Data is currently all the rage. From the ongoing revelations of the Facebook profile harvesting scandal, through to the EU’s attempt to defend individual privacy in the digital age in the shape of GDPR, it’s apparent that there is now furious pushback against the unquestioned automated gathering of online information about individual consumers by global technology corporations. We are outraged by the idea of the algorithms knowing us too well, that our votes and purchases are a subject of easy manipulation. Even Mark Zuckerberg concedes that regulation may be a necessity.
Nevertheless, Big Data isn’t going away. While Silicon Valley is receiving a global scolding for its presumption (not least by the EU) in reorganising civilization on the basis of Facebook ‘likes’, tax authorities (not least in the EU) continue to view automatic electronic data capture as the key to a future of effective tax collection.
This July, Hungary introduces real time VAT reporting. Details of all B2B transactions with a Hungarian VAT amount equal to or greater than 100,000 forints (approx. €320) will need to be reported immediately and electronically to the Hungarian tax authorities. Though the primary target of the measure is domestic Hungarian businesses, many EU (and UK) companies selling into and operating in Hungary will be affected.
We are fast approaching the implementation date, but definitive details of reporting requirements are not yet available. Nonetheless, technical challenges for business will be significant; as soon as the relevant invoice is raised, its data must be automatically transmitted to the tax authority. (Is your system set up to do that?) Hungary intends to operate a strict penalty regime for backsliders. The numbers are eye-watering: anything up to €1600 per non-compliant invoice.
Hungary is following the example of Spain, which brought in Immediate Supply of Information (also directed at VAT collection) last year. But whereas Spain had postponed the start date of ISI because of protests from business, Hungary — an altogether more severe political and fiscal entity — is expected to push on through any resistance. The combination of uncertainty and aggression creates jeopardy for businesses; it would be unwise to ignore the issue.
In any case, in the medium term if not before, it is likely that various forms of real time VAT reporting will force themselves on the attention of all EU businesses, irrespective of their wishes. Most EU member states are actively considering implementation, and the departing UK is starting with VAT in its Making Tax Digital programme, due to be rolled out next year. Data will be piled on data: for the foreseeable future, electronic reporting will run in parallel with the filing of traditional VAT returns. (And maybe permanently, as tax authorities will be extremely wary about surrendering any source of information). It will be crucial for businesses to ensure that the outputs of these various reporting schemes agree with each other; there is the data, and there are the facts and interpretations behind the data: it all must flow together.
Italy intends to roll out a related real time electronic invoicing scheme in January 2019. The Italian regime differs from Spain and Hungary in that the invoice won’t be sent to the tax authority just for the purposes of reporting – it is sent at the issuance stage to the tax authority who checks the invoice data, verifies it, and only then sends it on to the customer, on behalf of the supplier. This is known as a ‘clearance model’, under which tax authorities audit and monitor transactions in real-time. It is used in Turkey and some Latin American countries.
The driver for real time reporting is increased revenue collection and improved fraud prevention. VAT is the fastest growing source of revenue for EU member states; they are desperate to keep control of it, and determined not be left behind by the accelerating digital economy. The annual EU VAT gap (the difference between VAT due and VAT collected) is c. €150-170B. The European social model depends on keeping the VAT gap in check. Hungary itself generates more than half its revenue from indirect taxes, and has a successful history of closing its VAT gap through major technical interventions. Real time reporting is an extension of that policy.
VAT may have originated in Europe, and colonised the world, but real time VAT reporting is an import to Europe from Latin America: it was developed to address chronic unsustainable VAT gaps in the region. Spain, with its close ties to the area, was the natural early adopter of the new digital tax culture.
The rapid implementation of real time reporting may suit individual EU member states, but what of Europe as a whole? How will consistency and coherence be maintained across the EU27?
In truth, real time reporting sits extremely uneasily with the European Commission’s own VAT collection and fraud prevention plans. The European Commission’s argument has always been that the best defence against fraud is tax authority cooperation and cross-border process harmonisation. This is, for example, the thinking that dominates the Commission’s recent VAT Action Plan, with its ambitious scheme for a ‘definitive’ EU VAT framework. But member states suspect a power grab on the part of Brussels, and in any case doubt whether the Commission could ever implement a workable system in a reasonable timeframe. As the EU VAT Commissioner has herself recently admitted, the pace of technological change keeps on making large scale bureaucratic solutions immensely difficult. The Commission is forever responding to the problems of the previous decade.
Real time reporting, by contrast, is being implemented completely differently in Hungary to how ISI was in Spain; and Italy and the UK will be different again. Indeed, we can generally expect member states to implement in ways that reflect their specific needs, rather the supposed interests of the European polity.
Digital reporting demands will increase for businesses; but obligations will be inconsistent from country to country. Companies will have to keep up with varying changing technology requirements, and, perhaps most challengingly, must develop mechanisms to deal with the more proactive interest from tax authorities that is sure to follow.
About Nicholas Hallam:
Nicholas is responsible for overseeing Accordance’s international consulting, compliance and sales teams; defining the company’s position in a complex and changing marketplace; and developing a long-term strategy for the business.
He was, along with David Stokes and Bart O’Toole, one of the founders of Accordance, and is interested in creating and fostering a positive and dynamic working environment, where success is driven by imagination and empowerment, and relationships are built on respect.
Nicholas career-changed into VAT in 2000 after a brief period as an academic: he holds a BA and MPhil from the University of Cambridge. He is a regular attendee at the International VAT Association, and is focused on increasing public and business awareness of European VAT policy – particularly the political and commercial implications of the European Commission’s VAT harmonisation agenda. He writes regularly on European VAT, and has recently featured in The Telegraph and Accountancy magazine.