The “VAT after ViDA” seen from a taxpayer point of view. Fighting against the “forgotten VAT gap” and related ideas

I. Background

On December 2022 the European Commission proposed a wide reform package to modernize and simplify the EU’s VAT ( “VAT in the Digital Age” or plan ViDA), with new rules on electronic invoices and real-time data reporting, as well as business carried out through digital platforms, with the objectives of fighting against tax fraud, supporting businesses and promoting digitalization. After almost two years of political struggle, the ViDA package was politically adopted by the EU Council in its meeting of 5 November 2024.

In the meantime the European Commission had also launched the initiative “VAT after ViDA”, to incentive the exploration of new ideas which may help in the objective of creating a more efficient EU VAT system “that allows business to operate EU-cross border as simply and smoothly as they do domestically” (author’s note)[i], in a future of sustainable growth and competitiveness of the EU in the EU single market that aligns with the findings of the Draghi and Letta reports.

This initiative was presented to the VAT Expert Group (VEG) by the European Commission in March 2024, with the request that it produced a report with its ideas by the end of the year. This has resulted in a document entitled “VAT after ViDA, Reflections on the future of VAT” (hereinafter, the “Report”) which was made public in the 38^th meeting of the VEG held in December, 2024.

As stated in document, it is a strategic report which aim is “to provide ideas to the EU Commission and interested stakeholders to further explore and research”, outlining the fact that “It is not aimed at providing fully fledged solutions”.

The VEG brainstorms about a long-term future of a possible EU VAT system, situating the horizon in the year 2050 and beyond, and carries out its analysis with a two angles approach:

• The first angle is a long-term vision that, thinking outside the box, explores freely how this possible EU VAT system could look, considering the original concept and structure of VAT, the worldwide experiences in its legal implementation and the current and possible evolving technologies that may impact in such a future.

• The second angle starts from the current VAT system, reflecting on its shortcomings and weaknesses, and the implications that may result from the legal implementation of the ViDA package, suggesting improvements that could be introduced during the process, so the ViDA can serve as a catalyst for future developments that pave the way forward the future EU VAT system imagined under the first angle.

Following this approach, the VEG formulates suggestions in different areas which implantation would contribute to the design of a new desired EU VAT system conforming to the principles of neutrality, broadening of the taxable base, alignment of treatment of goods and services, and updated VAT collection and VAT refund processes (as mentioned in 3.3.1. of the Report).

The Report summarizes the ideas proposed by the VEG in chapter 2 (“suggested deliverables for the EU Commission to consider”), which are presented in the form of a road map with suggested steps and a time frame that extend from 2025 until 2050, when the future VAT system is to be accomplished, with the intermediate objective that the key proposals leading to this final goal are published before 2040 to be politically adopted by the Council by 2045.

Lastly, it is not to be missed the importance given in the Report to the role that is to play the successful implementation of the ViDA package into paving the road to the final objective of creating the new desired EU VAT system, importance shown by the fact that there is an Annex in the Report specifically dedicated to this topic.

And, since being at the origin of this article, some opening remarks in the Annex when referring to the implementation of ViDA must be quoted: “since not every detail of ViDA is and can  be discussed during the technical and  political negotiations within the EU Council process” the VEG concludes “that the key next steps for all stakeholders – the EU Commission, Member States and businesses – in the months and years ahead is to actively and jointly work together to ensure that the implementation of the ViDA package is a step in the modernizing of the EU VAT system to make it fit for the future”.

II. Our contribution to the initiative VAT after ViDA. The forgotten VAT gap and other related ideas

Joining the lead of the VEG request, this article put forward ideas which, in the form of suggestions, may contribute to the successful implementation of the ViDA in a way that it is consistent with the future EU VAT system that is formulated in the Report.

II.1.  Widening the concept of “VAT gap” so to also include the VAT refund side of the equation

Suggestion: A wider concept of “VAT gap” that also includes the VAT refunds that are not paid due to what can be considered a malfunction of the system (the “forgotten VAT gap”):

It is important that, when designing the future, European policymakers place the interests of taxpayers at the same level as those of the tax administrations of members states.

So, it is suggested that the “VAT gap” does not only quantifies the “missing” VAT income that member states fail to collect if compared with a hypothetical optimum VAT income (author’s note)[ii], but it also takes into account the amount of  “missing” VAT refunds (so the terme these same member states fail to pay , that is, the amount corresponding to those VAT refunds applications filed by taxpayers during a period which these same member states failed to pay due inefficiencies of the system (difference which we refer to as the “forgotten VAT gap”) (author’s note)[iii].

Reason behind the suggestion: Fighting against the VAT fraud so to reduce the so called “VAT gap”, is the reason that explains many of the measures contemplated in the plan ViDA or of the ideas suggested in the Report in their objective of obtaining a more efficient EU VAT system in terms or reducing such a gap.

