EU VAT invoicing controls: What the unfolding policy mix tells us about the future
The European Commission recently made a big communications splash about what’s literally being positioned as the ‘final’ EU VAT system. The change in the logic to be applied as to the ‘place of supply’ is indeed fundamental to the VAT system and its legal underpinnings, and it will affect companies in their administrative practices. So it’s undoubtedly big in many ways. Nonetheless, the big media splash feels a little bit like a storm in a teacup from our vantage point.
Let me explain. The impact to business and the economy as a whole of tax control measures is to a large extent determined by their impact on businesses’ IT systems and associated processes. This correlation will only increase further in the coming decades.
Looking at things that way, it is quite disconcerting to see how a very large part of the costliest tax control action today is driven out of individual EU Member States and not from harmonised EU initiatives. Even more worrying is that these local initiatives only seem to generate negligible interest from Brussels.
Put simply, it appears that under current EU policies, an EU Member State can pull off almost any changes to their VAT control environment if the purpose is to combat fraud. This possibility has been used by a growing list of countries in the past years (Portugal, Spain, Hungary, Poland, Italy, Greece etc.) to implement a mix of the following additional controls:
A few EU countries (Poland, Italy and Romania) have recently announced plans – or already begun – to enforce a new measure that upheaves the principle of the “supplier as a tax collector”. The scope and method varies between the different countries, but works by forcing the buyer to split the payment in two parts: the supplier gets paid equivalent to the price exclusive of VAT, while the VAT due is paid either directly to the tax authority, or into a separate bank account of the Supplier that has been reserved exclusively for this purpose. In Romania, the draft legislation includes provisions on penalties up to 50% of the VAT amount for cases such as when the buyer doesn’t pay the VAT amount to the reserved VAT bank account, or when a supplier doesn’t open the reserved VAT bank account, of if a supplier fails to deposit cash payments to the reserved VAT bank account within the time limit set out by law. As you can tell, the administrative burden on taxpayers will be significant, but the impact on business IT systems and processes will be low.
Domestic reverse charge:
Under this option, countries shift the full administrative burden for input and output VAT reporting to the buyer – this is common for inter-community supplies, but some countries (a recent high-profile example being Greece) are re-using this as a way to concentrate responsibility for VAT processing into the party which has the most to lose: the buyer. This has a medium-level impact on IT systems and processes.
Real-time or near-time invoice controls:
Here, Member States are combining the ‘anti-fraud’ arguments with claiming that these additional (e) invoicing requirements are really ‘reporting’ requirements and not within the scope of the VAT Directive’s e-invoicing rules. Each country has not just a different implementation of invoice clearance (which would put them on the same level as e.g. most Latin American countries): each system has a completely different set of ground rules which opportunistically borrow elements from both the world of VAT reporting and ‘real’ clearance systems. The diversity, legal interpretation issues, lack of maturity and many aspects of these new on-the-fly tax eavesdropping systems lead to very, very high costs on IT systems and processes.
Even though the first of these two measures don’t impact IT systems and processes significantly, the fact that these measures all come in the same period of time, and that there is massive variation within each group as well as, will lead to an unprecedented total of tax law enforcement costs to businesses and the European economy.
For one, the Commission’s objective for e-invoicing to be the predominant means of invoicing by 2020 is off the table already now – let alone by that time, when we predict another three to five EU Member States will have announced plans towards one or all of these additional control measures.
It’s truly a mystery why this situation doesn’t seem to send shockwaves through Brussels.
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Alicja Kwiatkowski, Legal Counsel, TrustWeaver