We are honoured that VAT expert Aleksandra Bal wanted to join us on this episode of VAT Talks. Aleksandra has years of experience in both the field of taxation and technology. Besides being fluent in multiple programming languages, she holds a PhD in International Taxation as well as other degrees. Luckily for us, she loves to share her knowledge! In the following Aleksandra first explains what she finds so interesting about VAT and that by now “technology is indispensable for the operation of any VAT system”, because it’s almost not possible to comply without using it. On the other hand, she warns that technology is not the panacea for all problems and that fundamental legislative problems should not be overlooked. Afterwards, we speak about the difference between real-time reporting and e-invoicing. She states that “those two concepts are fundamentally different”.
Closely related to that topic, Aleksandra explains why she is an advocate of an independent evaluation of the so-called Italian-model (where real-time reporting and e-invoicing is combined). Lastly, we discuss upcoming real-time reporting regimes, real-time reporting for intra-Community transactions, the difficulties of creating a harmonised EU real-time reporting system and why “untangling VAT complexity” is “a worthwhile project”.
Could you tell a bit more about your personal and professional background?
“I am originally from Poland, but I have been living in the Netherlands for over ten years. My entire professional career has been about building digital tax products, tax solutions. Previously, I worked at Vertex as a senior product manager. I was responsible for the strategy direction of Vertex’s indirect tax products. Recently, I started as an indirect tax technology & operations lead at Stripe.”
Considering your experience in this field, what makes VAT so interesting to you?
“VAT is interesting for me because everyone is confronted with VAT. It is like a tax that affects everyone. Consumers have to pay it while businesses have to remit it to the tax authority and have to comply with VAT obligations. At the same time, the state needs it to finance public spending.”
“Another interesting aspect is that VAT started as a simple tax, with the main goal to raise revenues. However, over time, it became very complex. Sometimes, it takes more time to comply with VAT than to comply with corporate income tax obligations.”
How can technology help to make this process easier and more efficient?
“VAT systems nowadays rely on technology. So, technology is indispensable for the operation of any VAT system. In fact, it is no longer possible to comply manually. In some counties, for example in the United Kingdom fostered by their Making Tax Digital programme, you cannot file VAT returns if you do not make use of an approved third-party VAT software. In other words, you need technology. Nevertheless, we should not forget that technology is not a cure for everything. The EU VAT system is very inefficient and prone to fraud because of its design, so we have to focus on those problems as well.”
One solution is real-time reporting, already implemented in Italy combined with e-invoicing but there are also other ways to implement it. These different ways of implementation can be quite confusing; How would you separate e-invoicing and real-time reporting to help people understand that real-time reporting and e-invoicing are two distinct concepts?
“Those two concepts are fundamentally different. On the one hand, we have reporting, which is about providing tax administrations with data on business activities, and on the other hand we have e-invoicing, which refers to the exchange of invoices in a computer-readable format such as XML. However, when people use the term ‘mandatory e-invoicing’, they often mean invoice clearance. In such a model, you send your invoice to the tax authority which has to approve it before forwarding it to the customer. The invoice clearance model is part of the order to cash process, it is part of the actual transaction whereas reporting is really about providing data to the tax authority which happens after your transaction. So you perform your transaction and at a certain point, it can be every day, every week or every month you transfer this data to the tax authority.”
“For me only implementing real-time reporting, without e-invoicing, could be just a burden, a cost for businesses because they have to provide the tax authority with their data but they do not get any benefit from it, whereas e-invoicing can provide many benefits, for example reducing costs and facility automation, improving account conciliation and preventing errors. Combining e-invoicing with real-time reporting is therefore more beneficial than implementing real-time reporting on its own.”
Do you want to add anything to a good definition of real-time reporting?
“Real-time reporting is just about providing data to the tax authority and is not about the order-to-cash-process. It does not affect the existence of your transaction. In invoice-clearance systems, for example in the Italian one, you have to submit your invoice to the tax authority and if your invoice is not approved there is no invoice, there is no valid transaction. That’s the difference.”
Are you aware of how the upcoming Polish real-time reporting system will look like? Will it be similar to the Italian model?
“We do not know too much yet about the invoice clearance model that will be implemented in Poland. Most likely, Poland will follow Italy because the government stated that they are looking at the Italian example. However, we cannot be 100% sure. Structured e-invoicing will become voluntary in Poland in October this year. There are plans to make it mandatory in 2023 but there is no draft law on that yet. That’s why we still do not know what it will look like.”
From the business perspective, what are the practical adjustments companies have to make to the ERP system to comply with e-invoicing and real-time reporting?
“Both real-time reporting and invoice clearance are new ways of VAT compliance. So, of course you have to adapt your system. The most important thing is to be sure that your data is correct and complete. You will be sending your data in real-time to the tax authority, so there is no time for post transaction verification. You cannot take a look at your data at the end of the month and make some adjustments. This actually makes tax data even more important than it already is. There is this famous principle “Garbage in, garbage out”. If your data is incorrect, your return will never be correct. So you have to be sure that you have correct and complete data. Furthermore, you have to transmit it in the correct format.”
