Tax Challenges and Opportunities of the Growing Digital Economy
The 171st mBank-CASE seminar analyzed the opportunities and challenges of the digitalization of the economy on tax systems, particularly on Value-Added Tax (VAT), in the Member States of the European Union. Recent trends in the platform economy and the digital reporting requirements related to VAT transactions were the other major topics discussed during the seminar.
The speakers were Dr. Giacomo Luchetta, Economic Analyst at Economisti Associati, and Dr. Grzegorz Poniatowski, Director of Fiscal Policy at CASE. They presented the results of the DG-TAXUD-funded project entitled VAT in the Digital Age, coordinated by the Italian institute Economisti Associati. CASE was a project partner and Grzegorz Poniatowski was CASE’s team leader.
Dr. Grzegorz Poniatowski was the first to speak, presenting the scope and key features of the platform economy and providing information related to its growth and market size. A key feature of the platform economy is its offer of access to assets, resources, time and/or skills, and goods and/or services by the provider to the customer via online/digital platforms using internet technology. The figures provided by Dr. Poniatowski show that platforms enjoyed double-digit growth rates in recent years, the market is highly concentrated, and the value of goods and services provided through major platforms reached almost USD 420 billion in 2019. Dr. Poniatowski then continued with the VAT treatment of the platform economy. He noted that increasing the scale and complexity of platform business models, along with the varying VAT rules across Member States, brings problems related to unclear and non-harmonized VAT rules, the enforcement of VAT compliance, and unequal tax treatment between traditional and platform economies. These problems result in compliance costs, the uneven distribution of VAT revenue across Member States, VAT base erosion and revenue decline, and distortions to competition (i.e., an uneven playing field for compliant and non-compliant platforms).
Dr. Poniatowski continued with potential solutions to these problems. Clarifying VAT rules regarding the nature of supplies, provider status, and information obligations, simplifying the VAT scheme, for example by using a flat rate with a fixed deduction, and introducing a deemed supplier regime for some or all sectors could alleviate the problems associated with the platform economy. Dr. Poniatowski concluded that the recent growth trends in the platform economy are expected to continue, which may amplify the problems related to the VAT treatment of the platform economy in the future.
Dr. Giacomo Luchetta started his presentation by explaining digital reporting requirements (DRRs) – the information taxpayers are required to disclose concerning the value, customer, and VAT due on transactions. He noted that DRRs can be divided into: VAT listing, SAF-T (Standard Audit File for Tax), real-time, and e-invoicing, and that there is no uniform system in the European Union – DRR adoption, coverage, and transmission methods vary across Member States. Dr. Luchetta continued with the causes and consequences of problems related to DRRs. The first problem discussed by Dr. Luchetta is the suboptimal fight against VAT fraud due to the compliance costs associated with DRRs and the derogation for e-invoicing. Consequently, the further introduction of DRRs can have a positive effect on VAT revenue through improved tax controls and higher compliance, as identified by econometric analysis. The second problem is a fragmented regulatory framework caused by wide discretion within Member States thanks to the VAT directive and the lack of a uniform EU framework. This problem largely affects multinational companies that need to comply with many different DRRs in different Member States.
Dr. Luchetta then discussed potential policy interventions, which are assessed based on costs and benefits. For example, possible options include: the status quo; no reporting mechanism at the EU level, but recording data in a predetermined format via the new VAT directive; and the introduction of an EU reporting mechanism/mandatory B2B e-invoicing. The latter could be in the format of partial harmonization, with optional DRRs for domestic transactions and mandatory DRRs for intra-EU transactions, or in the format of full harmonization, with mandatory DRRs for both domestic and intra-EU transactions. However, either partially or fully harmonized, EU-level reporting requires agreement in certain aspects, such as type of DRR, frequency, coverage, and transaction type.
Dr. Luchetta concluded by noting that DRRs are a growing global trend and that Member States are either implementing or extending their coverage. Furthermore, he noted that the European Commission announced the adoption of a proposal for VAT in the Digital Age in 2022 for better harmonization of DRRs. However, the complex political landscape and the possibility of costs exceeding the benefits for companies pose challenges to the harmonization of DRRs across the EU.
The seminar ended with questions by the participants. One question was “How to tailor the system for micro companies to ensure costs are reasonable while they can enjoy some benefits?”. Dr. Giacomo Luchetta responded by excluding micro companies, i.e., those with revenue with less than EUR 10 thousand, from DRRs as one possibility. Another question raised was “How a potential shift in tax responsibilities from providers to platforms would affect the platform economy?”. Dr. Poniatowski stated that compliance costs may negatively affect small platforms and create barriers to entry; hence, in addition to average costs, the impact of costs on small platforms should be analyzed as well before such a shift.
Closing the seminar, Dr. Balcerowicz stated that the advantages of ongoing and growing digitalization will hopefully overcome its complexity to benefit entrepreneurs, firms, and tax authorities in the future.
