EUROPEAN COMMISSION

Brussels, 8.12.2022

SWD(2022) 393 final

COMMISSION STAFF WORKING DOCUMENT

IMPACT ASSESSMENT REPORT

Accompanying the documents

Proposal for a COUNCIL DIRECTIVE amending Directive 2006/112/EC as regards VAT rules for the digital age




Proposal for a COUNCIL REGULATION amending Regulation (EU) No 904/2010 as regards the VAT administrative cooperation arrangements needed for the digital age




Proposal for a COUNCIL IMPLEMENTING REGULATION amending Implementing Regulation (EU) No 282/2011 as regards information requirements for certain VAT schemes

{COM(2022) 701 final} - {COM(2022) 703 final} - {COM(2022) 704 final} - {SEC(2022) 433 final} - {SWD(2022) 394 final}

Table of contents

1.    Introduction: Political and legal context    

2.    Problem definition    

2.1.    What are the problems?    

2.2.    What are the problem drivers?    

2.3.    How likely is the problem to persist?    

3.    Why should the EU act?    

3.1.    Legal basis    

3.2.    Subsidiarity: Necessity of EU action    

3.3.    Subsidiarity: Added value of EU action    

4.    Objectives: What is to be achieved?    

4.1.    General objectives    

4.2.    Specific objectives    

5.    What are the available policy options?    

5.1.    What is the baseline from which options are assessed?    

5.2.    Description of the policy options    

5.3.    Options discarded at an early stage    

6.    What are the impacts of the policy options?    

6.1.    Description of impacts    

6.2.    Impacts by VAT area    

6.2.1.    Impacts on SMEs of the digital reporting (SME test)    

6.2.2.    Impacts on SMEs of the platform economy    

6.2.3.    Impacts on SMEs of the VAT registration    

6.3.    Stakeholders’ views on the options    

6.4.    Policy intervention – gradual approach    

7.    How do the options compare?    

7.1.    Evaluation criteria and the gradual approach    

7.2.    Policy comparison    

8.    Preferred option(s)    

8.1.    REFIT (simplification and improved efficiency)    

9.    How will actual impacts be monitored and evaluated?    

9.1.    Monitoring structures    

9.2.    Evaluation    

10.    Figures and Tables Overview    

11.    Annex 1: Procedural information    

11.1.    Lead DG, Decide Planning/CWP references    

11.1.1.    Organisation and timing    

11.1.2.    Consultation of the RSB    

11.1.3.    Evidence, sources and quality    

12.    Annex 2: Stakeholder consultation (Synopsis report)    

12.1.    Targeted consultation    

12.2.    Call for Evidence    

12.3.    Public consultation    

12.3.1.    Overview    

12.3.2.    About the respondents    

12.3.3.    VAT reporting (Digital Reporting Requirements)    

12.3.4.    VAT treatment of the Platform economy    

12.3.5.    VAT registration    

13.    Annex 3: Who is affected and how?    

13.1.    Practical implications of the initiative    

13.1.1.    Businesses (taxpayers)    

13.1.2.    Member States    

13.1.3.    Citizens    

13.2.    Summary of costs and benefits    

13.3.    Relevant sustainable development goals    

14.    Annex 4: Analytical methods    

14.1.    Econometric Model (estimate the DRR impact on VAT compliance)    

14.2.    Net impacts on businesses’ administrative burdens by category and type of firm (Table 12)    

14.3.    VAT liability simulation model    

14.4.    Standard Cost Model (SCM)    

14.5.    Comparative analysis    

14.6.    Qualitative assessment of legal certainty and other regulatory costs    

14.7.    Methodology to assess the revenue shift in platform economy    

14.8.    Parameters, assumptions and calculations    

15.    Annex 5: other initiatives    

16.    Annex 6: e-commerce evaluation    

16.1.    Introduction    

16.2.    What was the expected outcome of the intervention?    

16.2.1.    Description of the intervention and its objectives    

16.2.2.    Point(s) of comparison    

16.3.    How has the situation evolved over the evaluation period?    

16.3.1.    Implementation    

16.3.2.    Growth and evolution of e-commerce    

16.3.3.    Actions taken    

16.3.4.    Identified issues    

16.4.    Evaluation findings (analytical part)    

16.4.1.    To what extent was the intervention successful and why?    

16.4.2.    How did the EU intervention make a difference?    

16.4.3.    Is the intervention still relevant?    

16.5.    What are the conclusions?    

Glossary of acronyms

Glossary of Terms

Chain transactions

This is the situation in which successive supplies of the same goods are made between different businesses, with the goods being transported from the first supplier to the final customer.

Deemed supplier

Whereas in most transactions it is the supplier of the goods or services who accounts for the VAT due on the transaction, in certain cases another person can be deemed to have received and supplied those goods or services themselves, and they would therefore be liable to account for the VAT on the sales. Under the deemed supplier regime option proposed in the ‘VAT Treatment of the Platform Economy’ element of the initiative, where the underlying supplier using a platform does not charge VAT (because they are a natural person, for example, or a taxable person using the SME scheme) the platform would account for the VAT in their place. This means that the underlying supplier would not be required to register and account for the VAT themselves.

Digital platform

For the purposes of this exercise, the definition of a digital platform is taken from the ‘VAT in the Digital Age’ supporting study 1 and is as follows:

‘Platform economy’ is the term used to describe a multi-sided model of transactions, where there are three or more parties involved. In these transactions, the role of the ‘online/digital platform’ is to facilitate the connection between two or more distinct but interdependent sets of users (whether firms or individuals, whether carrying out an economic activity or not) who interact via electronic means. In these interactions, one of the parties to the platform offers access to or transfers assets, resources, time and/or skills, goods and/or services to the other party, in return for monetary consideration or, in certain cases, by barter/non-monetary exchanges. In most of these cases, these users could be named as ‘providers’ and ‘consumers’, respectively. A platform usually charges a fee for the facilitation of the transaction.’ 2  

It should be noted that the ‘VAT treatment of the platform economy’ element of this package only relates to the supply of services via a platform. Supplies of goods via platforms have their own set of e-commerce rules.

E-invoicing

‘Electronic invoice’ means an invoice that has been issued, transmitted and received in a structured electronic format which allows for its automatic and electronic processing.

Union One-Stop-Shop (Union OSS) and Import-One-Stop-Shop (IOSS)

The Union One Stop-Shop (OSS) is an optional simplification measure that traders established in the EU can use to declare and pay the VAT due on all their cross-border supplies of services to non-taxable persons taking place in the EU, as well as all their intra-Community distance sales of goods 3 . Exceptionally, Electronic Interfaces (EIs) who become the ‘deemed’ supplier for certain supplies of goods within the EU can also declare certain domestic supplies of goods in the Union OSS. Traders that opt to use this simplification do not need to register for VAT in each Member State in which their eligible supplies of goods and services to consumers take place. Instead, the VAT due on those supplies is declared via a single quarterly electronic VAT OSS return, followed by a single quarterly payment, which are submitted to their Member State of identification.

The Import One Stop-Shop (IOSS) is an optional simplification used for the declaration and payment of VAT due on distance sales of low value goods imported into the EU with an intrinsic value not exceeding EUR 150, excluding excisable goods. Where a trader registers to use IOSS, their supplies of eligible goods are effectively taxed at the time of purchase. Consequently, these low value goods are exempt from import VAT upon importation into the EU. The VAT due on eligible supplies of low value imported goods can be declared via a single monthly electronic IOSS VAT return, accompanied by a single payment to the Member State of identification. Suppliers and electronic interfaces who are not established in the EU need to appoint an intermediary to be able to use the import scheme, unless they are established in a third country with which the EU has concluded a VAT mutual assistance agreement which is similar in scope to EU legal acts in that area.

Place of supply

The place of supply is the Member State in which the VAT is due. Under that general rules, the place of supply of goods is where those goods are located at the time of the supply, or if they are transported, where the goods are located when the transport begins. For services, the place of supply is the Member State of the customer for B2B supplies, and the supplier for B2C supplies. However, there are a number of exceptions to these rules, for example relating to services connected to immoveable property (where the place of supply is where the property is located), and electronically supplied services (where the recipient is established in both B2B and B2C cases).

Recapitulative statement

When a business sells goods or services to a business in another Member State, it is obliged to submit a recapitulative statement to its Member State detailing the business to whom it has made the supply, and the total amount of supplies to that business. This information is submitted monthly, although Member States may allow for quarterly submission where the value of supplies does not exceed EUR 50,000 per quarter. The information is shared between Member States, and is used to help ensure compliance (for example, Member States can check whether the business acquiring the goods or services has made a domestic supply in their own Member State).

Reverse charge

When a business makes certain supplies of services or goods to a business in another Member State and the place of supply is the Member State of the customer, that business would be required to register in the Member State of the customer in order the account for the VAT. In order to avoid this, the business can use the reverse charge. This is a system by which the supplier does not account for the VAT on its invoice, and instead the customer accounts for the VAT in its VAT return. The supplier should clearly indicate on its invoice that the reverse charge applies.

SAF-T

A SAF-T is a file containing reliable accounting data exportable from an original accounting system, for a specific time period and easily readable by virtue of its standardisation of layout and format that can be used by revenue authority staff for compliance checking purposes. One of its possible uses is the reporting of transaction data.

SME scheme

VAT is, in essence, applied to every taxable transaction by a taxable person. This means that small and micro enterprises should account for VAT on every transaction. However, due to the historical difficulties of a) ensuring compliance on these small businesses, and b) the relatively high administrative burdens VAT registration would impose on these businesses, the VAT Directive 4 contains an optional SME scheme, where Member States allow for small businesses to eschew some or all of the burdens imposed on a business. In practice, this means that, where the SME scheme applies, businesses are not required to account for VAT on their sales, but neither can they deduct VAT on their purchases. The eligibility of a business to use a SME scheme is based on their annual turnover, with thresholds differing across Member States, ranging from EUR 5,000 to EUR 88,500 5 .

Value Added Tax (VAT) and VAT system

The Value Added Tax (VAT) is a general tax on consumption. The term ‘general’ refers to the fact that the tax is paid on most goods and services, with relatively few exceptions (e.g. medical treatment, teaching). Purchasers pay a percentage-based tax on what they buy, based on the value and the nature of the product. VAT is collected fractionally by businesses who pay it on to the government. The term ‘fractional’ refers to the fact that each business only pays for the added value on its turnover, i.e. the difference between its sales (output) and purchases (inputs). In practice this is done by charging VAT fully on each sale but granting businesses the right to recover (deduct) the VAT they themselves paid on their purchases. An exception to that rule is that businesses whose sales are lower than a certain threshold are allowed to stay out the system and not pay VAT; however, if they do so they are not entitled to any reimbursement of the VAT (SME scheme). This exemption system has the advantage of sparing micro-enterprises from red tape but can create some distortions.

The VAT Directive is the main piece of EU VAT legislation. Recitals 4 and 5 of this Directive provide:

“A VAT system achieves the highest degree of simplicity and of neutrality when the tax is levied in as general a manner as possible and when its scope covers all stages of production and distribution, as well as the supply of services. (…) It is therefore necessary to achieve such harmonisation of legislation on turnover taxes by means of a system of value added tax (VAT), such as will eliminate, as far as possible, factors which may distort conditions of competition, whether at national or Community level”.

In brief: in order to work as intended, the VAT rules need to be harmonised and applied uniformly by the Member States. 

1.Introduction: Political and legal context

VAT is a major source of revenue 6 for Member States’ budgets, representing approximately 7% of gross domestic product (GDP). In 2019, the VAT revenue for the 27 Member States (EU-27) amounted to over one trillion euro. Moreover, VAT revenues contribute to the EU budget, since 0.3 percent of VAT collected at domestic level is transferred to the EU as own resources, representing 12% of the total EU budget.

However, the VAT system has not kept pace with the digitalisation of the economy, which poses new challenges to tax authorities and the VAT system due to, for example, the emergence of new business models and the increasing amount of data with which tax authorities need to deal. Nevertheless, digitalisation also creates opportunities, providing new digital tools and solutions to help tax authorities cope with their tasks while allowing for the simplification of tax compliance and reducing its costs. This initiative thus seeks to adapt the EU VAT framework to the digital era, in line with one of the six top priorities of the Commission 7 , “A Europe fit for the digital age”.

The Commission announced this initiative as part of its Action Plan for fair and simple taxation supporting the recovery (hereafter “Tax Action Plan”) 8  and is included in the 2022 Commission work programme 9 . The objectives of this initiative, as indicated in several actions of the Tax Action Plan, are as follows:

-Modernising VAT reporting obligations 10 (Action A4),

-Addressing the challenges of the platform economy 11 (Action A23), and

-Avoiding the need for multiple VAT registrations in the EU and improving the functioning of the tool implemented to declare and pay the VAT due for distance sales of goods imported from outside the EU 12 (Actions A1 and A5).

