Transforming VAT: How is Europe modernising tax reporting?
By James Buckley, Managing Director, Europe, at Sovos
The digitisation of indirect tax collection, such as VAT, is growing in popularity across governments in Europe. Public authorities are looking to increase visibility into transactions and close long standing VAT gaps to collect more revenue. With countries facing increased economic pressure, including a global recession in sight and buildup of debt from the global pandemic and energy crisis, this increased revenue might offer some relief.
These digitisation instruments, such as Standard Audit File for Tax (SAF-T), however, did not originate in Europe and have been around for some time. Latin America boasts some of the world’s most advanced continuous transaction control (CTC) regimes, with digitisation instruments emerging in countries such as Brazil and Chile in the early 2000s. Due to pre-existing tax enforcement infrastructure and e-audit advances, Europe has experienced a much more gradual rollout of CTCs.
In recent years, however, it seems tax collection may have reached a turning point on the continent: countries such as Poland, Italy, Hungary and most recently France, have invested heavily in e-invoicing mandates and the European Commission released a revolutionary proposal which if approved will make digital invoicing the norm across the EU and (near) real-time reporting mandatory for intra-EU transactions. The most recent reforms to be made in tax digitisation in the EU, were put forward in the VAT in the Digital Age (ViDA) proposals in December 2022 by the European Commission. The reforms look to upgrade the VAT directive to make it ready for the digital age. These measures have the potential to both reduce tax fraud and streamline tax processes for businesses which operate in multiple countries in the EU.
Efforts have also been made outside the EU, as the UK government has introduced a more modest “Making Tax Digital” (MTD) initiative, which instructs all VAT-registered businesses to keep digital records of invoices and use software to submit their VAT returns.
While accountants have a tendency to be change averse, especially when it comes to new technology, government tax reforms have forced their hands. The growth in platforms which support the digitisation of tax processes is proof of this, especially those which offer services to small and medium sized businesses that have to comply with MTD. We can expect to see a similar increase in popularity across software and platforms that support the digitisation of tax processes as VAT digitisation gathers momentum.
The state of VAT digitisation in Europe
Digitisation of tax reporting
Arguably the most important tax digitisation trend taking place is the spread of CTC mandates across Europe. The mandates dictate that businesses submit transactional data to a platform designed by their tax administration at the same time as an actual business transaction.
Although the European Commission has pushed for a uniform model for implementing CTC mandates across the continent in its recent ViDA proposals, there are still no realistic plans that would lead to this. Individual member states still have the freedom to design their own CTC systems and as a result European countries boast systems of varying sophistication. For example, Italy uses a well-established model, having introduced a clearance e-invoicing model in 2014 which started with business-to-government e-invoicing and has now extended to cover business-to-business invoices and some business-to-consumer transactions from 2019. In comparison, France only recently introduced a CTC system and while B2G invoicing has already been made compulsory from July 2024 to January 2026, mandatory B2B e-invoicing is also expected to come into force. When data is not reviewed through this process, compulsory e-reporting is carried out using both B2C invoices and cross-border B2B invoices. The French system used an interesting mix of centralised invoice processing by the government for standard invoices and the use of a certified private service to handle more complex enterprise flows, veering away from Italy’s example and adopting a process which is somewhat similar to Mexico’s.
With these CTC systems still being relatively young, it is unknown which could produce the most societal benefits. While the European Commission appears to prefer a model based on real-time reporting rather than invoice “clearance” by the tax administration this is clearly a contentious topic and will be debated in the European Council this year.
Digitisation of electronic invoice transmission
A second digitisation trend taking place in Europe is the digitisation of e-invoice transmission. EU, authorities that didn’t consider CTCs until much later gained experience with the automation of e-invoice exchange and standardisation. Investments not only focused on individual invoice messages, but on all the components that are needed for trading partners to automate the exchange of data with each other. The main impetus for this standardisation and best practice development was the desire to use digital tools to make the European public procurement market more efficient and to create a level playing field for businesses across the single market competing for government contracts. The so-called PEPPOL methodology, which encompasses technical standards but also central security and directory services, subsequently grew out of the public procurement space and became central to the European thinking about how to create an interoperable market for e-invoicing between businesses. The policy objective behind initiatives using or inspired by PEPPOL was often economic efficiency rather than tax collection.
The architects behind PEPPOL, however, realised that, even with perfect standardisation, it is very difficult to build a vast interoperable network based on the unintermediated, peer-to-peer exchange of commercial data between businesses. Hence, they envisaged an interconnected ‘network of networks’ based on ‘access points’ which may be individual companies with significant IT resources, but would mostly be professional service providers connecting large amounts of trading partners on their networks.
Today, there are several regulatory instruments towards ‘e-invoicing’ that coexist, sometimes in the same country: rules about the ‘horizontal’ exchange of e-invoices in public procurement (‘B2G’) and B2B invoicing (‘B2B’) and rules about the ‘vertical’ communication of invoice data with tax administrations in VAT-centric CTCs. This can be quite confusing for businesses wanting to just get on with business.
How will this influence the tax tech space?
With this mass adoption of a CTC approach in VAT digitisation and confusing surrounding e-invoice transmission in Europe, we are now seeing mostly international businesses driving a notable increase in activity in the tax tech market. Businesses operating in multiple countries are required to comply with VAT reporting requirements in each country they work in and with multiple, diverging CTC mandates existing in Europe, this process is becoming more and more complicated.
Governments also tend to target large corporations first when introducing CTCs and other digital tax reforms, introducing B2G e-invoicing and B2B e-invoicing for multinationals and larger domestic players. So, while in certain Latin America countries, e-invoicing has been extended to cover all transactions – including B2C invoicing – reforms in Europe are yet to extend deeper into the SME space.
There seems to be a greater desire, among businesses on the search for tax tech, for vendors who offer multiple tax compliance capabilities in one. This could stretch from SAF-T, VAT determination, reporting and e-invoicing, whilst also being able to connect their tax tech business to business process platforms like the procurement systems rolled out in Europe.
Businesses are aware that tax administrations are gaining deeper insight into their operations, in some cases more than the business itself. Expectations are much higher for tax tech firms who now must offer a broader and more focused service to match the digital data insights governments have gained. With the roll out of digitisation reforms occurring at such speed, especially in countries like France, it is hard to keep up and few tax tech players have been able to meet these demands alone. Partnerships and alliances between companies and even a fair amount of M&A activity has been observed, enabling companies to meet their customers’ expectations.
What the future holds for tax tech
The UK and Europe are at the beginning of a long journey of tax digitisation. Whilst in the short-term businesses might struggle to adapt to digitised internal processes and structures at the same rate tax administrations are rolling out reforms, the long-term outlook remains positive for those who are prepared for this new era of change. On balance, though they may seem a burden to implement, new government mandates offer the opportunity for businesses to streamline their internal processes and gain advanced insights from new standardised data. In other words, businesses should endure the short-term hassle in order to reap the long-term benefits.
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