The Rise of Digital Reporting Requirements in the EU

Digital tax reporting requirements in the EU is the latest trend in a larger transformation: the digitalization of tax processes. Digitalization has been ongoing for over a decade, and it's picking up speed. With online business booming globally and tax revenue growing, more countries are enacting new tax laws for e-commerce and online marketplaces. This also means they're investing in digital tools to track tax reporting more closely.

As new business sectors emerge and evolve, there are new types of transactions and operators to deal with. Tax authorities are often slow to catch up with these changes, needing to develop efficient ways to monitor them.

Though technological advancements in tax reporting have accelerated in the last decade, the shift from paper to electronic reporting is happening gradually. Based on our experience, it usually takes a few years from the government's initial push for e-reporting and e-invoicing to full implementation.

This blog post will explore the rise of digital reporting requirements in the EU and what the new rules mean for businesses and taxpayers alike.

How tax reporting went digital

Tax reporting is still a paper-based system in many places. Some countries have a hybrid model, offering a choice between paper and electronic channels, primarily through a tax authority online portal. Only a few countries have completed a digital transformation and moved to full tax digitalization and automation.

As far as industries go, digital tax reporting first made its biggest strides in the retail sector. Retail has always been one of the most lucrative business sectors, so some governments focused their efforts here to ensure they were recouping the highest possible amount of tax revenue.

Back in the 1980s, Italy introduced the obligatory use of fiscal cash registers. Romania followed in early 2000s, and then Serbia in 2012. How did these cash registers work? The governments certified the machines with a specific type of fiscal memory, where all VAT-related information is collected. There are no gaps in the data, and the data cannot be manipulated by anyone. The machines also transmitted the data semi-automatically to a server of the tax authority, where the tax authority could conduct detailed inspections of the reporting.

This is how “fiscalization” was born! Fiscalization is essentially a tax reporting mechanism that was initially designed for retail transactions. In many EU countries, it’s already mandatory for public procurement or B2G, thanks to an EU VAT directive. And now it’s being adopted for all industries and transactions, and most importantly for e-commerce.

How e-commerce spurred digital reporting requirements

The digital economy has grown quickly worldwide, and it has become increasingly urgent for governments to regulate e-commerce. Some countries have struggled with high levels of unreported taxes – or what is also called a “VAT gap” – for years, while others haven't had as much trouble. Those governments losing a lot of tax revenue from unreported transactions were the first to act.

The growth of e-commerce and an unprecedented expansion of cross-border transactions put major pressure on tax authorities to write new tax policies on the one hand, and on the other, to build a modern technical infrastructure that could monitor the flow of transactions in new business sectors.

Different countries have different ways of handling this, but across the board one thing remains true: regulators face challenges in understanding the internet’s complex transactions due to ever-changing technology. And institutions like governments move famously slow, which adds to the challenges of trying to keep up and build a sufficient solution.

Nevertheless, they have started using advanced technology to monitor and catch tax fraud. Digital reporting is one of those tactics. To be sure, if they hadn't found new ways to regulate taxes with the rise of e-commerce, the VAT gap problem would continue to get worse.

That’s where the European Commission’s ViDA directive comes in!

VAT in the Digital Age (ViDA)

VAT in the Digital Age (ViDA) is a new set of rules from the EU Commission. It's meant to update how VAT works for online businesses selling to customers in the EU. The idea is to make sure VAT is collected fairly and efficiently, whether the businesses are in the EU or not. ViDA proposes amendments to the EU VAT legislation based on the following three pillars:

1. Digital Reporting Requirements
2. Single VAT Registration
3. Platform Economy

When it comes to the digital reporting requirements, the proposal from the EU Commission is mainly based on the following:

• Developing a harmonized EU-wide digital reporting framework for cross-border B2B transactions
• Reducing fragmentation of already existing domestic digital reporting systems
• Eliminate derogation provision from EU VAT directive for introduction of domestic DRR
• Harmonize to some extent domestic DRR with future EU-wide DRR system

To be sure, more and more EU countries will adopt and implement digital reporting mandates for VAT-registered businesses. But how will they do it?

Digital Reporting Tools in the EU

As we’ve said so far, the countries and international associations are working diligently to develop secure and flexible tools to cope with the global expansion of e-commerce, the platform and marketplace economies, and related cross-border transactions.

The old rules and methods for reporting taxes, which worked when most businesses were local, aren't good enough anymore. Some member states have introduced new digital reporting requirements for local or resident businesses only. Others expanded the reporting mandate to foreign businesses as well.

As for what each country is building, the EU VAT Directive gives national regulators some freedom to shape a reporting requirement according to their own vision. The result is a variety of different policies and technologies, which can cause a real headache for businesses operating in multiple EU countries.