Following the announcement of the Commission’s Tax Action Plan, the Council stated that it “supports the Commission’s suggestion to clarify, simplify and modernise the EU VAT rules”, “welcomes the initiative announced by the Commission to modernise reporting obligations for cross-border transactions (…) and the Commission’s intention to examine the need to adapt the VAT framework to the platform economy” 13 . The European Parliament resolutions generally support initiatives to fight VAT fraud 14 . Further, the Parliament mentioned its explicit support for the initiative in that it “looks forward to the legislative proposal for modernising VAT reporting obligations” 15 . More recently, the European Parliament adopted a resolution 16 noting the potential of data and digital tools to reduce red tape and simplify various taxpayer obligations, in particular in the area of VAT returns and recapitulative statements, (…) and welcoming the Commission's proposal to modernise, simplify and harmonise VAT requirements, using transaction-based real-time reporting and e-invoicing. Moreover, the resolution underlines that the diversity of the Member States’ tax regulations constitutes a cumbersome challenge and, while endorsing the Union One Stop Shop (OSS), asks to broaden its scope to encompass a wider range of services.

By exploiting digital technologies, the current initiative offers a huge potential in the fight against VAT fraud, in particular missing trader intra-Community (MTIC) fraud 17 , estimated in the range of EUR 40-60 billion 18 , which is a significant part of the ‘VAT Gap’, which itself was recently estimated at EUR 134 billion in the VAT Gap Study. 19  In the same study, the underlying reasons for the VAT Gap were grouped into four broad categories that include (i) VAT fraud and VAT evasion, (ii) VAT avoidance practices and optimisation, (iii) bankruptcies and financial insolvencies and (iv) administrative errors. Since VAT fraud is part of the VAT gap, even if the exact size of the VAT fraud is difficult to measure, the VAT gap still offers a useful and unique EU-wide indicator of the fraud. MTIC fraud is linked to the way cross-border EU transactions are taxed under the current VAT regime 20 , which dates from 1993 and was intended to be a transitional system. While several Member States have made significant technological investments to improve risk assessment and tax control processes, the possibilities offered by new technologies have not yet been reflected in the VAT Directive, whose mechanism to report intra-Community transactions, the recapitulative statements 21 , is outdated compared to the digital reporting systems implemented by Member States.

The Commission tabled in 2018 a proposal 22  for a definitive VAT system for the taxation of trade between Member States, which is still under discussion in Council. This proposal aimed to replace the transitional system referred above by treating intra-Community transactions in the same way as domestic ones. VAT would be due in the Member State of destination of the goods 23  at the rate of that Member State but would be charged and collected by the supplier in its own Member State 24 . The VAT in the Digital Age initiative has the potential to strengthen both the current and the definitive VAT system. 

In addition, over recent years, issues relating to the taxation of the digital economy have become the subject of discussions regarding possible changes to fiscal policies 25 . The growing importance of the platform economy in the collection of VAT was recognised, notably the potential for digital platforms to significantly enhance the effectiveness of VAT collection given their role in generating or facilitating online sales 26 . This is particularly relevant considering the large number of natural persons and small businesses who operate on these platforms, many of whom are unaware of their potential VAT obligations. 

The VAT in the Digital Age initiative runs alongside further Commission initiatives relating to the Digital Economy 27 , such as the recently adopted Digital Services Act 28 , the recent proposal for a Directive to improve working conditions in platform work 29 , or the ongoing work relating to Short Term Rental 30 . Under these initiatives the general direction of travel is to make platforms more responsible and play a greater role in the regulatory framework.

Furthermore, from 1 July 2021, the VAT rules on cross-border business-to-consumer (B2C) e-commerce activities changed to address challenges arising from the VAT regimes for distance sales of goods and for the importation of low value consignments. Online sellers, including online marketplaces/platforms can register in a single Member State using the One Stop Shop (OSS) for the declaration and payment of VAT on their distance sales of goods and cross-border supplies of services to customers within the EU and the Import One Stop Shop (IOSS) for goods coming from outside of EU 31 . An evaluation of the first six months since the entry into application of these new rules can be found in Annex 6. Improvements to the current schemes will be considered in this initiative. Moreover, an e-commerce study 32 focussing on the import process as well as an evaluation of the Union Customs Code is currently being carried out and could impact on the IOSS extension.

The initiative supports the EU’s sustainable growth strategy 33  that refers to better tax collection, the reduction of tax fraud, avoidance and evasion and the reduction of administrative burdens and compliance costs for business, individuals, and tax administrations. Improvement of the taxation systems to favour more sustainable and fairer economic activity is also included in the EU’s competitive sustainability’s agenda.

2.Problem definition

The causes and consequences of the problems to be tackled by the Commission initiative are summarised in the Problem Tree.

Figure 1 – Problem tree

________________

* i) Some transactions are not covered by the OSS and IOSS schemes and ii) the SME simplification scheme reduces VAT equality and neutrality in the platform economy

2.1.What are the problems?

Two main problems were identified in the supporting study 34 :

1.Sub-optimal VAT collection and control – the EU VAT legislative framework is not fully adapted to deal with the new digital reality and is prone to fraud.

2.Excessive burdens and compliance costs – the digital economy and the development of new business models create new challenges and costs for tax administrations and businesses.

The challenges and potential benefits of digitalisation in terms of control/fight against fraud (related to problem 1) and burden reduction (related to problem 2) are not fully seized. The problems are especially visible in three areas:

§VAT reporting (including digital reporting),

§VAT administration (treatment) of the platform economy, and

§VAT registration.

VAT reporting and digital reporting requirements (DRR)

The VAT Directive ( Directive 2006/112/EC ) 35 , which is the main piece of EU legislation in the field of VAT, dates from the 1970s and, as such, the default reporting requirements are not digital. However, the Directive grants Member States a wide discretion to introduce the obligations they deem necessary to ensure the correct collection of the tax and to prevent evasion.

Taking advantage of this possibility, several Member States have introduced various types of digital reporting requirements (DRR) 36 which have proven successful in increasing tax collection, thanks to both the improvements to tax control and the deterrent effect on non-compliance 37 . Different types of DRRs are currently in place in several Member States: clearance e-invoicing (Italy), real-time reporting (Hungary, Spain), SAF-T reporting (Lithuania, Poland, Portugal), VAT listing (Bulgaria, Croatia, Czechia, Estonia, Latvia, Slovak Republic) – see Box 1 and Annex 4: Analytical methods . In addition, some Member States have requested a derogation to introduce obligatory e-invoicing (France, Romania, Poland) or announced upcoming reporting requirements (Greece), while mentioning in the targeted consultation that they prefer to wait for an EU solution before introducing a unilateral solution. Other Member States (Belgium and Denmark) have announced their intention to apply mandatory e-invoicing, even though they are not linked to a reporting obligation yet. Germany has also confirmed its intention to implement mandatory e-invoicing for B2B transactions. This shows the high degree of complexity generated by the lack of EU regulation in the field, and how the situation, far from being settled, continues to evolve, and requires increasing administrative and adaptation costs for businesses.

An econometric model 38  based on a panel regression method with fixed effects was used to estimate the impact on VAT revenue associated with the introduction of DRR solutions. The model looked at the development of VAT revenue in Member States which had introduced DRRs as opposed to a control group which had not. The assessment of the changes to VAT revenues has been done by means of an econometric analysis based on panel-data, to determine whether and to what extent the existing DRRs have resulted in an increase in VAT compliance in the Member States concerned. The increase in VAT revenue during the 2014-2019 period is estimated to be between EUR 19 and EUR 28 billion in the Member States which have introduced DRRs in this period, corresponding to an annual increase of VAT revenue of between 2.6% and 3.5%. 39  

Several Member States (Belgium, Denmark, Germany, Ireland, Cyprus, Luxembourg, Malta, Netherlands, Austria, Slovenia, Finland, and Sweden) have not yet introduced DRRs. The decision appears to be mainly driven by their relative lower level of VAT fraud (the 2016-2019 average VAT Gap of the Member States currently having or announcing to adopt DRRs is 15.2% compared with an average of 8.6% for the ones who do not yet have DRRs in place). There are other aspects that may influence the decision on whether to introduce or not DRRs, such as the IT-related ones (e.g. the particularities of the national IT systems), the adoption of similar requirements in other Member States (e.g. a neighbouring/important trade partner Member State takes the decision to introduce DRR), or other local particularities (e.g. the general readiness of the business population for such measures or the administrative organisation). None of the Member States that have implemented DRRs had recorded a VAT Gap lower than 10% prior to their introduction, except for Spain (where the VAT Gap was 6.5% in 2016) 40 and the top Member States constantly registering the highest VAT gaps (Romania, Greece, Lithuania, and Italy) are among those that have introduced or announced the introduction of DRRs.

As can be seen, the DRRs adopted, which provide information to tax authorities on a transaction-by-transaction basis, vary substantially from one Member State to the other. They can consist in the transmission of monthly reports of business transactions, submissions of invoices in real-time, the transmission of invoice data in real or quasi-real time, or the submission of tax and accounting data or VAT records. Further, other Member States have implemented non-digital tools for reporting of transactions, such as listings which do not provide data at transactional level, but only the values of sales or purchases per customer or supplier (listings of suppliers and customers). All these requirements are additional to the submission of VAT returns. The global trend shows a move from traditional VAT compliance (i.e. filing forms with periodic aggregate data) towards real-time sharing of transaction-based data with the tax administration (generally based on e-invoicing). However, the VAT Directive 41 represents a significant barrier towards the adoption of e-invoicing requirements, due to the need for Member States to obtain an explicit derogation to adopt digital reporting requirements based on e-invoicing requirements. This has also influenced both the adoption and the design of national digital reporting requirements.

The importance of this problem and the need to act has been confirmed by stakeholders during the public consultation: “the rapid introduction of divergent digital VAT requirements (…) since the adoption of modifications to Article 273 of the VAT Directive via Directive 2010/45 have shown that it is important not only that Member States formally go along with a consensus, but are actually committed to harmonization”. 42

The resulting fragmented regulatory framework brings additional compliance costs for businesses operating in different Member States that have to comply with diverse local requirements and creates barriers within the Single Market. With an increasing number of Member States implementing different models of digital reporting obligations, the costs of fragmentation for multinational companies (MNCs) 43 are significant, estimated at about EUR 1.6 billion per year EU-wide, of which 1.2 billion are borne by small-scale and 0.4 billion by large-scale MNCs 44 . 

Further, the current reporting system of intra-Community transactions (referred to in the VAT Directive as “recapitulative statements”) does not allow Member States to effectively tackle VAT fraud linked to these transactions 45 . It should be noted that the current recapitulative statements date from 1993 and have not substantially changed since then. They are ill-prepared for the digital economy and can hardly be compared to the much more modern digital reporting systems implemented by the Member States for domestic transactions.

Among other shortcomings, recapitulative statements provide aggregated data for each taxable person, and not transaction-by-transaction data. They do not allow cross-matching of the data from supplies with that of acquisitions, as the VAT Directive leaves optional for Member States the reporting of intra-Community acquisitions and less than half Member States have introduced this obligation. Further, due to time-reporting differences across Member States, the data may be available to tax authorities in other Member States too late, not only because of the filing frequency, but also because of the time it takes for local tax authorities to upload data on the system. Such shortcomings were rightfully noticed by almost two-thirds of informed stakeholders publicly consulted (also see Figure 4  specific to tax administrations) who totally or partly agree that recapitulative statements would be more effective in fighting intra-EU fraud if data is collected on a transaction-by-basis and closer to the moment of the transaction.

It is worth noting that the reform of the reporting of cross-border transactions inevitably entails changes to administrative cooperation and exchange of data between the competent authorities of the Member States and the VAT Information Exchange System (VIES) 46 . The Tax Action Plan also mentions the “reinforcement of verifications of cross-border transactions”, and a 2023 proposal for VIES 2.0 is expected to complement the current initiative.

Figure 2 – VAT reporting: stakeholders’ views on current situation

Concerning the identified problem, stakeholders in different groups (private individuals – ‘PI’; business organisation/federation – ‘BF’; economic operators – ‘EO’; service providers – ‘SP’; and others, non-specific – ‘O’) agree on the negative impacts stemming from the current situation with regards to DRRs. During targeted interviews, Member States also validated the problem.

In conclusion, while the EU legislation leaves substantial freedom to Member States to implement reporting systems, without providing guidance or a common framework, it still remains difficult for Member States to apply mandatory e-invoicing. Consequently, businesses operating cross-border are confronted with completely divergent systems which in addition cannot be used to exchange information between tax authorities of different Member States. Therefore, Member States cannot address cross border fraud effectively, and in particular MTIC fraud, which is a fraud specifically deriving from the way the VAT rules deal with intra-Community trade. That is why it is necessary to reform the VAT framework right now both to avoid the proliferation of divergent digital reporting systems, preventing unnecessary costs for businesses and to have a common digital transaction-based reporting of intra-Community transactions to tackle cross-border VAT fraud.

VAT treatment of the platform economy

Under the VAT rules a taxable person means any person (natural or legal) who, independently, carries out any economic activity 47 . Such a taxable person is normally required to register for VAT and charge VAT on its sales. Individuals, acting in their private capacity, i.e. not involved in an independent economic activity, are not therefore considered as taxable persons. In addition, the VAT Directive allows for various simplification measures, in particular the special scheme for small enterprises (see glossary) which was introduced in order to a) remove the need to tax administrations to ensure the compliance of a large number of small businesses, and b) reduce the administrative burdens on these businesses. In the past, these businesses were not considered to have any impact on market competition with VAT registered businesses. 

