement TX++ to hook up to our system by making use of the BRIDGE. This will not only create an interoperable system, but will also provide businesses with additional advantages such as the ability to reuse reported data for e.g. audits.

[1] https://www.billentis.com/The_einvoicing_journey_2019-2025.pdf

[2] https://ec.europa.eu/transparency/regdoc/rep/1/2020/EN/COM-2020-242-F1-EN-MAIN-PART-1.PDF

[3] https://www.pagero.com/news/mandatory-e-invoicing-france/

[4] https://ec.europa.eu/taxation_customs/sites/taxation/files/2020_tax_package_tax_action_plan_en.pdf