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Why the EU’s VAT in the Digital Age Project matters

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Published: 26 Jan 2022 Update History

Stephen Dale, chair of ICAEW Tax Faculty’s VAT and Duties Committee, explains the significance of the EU Commission’s public consultation on the VAT in the Digital Age Project covering e-invoicing, VAT rules for the platform economy and a single EU VAT registration.

In its Action Plan for Fair and Simple taxation, the EU Commission announced a legislative package, including the VAT in the Digital Age Project, for 2022. This package, if adopted, will have a major impact on any business operating with and within the EU.

The significant scale of VAT revenue losses currently seen in the EU is not sustainable. These losses, which have been most recently estimated at some €134bn per year, are clearly one of the main drivers behind this project. MTIC fraud alone represents a loss of around €40-60bn per year.

To tackle these significant revenue losses, the Commission has put forward the Action Plan on the VAT in the Digital Age Project, which consists of three pillars:

  1. The modernisation of VAT reporting obligations and the facilitation of e-invoicing;
  2. Updating the VAT rules for the platform economy; and
  3. Moving to a single VAT registration in the EU (rather than potentially 27) and reviewing the need to make improvements to the Import One Stop Shop regime, introduced on 1 July 2021.

The Commission intends to come forward with legislative proposals on all three pillars – which are clearly interrelated – by the second half of this year (2022).

To help formulate the policy options, the Commission, in its Public Consultation on the VAT in the Digital Age Project, invites all stakeholders, whether established within the EU or not, to comment on the issues encountered with existing EU VAT rules. The feedback from this Public Consultation, the VAT in the Digital Age Project detailed report, and the impact assessment will lead to a number of Commission’ proposals that must be adopted unanimously by all 27 Member States under article 113 of the Treaty on the Functioning of the EU.

One of the issues currently encountered by Member States is the need to request a derogation from the VAT Directive (2006/112/EC) to be able to adopt mandatory e-invoicing, which is covered in Pillar 1. We are also seeing a significant level of uncoordinated growth in reporting obligations across the EU. This creates substantial new compliance burdens for businesses operating in multiple Member States and increases the risk of fragmentation. This clearly hinders the operations of businesses trading within and with the EU’s Single Market. The Commission will come forward with proposals in this area.

The questions raised in the Consultation are very wide ranging. In Pillar 2 (Platform economy) for example, the Commission asks whether the definition of ‘VAT taxable person’ should be amended or updated to reflect the digitalised economy of the 21st century. This is an important issue for operators in e-commerce sectors.

Pillar 3 deals with the single place of VAT registration and the IOSS. In relation to the latter, the Commission is requesting feedback on the operation of the IOSS. At the same time, it is requesting comments on the policy options under consideration, (eg, making the IOSS compulsory). If a UK business sells goods of an intrinsic value not exceeding €150, would making the IOSS compulsory (currently with a requirement to appoint an intermediary established within the EU) prevent that business from selling into the EU?

Responses and comments are requested by the Commission by 15 April 2022. The Tax Faculty will be responding. If you have any comments to include in ICAEW’s response, please contact Neil Gaskell by 14 March 2022.

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