Taxes & Law

EU Commission presents proposal to modernize the VAT system

Fatih-Kağan Taşkoparan

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On 8 December 2022, the European Commission presented a series of measures to modernize the VAT system:

  • Introduction of a single EU-wide VAT registration
  • Switch to digital reporting in real time
  • VAT regulations for passenger transportation platforms and short-term accommodation rental platforms

The proposal "Value added tax in the digital age" is part of a proposed revision of the EU VAT Directive. It represents the preliminary culmination of efforts undertaken since January 2022 to simplify compliance and reduce VAT losses. "VAT is one of the most important sources of income for our Member States," said Economic Affairs Commissioner Paolo Gentiloni at the presentation of the legislative proposals.

Member States lost EUR 93 billion in VAT revenue in 2020. This is shown by the current figures on the VAT gap. A quarter of the missing revenue is directly attributable to VAT fraud in connection with trade within the EU. The reform is now intended to change this. The measures concern the treatment of the platform economy, VAT reporting obligations and electronic invoicing as well as the uniform EU VAT registration.

Understanding and promoting digitalization as an opportunity

VAT regulations in the EU still involve a great deal of effort for companies. This applies in particular to small and medium-sized enterprises and those that operate across borders or want to expand into other countries. For this reason, local registrations for VAT purposes are to be replaced and an EU-wide digital reporting system introduced.

"Single VAT Registration": No more local registrations

In future, companies trading in different EU countries will only have to register for VAT in one country for the entire EU. This will replace the existing One-stop-shop procedure (OSS) and local registrations are no longer required. This should benefit small and medium-sized enterprises in particular, which would otherwise have to pay high administrative costs. The EU Commission estimates that registration and administrative costs of around EUR 8.7 billion will be saved over the next ten years. This new regulatory framework is planned for 01.01.2025.

Digital reporting system in real time

Furthermore, companies should in future report every cross-border commercial transaction in real time via electronic invoices. This is necessary to improve the fight against VAT fraud, in particular to combat intra-Community carousel fraud more effectively. This would give Member States immediate access to data on cross-border transactions within the EU. Carousel fraud is when companies import goods from another member state free of VAT, sell them with VAT and then keep the difference. The switch to a digital reporting system will also ensure the convergence of existing national systems across the EU.

Updated VAT regulations for online platforms for renting apartments 

Online platforms for renting apartments, such as Airbnb or Booking, will be obliged to collect and pay VAT to the tax authorities in future if the accommodation provider has not done so. This is the case, for example, if the accommodation providers are small businesses and are therefore not required to file a VAT return. The Commission expects this to generate additional tax revenue of 6.6 billion euros per year.

"A new era for the VAT system in the EU"

The reforms represent the most comprehensive modernization of VAT in Europe since the establishment of the single market at the beginning of 1993. "Today's proposals herald a new era for the EU's VAT system," emphasized Gentiloni. The next step is for the Council of the European Union and the EU Parliament to deal with the measures in the usual legislative procedure.