Widening the concept of “VAT gap” so to include the “forgotten VAT gap”, will also introduce a different point of view in the analysis and, eventually, the suggestion of measures which do not only aim to reduce the inefficiencies of the system for optimizing VAT collection by member states, but also for those existing in the VAT refunding process to taxpayers.

II.2.  Creation of an EU mail address and a single VAT mail account

Suggestion: Creation of an EU mail address and a single VAT mail account to channel electronic notifications on incidences related to intracommunity and domestic transactions affecting non-established: An idea which may contribute to a reduction of the formulated “forgotten VAT gap” would be to create at EU level an EU mail address where EU companies and entrepreneurs with VAT obligations are granted ex officio a single VAT mail account.

This mail would be used:

• When the domestic regulations allow, it will be used as the communication channel to file official notifications related to the processing of VAT compliance incidents (i.e. information requests or tax checks) and claims resulting therefrom when involving non-established.

• In case that the domestic regulations of the country do not allow to use this channel of communication to file official notifications mentioned above, a courtesy notification in English, parallel to the officially filed through the standard domestic means, could be delivered at the single VAT mail of the taxable subject so to make him aware of the fact that an action is required from his side, along with relevant information on the requested action (i.e. identification of the channel officially used, means of retrieval, dead-lines, reference to the applicable regulation ).

Reason behind the suggestion: It is our experience that incidences arising in the Spanish VAT compliance by non-resident VAT taxpayers may lead to negative consequences (i.e., undue liquidations, penalties, jeopardizing of VAT refunds, lapsing of deadlines, etc.) due to their having missed the official notification where he was required to comply with a certain formality.

This problem very often occurs on the VAT refund applications filed by companies or entrepreneurs, either from the European Union or from outside, that incur domestic VAT in connection with their activities in a Member State where they are not registered, are entitled to obtain a refund following the especial procedure for the non-established. (author’s note)[iv]

At the origin of this situation is the lack of a unified EU regulation that guarantees certainty in the relations of the non-established taxable subject that operates at an EU level by imposing minimum common rules such as:

• Imposing in certain cases where a non-resident is involved of a common notification channel and common processing rules.

• The translation of notices from a member state different of the one where the addressee taxpayer resides or is established, to the language of this later country or, at least, a common language of use (i.e. English).

We consider that our proposed suggestion will help reduce the negative consequences that have been mentioned until such a common EU regulation is designed, politically adopted and implemented, among other, the rejection of VAT refund applications based on unvoluntary uncompletion of formalities.

II.3.  Upgrade and improve usability of the centralized EU knowledge database

Suggestion: Upgrading and improving the usability of the centralized EU knowledge database: Until a final confluence/coordination at a UE level of the technical standards and VAT regulations within the different member states is achieved in the future intended post ViDA scenario, possible immediate actions to pave the road on this desired direction are:

• Upgrade the existing EU knowledge database kept by the European Commission at the site “Online services and databases for Taxation” and made it a single access point for its exploitation so to cover:

• Applicable regulations and ongoing proposals in the EU member states of their domestic technical standards on e-invoicing and e-reporting.

• Applicable domestic regulations in the EU member states on tax procedural (deadlines, notification channel, tax reviews, penalties, claims, etc.).

• Improvement of the interface usability so its exploitation can be automated by internal solutions that may be developed internally by taxpayers or the VAT and IT industry.

Reason behind the suggestion: The Report contemplates different suggestions which aim is that domestic regulations on technical issues and VAT procedures are coordinated, either because of the unilateral decision of member states to apply common standards when exercising their regulatory autonomy or by the creation at EU level of a VAT coordination agency.

Meanwhile these suggestions would require that new regulations are designed, politically adopted and implemented at an EU level and in the different member states, our proposed initiative will only require the executive decision of the Commission to take it over as an internal project and to allocate the required budgetary funds for its implementation.

[i] (author’s note) In the opinion of the author this could be considered an overstatement and a rather optimistic view from the part of the Commission when setting the bar of exigence at a EU level in a future EU VAT system, at the existing status quo of the companies as regards their position before the domestic tax authorities.

[ii] (author’s note) In the technical jargon to be suffered in the field of European VAT, there is a central term which is behind most of the changes that have been taking place in the recent past and are likely to give rise to further changes in the future.

This is the concept of “VAT Gap” that, in terms of “VAT compliance gap” (that is, “the estimated difference between potential VAT revenue under full compliance and the actual amount collected by tax authorities”) amounted to EUR 89.3 billion in the EU In 2022 according to the European Commission in its “EU Gap VAT Report” of 2024.

[iii] (author’s note) Such as the missing of deadlines, the failure to comply with formal requirements, failure to attend information requests from the tax authorities, restrictive interpretation of the law by local tax authorities not in line EU jurisprudence, etc.

[iv] (author’s note)  The especial VAT refund procedure is regulated in Council Directive 2008/9/EC of 12 February 2008 (EU business) and Thirteenth Council Directive 86/560/EEC of 17 November 1986 (non-EU business).