The platform economy has, however, introduced new business models in which an indefinite number of private individuals and small businesses can provide their services via a platform. Here the economies of scale and network effect 48 means that these providers are now in direct competition with traditional VAT registered suppliers. For the accommodation sector, for example, over 50% of users of a particular accommodation platform specifically access the offer of the platform over a traditional hotel, and, in Europe, the cost of accommodation offered via the accommodation platform can be, on average, some 8% to 17% cheaper than a regional hotel’s average daily rate 49 . The traditional hotel can be competing with a large number of short-term accommodation providers (for example, in Barcelona, one platform alone provides over 15,000 listings (rooms/apartments/houses etc. for rent), which represents around 50% of the total hotel rooms in the city) 50 .

The information provided by the supporting study indicates that the number of underlying suppliers who are not registered for VAT, whilst varying depending on the type of platform, can be up to 70% 51 . This means that, for example, a hotel in Barcelona could be competing with over 10,000 accommodation listings which do not charge VAT on their services. During the public consultation, more than 70% of respondents having an opinion on the issue said they experience distortions of competition with other domestic firms offering the same services via platforms due to very uneven or uneven treatment of similar services and providers in their Member States 52 . This experience was reported most strongly by business federations. On another hand, the platforms themselves did not see distortions due to uneven treatment at all.

The transport and accommodation sectors have been explicitly identified by the supporting study 53 as sectors in which a) the VAT inequality is at its most apparent (in that the accommodation platform model is competing directly with the hotel sector direct distribution model, and the transportation platform model is competing directly with private taxi firms); and b) these are the two largest sectors of the platform economy 54 , behind e-commerce, which has its own rules regarding the supply of goods. 55  The transport and accommodation sectors together are accounting for more than half of the total value of the platform economy and, by contrast, financial services represent a far smaller sector whose supplies are mostly VAT exempt (See Table 4 ). Other sectors include a variety of areas which suffer less from distortions of competition (e.g. hairdressers, swimming instructors), thus the issue of VAT inequality is not that manifest.

In addressing the distortions of competition in the transport and accommodation sectors, attention should be paid not to impose new obligations on SMEs and natural persons. A system should be found to resolve the existing distortions by looking at the role platforms could play in the collection of VAT, while not imposing disproportionate burden on them.

Furthermore, there are various rules in the VAT Directive which have been applied differently by Member States 56 . For example, the treatment of the facilitation service charged by the platform – in some Member States this is regarded as an electronically supplied service, whilst in others it is regarded as an intermediary service. This is relevant because it can lead to different places of supply 57 , which can subsequently lead to double or non-taxation. Therefore, clarification of these rules is necessary.

Platforms also face difficulties relating to the establishment of the taxable status of the provider of the service. This is because whether the provider is a taxable person or not influences how the platform accounts for the VAT on its facilitation service (for example, if the provider is established in a different Member State to the platform, the platform could use the One Stop Shop for a non-taxable person, or the reverse charge for a taxable person 58 ). Often the platform does not have sufficient information to establish this tax status.

Finally, under Article 242a of the VAT Directive, platforms are required to keep certain information 59 relating to supplies made via the platform and to make it available on request to Member States. Platforms can sometimes find it difficult to obtain that information from the underlying supplier 60 . In addition, they find that they are supplying information which they have already supplied to the tax authorities (for example, under DAC 7 regulations relating to direct taxes). Therefore, it is necessary to look at the information obligations required by platforms to find synergies with other legislation where possible, and consider other means of facilitating record keeping obligations, such as standardising the format in which the records should be made available to Member States, and the frequency with which the records are made available. Such an approach was strongly suggested and supported by the stakeholders during consultations.

During the public consultation, a majority of 161 informed respondents (excluding “do not know” answers) considers ensuring a level-playing field between traditional and platform economy (equal treatment) as very important (107) and important (47) For a minority it is either not important (4) or not so important (2).

In conclusion, the main issue with the platform economy is the inadequacy of the current VAT legal framework to ensure a level playing field with traditional businesses, specifically in the transport and accommodation sectors. Supplies made by small underlying suppliers via a platform are not taxed and the facilitation services made by platforms are taxed differently in different Member States. This leads to difficulties for the platforms, suppliers, and Member States. The business models of the platform economy in particular expose the legislative weaknesses of the VAT Directive with some Member States applying challenging joint and several liability rules on platforms, for example, or treating the supply of short-term accommodation differently depending on arbitrary elements such as the supply of towels etc. Uniform rules are therefore not only required, but also demanded by traditional businesses which are suffering from distorted competition.

VAT registration requirements in the EU

Where businesses perform cross-border transactions which are taxed in other Member States, they face considerable compliance burdens and costs, as presented in the table below.

Table 1 – Minimum VAT-related costs 61 of cross-border trade for businesses (EUR)

Source: elaboration based on the targeted consultation and Deloitte “VAT Aspects of cross-border e-commerce report” (2015)

From this table, it is to be concluded that the minimum one-off cost of obtaining a VAT registration in another Member State is EUR 1,200. The minimum ongoing cost, on a yearly basis, for VAT compliance in another Member State is EUR 8,000 for an average business and EUR 2,400 for a SME. In fact, being registered in another Member State entails ongoing reporting and other obligations in that Member State (such as the obligation to complete and submit VAT returns or listings, to pay the VAT due, or to request VAT refunds) which are included in the annual VAT compliance costs.

The VAT e-commerce package introduced a number of simplification schemes including the One Stop Shop (OSS) and the Import One Stop Shop (IOSS), which have alleviated the registration burden for non-established business carrying out transactions in other Member States. These optional schemes simplify compliance by avoiding the potential VAT registration obligations of the supplier/deemed supplier in each Member State of establishment of the customer. They cover cross-border supplies of services and intra-EU distance sales of goods (OSS) and the distance sales of imported goods to the EU from a third country/territory in consignments not exceeding EUR 150 (IOSS). As expected, minimising the need for taxable persons to hold multiple VAT registrations was considered as important/very important by stakeholders participating in the public consultation, only less than 2% (3 out 197 answers) seeing it as “not important”.

The implementation of the OSS and IOSS has proven to be a great success as shown by the evaluation of the e-commerce package (see Annex 6). Almost EUR 8 billion in VAT in the first 6 months of application of the new rules was collected via the OSS and the IOSS. The removal of the EUR 22 VAT exemption on imported goods allowed for the collection of a significant amount (EUR 0.7 billion) of VAT on previously exempted transactions. At the same time, the costs of implementation represent only 0.01% of that EUR 8 billion. In addition, the common EU-wide threshold that replaced the previously disparate VAT rules reduced the risk of non-compliance while new record keeping obligations for traders, including for platforms, support tax audits carried out by tax administrations. The success of the VAT e-commerce package was also confirmed by Member States at the Council Working Party on Taxation in January 2022 and further endorsed by the March ECOFIN 63 . A large majority of respondents to the public consultation (75%) acknowledged the progress made by the OSS in minimising the need for taxable persons to hold multiple VAT registrations, with only 2% (4 out of 193 answers) seeing “no progress” and 23% not expressing their opinion.

While this success has been recognised, a number of operational improvements (see Annex 6) have nevertheless been identified as a result of the evaluation. These improvements will be addressed in this initiative.

There are some remaining B2C transactions which are not covered by these simplification schemes. These include certain types of supplies of goods that, even though they may have a cross-border aspect, do not fall within the definition of intra-EU distance sales of goods and are not covered by the OSS. This is also the case, for instance, in the distance sale of goods imported with an intrinsic value exceeding EUR 150, or the supply of goods subject to excise duties (i.e. alcohol, tobacco and energy), which are not under the current scope of the IOSS. Certain B2B transactions that are also triggering registration in another Member States are also assessed. The type and prevalence of these transactions are depicted in the table below.

Table 2 – Transactions requiring non-established businesses to VAT register (1 July 2021)

Source: own elaboration

With the IOSS being currently optional, its impact on the need for multiple VAT registrations is limited and the complexity of import process is not reduced to the optimum level possible. The risk of undervaluation of the economic value of goods declared for importation is mitigated where the IOSS is used because the VAT is paid upfront at the time of purchase. Potential undervaluation remains a significant risk if the IOSS remains optional as VAT is only collected at the time of import, not at the time of purchase.

At present, imports of goods in the EU below the threshold of EUR 150 are not subject to customs duties. However, there is no similar VAT exemption 65 . As a result, the declared value of B2C shipments is frequently inaccurate, often intentionally falling under EUR 150 in order to fraudulently benefit from the Customs duties exemption. These misdeclarations of value affect not only the assessment of customs duties but also the VAT to be collected on those goods 66 .

Despite the introduction of the OSS and the IOSS, 124 respondents to the public consultation (90% of those providing an opinion on the matter) thought that the requirement to obtain and maintain multiple VAT registrations continues to be a problem, at least to some extent. Over two-thirds thought it is a problem to a large or even very large extent.

Figure 3 – Current situation: the need of multiple VAT registrations is still an issue

In general, regarding VAT registration, the problem resides in the scope of the existing EU One Stop Shop mechanism that was recently expanded but is still not covering specific transactions. Driven by the recognised success of the latest improvements, businesses and Member States have strongly advocated for an immediate expansion of the simplification measures to include the missing transactions. Moreover, in order to establish equal treatment, stakeholders suggested making the IOSS mandatory for all deemed suppliers.

2.2.What are the problem drivers?

Some of the drivers generating problems are exogenous to the VAT framework (i.e. the evolving technology and business models, value chains and trading practices), whilst others are about the VAT framework itself (i.e. the complex and fragmented regulatory environment). Businesses operating in multiple Member States are especially impacted. The drivers in both categories combine exposing the discrepancy between the 30 year-old rules and the current digital reality to create the two-faceted problem regarding the sub-optimal VAT collection and control and administrative burden.

Table 3 – Overview of the drivers

I.Increasing scale of the platform economy and e-commerce 

This driver generally affects all three VAT areas. Over 1,500 digital platforms 67 have a significant presence in the EU27 (about 1,800 including the UK). Overall, in 2019 the revenue of the digital platforms in the EU27 market reached EUR 66.9 billion. The revenue of their providers 68 is estimated at about three times the platform revenue, at EUR 191.1 billion. The value of VAT revenue from the digital platform ecosystem 69 is estimated at about EUR 25.7 billion per year for the EU27, i.e. 2.6 percent of total VAT revenue 70 .

Table 4 – Scale of platform economy operation, by sectors (EU27, EUR billion, 2019)

Source: Targeted consultation. *Revenue of digital platforms only. The numbers may not add up perfectly due to rounding.

Additionally, and importantly, the scale of the platform economy has increased rapidly over the last years. Considering the aggregate growth rate of the seven sectors 72 involved, platforms’ revenue grew three times, or 32 percent per year between 2015 and 2019 73 . The increasing scale and prevalence of the platform economy and e-commerce naturally magnifies the consequences of any VAT problem but in particular those identified in the three areas under examination. More transactions under the platform economy and in e-commerce means an incremental increase in the problems linked to the VAT registration and the administration of the rules and puts also additional pressure on the outdated VAT reporting system.

II.Multiplicity 74 and complexity of the new business models driven by technological changes

This driver generally affects all three VAT areas. The multi-sided nature (where there are three or more parties involved) and complexity of the business models have become a ‘difficult fit’ for the VAT rules which were developed when these business models were unknown. For example, the distinction between a consumer and a supplier is becoming blurred, as one party can be both whilst operating via a platform. Also, the explosion in e-commerce has led to exponential increases in cross-border trade and an increased complexity of business models of the marketplaces (for example goods being sold from fulfilment centres rather than directly from the underlying supplier) for which the VAT system is ill-suited. Again this intensifies the problems linked to the VAT registration, the administration of the rules and the VAT reporting system.

III.Fragmented regulatory framework (divergent requirements)

The wide discretion afforded to Member States by the VAT Directive in imposing reporting obligations and the need to apply the existing VAT rules to new business models has led to a divergence of the rules applicable within the EU as well as to differing interpretations of the existing rules. This affects differently the VAT areas as follows:

a) VAT reporting

There are 12 Member States which have in place digital reporting requirements, while three more are considering or have taken the first steps for their introduction 75 . These reporting requirements differ over several dimensions, including:

·Frequency. The main distinction is between periodic and real-time reporting. This can be further differentiated according to the exact frequency (either jointly with the VAT return or monthly), and “how real-time” real-time requirements are (within four days in Spain, daily in Hungary and before the invoice is issued in Italy).

·Scope – Taxpayers. National rules can include a turnover threshold below which VAT-registered taxable persons are not subject to the reporting obligations, and can exclude certain sectors or specific VAT regimes from these obligations. Furthermore, requirements can apply to resident entities only or to all registered taxable persons.

·Scope – Transactions. In a number of countries, only transactions above a certain value threshold are to be reported in detail. Besides, the reporting systems can differ in whether they cover (i) purchase and/or sale transactions; (ii) domestic, intra-EU or extra-EU transactions; and (iii) B2B, B2G or B2C transactions.

·Data content and format. The various systems differ in terms of the type and amount of data extracted from taxpayers, the format of submission as well as the communication architecture.

This lack of harmonisation of digital reporting requirements across the EU results in legal uncertainty and additional administrative burdens and compliance costs for companies with fixed establishments or VAT registrations in different Member States.

b) VAT treatment of the platform economy

Member States have different views on the treatment of the facilitation service of a platform - whether to regard this as an electronically supplied service or an intermediary service which in turn leads to a different place of supply.

c) VAT Registration

The VAT Directive provides the rules for determining in which Member State the VAT on a transaction is due, and the person liable to pay and report it. These rules are complex and depend on numerous factors, which differ according to the type of transaction, where suppliers and customers are based, and the Member States involved. The complexity increases when the taxable person carrying out a supply is not established in the Member State where the tax is due. Thus, the fragmentation in VAT registration area should actually read as the need to register in multiple Member States.

