The European Commission announced significant reforms to the EU VAT system on December 8, 2022. The reforms are part of its VAT in the Digital Age initiative (ViDA), which aims to modernise the EU VAT system. The reforms introduce (1) e-commerce and international trade changes, (2) platform economy updates and (3) new e-invoicing and digital reporting requirements. Once enacted, the reforms are expected to go live in multiple annual waves starting on 1 January next year.

Nearly all luxury businesses sell goods or services across the European Union via multiple e-commerce channels, including their online branded stores and third-party platforms. These EU VAT developments are a big issue impacting the industry. As my partner Manon Rieger-Jansen – head of Bird & Bird’s international luxury, fashion and retail team – counsels clients: “Managing VAT incorrectly can amongst others seriously damage brand value and brand reputation, especially when tax controversy enters the public eye. We therefore recommend in-house counsel at luxury businesses operating in the EU or entering the EU market to start determining potential impact of these reforms on their business models, operational processes and tax and legal positions.”

From my perspective, this is the biggest overhaul in EU VAT of the past 30 years. These may bring simplifications for luxury businesses, such as a single EU VAT registration concept for business-to-consumer (B2C) sales across the EU. However, these also introduce new tax rules, potentially requiring luxury businesses to manage multiple VAT regimes and VAT record keeping requirements in parallel.

E-commerce and international trade changes

Luxury businesses probably recall the introduction of the new EU VAT e-commerce rules in July 2021. These rules, amongst others, removed the so-called EU VAT distance sales thresholds and introduced the One Stop Shop (OSS), a single EU VAT return for B2C sales. E-commerce businesses have nonetheless experienced limitations of OSS in the past year-and-a-half. For example, B2C domestic sales of goods within an EU member state, and stock movements to platform fulfilment centres between those states, cannot be processed in OSS. Instead, local VAT registrations may be required in other EU member states, generally representing an administrative and costly burden. It is now proposed that as of 1 January 2025, OSS will account for these use cases commonly applicable to luxury business engaged in e-commerce.

Other changes for example cover the expansion of OSS to include second-hand goods. This may include pre-owned fashion, works of art, antiques, classic cars or other collectors’ items.

Platform economy updates

The EU VAT e-commerce rules introduced in July 2021 also provided for new deemed seller fictions for e-commerce platforms. These fictions may require platforms to collect EU VAT or to become liable for EU VAT on e-commerce sales, instead of sellers making sales via the platform. This fits in a wider EU legislative trend to place and sometimes shift responsibilities to online platforms.

As of 1 January 2025 a new deemed seller fiction for platforms will be introduced specifically for the short-term accommodation rental sector and passenger transport sector. Platforms in these sectors need to collect and remit VAT on covered sales if the underlying seller does not; for example if the underlying seller is a consumer or subject to a small business scheme. On the one hand, these updates ought to create a level-playing-field between the short-term accommodation rental sector and the hotel sector, as sellers should no longer be able to provide accommodation VAT free. On the other hand, hotels entering the short-term accommodation rental sector may need to take these developments into account of their business plans.

Further updates are proposed per 1 January 2025, such as expanding the current deemed seller platform fiction for facilitating B2C sales of goods in the EU by non-EU sellers. The idea is to broaden the scope of this fiction by taking in all sales of goods business-to-business (B2B) and B2C within the EU, regardless of where the seller is established. This means that e-commerce platforms in this sector may need to collect and remit VAT on covered sales within the EU by default going forward.

New e-invoicing and digital reporting requirements

These new requirements in principle apply to all businesses operating in the EU. The key takeaways are that e-invoices should be issued in a structured format allowing for automatic and electronic processing as of 1 January next year. Moreover, transactional data should be collected and reported for B2B intra-EU sales of goods and services as of 1 January 2028. The latter fits in a wider trend of data collection and reporting for EU VAT, including new e-commerce payment data reporting requirements as of 1 January next year. The challenge for businesses here is that VAT needs to be managed in real time and is subject to non-tax requirements, such as data privacy and data protection.

Next steps

The reforms must be approved through the EU’s legislative process first and may still be subject to change.

Andy van Esdonk is head of VAT Netherlands at Bird & Bird. He can be reached at [email protected].