The VAT gap in the European Union (EU) is expected to increase to €164 billion in 2020 due to the Covid-19 pandemic. Confronted with this situation of emergency, the European Commission (EC) has placed the reduction of the VAT gap high on its agenda in order to provide Member States with additional fundings to tackle the economic crisis. The “Mind the VAT gap” initiative of the European Commission aims at promoting projects at the level of tax authorities that have proven to be effective in significantly reducing the VAT gap. Additionally it’s an excellent way for any EU citizens to voice their opinion about this enormous issue. Furthermore, the initiative will help the EC in identifying the most relevant projects to support.
Summitto welcomed the initiative of the European Commission with enthusiasm. We also appreciate the broad participation from European businesses and business associations in the initiative. In the following we will highlight the most relevant suggestions that were made, which could help to close the VAT gap.
Digitalisation of VAT
The digitalisation of VAT through e-invoicing and real-time reporting is a common suggestion seen in several proposals. The German global technology platform Coupa Software highlights that the first measure for tackling the VAT gap is to ban all paper and PDF invoices from both B2B and B2G markets, while they also suggest that tax authorities should be able to verify invoices before goods are shipped. Similarly, the Dutch company BTW-adviseurs proposes to introduce a digital invoice to be sent via the tax authority for amounts exceeding €10,000. This way, it gives the customer the guarantee of a deduction right and it ensures an optimal control possibility for the tax authority itself.
The proposal of the Greek company ATG Computer Consultants goes one step further. They propose to implement a tax revenue collection-and-distribution automatic system that should process all tax electronic transactions in real-time. Similarly, Sovos, a Swedish company specialized in compliance software, stresses the necessity of implementing continuous transaction controls (CTCs) that should enable tax authorities to collect business’ tax-relevant data directly from the taxpayers in real-time or near real-time. Deloitte, one of the largest accounting firms in the world, also emphasises the importance of real-time reporting (also called Transaction Based Reporting) and stresses that it does not only tackle VAT fraud, but also increases VAT revenue because it reduces the possibilities of “human or technical errors, process flaws, timing differences, bankruptcies etc.”
Summitto shares the opinion that there is a need for the digitalisation of VAT, which can best be achieved through the implementation of real-time reporting. Automated controls on invoices are an important tool that could help Member States in tackling the VAT gap. On the other hand, it can also help businesses in automating their processes. Furthermore, although e-invoicing is not a requirement for the successful implementation of real-time reporting (see Hungary), we believe that it could be an excellent addition to it.
Deloitte underlines the necessity of developing a regulatory framework for privacy and data protection concerning real-time reporting reporting. According to Deloitte’s proposal, real-time reporting obligations should be embedded in a framework that protects the businesses’ interest in confidentiality.
Summitto shares this view and we recommend putting data protection high on the priority list. When sensitive invoice data is exposed, it could hurt companies and even the EU Single Market when it ends up with (foreign) competitors. This valuable information can be protected by making use of hashing, only storing an encrypted fingerprint. This way, the risk of data breaches can be minimised without impacting the auditing tasks of tax authorities.
Several proposals highlight the need for a deeper harmonisation of regulatory legislation in the EU. The Italian business association Confcommercio emphasises how business asymmetries contribute to greater difficulties in the application of regulatory legislations. Therefore, Confcommercio proposes to introduce a standard VAT declaration that could reduce the burden on businesses and improve the functioning of the internal market. This view is shared by Coupa Software by stressing the importance of regrouping on the minimum amount of invoice-data to be used across all EU member states.
Furthermore, the European Confederation of Independent Trade Unions (CESI) proposes to deepen the exchange of best practices between tax administrations in the EU, specifically regarding digital reforms that aim at strengthening efficiency. The need for more coordination between member states is additionally emphasised by Deloitte. Deloitte highlights the importance of undertaking efforts at the EU-level, otherwise the implementation of several different regulations at a national level could result in an unnecessary burden for businesses.
Summitto agrees with the above, as we also see a need for further collaboration between EU Member States concerning the implementation of real-time reporting and e-invoicing. Therefore, we would recommend developing European guidelines for the implementation of real-time reporting. This measure could help in harmonising the already existing reporting systems in the EU and those that will be implemented in the future. This would make it easier for companies operating in multiple countries to adapt to new real-time reporting requirements. Moreover, the reporting of intra-Community transactions in a real-time fashion could encourage other Member States to follow the global trend of implementing real-time reporting systems.
Furthermore, we believe it is essential to also develop a real-time solution for intra-Community transactions to modernise the current VIES system which will also contribute to reducing the VAT gap.
CESI and the Finnish Customs Officials Association (TVML) bring in other relevant proposals that were harder to categorise. They propose to allocate additional funding to the tax authorities. This way, member states could invest in the digital equipment and staff of their tax administrations. It is indeed an investment which will generate high revenues to public finances and pay off multiple times. Additional fundings will allow a more accurate tracking of both national and intra-Community VAT frauds.
Summitto is very pleased to see an outstanding participation in the European Commission’s initiative “Mind the VAT gap”. Each of these proposals could help in tackling the European VAT gap and increasing compliance. We share the need for a common European action to close the VAT gap.
Almost all submissions favour a real-time reporting system to reduce the VAT gap and help digitalise VAT. Together with others, we believe that confidentiality has to be put in the top three list of requirements of such a system. Another requirement is to achieve as much harmonisation as possible with such a system, so that further deviation is limited.
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