IV.Outdated system for the reporting of intracommunity transactions

VAT reporting

This driver specifically affects the area of VAT reporting. The current VAT rules for the taxation of cross-border trade between Member States date back to 1993, just after the creation of the Single Market and the abolition of “fiscal frontiers”. At the time, they were meant to be transitional, but they are still in place. The rules do not take account of the last 30 years of technological developments, changes in business models or the globalisation of the economy. These rules divide each EU Business-to-Business cross-border supply of goods into two transactions - a) an exempt intra-Community supply in the Member State of departure and b) a taxable intra-Community acquisition in the Member State of arrival of the goods. As a result, taxable persons acquire goods cross-border without having to pay VAT 76 .

The fact that goods can be acquired free of VAT creates a big incentive for fraud. Fraudsters acquire goods from other Member States, without paying VAT, and sell them on the domestic market charging VAT without remitting it to the treasury (basic fraud scheme) or pass them through a chain of transactions possibly involving several Member States (more sophisticated and typically referred to as MTIC fraud) where in the end no VAT is paid to the treasury. The result is that the acquirers of these goods can deduct the VAT charged while the fraudsters disappear without paying that VAT to the treasury.

In order to help detect and react to this fraud, a mechanism for reporting intra-Community trade flows (the recapitulative statements 77 ) is in place. However, while business and also fraud models evolved and became more complex and technologically driven, the recapitulative statements have remained basically unchanged since the pre-digital age. They are outdated and not adapted to the current reality, with the relevant data reaching the tax administration between two to four months after the transaction date, thus often too late to prevent VAT loss and fraud 78 .

Recapitulative statements provide aggregated information to national tax administrations about the supplies of goods and services made to their territory from other Member States. They allow tax administrations to follow the flow of goods and services in order to help fight intra-EU fraud. However, they are regarded as rather ineffective by the majority of Member States interviewed on this subject. During the interview carried out as part of the supporting study 79 , out of 12 tax authorities that replied, eleven provided a negative assessment of this reporting mechanism to tackle intra-EU VAT fraud (see Figure 4 ). 

Figure 4 – Effectiveness of recapitulative statements against MTIC fraud (Member States)

Source: elaboration based on the targeted consultation; views from tax authorities questioned whether the recapitulative statements are effective to tackle intra-EU Fraud

The reasons for such a widely held negative assessment are largely coherent across Member States, who unanimously criticize:

§The lack of data granularity, since data are not available at transaction level but aggregated;

§The inadequate timeframe of data exchange, further amplified by time reporting differences across Member States, as data can be filed monthly or quarterly and also because of the time it takes for local tax authorities to upload the data that will be later exchanged with other Member States;

§The partial scope of the tool, which mandatorily covers only intra-Community supplies (data on acquisitions are not automatically exchanged between Member States). In this regard, reporting of intra-Community acquisitions is not required by the VAT Directive and less than half Member States have introduced this obligation; and

§The poor quality of the data reported. 

The shortcomings of the current system to address intra-Community VAT fraud have also been stressed by the European Court of Auditors 80 .

As a result, crosschecks of intra-Community trade data and VAT anti-fraud controls are not as comprehensive, effective and as real-time as they should be to tackle fraud linked to intra-Community transactions.

V.The scope of the application of the simplification schemes 

This mainly affects the VAT areas as follows:

a) VAT treatment of platform economy

SMEs using the SME simplification scheme do not charge VAT whilst enjoying the economies of scale and network effects offered by platforms. As outlined in the study 81 , this gives them a competitive advantage over traditional VAT registered businesses making similar or identical supplies. In the past this competitive advantage was minimal because of the limited outreach and resources of SMEs, but platforms have allowed SMEs access to global markets, therefore allowing them to directly compete with traditional businesses without charging VAT or facing the regulatory or compliance burden of being a VAT registered business.

b) VAT registration

Some transactions are not covered by OSS and IOSS schemes - The complex and fragmented regulatory environment 82 creates costs and hassle for businesses operating in multiple Member States. The newly introduced One Stop Shop (OSS) helps businesses by reducing the instances in which registration in another Member State is required. However, the implementation of the OSS 83 and IOSS 84 schemes has not totally addressed the problem. A number of cross-border transactions still trigger the need for registration in another Member State forcing the businesses to face costs and burden associated with the VAT obligations in different Member States. Table 2 is providing the typology of these transactions constituting the framework for assessing the magnitude of the problem.

2.3.How likely is the problem to persist?

VAT Reporting

Member States will continue to adopt national Digital Reporting Requirements (DDR) over the next decade, worsening the fragmentation and the administrative burden. The main trend is represented by the Member States considering the introduction of mandatory e-invoicing. The problem of intra-EU fraud is not addressed at all, therefore it will persist.

VAT treatment of the platform economy

Member States are expected to introduce additional rules and guidelines concerning the status of the provider and the nature of supplies facilitated by platforms, but to do so in an uncoordinated fashion, as with reporting obligations. These additional rules and guidelines are expected to increase the administrative burdens and will not solve the level-playing field issue.

VAT Registration

Some key sectors, such as the fuel cards sector, and the supply of gas and electricity, construction works in another Member State etc. will continue to face the burden of multiple VAT registrations when supplying goods and/or services in other Member States.

3.Why should the EU act?

3.1.Legal basis

According to the principle of subsidiarity 85 , action at EU level may only be taken if the envisaged aims cannot be achieved sufficiently by the Member States alone and can be better achieved by the EU. The VAT rules for cross-border EU trade involve more than one Member State by nature and VAT is a tax harmonised at EU level. The problems identified in Section 2 are embedded in the rules of the VAT Directive. Therefore, any initiative to change the VAT system as regards intra-EU trade requires amending the VAT Directive.

The Treaty on the Functioning of the European Union, Article 113, gives the EU the right to act and adopt provisions to harmonise legislation in the area of indirect taxation, including value added tax. In addition, since net VAT revenue collected by each Member State is used to determine the harmonised base, the loss of VAT impacts both Member States’ revenue and the EU’s VAT own resource amounts 86 .

3.2.Subsidiarity: Necessity of EU action

The legislative proposal must be adopted at Union level, as it amends the existing common system of value added tax governed by the VAT Directive (Directive 2006/112/EC). Given the need to modify the VAT Directive, the objectives sought by the present initiative cannot be achieved by the Member States themselves. Therefore, it is necessary for the Commission, which has responsibility for ensuring the smooth functioning of the internal market and for promoting the general interest of the European Union, to propose action to improve the situation. Moreover, the VAT rules have the potential for distorting intra-EU trade if introduced in an uncoordinated way.

3.3.Subsidiarity: Added value of EU action

The Commission is responsible for ensuring the correct application of the harmonised VAT assessment base. Each Member State is responsible for the transposition of the VAT provisions into national legislation and their correct application within its territory. Member States implement common rules set out in the VAT Directive into their national legislation, thus the practical application and the administrative practices of each Member State vary. However, the intra-EU dimension of VAT fraud requires EU intervention regarding reporting obligations. In addition, for several Member States the size of the VAT gap (and its persistence over time) indicates that national instruments are not sufficient to fight cross-border and e-commerce fraud, as shown by the estimated levels of MTIC fraud, which can only be fought efficiently and effectively by coordinated action at EU level.

The harmonised VAT rules are needed to help businesses benefit from the potential of the internal market. In the targeted consultation, businesses doing cross-border trading repeatedly stated their preference to have VAT rules applied uniformly at EU level than to comply with different reporting or registration obligations at national level. This can only be ensured by EU action.

§

4.Objectives: What is to be achieved?

4.1.General objectives

The general objectives of the VAT in the Digital Age initiative are related to the modernisation of the VAT system. The general objectives address each of the two main identified problems:

General objectives are directly linked to the treaty-based goal of establishing a functional internal market and reflect the Commission priorities and EU strategic agenda for 2019-2024 87 . In this respect, the VAT in the Digital Age initiative aims to render the VAT rules more proportionate, effective and efficient by updating the 30-year old VAT system to the current realities of the digital age.

4.2.Specific objectives

The two general policy objectives will be achieved by pursuing five specific objectives in VAT reporting, VAT treatment of platform economy and VAT registration:

1.Improve reporting requirements to unlock the opportunities provided by digitalisation

The VAT reporting specific objective intends to improve reporting requirements by optimising the use of digital technologies, notably by utilising digital reporting to fight VAT fraud, and in particular MTIC fraud.

This specific objective is linked with and supports an effective and fair VAT system (3rd specific objective), helping the fight against VAT fraud and reducing the taxpayers’ administrative burden and compliance costs (4th specific objective) by allowing tax authorities the provision of additional services to taxpayers and the removal of other compliance obligations.

2. Promote convergence and interoperability of IT systems

Besides the complications the digital evolution brings, it also provides opportunities linked to IT systems, business automation and digitalisation. Businesses, Member States and the Commission have up and running IT systems that must be enhanced and at the same time be made compatible with each other. Thus, this specific objective, common to both VAT registration and VAT reporting, aims to promote the convergence and interoperability of existing IT systems and support the necessary developments. It covers both adapting the Commission’s IT environment (e.g. for exchanges of information between Member States on cross-borders transactions, for IOSS/OSS registration) and providing guidelines to Member States and businesses for preparing their IT systems in the short to medium term 88 .

3.Create a level-playing field for businesses, regardless of the business model

The specific objective aims to provide a level-playing field for EU businesses by imposing similar VAT liabilities regardless of the traditional or digital business model, their location or their engagement in domestic or cross-border transactions.

4.Reduce burdens, regulatory fragmentation and associated costs

The specific objective is expected to contribute to the simplification and modernisation of the VAT rules by reducing regulatory fragmentation, and to increase legal certainty, by reducing the multiplicity of the existing national frameworks.

5.Minimise the need for multiple VAT registrations in the EU

Minimising the need for multiple VAT registrations will not only reduce the costs for businesses but also allow authorities to better focus their control activities.

5.What are the available policy options?

5.1.What is the baseline from which options are assessed?

VAT Reporting

Based on the supporting study, the available information regarding the existing and planned introductions of DRRs 89  can be summarised as following:

·as of September 2021, DRRs had been introduced in 12 Member States (Bulgaria, Croatia, Czechia, Estonia, Hungary, Italy, Latvia, Lithuania, Poland, Portugal, Slovak Republic and Spain);

·between 2021 and 2023, Greece and France will also introduce DRRs;

·public acts were adopted or official announcements were made in Romania towards the introduction of SAF-T and in Bulgaria, Croatia, Hungary, Poland, Spain and the Slovak Republic towards the introduction of mandatory e-invoicing;

·a study has been launched in Finland on the possible adoption of DRRs, but no public act has been adopted by the government;

·given the amount of time necessary to deploy the national systems after the decision to introduce them, countries that have not taken steps in that direction so far are unlikely to be able to adopt their own DRRs within the next five years.

If the above information provides a sufficient degree of certainty for the short-term, i.e. the next five years, in terms of the countries which are likely to adopt or update domestic DRRs, as well as of those which are not going to do so, reasoned probabilistic incremental scenarios need to be built for the medium term. In the dynamic baseline scenario underpinning this Impact Assessment, Member States will continue to adopt national digital reporting requirements over the next decade.

Table 5 – Medium-term adoption scenarios 90

Based on the available information and the above scenarios, the dynamic baseline regarding the adoption of DRRs is presented in the table below.

Table 6 – Dynamic baseline: adoption of Digital Reporting Requirements (2023 – 2028) 91

* weighted average across scenarios.

Tax control efficiency and effectiveness is also expected to increase with the introduction of various DRRs, and whilst this will help fight fraud at national level, it will not solve the problem of intra-EU fraud. Furthermore, since no harmonisation measure is introduced, fragmentation costs would grow as more numerous and divergent DRRs are introduced. Confidentiality risks will increase as a result of more transactional data being exchanged. The current trend of Member States considering the introduction of mandatory e-invoicing would further spur business process automation.

The sections assessing the current situation regarding Member States and taxpayers (domestic and multinational companies) in the supporting study 92  are based on both information from the targeted consultation of public authorities and data collected during targeted consultation activities with economic operators, VAT practitioners and service providers, as well as information from secondary sources, VAT revenue statistics, and studies at national levels. As mentioned in the problem section, the quantification of the DRRs’ outcomes on tax control activities and fraud detection is based on the comparison of data before and after the introduction of these requirements.

Since the VAT Gap represents the difference between the theoretical VAT liability and the VAT revenues accrued, more revenues are a clear sign of improved compliance where the liability does not change. The assessment of changes to VAT revenues has been done by means of an econometric analysis based on panel-data (See Annex 4: Analytical methods ), to determine whether and to what extent the existing DRRs have resulted in increased revenues, thus a decrease in VAT non-compliance in the adopting Member States.

