The world is currently undergoing a massive change when it comes to digitalization and it has naturally had a significant impact on companies’ businesses in many different fields. In this blog post we will focus on how it has affected the VAT reporting in the EU.
Being compliant in VAT in all the countries where an organization conducts business at is not a particularly easy task – especially to companies operating in several countries. Only at the EU level, more and more countries are implementing new VAT reporting obligations in addition to the “traditional” VAT returns by exploiting new technical tools that enable transactional data to be transferred directly to local tax authorities almost in real-time. This makes tax control a lot easier and more efficient for tax authorities as it enables them to cross-check the data on a transactional level with the values reported on the actual VAT return without having to perform any official and extensive tax audits. This will also help countries battle against tax evasion by giving the tax authorities more tools to identify e.g. suspicious chain supplies and VAT fraud.
There are currently some variations in terms of the VAT reporting requirements and level of the actual digitalization in those countries where so called real-time reporting obligations have already been taken into use. In some countries each sales and purchase invoice need to be reported to the local tax authority on a periodical basis using e.g. a local ledger template whereas in other countries information of each transaction will have to be transferred electronically to the local tax administration practically in a real-time basis.
In practice this means that all the technical systems and tools need to be on up-to-date in order for the company to be able to transfer the necessary data to the tax administration with such a short notice. In the following we will go through some examples of digital elements implemented across the EU in the VAT reporting and discuss real-time reporting and other local reporting obligations.
From SAF-T, SII to MTD – broad spectrum of different types of digital elements in local VAT reporting obligations
One of the most well-known real-time reporting format is the SAF-T file which stands for “Standard Audit File for Tax”. Its main purpose is to enable efficient information exchange between companies and tax administrations globally. The SAF-T is usually an XML file which contains reliable accounting data which has been directly exported from the company’s accounting system. It will basically give the tax authorities an easy access to the company’s data in an easily readable format. The SAF-T does not only benefit the public sector but also businesses as it will e.g. speed up the VAT refund process as well as decrease the risk of unintentional misreporting of VAT. The SAF-T scheme has currently been implemented in Austria, Lithuania, Luxembourg, Poland, Portugal and France. Norway is also planning on implementing the SAF-T file in January 2020.
There are also other similar kind of real-time reporting requirements within the EU countries, such as the SII (‘Immediate Supply of Information’) in Spain and live VAT invoice reporting in Hungary. In both countries information of invoices will under certain conditions need to be provided to the local tax authority basically in real-time – in Spain within 4 working days after handling the invoice and in Hungary already within 24 hours if the given VAT threshold exceeds. Italy also introduced the mandatory e-invoicing system in January 2019 which requires all companies established in Italy to issue and submit domestic invoices electronically in the Italian Revenue Agency’s e-invoicing platform called “SDI”.
However, this obligation does not apply to non-established companies registered for VAT in Italy and for these companies a paper invoice is still a valid document to deduct the input VAT. Also Greece is planning to implement the real-time invoice reporting requirement in 2020 in which case companies will have to electronically submit details of sales invoices to the tax authority at the same time as they are issued to the customers. Currently the system is being tested within limited target group companies.
Some EU countries also require businesses to provide local ledgers to the tax authority to collect more detailed information on the purchase and sales transactions. For example, in Italy established companies are obligated to report basically all sales and purchase invoices to and from non-established companies in the monthly Esterometro listing which has recently replaced the Spesometro report. In both Czech Republic and Romania taxable persons registered for VAT are obligated to file informative statements which contains information of local transactions. Similar kind of purchase and sales listings are in use in other countries as well – with some variety in terms of the contents and requirements.
UK also recently took a big step forward when it comes to digitalizing the local VAT reporting process and introduced the new “Making Tax Digital” (MTD) which requires VAT registered businesses with a taxable turnover above £85,000 to use the MTD service from the first VAT period starting on or after 1 April 2019 unless they have received a deferral letter from the HMRC. The key element of the MTD is setting requirement for companies to keep VAT records digitally – i.e. they are obligated to indicate a digital journey from source systems through to the VAT return. Due to this, VAT return information will need to be provided to the HMRC through software compatible with the MTD.
Poland is a good example of a country taking the real-time VAT reporting one step further and is according to the latest published information planning to replace the current VAT return with the SAF-T report in July 2019. Currently all taxpayers registered for VAT in Poland are obligated to submit monthly SAF-T files in addition to the VAT return. The reason for such drastic measure is that the SAF-T file already contains all the necessary information which needs to be reported on the VAT return and will therefore make it useless. It is likely that other EU countries might also follow Poland’s footsteps in the future.
Recent plans on updating the VAT return in Finland – the beginning of Finland’s digital VAT journey?
The Finnish tax administration is currently planning on implementing new changes to the current VAT return form in Finland in order to make the VAT reporting process more similar as in other EU Member States and to collect more detailed level information already on the periodical VAT return. According to the information published of this topic so far, the purpose of the upcoming change is to exploit new technology in the VAT reporting in order to prevent tax evasion as well as make the VAT reporting process more efficient.
According to the tax authority, the new VAT return form will require companies to report more information on the periodical VAT return and it should therefore decrease the need for the tax authorities to send additional queries to the companies regarding the reported values. Despite this goal there is however a possibility that the queries could, on the contrary, increase due to the more extensive VAT return form, and therefore, also increase the administrative workload for the companies registered for VAT in Finland. According to the current plans, the new VAT return form will be implemented in 2022 at the earliest. The Finnish tax administration has also expressed their will to follow other EU Member State’s lead when it comes to exploiting companies’ existing digital data in the VAT reporting which could possibly even enable an automated VAT return in the future.
EY team at your service in meeting the VAT compliance requirements and utilizing the latest technological tools
VAT reporting obligations requiring companies to report transactional data to the tax administrations almost in real-time is clearly a growing trend within the field of VAT and it is very likely that companies operating in several countries will come across these requirements sooner or later. Therefore, it is crucial to be on top of all the current and upcoming VAT reporting requirements in the countries where businesses are currently conducted and also where the business is expected to be extended.
Also, being on top of the changes is not enough – the next step is to implement the needed flows into the IT systems well in advance before the actual reporting obligation starts. We at EY have a strong worldwide expertise when it comes to VAT reporting, meeting the statutory requirements and implementing the latest technical tools to improve the reporting processes. We can also assist your company with system development and automation of the VAT reporting processes enabling your organization to streamline processes and organize operations in the most optimal way.
In case you have any doubts in terms of these themes, we at EY would be more than happy to assist you and ensure that your organization is compliant and processes are organized most efficiently when it comes to reporting VAT in all the countries you are globally present at.
Sarah Ahlskog is working as a Tax Advisor at the Indirect Tax team focusing on local and global VAT compliance matters.
Tuija Kokko works as a Manager in the Indirect Tax team focusing on global and local tax compliance and reporting. She has mixed consulting and experience background consisting of strategic and operational, and finance and technology related areas from Big 4 setting, SAP consultancy and in-house perspective.