The European Economic Community (EEC) originally established the Value Added Tax (VAT) in 1978. VAT is a consumption-based tax that is applied to most goods and services bought and sold within the European Union (EU). After a nearly 50-year run, the EEC is preparing to modernize VAT with the new and improved “VAT in the Digital Age” (ViDA) system. ViDA will have a meaningful impact on professional services firms that operate in or have customers in EU countries.

A Brief History of the EU VAT

VAT in the EU is a tax paid by consumers that is collected by businesses. So, it is like sales tax in the United States but is an agreement across EU countries. The EU requires a minimum standard VAT rate of 15%, but member countries can set their own standard VAT rate at any amount above 15%.

In many ways, the EU VAT has been successful. Specifically, the VAT has:

• Created a substantial and predictable revenue stream for governments of member countries. This revenue has funded important public services and projects.
• Leveled the playing field for businesses within the EU. The “single market” approach has enabled competition which has benefitted consumers via lower prices and higher-quality products and services.
• Replaced the legacy convoluted “cascade taxes” with a system that was transparent and easy to understand.
• Facilitated cross-border trade via a common taxation system within EU member states.

Despite its successes, the VAT system has not kept pace with technological advances and suffers from significant drawbacks, including:

• VAT “carousel fraud” is rampant. This fraud involves exploiting the VAT system by claiming refunds on taxes that were never actually paid in the first place.
• VAT has struggled to keep up with new technologies in the areas of e-commerce, digital services, and the platform economy. This has caused significant tax revenue leakage.
• There are large discrepancies between the planned and realized VAT revenue in essentially all EU countries. This “VAT gap” is due to poor VAT collection and enforcement across borders and disrupts public sector services and projects.
• Although VAT is an EU framework, it is implemented differently by individual member states. This inconsistency diminishes the ability to uniformly manage and enforce VAT.

ViDA to the Rescue

In December of 2022, the VAT in the Digital Age proposal was published by the European Commission. The proposal focused heavily on reforming VAT to better address the challenges that grew from the rapid evolution of the digital economy. The original ViDA proposal focused on the following key objectives:

• Reducing Fraud: While the VAT system had always been plagued by fraud, this problem multiplied significantly as the digital economy grew.
• Supporting the Platform Economy: Online platforms such as AirBnb or Uber have generated billions in revenue within EU countries but the laws related to how those platforms must account for VAT were vague.
• Simplification: When businesses operate in multiple EU countries, complying with VAT in each country is complex and time-consuming. ViDA is designed to standardize policies, reduce administrative burden, and make it vastly easier for businesses to comply with the law.
• Solving the VAT Gap: As mentioned above, EU countries currently experience a significant difference between the expected and realized VAT tax collection.

How will ViDA Apply to Professional Services Firms?

ViDA will be implemented by all 27 EU member states. But, businesses outside of the EU that conduct meaningful commerce within the EU will also have to comply. Thus, nearly all professional services firms within the EU, or that provide services to clients within the EU, will need to adhere to ViDA.

The primary implications of ViDA for professional services firms are:

• E-invoicing: Services firms will be required to adapt their accounting processes to use e-invoicing and digital reporting. This involves issuing and receiving invoices in a standardized electronic format (EU standard EN16931).
• Digital Reporting Requirements (DRR): In addition to e-invoicing, businesses must electronically send transaction data in the prescribed format to tax authorities in near real-time.
• Data and Information Security: Companies will be required to comply with integrity, security, and compliance regulations related to data protection. Companies should establish an Information Security Management System (ISMS) and consider ISO 27001 certification. ISO 27001 is a globally-recognized standard that provides a framework for establishing, implementing, maintaining, and continually improving an ISMS.
• Software Upgrades: Services firms will need to upgrade or replace legacy accounting and professional services automation (PSA) platforms with modern platforms that are built to support ViDA. These systems must natively support ViDA and be capable of real-time encrypted submission of standardized transaction data to multiple tax authorities. Upgrading accounting and PSA software could require licensing and implementation fees.
• Automation: Firms that have leveraged legacy invoicing processes (such as sending printed invoices via the postal service) will need to completely replace those processes with a fully-automated approach to invoicing.
• Single VAT Registration (SVR): Companies should take advantage of the expanded One Stop Shop (OSS) system to simplify VAT registration and reporting across EU member states.  

What is the Rollout Timeline for ViDA?

ViDA will be rolled out in stages following this general timeline:

• Early 2025: EU member states may begin implementing mandatory e-invoicing for domestic transactions.
• January 2027: Modifications to the 2021 e-commerce VAT package, including extensions to the One-Stop Shop (OSS), are set to take effect.
• July 2028: The Single VAT Registration (SVR) system is scheduled to go live. Member States may optionally begin implementing the platform economy changes.
• January 2030: Mandatory implementation of the platform economy changes.
• July 2030: Mandatory e-invoicing and digital reporting requirements (DRR) for intra-EU B2B transactions are scheduled to take effect.
• January 2035: Full harmonization of e-invoicing and digital reporting across the EU, with existing domestic systems aligning with EU standards.  

It is also important to point out that individual EU member states could implement certain aspects of ViDA earlier than the EU-wide deadlines. Thus, professional services firms should be aware of any timeline discrepancies in the countries in which they operate.