Recently we discussed the outcome of the Group of the Future of VAT (GFV) meeting regarding Digital Reporting Requirements (DRR), such as real-time reporting. During the GFV meeting it was concluded that an EU DRR is the most feasible option in order to finally tackle the €134 billion VAT gap. However, several questions posed by the European Commission (EC) were unanswered during the meeting. In the following we will try to address these questions and hope that our view can add to the discussion.
Before we dig into these questions, it’s important to emphasise that there are two types of DRRs. (1) There is a DRR for domestic transactions and (2) there is a DRR for intra-Community transactions. When we speak about EU DRR in the following, we mean both concepts. In case we mean DRR for either domestic or intra-Community transactions, we will mention it specifically.
Should there be a gradual implementation of EU DRR?
One of the issues the EC is concerned with is if “implementation of an EU DRR should follow a gradual approach.” We believe this graduality has two sides: (1) a gradual approach for DRR harmonisation across EU Member States and (2) a gradual approach of implementation regarding taxpayers.
(1) For the first side, we would advise to offer a transitional period regarding the implementation of DRR for intra-Community transactions. EU Member States can use this period to learn best practices from others that have already implemented a solution. Furthermore, it’s essential to offer interoperability, so that EU Member States that have already invested in anti-fraud solutions won’t lose their investment which are in the best interest of the EU. The approach for DRR for domestic transactions is more complex. In an ideal world, these solutions will be harmonised throughout the EU which would mean the lowest friction for companies to comply with VAT reporting obligations. However, in reality the situation is more complicated where EU Member States have their own country specific preferences. Therefore, we would suggest that a DRR template is created which EU Member States could follow when designing their DRR for domestic transactions. This template can lower the cost and risk for EU Member States in implementing a domestic DRR. This template, together with a harmonised DRR for intra-Community transactions can help to converge the EU Member States’ DRRs.
(2) The second side refers to a gradual approach for taxpayers. Looking at previously implemented DRRs all over the world, most countries started making DRR mandatory for larger companies, then to SMEs and lastly to micro companies. France is also planning to implement its DRR in this way. Based on these experiences, we believe that for EU DRR the same graduality should apply. Nonetheless, it has to cover all taxpayers at a certain point otherwise fraud detection is not guaranteed.
Periodic Transaction Controls (PTC) or Continuous Transaction Control (CTC)?
The EC asked the delegates if they prefer “a Periodic Transaction Control (PTC) or a Continuous Transaction Control (CTC)”. PTC refers to VAT listings or SAF-T, while CTC is real-time reporting or e-invoicing according to the EC document. Important to understand is that e-invoicing is not necessarily a CTC as we explained here. E-invoicing is the exchange of computer readable invoices, whereas CTC always involves a reporting aspect to the tax authority. E-invoicing can help to implement real-time reporting in such a way that companies can automate most of their business processes.
We believe the main goals of an EU DRR are fighting fraud and reducing the VAT gap, while making it easy for companies to comply. Real-time reporting (thus a CTC), potentially combined with mandatory e-invoicing, would be the best option to achieve these goals. First, receiving the data in (near) real-time enables the tax authority to act as fast as possible. Second, as more and more countries are moving towards real-time reporting, it would be the easiest way to achieve harmonisation without having to reinvent the wheel. Third, combined with e-invoicing and/or EDI standards real-time reporting can be perfectly integrated with the existing invoice workflow. Minimising the additional administrative burden. With every upside normally there is also a downside, so although the goals of the EU DRR are best met, the burden will be carried by the taxpayers as a mandatory e-Invoicing standard will incur cost to both companies that are already doing some form of e-invoicing (think old EDI implementations) as well as taxpayers using still Word & Excel.
In order to achieve optimal harmonisation and make it as easy as possible for companies to comply, both the DRR for domestic as the DRR for intra-Community transactions should have the same modality.
What should be the frequency of reporting?