“Regarding the adjustments, it may happen that companies are required to provide data that is not present in the ERP system, for example, the tax administration may require to tag certain transactions with certain codes. This data is not in the ERP system, so businesses have to adapt their ERP system. Additionally, you have of course the normal tax technology project considerations, you have to determine whether you want to buy or build your solution. You have all the communication challenges, because not only the tax department is involved, but you also have to talk to the IT department, the finance department and many other stake-holders.”
Do you already hear concerns coming from e.g. the Polish business community concerning the adjustments they have to make in the near future?
“In Poland structured e-invoicing will first be voluntary, so there are no complaints yet. However, businesses started mentioning that anyone in Europe can at this point issue an e-invoice. In other words, businesses can decide themselves if they want to issue an invoice electronically or on paper. However, in an invoice clearance model, the government prescribes the requirements for the invoice format. Thus, businesses argue that they are already making use of e-invoicing and wonder why someone needs to tell them to apply a particular format. They do not see any benefit to it. They would like to keep on using the existing processes and not be forced to adapt their invoice to a particular format.”
It seems that everyone is looking to Italy when they are making a decision about real-time reporting. We have discussed Poland already, but also in Germany they talk about the Italian model. You have been advocating for an independent investigation into how that model works before other countries copy the Italian model. What should this investigation look like?
“Italy has been the first country in Europe to implement the invoice clearance model. In order to implement something like that, you need to get permission from the European Commission because this is a deviation from the VAT directive which says that electronic invoicing is allowed but should not be made mandatory. If you want to make it mandatory, you need a derogation. Italy got this derogation for three years and at the end of this period Italy will have to present an evaluation of the system to get an extension on the derogation. At this point, I am sure the extension will be granted.”
“Still, as Italy implemented invoice clearance to reduce the level of VAT fraud, it is reasonable to evaluate if it really works. What is needed is a cost-benefit analysis: what is the amount of additional VAT revenue generated? What are the compliance costs for businesses? The latter would not only include the cost of software adjustments, but also the indirect costs like making changes to your process and training your staff.”
“Another aspect that is worth investigating is that in the Italian solution there is a central government platform for the exchange of e-invoices. You have to send your invoice to the government platform and then they send it to your customer. It would be interesting to know if it is not more beneficial to work with services providers, so that businesses do not have to send everything to a central point but to a service provider which will extract your data and send it to the tax authority. This way, there would be no single point of failure.”
You just mentioned France, do you think that France will also be able to get the necessary derogation from the European Commission?
“That depends on the decision of the European Commission. Fact is that France is losing a lot of VAT revenues. In absolute terms, France has one of the largest VAT gaps in the EU. In the EU there is an obligation to reduce the VAT gap, but the design of the measures taken are also important. For example, anyone should be able to comply with these measures by e.g. by creating a government portal where you can issue your invoices, there should be no excessive costs for SMEs. Furthermore, there should be a reliable infrastructure and it should be business friendly. The European Commission takes all those aspects into consideration when making the decision.”
Could you make a prediction of how long it will take for all countries in Europe to make use of real-time reporting? And what would be the next country that will put it on the political agenda?
“The invoice clearance model is now mandatory in Italy. France and Poland are planning to implement it from 2023. Slovakia also started thinking about it with a public consultation. Some discussions have begun at the German parliament, but these are just discussions. A very difficult aspect of this trend is that everything occurs at a country level. Every country is doing something different and there is no harmonisation. The European Commission wants to review VAT compliance obligations in the EU and maybe also a new legislation to modernise VAT compliance will be proposed. The most difficult part is that to enact a new VAT legislation at the EU level unanimity is required, all countries have to agree. We already see that countries have or consider different models: for example the French model will be different from the Italian one.”
As you said, the European Commission is currently preparing a legislative proposal for the modernisation of VAT reporting, what would be your advice to the European Commission regarding this project?
“Of course, everyone would benefit from simplified VAT reporting. All businesses would be very happy to comply with only one single set of requirements. However, I think that the European Commission should also focus on improving the existing VAT system, especially the system for intra-EU trade. We cannot have an inefficient system and fix the problems at the level of VAT reporting. We should have a good system and an efficient, business-friendly way for VAT compliance. This is an ideal situation.”
Could you give the readers a quick overview of how this works?
“The current system for intra-EU trade is very prone to fraud. We have two transactions when you sell goods to customers in other member states (intra-community acquisition and supply). This is very inefficient. I would just change the entire system of intra-EU trade. The European Commission is working on some proposals that could improve the VAT system for intra-EU trade like single registration so that you do not have to register in all countries. That would also be an improvement. We should just not solve the problems of intra EU trade at the level of reporting but we also need to look at the design of the system and we have to fix it.”
What would you say to the readers to make them more enthusiastic about VAT?
“Although I can’t make everyone enthusiastic because some people think that taxes are boring, I will give it a try. In the EU we have 35 million unpaid tax collectors. Businesses are unpaid tax collectors. They have to meet the burdens of compliance obligations so that the government can have the money. Untangling VAT complexity and helping them seems to be a worthwhile project.”
We would like to thank Aleksandra again for her time and for giving her perspective on VAT. The opinions expressed in this article are personal. If you have any questions, suggestions or if you want to be our next interviewee, do not hesitate to contact us via firstname.lastname@example.org