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The future of EU VAT: analysis of the latest GFV meeting

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Introduction

With an increasing number of EU Member States considering the implementation of real-time reporting, the European Commission is doing everything they can to harmonise this process as much as possible. Discussions between Member States and the EC are ongoing and a recently published summary of the meeting of the Group of the Future of VAT (GFV) in November provides a clear overview of the options that are now on the table. Additionally, it shows what questions regarding the topic still remain. In this blog we analyse the outcome of the meeting, while in a next blog post we will answer all the remaining questions the European Commission posed during the session. So let’s first see what was discussed!

The status quo: a diverging DRR landscape

The GFV (which consists of representatives of national tax authorities) meeting discussed the upcoming report “VAT in the Digital Age”.[1] One of the central topics was Digital Reporting Requirements (DRR). It is yet another abbreviation which refers to (1) various types of reporting requirements (e.g. SAF-T and real-time reporting) and (2) mandatory e-invoicing. Although e-invoicing should indeed be part of the discussion, it’s remarkable that mandatory e-invoicing is included into the definition of DRR as it is not a reporting obligation per se. E-invoicing is only the exchange of invoice information between companies in a computer readable way, as we have explained here.

During the meeting, two main problems of the present DRR situation were adequately identified. Namely, (1) it’s becoming harder and harder for companies to comply with VAT reporting obligations due to the wide variety of DRR models implemented in Member States and (2) this non-harmonised, partial implementation of DRR does not effectively tackle VAT fraud.

Analysis of the proposed solutions

There are several different policy options on the table to address these problems:

  • Option 1: Maintain the status quo;
  • Option 2: Provide an official Recommendation for the implementation of domestic DRR and remove the derogation for B2B e-invoicing by a notification;
  • Option 3: No DRR is imposed, but taxpayers are obligated to store transactional data for themselves in a “pre-determined format”;
  • Option 4: The introduction of an EU DRR. This is divided into two options which will be discussed below.

It is clear that option 1 and option 3 are the least feasible options. First of all, maintaining the status quo will make it even more difficult for companies to comply, which will weaken the EU Single Market. Second, option 3 will not solve VAT fraud and will only be an additional burden for taxpayers. It might make the auditing process easier for tax authorities, but the detection time will not be improved. And as is well-known, time is of the essence if you want to tackle VAT fraud. Option 2 looks somewhat more appealing. The creation of a non-binding Commission Recommendation for the implementation of DRR, might help to steer Member States towards harmonisation (to a certain extent). However, it’s still only a recommendation and the removal of the derogation might actually result in an accelerated de-harmonisation.

Option 4 (the introduction of an EU DRR) seems to be the most feasible when looking at the problems that need to be resolved: harmonise DRR systems in the EU and tackle VAT fraud in the most effective way. Option 4 is divided into option 4a and option 4b. Option 4a is a partial harmonisation which means the introduction of an EU DRR for intra-Community transactions, while DRRs for domestic transactions remain optional. However, countries that want to introduce a domestic DRR system should conform to the system used for intra-EU transactions. Furthermore, in the medium-term countries that already have a national DRR in place should converge to the EU system. Option 4b is full harmonisation, for both domestic and intra-Community transactions. There is again a transition phase for Member States that already have a DRR for domestic transactions implemented.

Outcome

Member States seem to agree with the above analysis as “the preferred option was the implementation of an EU DRR”. Still, Member States have a lot of questions and have not decided yet if it is option 4a or 4b that they prefer.

As all Member States have their own specific needs for a DRR system for domestic transactions, it’s hardly possible to come to a EU wide harmonised solution. This harmonisation was already not possible to achieve for VAT returns[2], so to go towards one EU DRR for domestic transactions seems, unfortunately, not a realistic option. Furthermore, some Member States already made enormous investments in well-functioning DRR models. The responses of some of the participants of the GFV meeting show a similar sentiment as they asked: “for a cautious and gradual approach”. Therefore, in our view, option 4a looks like a solution that is realistic, while at the same time it can really tackle the problems listed above. Furthermore, the implementation of DRR for intra-Community transactions can help to steer Member States that did not implement any DRR towards the right direction.

Participants also stated that the chosen option should be future-proof. “Most participants were of the view that an e-invoicing system is the more future-proof option”. We tend to agree with this statement, but it’s very important to define what is meant with e-invoicing. Does it mean the acceptance of 1-single e-invoicing standard, or the acceptance of several computer readable invoicing standards (e-invoicing, EDI etc.). The latter seems the best solution according to us as many companies already invested heavily in their invoicing set-up. Therefore, summitto’s real-time reporting solution can accept any standard, making it ready for any futuristic situation.

Another aspect discussed is data confidentiality. It is said that “data confidentiality is […] of utmost importance”. If this is not the first summitto blog post you read, you are aware that our solution uniquely addresses this concern as our solution does not store any invoice data in the first place (you can read more about it here and here), while at the same time fraud can be tackled. Additionally, it is stated that taxpayers will bear a significant part of the cost of such a EU DRR system. Therefore it is necessary to investigate how to provide additional services to taxpayers. These additional services can come in the form of e.g. pre-filled VAT returns and abolishing the recapitulative statement. Summitto can offer an unique additional advantage for businesses. Namely, with our solution companies will be able to reuse the data they report, for example they can automate audits or mathematically prove to their investors how much revenue they generated (learn more here).

Conclusion

In the above we gave an overview of the discussions regarding real-time reporting (or DRR) that took place within the GFV. The option to implement an EU DRR seems the most feasible option (option 4). More specifically, the option to start with a DRR for intra-Community transactions (option 4a) looks like the most realistic solution, while at the same time the problems of de-harmonisation and VAT fraud can be solved. Furthermore, we showed that our technology addresses all concerns raised during the meeting.

Still, the European Commission has many questions regarding the exact implementation of an EU DRR. Some of these questions we answered already in this blog post. Others we will discuss in a second blog post. Some examples of the questions that still need to be answered:

  • Do you prefer that the system implemented is a Periodic Transaction Control (PTC) or a Continuous Transaction Control (CTC)?
  • What modality of PTC (VAT listings or SAF-T) or CTC (real-time reporting or e-invoicing) do you prefer?
  • What transactions should be covered by the DRR? B2B, B2G and B2C?

These and many other questions will be answered in a next blog post, so stay tuned!

For questions, shoot us a message at info@summitto.com

[1] This will be published in January and, of course, you will be able to read an analysis of the report later on this blog!

[2] https://blog.summitto.com/posts/vat_talks_paul_gisby/