EU Takes Major Step Towards Modernizing VAT for the Digital Era

The Council of the European Union has reached a ground-breaking agreement on a comprehensive package to modernize Value Added Tax (VAT) rules for the digital age, encompassing a comprehensive regulatory framework. This landmark decision, announced on November 5, 2024, aims to combat tax fraud, support businesses, promote digitalization across the EU, and streamline VAT rules, particularly in relation to digital transactions and the platform economy.

This includes three key components: a Directive, Regulation, and Implementing Regulation.

Key Components of the VAT Reform

Digital VAT Reporting

• Introduction of a real-time digital reporting system using e-invoices for cross-border B2B transactions.
• The Council agreed that a unified EU VAT reporting system should be in place by 2030, with all existing national VAT systems becoming interoperable with this EU-wide system by 2035.
• Aims to combat VAT fraud through rapid detection of suspicious activities, simplify digital VAT reporting, and ensure smoother cross-border transactions with the EU.

VAT for the Platform Economy

• The Council has provided member states with more flexibility concerning the platform economy. Key changes include:
• Expanding the definition of short-term accommodation rentals for tax purposes.
• Allowing member states to have the option to exempt small and medium-sized enterprises (SMEs) from the deemed supplier rules.
• Introducing a short transaction period for applying the deemed suppler rules, which place responsibility for VAT collection on platforms facilitating transactions, rather than on individual suppliers.

Expanded One-Stop Shop for VAT Registration

• The Council has also agreed on a significant shift regarding VAT liability in business-to-business (B2B) transactions.
• Going forward, liability for VAT payments will transfer from the supplier to the buyer when the supplier is not established in the member state where VAT is due (under the ‘reverse charge mechanism’).
• The shift, which was already possible in certain cases, will now become mandatory.

Impact and Implementation

The Council decided not to extend the existing deemed supplier provision – which places VAT collection responsibility on platforms – to cover all goods supplied through online platforms or the transfer of goods owned by platform operators.

Additionally, the rules for works of art and antiques will remain unchanged.

Regarding the one-stop-shop for imports, the Council decided to defer further discussion on making this mandatory, as part of ongoing discussions within the framework of the proposed reform to the Union Customs Code.

This package represents a significant step towards digitalizing VAT processes, enhancing fraud prevention, and easing administrative burdens for businesses across the EU. The agreement marks the culmination of nearly two years of negotiations and is poised to reshape the VAT landscape in the coming years.

Hungarian Minister for Finance, Mihály Varga, emphasized the importance of this agreement, stating, “This is a cornerstone for the digital transition and a significant step in improving the competitiveness of the EU. The new rules will update our VAT systems to reflect the digitalization of our economies, help combat VAT fraud, and ease administrative obligations for small companies and individual service providers.”

As the EU moves forward with these reforms, businesses operating within the bloc should start preparing for the upcoming changes. The digital transformation of VAT processes will require adaptation but promises to streamline compliance and reduce fraud in the long run.

Following the Council’s agreement, the European Parliament will be consulted on the revised text due to the substantial changes made to the Directive.

Once the Parliament has been consulted, the regulations will be formally adopted by the Council.

They will enter into force once published in the EU’s Official Journal.

Stay tuned for further updates as the implementation of these new VAT rules unfolds across the European Union. Subscribe to our newsletter for updates!