Both costs and benefits are expected to grow over the 2023-2032 period; however, benefits will remain higher than costs (EUR 371 billion vs. EUR 121 billion) and will grow faster, resulting EUR 250.7 billion in positive net impacts:

The VAT collection is measured using the C-efficiency model as the base model. The impacts of DRRs are estimated on two dependent variables: the VAT Gap and C-efficiency. 94  C-efficiency is the ratio of the actual VAT revenue to the theoretical revenue derived from the product of the VAT standard rate and the aggregate final consumption. Thus, it measures the departure of a country’s actual VAT system from a perfectly enforced tax levied at a single rate on all consumption. This ratio takes a value lower than one for various reasons: the application of VAT reduced rates and exemptions, as well as less-than-perfect compliance. In other words, the C-efficiency is an intensive measure, i.e. expressed in relation to the tax base, of both the level of VAT compliance as well as VAT policy choices, such as the adoption of differentiated rates and exemptions. The VAT Gap is defined as the difference between the expected VAT revenue (i.e. the VAT Total Tax Liability, VTTL) and the amount of VAT actually collected over the same period. It includes aspects that are directly influenced by the introduction of reporting obligations, such as VAT fraud and evasion, as well as other elements which are not impacted (e.g. insolvencies, bankruptcies, legal tax optimisation). The VAT Gap directly links with the level of VAT compliance in a country.

Since the VAT Gap model relies on annual data, while the C-efficiency model relies on quarterly data, thus providing larger number of observations and degrees of freedom, the latter was retained as the base model and is being used to fundament this impact assessment. Nevertheless, for reasons of transparency, both the base model based on C-efficiency and the alternative model based on VAT Gap data are presented in the Annex 4: Analytical methods .

In terms of other ongoing initiatives reflected in the baseline, the EU Directive on electronic invoicing in public procurement (B2G) 95  currently in place has the goal of facilitating the use of a common European Standard on electronic invoicing across Member States to promote interoperability and convergence at EU level (See Annex 5: other initiative s ). In the baseline scenario, the IT platform used to handle B2G transactions is often leveraged by the tax authorities for handling and reporting B2B transactions. 96  

In addition, the work on the proposal for a definitive regime 97  that is still to be adopted was used as a starting point to identify the problems of cross-border VAT fraud. It already reflected the magnitude of the fraud derived from the way intra-Community transactions were taxed, and how the existing tools, including the recapitulative statements, were not sufficient to tackle it. The definitive regime was seen as a solution to address the risk of VAT fraud (MTIC fraud) that is linked to the current VAT rules build common ground for possible digital solutions such as the DRRs.

VAT treatment of the Platform economy

Under the dynamic baseline scenario, the growth of the platform economy will increase VAT revenue in both absolute and relative terms. However, Member States are expected to introduce additional rules and guidelines concerning the status of the provider and the nature of supplies facilitated by platforms, but will do so in an uncoordinated fashion, as with reporting obligations. These additional rules and guidelines are expected to increase the administrative burdens for businesses by EUR 1.9 billion 98 . The distortion of competition will not be solved and will evolve in line with the development of the platform economy.

The scale of the platform economy was estimated by using financial data from Crunchbase and Dun & Bradstreet databases, web application download statistics from SEMrush, questionnaires for platform operators and tax administrations, previous reports, and Eurostat’s sectoral statistics. 99 A VAT liability simulation model with two blocks (for platforms’ facilitation services and for the underlying services) was used in the sectoral analysis. The model is presented in Annex 4: Analytical methods and in the supporting study. 100

The share of the VAT revenue from the platform economy is expected to increase between 0.19 and 0.35 percentage points per year reaching 3.7 percent in 2032. As the pace of growth of the platform economy will decline in the medium-term, the VAT revenue as a share of overall revenue will start stabilising in ca. 10 years’ time. In nominal terms, VAT revenue in the platform economy 101 will grow to about EUR 57 billion in 2032. In addition to revenue growth resulting from the increase in tax base, the availability of information on transactions and providers in the platform economy resulting from reporting and record-keeping obligations is expected to increase the effectiveness of control activities and, as a result, VAT compliance. Though it is not possible to assess the magnitude of this enhancement 102 , the improvements in compliance are expected to have a lower contribution to the VAT increase than the increase in tax base.

In an increasingly digitalised world in which online platforms play a fundamental role, the P2B Regulation 103 aims to protect, in this specific case, the business users of such services (See Annex 5: other initiatives ). It contains transparency rules and protection for business users’ accounts. The ‘DAC7’ 104 extends the automatic exchange of information in the field of taxation. It creates an obligation for platforms to report annually the income earned by sellers and for the Member State where reporting takes place, to exchange this information automatically, thus being fully coherent - but complementary as an ex-post control tool - with the current initiative.

In addition, the Digital Services Act (DSA) 105  enhances the responsibility and transparency obligations for providers of online intermediary services, including online platforms. For instance, online platforms allowing the conclusion of contracts between traders and consumers will have to gather information on the identity of traders. The Digital Markets Act (DMA) 106  will ensure fair markets in the digital sectors across the Union by addressing the unfair practices of certain undertakings. The DSA and the DMA covers services such as online intermediary services, including online marketplaces, online search engines, social networking, video sharing, operating systems, and cloud services, thus having an impact on the VAT in the Digital Age initiative, especially in the accommodation and transport sectors.

The proposed Platform Workers Directive 107  aims to ensure the legal employment status for the workers. This proposal may have an impact on the VAT in the Digital Age initiative, in that, if adopted, a number of platform workers may become employees, and therefore taken out of the scope of the measure concerning the VAT rules for platforms (because employees are not required to charge VAT on their services, instead this responsibility would fall on the platforms).

VAT Registration

Some key sectors, such as the fuel cards sector, and the supply of gas and electricity, construction works in another Member State etc. will continue to face the burden of multiple VAT registrations when supplying goods and/or services in other Member States.

Some transactions requiring non-established businesses to VAT register (see Table 2 ), such as the transfer of own goods cross-border 108 are mostly relevant within the context of distance sales made in the e-commerce sector. An estimate of 20,000 ‘average businesses’ and 280,000 SMEs are experiencing registration costs (see Table 1 ) associated with VAT registration in the EU in a Member State other than that of establishment 109 . At the EU level, this translates in up to EUR 0.36 billion (one-off) and EUR 0.83 billion yearly VAT compliance costs of doing cross-border trade implying VAT registration.

Distance sales of goods cross-border were estimated to amount to about EUR 72 billion across the EU-27 in 2020 (EUR 43 billion within the EU and EUR 29 billion from outside the EU – distance sales of imported goods). 110 Moreover, in terms of the number of parcels, although it is difficult to estimate their volumes precisely, the order of magnitude is likely to be in the billions of units transferred cross-border across the EU every year. In addition to the significance of the scale of these transactions, the continued growth of e-commerce means they will become more so, exacerbating the problems if the status quo is left to continue.

The existing burdens (and additional costs) in these specific sectors will persist if the status quo remains in place.

5.2.Description of the policy options

An overview of the policy 111  sub-options in the three areas can be found in the table below.

Table 7 – Description of the policy sub-options by VAT area

5.3.Options discarded at an early stage

Certain options have been discarded at an early stage as inconsistent with the EU legal framework or the objectives of this initiative. Other options were discarded because of their technical unfeasibility or considering their clearly inferior impacts.

1.VAT reporting

a.Adopting different designs for EU and domestic transactions.

It would be inappropriate to design a different DRR for domestic and intra-EU transactions. From the analysis, no evidence emerged suggesting that domestic and intra-EU transactions require a different reporting mechanism, and this choice would duplicate costs without any significant benefit for tax authorities and taxpayers. However, the possibility of introducing a DRR only for intra-EU transactions is considered among the policy options. This could, for example, allow substituting the ineffective recapitulative statements and thus reducing intra-Community VAT fraud, while limiting compliance costs for taxpayers that only operate domestically.

b.Harmonising existing DRRs in the short-term.

Any policy proposal on an EU DRR does not work on a tabula rasa, given that national mechanisms have been introduced or adopted in a majority of Member States. Therefore, any proposal needs to incorporate a strategy for dealing with the existing requirements. Expecting to immediately retrofit all these systems into a new EU system would be politically very complex, and, most importantly, would generate duplicated burdens, since the investment in IT solutions and know-how borne by tax authorities and taxpayers in these Member States would become sunk costs.

2.VAT treatment of platform economy

a.Adding a common simplified VAT scheme for persons providing their services via platforms by applying a flat VAT rate without input tax deduction. Under this option, a new special scheme would be introduced for providers supplying services using a platform, subjecting them to a flat VAT rate without input tax deduction. The additional complexity in the VAT system and the limited impact on VAT equality and neutrality are the main factors for discarding the option. Also, it would be difficult to apply, considering that a number of underlying supplies may be exempt (e.g. provision of real estate services). Accordingly, the option received little support from both platform operators and tax authorities consulted.

b.A system whereby the provider becomes a taxable person upon exceeding a set turnover threshold. The enforcement of such an option presents significant feasibility problems. In particular, it would not be possible for platforms to monitor the revenue obtained over other platforms and sub-platforms. Also, it would lead to certain problematic characterisations of the provider. E.g. an individual may provide occasional supplies in different sectors (for example, short term rental and ride-on-demand transport services), which, once combined, would bring them over the threshold. Finally, the threshold could hardly be applied to platforms which operate in markets with high-value transactions (e.g. sales of properties or second-hand cars), since individuals may risk being considered as a taxable person from the very first, occasional, transaction.

3.VAT registration

a.One possibility could be to include also B2B transactions in the OSS. In practice, this means that any cross-border sales made by a business supplier to another business would fall within the scope of the OSS, hence not require multiple VAT registrations. Such transactions are very prevalent in the Single Market. However, without including a deduction mechanism in the OSS, the lifting of the VAT registration requirement alone may not solve the problem if the burden of claiming back input VAT through the VAT refund mechanism (Directive 2008/9/EC) is deemed higher than the burden of VAT registering and filing local VAT returns. Due to the impossibility to deduct input VAT through the OSS mechanism, the uptake of this possibility will be very limited.

b.Introducing the input VAT deduction mechanism within the OSS is expected to make the OSS more attractive for businesses carrying out applicable B2B transactions, as the impossibility to deduct VAT through the OSS was perceived as a major stumbling block. However, the feasibility of this option is questionable for different reasons. Because it would entail the Member State of establishment deciding on the quantum of deductible VAT incurred in another Member State it is technically challenging, as VAT deduction rules vary by country. Tax authorities also discarded this solution both because they would be obliged to make financial outlays based on decisions made outside their country, and because of the practical barriers to conducting audits and controls on companies based in other Member States. In addition, there are obvious similarities between this option and the proposal on a definitive VAT system (see Section 1 and Annex 5: other initiative s ), whose adoption at the Council is presently stalled due to comparable issues.

Figure 5 – Intervention logic

6.What are the impacts of the policy options?

6.1.Description of impacts

The impacts of the VAT in the digital age initiative are described by type and by area (see Table 8 ): VAT reporting, VAT treatment of platform economy, VAT registration. The section will also focus on the impact on small and medium enterprises.

Table 8 – Overview of impact types by VAT area (reporting, platform economy, registration)

Administrative burdens and implementation costs

Administrative burdens represent the largest impact for businesses, spanning all VAT areas. Measures under analysis may have a negative impact in terms of administrative burden (for example the introduction of DRRs generates burdens for businesses due to the need to invest in new IT solutions and because of the routine costs of compliance) but also a positive one (the very same DRR could reduce burdens by introducing an EU wide harmonised system of reporting allowing for pre-filled VAT returns, removing the recapitulative statements and other domestic obligations and encouraging business automation. The use of e-invoicing could also provide benefits linked to the dematerialisation of paper invoices (savings in printing and postage costs, quicker issuance, invoice integrity and security, etc.).

Both the administrative burdens and their reduction are assessed using the Standard Cost model (SCM) 126  based on the findings from the current situation.

Fragmentation and legal certainty

Fragmentation is reduced, and legal certainty enhanced for reporting obligations and the rules regarding the platform economy. For example, the introduction of a standard EU DRR will reduce the current fragmentation in the unilateral application of DRRs, and clarifications of the VAT rules for platforms (i.e. in establishing the status of the underlying supplier) will improve the legal certainty. Fragmentation costs due to the diversity of the DRRs in place increase the more (and more diverse) DRRs are introduced at national level and decrease by harmonising policy interventions; these are quantified via the SCM based on the findings from the current situation. VAT collection (revenue) and fraud

Impacts on VAT collection (which are expressed by the evolution of VAT revenue) and VAT control/fraud (which are measured by the evolution of VAT Gap) would be the largest impact generated by the introduction of DRRs and are measured via the econometric model (See Annex 4: Analytical methods ).

Environment

The introduction of mandatory e-invoicing implies the dematerialisation of paper invoices, thus reducing consumption of paper and transport services (for postage) while increasing the costs for IT infrastructure and energy consumption. These net savings are converted into CO2 savings per invoice and monetised by considering the price of EU emission allowances.

A second-order environmental impact derives from the savings associated with the reduction of administrative burden and digitalisation, where taxpayers will interact less with the authorities and distance audits will require less resources.

Social

The social impacts derive from the increase of tax fairness and as a second-order effect of the impacts on competition (VAT neutrality and equality), and the corresponding impact on those working in the relevant sectors (for example those working in the platform economy). The platform economy can boost employment not only by creating work opportunities both for unskilled, part-time and high-skilled individuals, but also by fostering employment opportunities in smaller cities and disadvantaged zones. The burden reduction also generates some favourable social impacts, as administrative barriers have the greatest negative effect on micro and individual businesses, which typically create the most job opportunities for disadvantaged workers.

