Episode 1 – VAT in the Digital Age

Welcome to TBI Expert View Season 3, Episode 1. In this episode, we’re going to talk about VAT in the digital age, the changes that are coming down the line for business from a digital point of view. I’m joined today by Nicoletta Petrosino, the Global Indirect Tax Manager from the Nestlé group, to discuss this topic. Welcome, Nicoletta.

Thank you. It’s always a pleasure to be with you.

Today we are talking about the lack of harmonization and digital change that is coming into VAT compliance. We’re seeing it in various forms. We’re seeing it in mandatory B2B e-invoicing being rolled out throughout Europe. We’re seeing it in various different digital reporting requirements, also throughout Europe, for example SAF-T (Standard Audit File Tax). We’re seeing it for the platform economy. We’re seeing it with simplifications in OSS and IOSS. And this all brings an element of a burden to businesses because with various domestic changes that are being introduced, businesses are struggling to keep up.

We want to look at this topic from the EU Commission’s point of view and what the EU Commission has done this year to address those kinds of burdens for businesses and to address the lack of harmonization in the VAT system in Europe.

So, Nicoletta, could you just explain to us what the EU Commission has done this year to start to address those kinds of issues?

Yeah, definitely. This year European Commission launched a public consultation. It was to gather information from different stakeholders regarding three main pillars. The idea was to have this consultation ending up as draft legislation that will probably be out this year, in November. We already have a report of the findings that are coming from the consultation, but the final draft should be in November and the package should be implemented in 2024 or in 2025 depending on the topic.

The three main pillars are, first of all, digital reporting requirements. The European Commission realized how fragmented the regulation within the 27 states was and how heavy the burden was on businesses trying to comply with it. They would like to conduct an analysis of the digital reporting requirements, that will mainly focus on e-invoicing, alongside a focus on Intra-EU digital reporting requirements. The first benefit you can have from this approach is the elimination of Intra-EU sales list and of Intrastat, which would be a very good outcome.

It’s also important to note that there is an ongoing discussion on where the data coming from the taxpayer has to be kept, either at the taxpayer level or at the central level. In this last case, and if the information is centralized within the tax authorities, there still is a benefit coming out of this. This is basically to provide a VAT Return or the faster VAT refund procedure and also a more targeted audit to the business.

What are you seeing at the moment, though? We saw that the mandatory B2B invoicing rolled out in Italy. What was the benefit for business or what were the gaps that the authorities there didn’t consider? I suppose one of the big gaps there was the refund procedure and how the mandatory B2B e-invoicing impacted some of the VAT deduction opportunity for business in Italy, and particularly with employee expenses. We saw that a lot of companies resident in Italy gave up their right to VAT deduction on those kinds of expenses because they couldn’t marry the e-invoicing process with their T&E flow. And so they decided that it was less burdensome just to give up the right to deduction, which is kind of a negative outcome of the roll out of mandatory B2B e-invoicing in Italy.

So you would hope then that any further rollout of mandatory B2B invoicing would take these into consideration. But as you say, the Commission are only looking at a very tight scope for e-invoicing and a harmonization of e-invoicing. We’re going to continue to see these differences throughout Europe you would imagine for those mandatory B2B rollouts.

We’re seeing developments in Poland, we’re seeing developments in France and already they even look different from each other. So the French model is different from what’s being proposed for Poland. Poland seem similar to Italy, but businesses are still going to have to deal with these kind of differences, right Nicoletta? Also the EU Commission proposal and the policy suggestions that have been made don’t really go very far to address those kinds of differences that businesses are going to have to deal with.

Unfortunately, yes.

If there is going to be harmonization, there has been commentary that the IT infrastructure that’s needed for the tax offices to be able to roll out these kinds of changes are huge and very burdensome for tax offices as well. The benefits down the line are great but the initial burden is very great too. Also the expectation is that a full rollout will take probably until 2030, which is a long road and a long process.

So that’s the first pillar. And then the second pillar that is dealt with in this consultation, which we’re still pulling together is looking at that final report as a result of the consultation that began at the beginning of this year. The second pillar relates to the platform economy. What can you tell us about this, Nicoletta?

In July 2021 was the launch of the e-commerce VAT package. So it was introduced to tackle fraud related to the low value importation and also to simplify the distant sales regulation for businesses. After the first six months of implementation of the package, the Commission observed that they were able to cash-in €8 billion of VAT from the OSS and IOSS scheme introduced by the package.

