The need for a VAT reform has spurred the EU into action and the EU commission published a detailed report establishing various ways to improve direct tax and VAT collection. One of the suggestions in the EU commission’s report is to increase the use of automated systems by tax authorities and taxpayers to collect and pay taxes.
As an anti-VAT fraud reporting measure, many EU Member States are showing a staggering inclination towards the process of automated and electronic VAT transactional reporting. With this, the tax authorities can effectively track the due tax in real-time and avoid tax evasion. This includes EU SAF-T (Standard Audit File for Tax), digitizing taxes in the UK and implementation of real-time VAT invoice reporting in Spain, Hungary and Italy and this concept of real-time invoice reporting is gaining popularity in other EU Member States.
The benefits of real-time invoice reporting
The suggested benefits of moving towards a real-time invoice reporting regime includes a faster and easier method for collecting, transferring, storing and analysing large data without significantly increasing the time spent by companies on compliance.
Additionally, the IT systems will be able to verify the VAT amount charged with the reciprocal transaction on which the VAT is charged. The tax authorities believe that this would result in a reduction of VAT fraud by increasing the efficiency of VAT compliance and process of VAT refunds.
Who is obliged to report this information and what are the penalties in case of non-compliance?
The real-time invoice reporting is mandatory for
- All taxpayers registered for VAT purposes
- The distance sellers who carry out B2B supplies
Some countries are already in the process of automating their invoice reporting, and below are a few striking examples.
Hungary introduced a real-time invoice reporting obligation from 1st July 2018. This means any business entity, registered by the Hungarian Tax Authority (HUTA), which issues invoices with a VAT amount above HUF 100,000 (approx. EUR 320) to another registered business, must report these invoices immediately to HUTA. This rule also includes all businesses established outside but registered for VAT in Hungary.
In case of non-compliance, a fine of HUF 500,000 (EUR 1700) per invoice will be levied on failing to report these invoices in real-time.
Italy will be introducing the mandatory real-time electronic sales invoice issuance and reporting the same from 1st January 2019 for all businesses. It will be applied to all domestic business-to-business (B2B) transactions and business-to-consumer (B2C) transactions, the latter if the consumer specifically requests an invoice. As of now, the system is only used for B2G (business to government) transactions.
The invoices not submitted on time and via the Sistema di Interscambio (SdI) system will be subjected to a fine of approximately 90% to 180% of the due VAT amount. Failure to declare the ‘cross-border communication’ invoices will result in a fine of €2 per invoice up to a ceiling of €1,000 per quarter.
Spain introduced the Immediate Supply of Information (ISI/SII) System on 1st July 2017 for approximately 62,000 companies and introduced a new version of it on 1st July 2018. The SII system for real-time reporting of tax data is mandatory for all businesses with an annual turnover of more than €6m and which belong to a VAT group or for those businesses which have applied for the ‘REDEME’ scheme.
The SII requires taxpayers to submit VAT invoices to the Spanish tax authorities within four days of the invoice issue. In case of non-compliance, the business will attract a penalty of 0.5% with a minimum of €300 and a maximum of €6,000 per quarter.
What does this mean for your business?
- As of now, within the EU, the real-time invoice reporting system has been introduced in Hungary and Spain while Italy will be joining the bandwagon soon. In case, you do business in any of these countries, you will most likely have to make certain significant administrative and technological changes to your VAT reporting systems.
- Businesses will have to make changes in their current ERP and reporting systems in order to report the transactions in real-time to the appropriate authorities.
- Additionally, even the report format will need to be changed as per the guidelines laid down by the tax authorities of the Member States of Hungary, Italy, Spain
- The penalties are significant and so the cost of not doing it is onerous.
Impact of the new real-time reporting system in different EU countries
By far the largest, Italy’s VAT gap accounts for 23% of the estimated EU VAT gap of €151.5 billion. In order to implement the real-time reporting, Italy’s tax authorities had to derogate the VAT Directive Article 218 and 232 from the European Commission that covered the buyers’ consent to e-invoices and formats.
Initially, the Italian authorities had planned the release of the SdI live invoice reporting for all other companies on 1st July 2018 but has postponed it to 1st January 2019. This delay is the result of the strike threat from businesses i who are opposing the implementation of this new system hence the impact for the Italian government is not yet felt.
The SII had a great impact on VAT reporting compliance in Spain, It succeeded in raising its operating income by 9% and a compliance rate of more than 90%. Additionally, 700 million invoices have been submitted recovering €630 million in value, while there was an 84% correlation between reported transactions and the corresponding VAT returns.
The process of real-time invoice reporting is expected to reduce the time span of the input VAT refund. While the systems for real-time information not only enables the verification of the VAT charged on transactions with the corresponding purchases, it also reduces the possibilities for VAT fraud and evasion. It also reduces the requirements for regular VAT audits that are needed to validate VAT refund claims.
However, it may pose challenges for the taxpayers, as they have to introduce new systems for real-time reporting and parallel checking of their transactions to spot any errors in advance of the tax authorities.