VAT In The Digital Age: How EU Reforms Impact Non-EU Businesses

The European Union’s “VAT in the Digital Age” (ViDA) reform package, approved by the ECOFIN Council on November 5, 2024, is set to bring major updates to the EU VAT system. For businesses outside the EU, ViDA’s impact will depend largely on their level of engagement within the EU market. Companies without supply chains or physical operations in the EU will see minimal impact. However, those involved in cross-border sales of goods or services or operating certain online platforms within the EU will face more extensive changes, requiring swift updates to their billing and accounting systems.

ViDA reform package, introduced by the European Commission in December 2022, is organized around three main pillars, each targeting specific areas of VAT modernization:

• Digital Reporting and E-invoicing: This pillar will mandate electronic invoicing for business-to-business (B2B) transactions across EU borders and introduces near-real-time digital reporting.
• Platform Economy: New “deemed supplier” rules will require online platforms that facilitate short-term rentals or passenger transport to collect VAT on transactions where the service provider does not.
• Single VAT Registration: Expansions to the One-Stop Shop (OSS), a special scheme for transfers of own goods, and a mandatory reverse charge mechanism aim to reduce the need for multiple registrations across EU countries.

The first and third pillars were already agreed upon in May 2024, based on a compromise text prepared by the Belgian EU Council presidency. However, progress was initially stalled when Estonia opposed the deemed supplier model for platforms facilitating short-term rentals and road passenger transport. Initially, ViDA proposals were expected to be introduced between 2024 and 2028. However, recent updates have extended the timeline, with full implementation now set for between 2025 and 2035.

Digital reporting and e-invoicing

The most impactful aspect of ViDA is the move to mandatory e-invoicing and digital reporting for cross-border intra-EU transactions. Starting July 1, 2030, all VAT-registered businesses will be required to issue structured e-invoices for B2B sales across EU borders. These e-invoices must be generated within 10 days of the transaction date (or the payment date, if earlier). Once issued, the supplier must digitally report specific details from the e-invoice to the relevant tax authorities. These requirements will apply to all businesses engaged in EU cross-border trade, regardless of whether they are established in the EU or not. For example, UK companies storing goods in one EU country and shipping them to a business customer in another EU country will need to comply, even if they don’t have a physical presence in the EU. This is a shift from many domestic e-invoicing systems, which typically apply only to sales between businesses with local establishments.

While digital reporting and e-invoicing for intra-EU sales won’t be mandatory until July 1, 2030, ViDA introduces short-term measures that encourage member states to adopt e-invoicing for domestic transactions sooner. Just 20 days after the reform package’s publication (targeted for the first half of 2025), EU countries will be able to mandate e-invoicing for domestic transactions without requiring prior authorization from the EU Council. Member states may also require customers to accept e-invoices from this date onward.

ViDA will require more details on e-invoices, mainly starting July 1, 2030. These will include the bank account numbers for payment, the original invoice reference number for any corrective invoices, and an indication if cash accounting applies. The reforms will also permit businesses to issue summary invoices that cover sales within a single calendar month.

ViDA aims to standardize e-invoicing and digital reporting for intra-EU trade. However, as a compromise, member states with existing domestic e-reporting systems as of January 1, 2024, or those in the process of implementing them by that date, may retain their current systems. As a result, businesses operating in multiple EU countries may still face varying e-invoicing and reporting requirements across the EU for some time.

Platforms facilitating accommodation rentals and passenger transport

The second pillar of ViDA reforms changes VAT rules for platforms and marketplaces that facilitate short-term accommodation rentals (30 nights or fewer per customer) and road passenger transport. From July 1, 2028 (or by January 1, 2030, at the latest), these platforms—regardless of where they are based—will be deemed the “supplier” for VAT purposes, making them responsible for VAT collection on these services. However, the platform will not be required to collect VAT if the underlying service provider provides a valid VAT identification number for the relevant EU country and declares to the platform that they will handle the VAT. The deemed supplier rule is intended to capture VAT from cases where the underlying supplier would typically not charge it, such as private individuals or businesses with revenue below VAT registration thresholds. A recent update to the ViDA package includes an opt-out provision allowing member states to exempt platforms from deemed supplier responsibilities if the provider qualifies for the special regime for small and medium-sized enterprises.

While ViDA aims to streamline VAT collection on platform-facilitated services, it also allows member states flexibility in how they apply the rules. This flexibility could lead to inconsistent VAT requirements across the EU, creating a fragmented compliance landscape. Non-EU platforms operating in multiple EU countries may face added complexity, as varying VAT treatments will often require substantial changes to billing and reporting systems. Additionally, platforms taking on VAT responsibilities may encounter challenges in verifying providers’ VAT status, introducing further compliance risks.