Business Automation

The VAT in the Digital Age initiative contributes to the digital transformation 127 by pushing for more business automation and the use of digital. The initiative supports digital transformation as VAT digital reporting further incentivises the natural trend of business automation. In this respect, the introduction of specific reporting obligations (listings, SAF-T etc.) for tax purposes only are rather seen as an additional burden by the stakeholders consulted. However, stakeholders unanimously agree that when the reporting obligations are combined with standardized e-invoicing, economic benefits are also expected. The introduction of mandatory electronic invoicing is the cornerstone in this context and could create benefits such as the use of structured data to analyse and optimize value chains, quicker invoicing processes, faster VAT reimbursement and strong business automation gains.

Level playing field (internal market)

Impacts on the functioning of the Internal Market and competition (level-playing field), are linked to the equality and neutrality of VAT for different business models (digital vs. traditional) in the platform economy area and the possibility of benefiting from the OSS and IOSS for VAT registration (domestic vs. cross-border).

Tax control and efficiency

Tax control efficiency for tax authorities is expressed by there being better/fewer audits and requests for information and quicker VAT reimbursement 128 .

Data Confidentiality

Data confidentiality is defined as the protection against the disclosure of information – in this case the taxpayers’ transactional data – by ensuring that access to the data is limited only to those who are authorised. Confidentiality can be ensured in various ways (e.g. by limiting data collection or transmission) and is assessed based on risk variation (increase, decrease), since no IT system is completely ‘confidential’ (or secure) in absolute terms.

6.2.Impacts by VAT area

The policy sub-options in each of the VAT areas were individually assessed by the supporting study.  Table 9  (VAT reporting), Table 13 (platform economy) and Table 14 (VAT registration) present an overview of this assessment.

Table 9 – Impacts in VAT reporting area by policy sub-option (net impacts, 2023-2032)

The net impacts on VAT revenue and burdens are composed of the elements detailed below.

Table 10 – VAT reporting: net impacts on VAT revenue and burdens (2023-2032)

* To fundament the cost-effectiveness analysis, the most costly and complex type of digital reporting requirement (e-invoicing) was considered.

** The impact of the introduction of DRRs on VAT revenue is estimated based on the results of the econometric model (see Annex 4: Analytical methods ).The introduction of DRRs is estimated to increase C-efficiency by 1.9 percentage points, based on the C-efficiency (quarterly data) model. The alternative methodology using the VAT gap projects a reduction in the VAT Gap by 2.6 percentage points. The VAT Gap reduction refers to the models used, not accounting for the dynamic baseline. However, Member States will, if nothing is done on an EU level, introduce domestic reporting requirements to deal with their specific problems. Thus, the figures in Table 10  reflect this situation. 130

*** The impact on the VAT Gap mainly comes from the introduction of digital reporting, which is an antifraud measure. Calculations are made by notionally increasing the 2021 VAT revenue (VAT Gap Study), amended to exclude the UK with the additional VAT revenue obtained under C-efficiency model

DRRs: Cost-benefit comparison against baseline

Tax control and efficiency

The benefits to tax control would increase with the volume, quality, timeliness and granularity of data. Therefore, options which entail the provision of data on both domestic and cross-border transactions provide the highest benefits for tax control.

Measures which only cover domestic supplies, would provide benefits in this regard (for example, through better targeted audits, or allowing faster processing of reimbursements). However, these benefits would be limited on fight against cross-border fraud, and in particular MTIC fraud, as the current system of information on intra-EU supplies would remain in place (the recapitulative statements).

Measures which apply to cross-border transactions would significantly improve the current control capabilities for these transactions which are currently based on the recapitulative statements, allowing a more efficient and effective fight against cross-border fraud.

Therefore, the optimal option for tax control purposes would be one which applies both to domestic and cross border transactions. However, this option would need to be fully interoperable with the systems already in place in Member States.

In any case, any option increasing the volume, quality, timeliness and/or granularity of the data would improve the abilities of Member States to control their taxpayers, leading to increased efficiency in tax collection, and the ability to better target fraudulent traders and problematic supplies.

Business Automation

The introduction of digital reporting requirements, in particular through the implementation of mandatory electronic invoicing, allows a more efficient management of the business’ invoicing process, significantly reducing the cost for receiving and recording invoices. Further, the dematerialisation of invoices reduces the costs related to their archiving.

The benefits derived from the business automation could be significant. However, they unevenly distribute among taxpayers. These benefits seem to be more important for large companies, which keep accounting and invoicing activities in-house, while they will be reduced for small companies, which frequently outsource these activities to external tax advisors.

The more extended the implementation of digital reporting requirements, especially if they take the form of electronic invoicing, the bigger the benefits for taxable persons derived from the automation of their processes.

Data Confidentiality

The more data are exchanged, the greater the risk to data confidentiality. In that sense, an option which keeps the data with the taxpayers gives the lowest risk to data confidentiality, and that which has the most data travelling from taxpayers to tax administrations, and between tax administrations, has the highest risk.

6.2.1.Impacts on SMEs of the digital reporting (SME test)

The introduction of DRRs will impact all taxable persons. However, this impact will be different for each type of business. In this regard, it is worthwhile providing an additional analysis on the impacts on SMEs of the introduction of digital reporting at an EU level. Such SME analysis (SME test) aim to identify the possible effects of introduction of DRRs on SMEs.

The table below provides the range of net impacts. The analysis assumes that additional services, and in particular pre-filled VAT returns, will be provided by the tax authorities under the new digital reporting requirements that are to be introduced.

Table 12 – Administrative burdens by category and type; net impacts, EUR per year; ranges

* the analysis does not account for the benefits from business automation

The results show that companies engaged in cross-border transactions get a net benefit from the introduction of an EU DRR. These are smaller for micro and small entities, but still positive. This is due to the removal of the recapitulative statements, which come on top of the other benefits generated by the DRR, and in particular the pre-filled VAT returns. On the contrary, the analysis shows mixed findings for companies that are not active cross-border, which represent the vast majority of micro and small entities. For purely domestic micro and small enterprises, net benefits may be negative; this is because they do not gain benefit from the facilitation of cross-border transactions. About the ranges, in line with the overall cost analysis, the costs are higher if more complex types of DRRs are selected, such as e-invoicing. The taxpayers made it clear in the public consultation that “the VAT reporting should not be planned only to fulfil the information requests of tax administrations but also to make real-time data available for companies, so that they can benefit from detailed financial data in their own business”. Therefore, appropriate support measures, for instance for the investment in e-invoicing services or the provision of free software could be considered, to make sure that the net costs for taxpayers are lowered or compensated. In any case, the minimisation of net impacts also depends on the provision of pre-filled VAT returns by the tax authorities. Such support was also requested by stakeholders during the public consultation, precisely pointing at possible compensation measures.

However, it should be underlined that the costs for businesses of the implementation of DRR systems would materialise even in the case that no action is taken at EU level. This is because under the current status quo, Member States will continue to implement DRR systems to improve tax collection. According to the technical study 133 carried out to assess the different policy sub-options, in the medium term the same number of Member States will have in place DRR systems for domestic transactions if no action is taken at EU level, regardless of whether systems for the reporting of domestic transactions are harmonised at EU level or left at the discretion of Member States. Therefore, the main difference of the EU action would be that the process will speed up. Therefore, the negative impact for certain businesses which are only engaged in domestic transactions are not a consequence of the EU action.

Table 13 summarises the main impacts in VAT treatment of platform economy area that are visible on VAT revenue, legal certainty, administrative burdens, and internal market – level playing field.

Table 13 – Main impacts in VAT treatment of platform economy area

VAT Revenue

Whilst VAT revenue will grow in absolute and relative terms if nothing is done, this is due to the growth of the platform economy and not to any increase in compliance efficiencies. The inconsistencies in the application of the rules will remain, along with the lost revenue collection opportunities.

Clarifying the existing rules to any extent will increase revenue as suppliers become more aware of the rules, however the difficulties would remain in how a tax authority would ensure the compliance of a large number of small suppliers. The clarification of the rules regarding the treatment of the platforms’ facilitation services (whether they are regarded as an electronically supplied service or an intermediary service) will lead to a shift in revenue between Member States.

With the introduction of the deemed supplier regime, VAT revenue increases substantially, because it introduces an extension of the tax base, and because it shifts the compliance burden from the small supplier to the platform, which would be also easier for the Member States to control. The wider the scope of the measure, the higher the additional VAT revenue.

Legal Certainty and Administrative Burdens

Currently compliance issues surrounding the determination of the status of the supplier and various record keeping obligations generate burdens of around EUR 1.9 billion. Any clarification of the current rules will reduce this burden and increase the legal certainty.

In judging the impact of any measure, it is difficult to assess the numbers of individuals providing services via platforms. For example, the study ‘VAT in the Digital Age’ assesses 410,000 full time employees deriving income from the transportation sector, and 458,000 in the accommodation sector. The Impact Assessment Report on the proposal for a Directive on improving working conditions in platform work estimates that 28.3 million people have at least occasionally worked through digital labour platforms.

It should be noted, however, that the impact due to the administration of the deemed supplier measure will fall not on the underlying suppliers, but on the platforms themselves, who will account for the VAT on the underlying transactions via their existing VAT accounting procedures.

In addition, the legal uncertainties due to the boundaries of the system will decrease with the scope of the measure. There is less legal uncertainty regarding the scope of a measure which applies to all accommodation and transport services rather than certain accommodation and transport services, and indeed if the measure is applied to all services the legal uncertainties would be minimal.

Level playing field (internal market)

Whilst clarification of the existing rules will help with legal certainty, it will not address the problem of competition, which, of the options listed, can only be addressed by a deemed supplier measure. This will eliminate the VAT advantage of occasional and very small suppliers when operating via a platform and benefiting from the network effect and follows a model adopted in other countries when faced with similar competitive imbalances (most recently the Canadian deemed supplier model for residential letting 134 ). 

However, the introduction of the deemed supplier rule would create a new impact on competition, between very small and occasional suppliers within or outside a platform. Such impact is in direct proportion with the scope: minor for more restricted or sectoral deemed supplier options and more significant for the inclusive ones.

6.2.2.Impacts on SMEs of the platform economy 

The stakeholder consulted asked for a global and reasonable solution, this being valid especially for the SMEs.

Under the deemed supplier regime options, the platform would account for the VAT in the place of small underlying suppliers. This means that the underlying supplier would not be required to register and account for the VAT itself, thus bearing no additional burden.

Table 14 summarises the main impacts in VAT registration area that are visible on administrative burdens, VAT collection and fraud and internal market – level playing field.

Table 14 – Main impacts in VAT registration area

Administrative burdens

OSS

The e-commerce sector will continue to grow, and as such, if nothing is done, an increasing number of businesses, and in particular SMEs, will face the burden of having to register for VAT in (an)other Member State(s) and comply with the specific VAT obligations of these Member States in respect of transactions not yet covered by the OSS.

Any measure which increases the scope of the OSS will decrease the necessity of businesses making B2C supplies (and other specific transactions such as own movements of goods) to register in other Member States – this could be targeted to specific sectors/problem areas (such as electric vehicle charging) where the sectoral burden reduction could be significant, or have a broader scope, enabling a wider use of the OSS.

Similarly, broadening the scope of the reverse charge will reduce the necessity of businesses being required to register in other Member States when they have made B2B supplies.

IOSS

Removing the current threshold of EUR 150 will mean that some businesses will no longer be required to register in the Member State of destination, thus reducing their burdens. However, it can be seen that any of the proposed changes to make the IOSS mandatory will have minimal impact on administrative burdens (because the majority of businesses who see a benefit from using the IOSS are already doing so).

VAT collection (revenue) and fraud

OSS

The wider use of the OSS is likely to improve compliance as businesses find the OSS easier to administer, and the wider use of the reverse charge may help detect and reduce certain types of MTIC fraud.

IOSS

Increasing the scope of the IOSS will reduce the levels of fraud, particularly from non-EU third party suppliers, however, it will not eliminate it completely (i.e. there remain the opportunities for the undervaluation of parcels or the misuse of IOSS numbers).

Level playing field

OSS

The disparity which currently exists between SMEs and large businesses will continue to exist (because a large business is more likely to be either a) already established in another Member State or b) if not, will face proportionately lower registration costs) and will rise as the value and volume of distance sales increases. To increase the scope of the OSS will go some way to redress this imbalance, reducing the necessity for SMEs to register in other Member States.

IOSS

There are ongoing opportunities for fraud, in particular from non-EU based suppliers, which impact on the competitiveness of EU businesses. Improvements to the scope and functioning of the IOSS will reduce this unfairness by improving the compliance of non-EU based suppliers.

6.2.3.Impacts on SMEs of the VAT registration 

Approx. 280,000 SMEs will benefit from the extension of the scope of the OSS/IOSS. The number of SMEs was extrapolated from the 2015 study (Deloitte’s VAT Aspects of cross-border e-commerce report), which estimates 248,581 companies engaged in B2C cross-border e-commerce, among which 232,118 SMEs. These figures were extrapolated by the supporting study to 300,000 companies in total (and the same proportion of SMEs), resting on the assumption that the growth of e-commerce since 2015 not only reflects growth in the number of active e-commerce businesses but also in the growth of volumes and values of sales of already existing businesses; hence the growth of the number of businesses should be significantly smaller than the growth of e-commerce sales over the same period (see Table 1 ) 135 . Conservatively, for SMEs only this translates in a cost saving up to EUR 0.34 (one-off) and up to EUR 0.67 (recurrent), thus a total of EUR 7 billion for the period 2023- 2032. Since the total savings are EUR 8.7 billion, SMEs will benefit the most from the measures.