That said, there are some commonalities in the types of digital reporting tools out there so far. Let’s look at the different types of digital reporting requirements introduced by EU Member States.

Main Types of Digital Reporting Requirements in the EU

The most common types of digital reporting requirements are the following:

• VAT Listings
• SAF-T
• Real-time reporting
• E-Invoicing

VAT Listings

This type of digital reporting is based on a detailed aggregation of different transactional data, e.g., information about sellers and buyers, VAT amounts, and taxable amounts. The VAT listing report is often submitted together with VAT returns.

Some countries that have mandated this type of digital reporting mechanism are Bulgaria, Croatia, and Estonia.

SAF-T

This reporting tool is based on the OECD standard. In most cases, Member States adopted the standard following the national policy priorities. This type of e-file can be extensive and goes beyond indirect tax transactional information. It can cover additional details connected to direct taxes, as well as the accounting obligations of taxpayers.

In the case of audits, to the extent of accounting and tax data, the SAF-T obligation is mandated in Austria and France. If we focus on countries that have required obligatory preparation of the SAF-T file for indirect tax reasons, we should mention Lithuania and Poland. In both countries, the submission of the SAF-T file follows the reporting frequency of the VAT return.

Real-time Reporting

Real-time reporting, or e-reporting, represents a digital tax reporting mandate by which the taxpayers in scope must transmit the subset of the invoice data to the tax authority. Important to point out is that the obligation is put on the transmission of the extract of the invoice data, not on the transmission of the entire invoice.

Real-time reporting is mandated in Spain and Hungary.

E-Invoicing

Electronic invoicing is one of the most sophisticated VAT compliance systems developed. The system is built around the structured electronic invoice. E-invoice is this reporting system's only accepted and fiscally valid document type.

The e-invoice or subset of its data is transmitted to the tax authority portal before, during, or after issuance. The moment when the invoice must be submitted to the tax authority depends on various parameters, e.g., whether the country has developed a centralized clearance or non-clearance system.

Most Member States, almost all excluding Italy, use electronic invoicing only for B2G transactions as a mandatory requirement.

Italy is the first country in the European Union to have mandated the exclusive usage of electronic invoicing for B2B transactions. It will stay the only country in the European Union with this specific requirement until the end of 2023.

Current Digital Reporting Laws in the EU

France

France has mandated the introduction of electronic invoicing and reporting for B2B transactions between VAT-registered businesses. The initially planned gradual roll-out dates are still in discussion. Learn more about France’s digital reporting and e-invoicing requirements.

Poland

Starting from July 1, 2024, e-invoicing should be mandatory for VAT-registered resident businesses.

Portugal

Electronic invoicing in Portugal will come into effect on January 1, 2025 for businesses that are selling to public entities. In the future, these e-invoicing rules might apply to all businesses and all types of transactions.

For now, other electronic data submission and reporting requirements, such as using qualified electronic signatures (QES) will affect all businesses and all sales, including B2B and B2C. These rules come into effect on January 1, 2025.

Learn more about Portugal’s digital reporting and e-invoicing requirements.

Romania

The Romanian government has mandated the gradual usage of electronic invoicing and electronic reporting starting from January 1, 2024.

The reporting obligations will cover all VAT-registered resident businesses, and to some extent, requirements should apply to non-resident businesses registered for VAT purposes in the country.

Spain

Since July 2017, semi-real time reporting through the SII (Suministro Inmediato de Información) has been mandatory for taxpayers that are enrolled in the automatic refund mechanism with a turnover of more than EUR 6,010,121.06, and for VAT groups, for any type of transaction.

Electronic invoicing in Spain will come into effect between 2024 and 2025. The e-invoicing rules were drafted in the "Crea y Crece" law back in September 2022.

Learn more about Spain’s digital reporting and e-invoicing requirements.

Germany

The European Council adopted the Commission's proposal to permit Germany to embrace a national digital reporting system for B2B transactions based on electronic invoicing and digital reporting.

At present, the country officials are expressing that the goal would be that the first phase of e-invoicing should be operative from the year 2026.

How to stay compliant

One of the main goals of each business person or company is to establish a bullet-proof VAT compliance system while building their business.

For businesses that are operating cross-border, the compliance challenges are much more complex. The first step would be to get familiar with all the rules applicable to their business model within each country where the customers are.

The second step would be to look into third-party providers of tax compliance and digital reporting services. There are different softwares on the market that will help you comply with domestic and cross-border tax rules, as well as send automatic invoices that comply with the EU digital reporting requirements.

If you’d like to test out a solution for your business today, start a free trial with Quaderno.

Thanks to Aleksandar Delic, Senior Indirect Tax Researcher from our partners at 1stopVAT, for sharing his expertise and contributions to this article!