Platform facilitation services

Current VAT rules do not define whether platform fees should be treated as remuneration for digital or intermediary services, a distinction that affects VAT collection in business-to-consumer (B2C) transactions. If an accommodation platform classifies its services as intermediary, VAT is due in the country where the rental property is located. If classified as digital services, VAT is collected in the customer’s country. For B2B transactions, this distinction is irrelevant, as VAT is due in the customer’s country regardless.

ViDA addresses this ambiguity by clarifying that platform facilitation services provided to private individuals will be treated as intermediary services, with VAT due in the country where the transaction occurs. This rule applies to services facilitated through platforms, ensuring consistency in VAT treatment across EU member states. Although ViDA does not explicitly address how platform facilitation fees should be treated under the deemed supplier model, the intent seems clear: if a platform is regarded as the deemed seller, the facilitation fee should not be billed separately. Instead, it should be included in the total price charged to the customer, as the model effectively creates two identical transactions—one between the service provider and the platform and another between the platform and the customer. This approach simplifies VAT calculations by incorporating the platform fee into the overall taxable amount.

One Stop Shop registrations

The EU currently operates three OSS schemes for reporting sales to private individuals within the EU: the Union OSS, the non-Union OSS, and the Import One Stop Shop (IOSS). Non-EU businesses can use all three, though each applies to different scenarios. The non-Union OSS is used for sales of services, the Union OSS for sales of goods located within the EU, and the IOSS for low-value goods imported into the EU.

Under the ViDA reforms, the Union OSS will expand to cover additional types of B2C goods sales, with a notable new scenario including domestic sales within a member state. For instance, a US business selling goods from a German warehouse to a German private individual will be able to report this transaction through the Union OSS. Additional eligible scenarios include goods with installation or assembly, goods sold onboard ships, aircraft, or trains, and supplies of energy sources like gas and electricity.

The non-Union OSS will not see expanded coverage under ViDA, though there will be a minor amendment: beginning January 2027, non-EU businesses will be able to report services taxable in the EU through the OSS, regardless of whether the service recipient is located in the EU or not.

ViDA introduces a new type of OSS called the “Special Scheme for Transfers of Own Goods,” designed to simplify VAT reporting for businesses moving goods across EU borders. This scheme allows non-EU companies to report goods stored in one EU country and later transferred to another without needing VAT registrations in both the origin and destination countries. Beginning on July 1, 2028, businesses can report these intra-EU movements through the new OSS, avoiding the obligation to pay acquisition VAT in the destination country.

ViDA will also streamline OSS report corrections across all schemes. Corrections to OSS reports will now be allowed until the submission deadline, permitting businesses to make immediate corrections to current returns before the deadline if mistakes are noticed—a significant improvement over the current process, where corrections were only possible in a future return.

Despite these simplifications, some businesses will still need multiple VAT registrations. For instance, non-EU companies with warehouses in EU countries that distribute goods to businesses in other EU states must maintain these registrations. Foreign VAT registration is costly, with setup fees starting around €1,200 and annual compliance expenses ranging from €2,400 to €8,000. While the OSS offers an alternative, it can lead to cash flow issues as reclaiming input VAT must occur through a separate refund procedure rather than the simpler local VAT return. Companies will need to carefully assess the advantages of retaining their existing VAT registrations against the convenience of using the OSS, balancing the administrative ease it offers with the potential financial implications.

Reverse charge

The reverse charge mechanism shifts the VAT liability from the supplier to the purchaser in B2B transactions. While it is obligatory for most intra-EU B2B services, member states do not have to apply it to services, such as admission to events, passenger transport, restaurant services, services connected with immovable property, or short-term hiring of means of transport.

Under ViDA’s new rules, the reverse charge will expand to cover all B2B supplies of services provided by suppliers who are not established or registered in the member state where VAT is owed. This applies as long as the customer is VAT-registered in that member state. Even if the customer is not VAT-registered in the destination state, member states can still choose to require the customer to apply reverse charge VAT on the supply. This expansion aims to streamline VAT processes and reduce the need for foreign VAT registrations in the customer’s country.

Concluding remarks

The ViDA reform was introduced to address significant challenges in the EU VAT system, largely driven by the digital economy’s rapid expansion. Originally designed for a pre-digital world, the EU VAT system has struggled to keep pace with new business models and the growth of cross-border trade, creating gaps that VAT fraudsters can exploit.

For non-EU businesses without direct operations in the EU, ViDA’s impact may be limited. However, non-EU companies engaged in EU trade and those in the digital platform economy will face new compliance obligations. For these businesses, understanding and preparing for ViDA’s requirements will be essential, as compliance will demand updates to invoicing, reporting, and VAT management systems. Additionally, ViDA’s comprehensive approach to VAT modernization may set a global precedent, potentially inspiring other countries to adopt similar measures, making readiness for such reforms increasingly important. With a shared interest in modernizing VAT systems and improving tax collection, other countries may look closely at ViDA’s effectiveness in combating VAT fraud and simplifying compliance.

The opinions expressed in this article are those of the author and do not necessarily reflect the views of any organizations with which the author is affiliated.