6.3.Stakeholders’ views on the options

Regarding the VAT reporting options stakeholders generally support the introduction of an EU DRR for intra-EU transactions, with or without the inclusion of the domestic transactions. Agreement was less pronounced for options referring to recording data on VAT transactions in a standard digital format, adopting non-binding Commission recommendations providing a common design for reporting obligations across the EU, and for no longer requiring Member States to have to ask for an explicit derogation for introducing mandatory e-invoicing for B2B transactions.

Figure 6 – Options for VAT registration (DRRs): stakeholders’ views

The need for changes to the VAT rules to ensure proper VAT treatment of the platform economy was considered necessary by most stakeholders. On the policy options, stakeholders noted that (1) keeping a legal clarification up to date with the business developments and with the exact nature of services offered by platforms will be difficult or impossible and it was remarked that the nature of the service and distinction between an intermediary and electronic supply of service cannot always be clearly defined; (2) to presume the VAT status of the service provider is difficult and may add complexity for platforms, thus a simple and secure mechanism should be found; (3) the imposition of new record-keeping obligations could increase costs and put platforms at a disadvantage compared to non-platform businesses; and (4) while being seen as a solution by the majority of respondents, a deemed supplier role for digital platforms may create difficulties for platforms, a burden which might be unreasonable for smaller or purely domestic platforms which may choose to shift the burden towards their users by imposing strict conditions and requirements.

Figure 7 – Options for VAT treatment of platform economy: stakeholders’ views

On the VAT registration proposed options, the strongest agreement among stakeholders was to extend the OSS to cover all B2C supplies of goods and services by non-established suppliers. Only slightly less respondents agreed or at least partly agreed with extending the OSS to intra-Community supplies and acquisitions of goods, and to B2B supplies of goods and services, together with the introduction of a deduction mechanism into the OSS. The latter was in fact the most popular option among economic operators. More than half of the answers indicated that they agree with the options of making reverse charge available for all B2B supplies carried out by non-established suppliers, and with removing the EURO 150 threshold for the IOSS. Two more options were at least partly agreed by a majority: to extend the OSS to B2B supplies of goods and services but leaving the current VAT refund mechanism in place and making the IOSS mandatory for all distance sales of imported goods. The former, however, was not supported by economic operators. The options of making the IOSS mandatory either for all distance sales of imported goods above a certain threshold or for marketplaces only did not find agreement among a majority of the responding stakeholders.

Figure 8 – Options for VAT registration (OSS and IOSS): stakeholders’ views

6.4.Policy intervention – gradual approach

Even if some options were discarded, the total number of remaining valid options in the three areas still allows for hundreds of possible combinations.

Therefore, the sub-policy options in each areas are combined in five successive approaches for further analysis of their combined impacts. These approaches are: status-quo, minimalistic, moderate, enhanced and maximal. With the exception of the status-quo which represents the baseline, each approach is progressively increasing the intensity of the intervention, thus also helping to strike the right balance in terms of proportionality and subsidiarity. The logic behind the grouping was to gradually raise the intensity of the intervention in each of the VAT policy areas: reporting, treatment of platform economy and registration compared with the preceding choice. Since the VAT registration area has two components, OSS (intra-EU) and IOSS (outside EU/ importation), the intervention started with the intra-EU component (OSS), and was then extended to the IOSS.

In addition, combining the various sub-options can produce synergies. For example, the OSS VAT registration sub-option 4 requires the use of a reverse charge mechanism. Such a system, where the customer accounts for the VAT on its VAT return instead of the supplier, can be enhanced by the provision of operational data to tax administrations to reassure them of its good functioning. The same data that will be made available by the introduction of digital reporting requirements (VAT reporting options 4a and 4b) can also be used for that purpose. Therefore, the combination of such sub-options in VAT registration and VAT reporting areas generates greater impacts than the sum of their separate effects.

“Status-quo”

VAT reporting Sub-option 1:

No measure to harmonise the DRRs is introduced at EU level. The introduction of mandatory e-invoicing remains subject to a derogation, and recapitulative statements are not modified.

VAT treatment of platform economy Sub-option A:

No legislative intervention to revise the VAT Directive and Implementing Regulation will be proposed to address the problems identified regarding the platform economy.

VAT registration Sub-option 1 (OSS) and Sub-option 1 (IOSS):

This would leave in place the VAT system as of 1 July 2021, with only minor refinements (e.g. additional guidance, quick fixes) to improve the implementation of the OSS and IOSS.

“Minimalistic approach”

VAT reporting Sub-option 2:

Under this sub-option, the introduction of DRRs remain optional for Member States whilst being encouraged for those Member States with a significant VAT Gap or evidence of VAT frauds 136 , provided that the new system conforms to the EU design. The core elements of the EU design which Member States are invited to consider are described in a non-binding recommendation. In parallel, the requirement for a derogation to introduce mandatory e-invoicing is removed. Member States can thus choose any reporting mechanism they deem fit. Recapitulative statements are not modified. 

VAT treatment of platform economy Sub-option B:

Clarifying the current VAT treatment of the platform economy. The nature of the services provided by the platform and their place of supply will be clarified and a rebuttable presumption on the status of providers of services using a platform will be introduced.

VAT registration Sub-option 2 (OSS):

An extension of the OSS so that it covers all B2C supplies of goods and services by non-established suppliers. This option would address the problem of multiple VAT registration, but only in a limited number of market sectors, particularly electric vehicle charging, supplies of goods made on board means of transport and certain companies operating in border regions. This would entail a minor increase in the scope of the OSS. The IOSS will remain unchanged.

“Moderate approach”

VAT reporting Sub-option 3:

Under this option, no EU DRR is imposed; rather, a new provision would be included in the VAT Directive requiring taxpayers to record transactional data according to a pre-determined format.

VAT treatment of platform economy Sub-option C:

Under the deemed supplier options, the platform would be deemed to be the supplier, and liable to collect and charge the VAT in cases where the provider does not charge VAT. A narrow deemed supplier regime would apply to the supply of certain accommodation and transport services (i.e. short term residence renting, ride-on-demand) for monetary consideration.

Certain elements from the Sub-option B regarding clarification of the existent VAT treatment should also be included or adapted, for example, new rules for the place of supply of the platform’s facilitation services and a presumption determining the status of the provider using the platform.

VAT registration the “Minimalistic approach” + Sub-option 4 (OSS):

It will add that Member States shall provide for the possibility of reverse charge for B2B supplies by non-established persons. The IOSS will remain unchanged.

“Enhanced approach”

VAT reporting Sub-option 4a:

A DRR is introduced for intra-EU transactions and the recapitulative statements are abolished 137 . The introduction of a DRR for domestic transactions remains optional for Member States. Member States wishing to introduce such a mechanism shall ensure that it conforms to the system used for intra-EU transactions. For Member States where a DRR for domestic transactions is already in place, interoperability 138 with the intra-EU digital reporting is required in the short-term, and national DRRs are required to converge to the EU system in the medium-term.

VAT treatment of platform economy Sub-option D:

A sectoral deemed supplier regime would apply to the supply of all accommodation and transport services for monetary consideration. This also includes those elements from sub-option B described in the moderate approach.

VAT registration “Moderate approach” + Sub-option 3 (OSS) + Sub-option 3a (IOSS):

Extension of the OSS so that it covers all B2C supplies of goods and services by non-established suppliers and the transfer of own goods cross-border combined with the introduction of a reverse charge for B2B supplies by non-established persons. The optional character of the IOSS will be removed for the deemed suppliers combined with additional data exchange prior the importation.

“Maximal approach”

VAT reporting Sub-option 4b:

A DRR is introduced for intra-EU and domestic transactions alike, and the recapitulative statements are abolished. For Member States where DRR for domestic transactions are already in place, interoperability with the intra-EU digital reporting is required in the short-term, and national DRRs are required to converge to the EU system in the medium-term.

VAT treatment of platform economy Sub-option E:

Under this option, the deemed supplier regime would apply to all services for monetary consideration. This also includes those elements from sub-option B described in the moderate approach

VAT registration “Enhanced approach” + Sub-option 2 (IOSS):

Extension of the OSS so that it covers all B2C supplies of goods and services by non-established suppliers and the transfer of own goods cross-border combined with the introduction of a reverse charge for B2B supplies by non-established persons. Both, the EUR 150 threshold for use of the IOSS and its optional character will be removed combined with additional data exchange prior the importation.

7.How do the options compare?

7.1.Evaluation criteria and the gradual approach

The options are assessed and compared with regard to their effectiveness, efficiency and coherence. Because the approaches include a mix of policy options in three areas of VAT (reporting, platform economy and registration), the synergies are also mentioned, where applicable. In addition, the proportionality and subsidiary are also taken into account for the full evaluation (see Table 17 ):

Effectiveness

The specific objectives against which the effectiveness is evaluated are (1) to improve reporting requirements to unlock the opportunities provided by digitalisation; (2) to promote convergence and interoperability of IT systems; (3) to create a level-playing field for businesses, regardless of the business model; (4) to reduce burdens, regulatory fragmentation and associated costs; and (5) to minimise the need for multiple VAT registrations in the EU.

Table 15 – Effectiveness table

Efficiency

To measure the efficiency (cost-effectiveness) of policy sub-options in each area, a combination of net benefits and scoring system was used to denote the nature and scale of impacts in comparison to the continuation of the status quo for all policy sub-options in the areas of VAT reporting, VAT treatment of platform economy and VAT registration. A score of 0 indicates no or only marginal change. The scale ranges from ‘much worse’ (---) to ‘much better’ (+++).

Table 16 – Efficiency table (against baseline)

Coherence

Other Commission initiatives (see Annex 5) either do not impact the coherence or translate into a minimal impact on the VAT in the Digital Age initiative. Therefore, the coherence with EU policy objectives is assessed against the provisions of the Tax Action Plan, more specifically against Actions A1, A4, A5, and A23 (see the Introduction).

The comparison of the options is made using the aforementioned five gradual approaches in policy intervention: status-quo as a baseline, minimalistic, moderate, enhanced and maximal. The gradual approach is used to ensure the intervention does not go beyond what is necessary to achieve the objective.

7.2.Policy comparison

“Status-quo”

The “status-quo” approach is analogous to no intervention. This approach fails to meet all specific objectives. It also fails the coherence objectives, since it is not aligned with the Tax Action Plan.

“Minimalistic approach”

Effectiveness in meeting the specific objectives

The minimalistic approach does not improve reporting requirements in a systematic way. The recapitulative statements that are the main source of the ineffective reporting system are not modified. Some positive impacts are possible due the non-binding recommendations addressed to Member States with significant VAT Gap levels. The IT systems are already running and do not need further preparation, since also the scope of OSS changes is limited and can be easily absorbed by the current system. Clarifications in the platform economy add some certainty and reduce burden but fail in addressing the distortion of competition. An extension of the OSS so that it covers all B2C supplies of goods and services by non-established suppliers would address the problem of multiple VAT registration, but only in a limited number of market sectors. No synergies and/or multiplication factors manifest.

Coherence and efficiency

The approach is only partly coherent with the Tax Action Plan, since it falls short in four action areas of the Plan: A1, A4, A5, and A23. The cumulative impact in efficiency (see Table 17 ) is minimal, however marginally positive in all areas, bringing EUR 16.5 billion net benefits from VAT reporting, approx. EUR 2.5 billion in platform economy area

“Moderate approach”

Effectiveness in meeting the specific objectives

The moderate approach still limits the ambition levels in all areas. However, the approach has the merit of allowing convergence and interoperability of IT systems and it is the first one to score more consistently across all specific objectives. Thus, some savings in administrative burdens are expected, however they will be combined with a more limited effect on VAT revenue as the DRRs are still optional for the Member States. The approach reduces the distortions between the same services offered via different channels in platform economy area, thus creating a more level-playing field, but adds new legal uncertainties linked to the limits of its application, since only part of the accommodation and transport sectors are in the scope. The combination of VAT registration minimalistic approach with the reverse charge (including the chain transactions into the scope) helps generating positive impacts for more business that will not have to register in multiple Member States.

Synergy factor

Because the moderate approach combines clarification elements from platform economy sub-option B with the deemed supplier regime and also combines multiple sub-options in area of VAT registration, it punches above the added impacts by integrating some synergies. However, because the digital reporting obligations are not introduced which would complement the reverse charge, the synergies are more limited.

Coherence and efficiency

The moderate approach achieves the minimum operational efficiency in all areas of the Tax Action Plan, except A4 140 . It streamlines the mechanisms that can be applied for domestic transaction using a pre-determined format, but does not provide a quicker, possibly real-time, and more detailed exchange of information on VAT intra-EU transactions. However, the cumulative impact in efficiency is largely positive compared with the previous approach and it is mainly driven by the introduction of a limited deemed supplier role in platform economy area that increases the VAT revenue several times (EUR 19-45 billion). The net benefits almost double compared with the previous approach in the VAT reporting area and amounts to EUR 27.5 billion.