And also they were able to recover €1.9 billion of VAT related to the low value goods importation. This is a very good result already for them. And of course, the idea is to improve the package as it is today, the idea would be really to eliminate the threshold €150 and also to make the IOSS mandatory.

Unfortunately, the IOSS is still not perfect as the numbers can be stolen. It can also not really be verified by the tax authority and this will end up as a double taxation and the exemption would be completely lost. Other challenges are coming from the package. For example, it is really difficult to qualify the marketplace as an electronic interface, as it is defined by the regulation.

And when it is the financed debt, the demand of the scheme should apply. Also, when it is applicable, it is still not possible to say that the business is relieved from the VAT liability because there are still challenges on the VAT rate applicable to the products and who is responsible for that: is it the marketplace or the producer of the product? If there is a challenge from the tax authorities, who is responsible for that?

Indeed, the marketplace pushes back this responsibility to the business. A scheme, for example, to apply a limited responsibility clause into the legal agreement – how this can be managed? This was a very tough point that was brought into the negotiation. Finally, what is still really complicated is the reconciliation and the reporting of the VAT amount. As you can see, they are still going into the business booking system. But after they have to be reported and the VAT is to be paid by the marketplaces. So there is still some magic to be done. Also, this magic doesn’t always work. The amount that is paid by the electronic interface to the tax authority needs to be recharged to the business and everything has to be reconciled into the business account because, otherwise, you may have an impact on your P&L and this is something that nobody wants to have.

Yes, so there is still this big administrative burden. There is still a lack clarity and responsibility. And we still have this issue that the tax offices haven’t really caught up with these kind of processes in order to validate an IOSS number. We still have fraudsters catching onto the process as well and being able to rob an IOSS registration number, so there’s still definite issues there with the changes for the platform economy. Hopefully this final report that we have in relation to the consultation will deal with some of this lack of clarity.

Let’s move on to the final pillar: we have the single EU VAT registration. What is this one dealing with?

So the last pillar is focusing on the single VAT registration. The IOSS has been so successful that they would like to expand this scheme also to other transactions that are not covered like the movement of own goods when the final customer is a consumer but also between resident companies where the reverse charge mechanism is not applicable.

Indeed, the other improvement that they would like to have is to extend this to all possible transactions where the reverse charge scheme is possible. However, this scheme is still not harmonized as all member states have their own rules for businesses. However, this improvement and harmonization is not part of the plan. Also, it is a pity that the granting of the right of deduction to the IOSS scheme is not included as this also has a big, big cashflow impact on the business.

Yes. So again, VAT deduction is impacted really by these kinds of simplifications that we’re seeing or these kind of process improvements that are being suggested. The inability to include your input VAT into these declarations is again a big burden and a big administrative issue for business. We don’t really see any kind of improvement there, we just see an extension of the One Stop Shop, which again, doesn’t include the right to VAT deductions within those declarations.

Thanks so much Nicoletta for going through the three pillars of the consultation. I would like to just talk a little bit about what has happened now. We had this consultation early in the year, now we have this final report, so what’s to be expected?

The final report, I suppose, gave us a summary of the pillars and the challenges for business, impact statements from the various stakeholders, policy suggestions. So what’s next?

We are expecting to have a draft of the regulation in November this year, and hopefully this will help with all the issues that we just discussed. Of course, the approach of the commission to have all of the stakeholders around the table is very welcome. We need to be consulting them in order to tackle this lack of harmonization within the EU. All of this is a very long journey so I don’t expect it to be fixed within this year or even next year. It is going to be a very long journey.

Yes, I think so. It’s a great approach to have this consultation paper, to get the stakeholder all together, to give their feedback on the challenges that they have, and to come up with this final report and to make a legislative proposal this year. But as you say, it’s a very long road and we don’t expect any immediate harmonization or relief for business.

But Nicoletta, what I would say is when we do have that draft legislation, maybe come back and talk to us again about what that means and the impact that will have for business.

With big pleasure.

Thanks, Nicoletta. It was lovely to talk to you today.

Take a look at Series 2 of Expert View where we featured discussions from industry experts on a range of emerging trends such as Brexit, Standard Audit File for Tax (SAF-T), Outsourcing of VAT Compliance and Continuous Transaction Controls (CTCs).