The next issue concerns the frequency of reporting. We argue that reporting information once per day would be sufficient in order to tackle fraud. Besides, in this way it can be integrated with existing business processes. For example, many larger companies already perform financial reports multiple times per day. Additionally, reporting can also be integrated with bookkeeping software solutions which enable companies to automate the reporting obligation. Again, for harmonisation purposes it would be most beneficial if the reporting frequency of the DRR for domestic as for intra-Community transactions would be the same. More importantly, the cost with a higher frequency will not be offset by catching more fraudsters. Time periods usually are in the month or rather years at the moment before TA’s spot fraudulent transactions. Bringing this to a weekly or even just monthly timeframe will take the biggest advantage away from fraudsters while still allowing lower costs for businesses.
Which transactions should be covered, B2B, B2G and/or B2C? And what is the role of the customer?
For the question “which transactions should be covered”, it is essential to look where the most fraud occurs. This is in B2B transactions. Therefore, EU DRR should first focus on these transactions. Later this can be extended to B2C by connecting cash registries to the system.
Another practical question relates to the role of the customer. The EC asks the delegates if it should report the acquisition, confirm the data reported by the supplier or accept the e-invoice? We would advise to let the supplier report the transaction and let the customer cross check the reported invoice. For domestic transactions, the monetary value attached to the invoice reporting (read VAT) incentivizes companies to report their data. For intra-Community transactions this incentive can be generated by, for example, letting the supplier ask the customer for permission to report an invoice on its name (similar to the current PO-process). This however should be also treated with care as it will increase the costs for businesses so one has to analyse again if this is truly necessary.
What should be the role of e-invoicing?
E-invoicing is currently quite a hot topic in the EU. Again, it’s essential to understand that e-invoicing in itself is not tackling VAT fraud. Still, the question “in case of e-invoicing, do you prefer clearance or non-clearance” might be relevant in this context.
However, it’s important to understand that clearance does not tackle fraud per se, it helps to make sure that all fields of an invoice are filled in. At the same time, the fields are not checked on correctness, let alone if the right VAT rate is applied. We will analyse clearance and what it means in more detail in a next blog post, but for now we can advise not to go for centralised clearance. This means that we would advise to not put the tax authority in between the supplier and the buyer for checking certain fields of the invoice. The fields of the invoice can be checked by third party service providers, or even better if all EU Member States make use of Peppol, Peppol service providers will perform these checks. Again, it is not essential to tackle fraud (as shown in Hungary), but it can still be considered in order to increase data quality which helps to reduce the general VAT gap.
Is there a role for blockchain?
The EC also specifically asked for the application of blockchain technology. We believe that especially in the case of DRR for intra-Community transactions, blockchain and more specifically modern cryptography might be very valuable. We still see some misconceptions when people speak about blockchain and DRRs. Important to note is that blockchain is nothing but a technological building block in order to make DRRs as secure and business-friendly as possible. It’s not a completely new concept on it’s own.
By making use of modern cryptography EU Member States can share VAT fraud information without sharing all the details of the transactions. This is essential to make the DRR for intra-Community transactions a success as Member States are not willing to exchange every piece of information with each other.
However, this feature is also relevant for domestic transactions as it allows for an optimal protection of valuable taxpayer data. Furthermore, as explained here, it offers additional benefits to companies by allowing them to reuse their VAT data for other purposes.
Always following the paradigm “don’t trust but verify” cryptography allows verification without seeing, which is a concept sometimes hard to understand for non-cryptographers. A simple translation is, one does not need to see all the data to accept it is correct.
We hope that our views regarding the questions posed by the EC can be of added value for the discussion regarding the EU DRR. Our advice in a nutshell:
- Gradually implement EU DRR, make sure to have a transitional period for intra-Community transactions and create a “template” for domestic transactions.
- Go for CTC and in specific real-time reporting, potentially in combination with e-invoicing (e.g. Peppol), but without centralised clearance with a daily frequency.
- First focus on B2B transactions. Afterwards, B2C transactions can also be integrated.
- There is a role for blockchain, especially for the modern cryptography that is used in our solution. This enables EU Member States to share VAT fraud information without having to reveal all the specific invoice details.
This is of course quite generic advice, and should be in some cases adapted to country specific needs. In case you want to discuss this further in depth let us now via: email@example.com