“Enhanced approach”

Effectiveness in meeting the specific objectives

The enhanced approach further increases the ambition level and the intensity of intervention in all areas. With the introduction of intra-EU digital reporting (VAT reporting Sub-option 4a), over 2 billion intra-EU transactions per year 141 are to be considered.

The convergence and interoperability of IT systems specific objective is met by introducing the short-term interoperability and medium-term convergence of the domestic reporting obligations with the EU DRR system. The interoperability and convergence combine with the non-inclusion of the removal of EUR 150 threshold for the use of IOSS that would further complicate the IT environment and lead to a maximum score regarding the IT-specific objective. The IT specific objective also has an inherent time-related component: this enhanced approach will reach the fastest the full convergence and interoperability for the Member States who have domestic DRRs in place or planned. Because of the introduction of an intra-EU digital reporting obligation, the enhanced approach is the first one to fulfil the improvement of reporting requirements using the opportunities provided by digitalisation specific objective. The benefits are driven mostly by higher VAT revenue, but the savings for businesses due to reduced burdens and improved business automation also contribute to the positive impacts. The introduction of an EU DRR and the wider and more targeted use of DRR for domestic transactions (being optional, it is expected that Member States with high VAT Gap or with specific fraud issues will be the first ones to use it) will also positively impact tax controls and business automation, especially if an e-invoicing solution is adopted, while the increased storage and exchange of fiscal data increases risks to data confidentiality.

In the platform economy field, the enhanced approach addresses the distortion of competition in the accommodation and transport sectors where the problems where identified. In addition, it achieves a good balance in dealing with burdens related to (1) the administration of the deemed supplier regime (2) legal uncertainties linked to the boundaries of the new system and (3) limiting the possible new distortion between very small and occasional suppliers within or outside a platform to these two sectors.

In the VAT registration area, combining the OSS sub-option 4 with 3a would maximise the likely positive impacts, by extending the OSS to transfers of own goods cross-border, and relying pragmatically on the reverse charge for wider B2B transactions. In addition, the removal of the optional character of IOSS for deemed suppliers will remove administrative burdens for certain actors, such as postal operators and express carriers, helping the authorities identify fraud, increase compliance and, as a consequence, improve the level playing field.

Synergy factor

The enhanced approach helps create greater synergies not only inside the VAT areas (mixing parts of and sub-options in reporting, platform economy and registration), but the multiplication effect is visible across the areas, by combining the reverse charge with the reporting obligations that are now in the scope. Thus, the synergy score is significantly improved.

Coherence and efficiency

The enhanced approached is better balanced to achieve the coherence in all areas of the Tax Action Plan, without exception. It provides a quicker and more detailed exchange of information on VAT intra-EU transactions and offers a very important and targeted incentive for Member States to introduce domestic reporting.

Additional EUR 139 billion net benefits in VAT reporting area are expected, and VAT revenue will increase by EUR 24-66 billion due to increased compliance and a broader tax base in the platform economy. Driven mainly by the introduction of digital reporting obligations, the cumulative impact in efficiency increases several times compared with the previous approach.

“Maximal approach”

Effectiveness in meeting the specific objectives

The maximal approach increases the intervention to the maximum extent possible. The majority of the specific objectives are fully met, with the exception of the IT-related one. The extension of the digital reporting requirements to include domestic transactions dramatically increases the number of transactions and the IT-related burdens for tax authorities and businesses. In principle, IT demand regarding the introduction of a DRR for intra-EU transactions should be lower than those necessary to apply the requirements to both intra-EU and domestic transactions. This may be especially true for operating costs, which are more closely linked to the number of transactions processed, but less so for investment costs.

Moreover, the maximal approach includes the elimination of the EUR 150 threshold for the use of the IOSS (VAT registration IOSS sub-option 2) wich also has a significant impact on customs, even more prominent when linked with the abolition of the threshold also for the customs duties. The inclusion has an additional negative impact on the IT-related specific objective that adds to a similar negative impact on the same specific objective linked with the possible adoption of the domestic digital reporting obligations

The benefits are driven mostly by higher VAT revenue, but the savings for businesses due to reduced burdens and improved business automation also contribute to the positive impacts. The introduction of an EU DRR and the wider use of DRR for domestic transactions will also positively impact tax controls and business automation, especially if an e-invoicing solution is adopted, while the increased storage and exchange of fiscal data increases risks to data confidentiality.

In the platform economy field, the maximal approach solves the identified distortion of competition. It deals better with the burdens related to the legal uncertainties linked to the boundaries of the new system but worsens the burdens related to the administration of the deemed supplier regime. It is increasing the possible distortion among very small and occasional suppliers within or outside a platform.

In the VAT registration area, the maximal approach further expands the scope by including the removal of the EUR 150 threshold, thus adding marginal benefits.

The synergy score is similar with the enhanced option.

Coherence and efficiency

The maximal approach has the highest cost and also displays superior net benefits. In VAT reporting area the benefits amount to EUR 231 billion. VAT revenue will also increase by EUR 63-146 billion due to the extension of the scope of deemed supplier broadening the base in platform economy. Driven by the introduction of domestic digital reporting obligations and the extension of the scope in platform economy, the cumulative impact in efficiency takes a step further compared with the previous approach.

Proportionality and subsidiarity

Under the minimalistic approach the action taken are subpar and they do not meet the minimum needs to achieve the goals. The moderate approach observes better the proportionality and subsidiarity, however it still falls short. The enhanced approach is the better balanced one, while the maximal approach is pushing the limits of proportionality and subsidiarity. The stakeholder consultation pointed to the fact that the maximal approach is more uncertain from a political feasibility point of view, having in mind the general rule in the European treaties that EU Member States must agree tax proposals unanimously before they can be adopted. The stakeholder consultation indicates that at least in the area of VAT reporting, where some Member States strongly expressed their preference for optional domestic DRRs, and in the platform economy, where the possible distortion and network effects manifest in specific areas, reaching the level of ambition required by the maximal approach could be challenging.

To summarise, the minimal and moderate approaches are the lowest hanging fruits, the enhanced approach is balanced, although cautious, and the maximal approach is very ambitious.

 Table 17 – Comparison of gradual policy intervention

Table 18 – Comparison of policy intervention: total net benefits (2023-2032)

* A multiplication factor of 1, 2, and 3 (see corresponding column in Table 17 ) was used to amend the benefit/cost ratios to better account for proportionality and subsidiarity

8.Preferred option(s)

From the comparison, it can be concluded that the best policy choice results from the introduction of digital reporting requirements (EU DRR), combined with a deemed supplier provision and an extension of the scope in VAT registration. This points to the maximal and enhanced approaches.

The enhanced approach introduces an EU DRR for intra-EU transactions with an option for Member States to introduce this system for domestic transactions and a deemed supplier regime in the accommodation and transport sectors in the platform economy. It also entails the modification of VAT registration by extending the coverage of OSS to all B2C supplies, extending the reverse charge to B2B supplies and making the IOSS mandatory. The maximal approach goes one step further by including mandatory domestic DRR, a deemed supplier regime in all sectors of the platform economy and also removes the EUR 150 threshold for the use of IOSS.

The maximal and the enhanced approaches are effectively addressing all specific objectives of improving reporting requirements to include digital opportunities; providing a level playing field for businesses; ensuring convergence and interoperability of IT systems; reducing burdens, regulatory fragmentation and associated costs; and minimising the need for multiple VAT registrations.

The most significant expected benefits are from the options that cover the greatest proportion of these situations. Both the maximal and enhanced approaches have a wide coverage, hence the greatest potential benefits. For example, in the VAT registration area where the focus is more on the issue of ‘high administrative and compliance costs’, the sub-options for OSS and IOSS mainly differ in terms of the scope of the situations currently triggering multiple VAT registrations that would be addressed. However, for a business to benefit from any change, it would need to avoid all situations that still require additional VAT registrations. In other words: even if 99% of the transactions of a business currently requiring VAT registration could be dealt with using the OSS or via the reverse charge, it would still need to register for VAT for the remaining 1%, meaning that the availability of the OSS would hardly affect its administrative burdens. Having this in mind, the greatest coverage of the enhanced and maximal approaches address the issue.

There is no clear single preferred option for the following reasons:

1. The maximal approach scores highest in efficiency: between 2023 and 2032 it will bring between EUR 303 billion and EUR 386 billion 142 (net impacts against baseline), compared to between EUR 172 billion and EUR 214 billion 143 for the enhanced approach. The difference will certainly be lower due the fastest adoption of domestic DRRs by the Member States. 144 From the cost-benefit analysis without including any potential risks, the maximal approach should be the obvious choice.

2. If in terms of efficiency the maximal approach is a clear winner, adding the effectiveness and especially proportionality and subsidiarity criteria tips the balance towards the enhanced approach. More precisely, the enhanced approach respects to a greater degree the principles of subsidiarity and proportionality. For example, Member States will have the possibility to decide at a national level whether to introduce domestic reporting requirements, (whilst ensuring the interoperability with the EU solutions).

3. The enhanced approach follows the targeted consultation more closely, therefore making any gains politically feasible. Member States strongly indicated during targeted consultations and in various forums that they value a higher degree of freedom regarding the introduction of domestic digital reporting obligations and manifested the strong support for a more moderate intervention. Moreover, they were equally concerned about the impacts of a wide deemed supplier regime on the sector as a whole, and indicated that it should begin with a more targeted approach, approving the Commission’s suggestion of introducing it into the transport and accommodation sectors.

A final word should be said on the compatibility of the enhanced and maximal approaches. If the maximal approach is a best case scenario, the enhanced approach is a self-standing viable set of measures that can be extended in scope in the future depending on aspects such as (1) the further evolution of the drivers, e.g. platforms that may become dominant and impose their specific business model, and (2) the evolution of IT solutions, thus being ready for the VAT in the digital age now and fit-for-future. For instance, Member States that do not adopt a DRR for domestic transactions immediately, could implement it once the DRR for intra-Community transactions is consolidated and businesses progress towards automation, fully achieving in the long term the benefits on VAT fraud reduction estimated for the maximal approach.

8.1.REFIT (simplification and improved efficiency)

VAT in the Digital initiative will fully compensate the costs of its implementation; however, the different parts of the initiative act differently in this regard: VAT reporting comes with additional costs and possible cost reductions, platform economy and VAT registration are mainly reducing costs. The Fit for Future Platform included VAT in the Digital Age in its annual work programme for 2022, recognising its potential for reducing the administrative burden in the policy field. The evidence produced by the Platform informed the impact assessment, as explained below.

The Platform’s evidence pointed out to the need of avoiding additional registration through change of VAT rules on processing in another Member State before exporting and extension of the VAT One-Stop-Shop to the transfer of own goods. The need to minimise the number of instances where a business has to register in other Member States than its Member State of establishment is accounted for in the preferred options under the VAT registration. Also, the aspect of e-invoicing features in the preferred options on VAT reporting. From a taxation point of view, interoperability would be ensured by accepting invoices issued according to the European e-invoicing standard that is already in place, and the best solution is to combine flexibility with standardisation.

While the registration process is under national responsibility, the preferred option on VAT registration (OSS, IOSS) addresses as well the Platform’s call for a more efficient registration process by proposing solutions for VAT registration in a way that will limit the number of instances where businesses have to register and deal with tax administrations of other Member States.

By removing the optional character of the IOSS for deemed suppliers, one of the measures proposed will indirectly limit the number of mistakes made by businesses. This is done by transferring certain responsibilities towards the platforms and hence lowering the risk of businesses receiving heavy penalties. This is also an aspect brought up by the Fit for Future Platform evidence pointing out to changing rules on VAT exemptions for services related to the importation of goods.

The introduction of a DRR could generate net costs for businesses, especially for those operating purely domestically, these could be partly compensated by the introduction of additional services, such as the pre-filling of VAT return, as well as by the removal of recapitulative statements.

The removal of recapitulative statements alone does not compensate for the higher costs associated with the introduction of digital reporting in the maximal approach. Therefore, to fully compensate the remaining costs, possible solutions would be:

§Introducing or promoting the introduction of support measures for investments in IT systems, such as support to the purchase of e-services for complying with the new requirement 145 , and/or

§Introducing other simplification measures. For instance, once the tax authority receives all transactional data from the digital reporting, it may consider that VAT returns are no longer necessary, thus, in the medium-to-long-term, VAT returns could become an optional obligation, at least for Member States which have implemented a DRR for all transactions.

In the platform economy area, the disparate reporting obligations introduced by several Member States at national level will certainly be removed, because a deemed supplier regime makes them obsolete and transforms them in a redundant burden for businesses and tax administration alike.

In the VAT registration area, the costs generated by the need to VAT register for distance sellers will be eliminated almost completely.

Under the one-in-one-out (OIOO) principle, the Commission committed to offset new burdens from legislative proposals by reducing existing burdens in the same policy area, so that negative impacts for businesses are limited. The offset concerns administrative burdens and not necessarily adjustment costs (e.g. the investment needed to upgrading production lines, reducing damage to the environment, improving public health or raising the level of consumer or worker protection), and the one-in-one-out table below includes adjustment costs (which do not need to be off-set and administrative costs (that will have to be off-set) and are more of recurrent nature.

Table 19 – One-in-one-out comparison table (enhanced/maximal approach)