Commission aims to unify and simplify VAT rules in EU

Instead of leaving it up to Member States to determine which items of information should be indicated and to decide on the form of the invoices for goods and services subject to VAT, the Commission proposes harmonising the rules.

Firms operating within the Internal Market would no longer have to cope with fifteen different sets of legislation on invoicing. At the same time, the Commission is proposing that Member States must recognise the validity of electronic invoices.

"This proposal would enable firms to benefit fully from the opportunities offered by the Internal Market and new technologies, to cut their administrative costs appreciably and thus increase their competitiveness" said Frits Bolkestein, European Commissioner for Taxation.

The proposal at a glance

The proposed system involves:

• A list of twelve mandatory general items of information on any invoice; and
• The possibility of transmitting the invoice electronically subject to the use of a digital signature guaranteeing authenticity of origin and data integrity;
• The possibility in certain circumstances of outsourcing invoicing operations to a third party or to the customer; and
• Free choice of the place and method of invoice storage provided immediate access, legibility and data integrity are guaranteed.

The result, says the Commission, would be a simplification of firms' obligations and a significant reduction in administrative costs, in particular for the smallest firms. The Commission also hopes that this will encourage the development of e-commerce which it believes is currently hampered by obsolete invoicing rules.

In a statement the Commission said: “In the long run, the competitiveness of European industry would be enhanced. But another outcome would be increased effectiveness on the part of the tax authorities in controlling the tax and in fighting fraud.”

The proposal for a Directive will be transmitted for adoption to the EU Council of Ministers and for opinion to the European Parliament.

The details

The current situation

Current Community rules on invoicing go back to the 1960s. Electronic invoicing, which is now burgeoning, is held back by the existence of diverse and often very restrictive sets of legislation and this, the Commission believes, is liable to thwart the competitiveness of the European firms and impede the development of electronic commerce.

The rules on invoicing stem chiefly from VAT legislation but they vary considerably from one Member State to the next, be it the obligatory items of information or the form the invoices should take.

Firms increasingly carry out taxable operations in Member States where they are not established, making those operations subject to several sets of VAT legislation. Moreover, many firms operating on an EU-wide scale have started specialising their invoicing operations, entrusting to a single branch the task of issuing invoices on behalf of all other branches established in different Member States. This process is made more difficult by the existence of fifteen different sets of invoicing legislation.

Member States today lay down the criteria according to which a document may be substituted for an invoice, so that electronic invoicing is regulated in many different ways. Electronic invoicing, which can cut invoicing costs (around 24p for an electronic invoice against 83p for a paper invoice), is now developing rapidly as a result of e-commerce.

In some countries, electronic invoicing is prohibited or has to be accompanied by parallel transmission of paper invoices. In other countries it is permitted subject to varying conditions. Such a situation therefore constitutes a major constraint for traders.

Firms established in several Member States thus require special authorisation in certain countries and have to use a technology specific to each Member State for the creation, transmission and storage of the electronic invoices. They also have to cope with different items of information for each country, store information for a different period in each country and sometimes even make a simultaneous transmission of data on paper.

What is the new proposal?

The proposal would harmonise the VAT rules for invoicing (both on paper and by electronic means) and create a Community legal framework for electronic transmission and storage of invoices.

A trader in Europe would have to comply with only one set of rules for all the invoices he issued, irrespective of the Member State where the goods or services he was supplying were taxable. Therefore his invoices would be accepted as valid invoices throughout the Community by all tax administrations.

To achieve this, the proposal would lay down the following rules:

• Twelve obligatory items to be mentioned on each invoice such as date of issue, number of the invoice, name and address of the taxable person and his customer, description of the goods or services, VAT rate applicable, VAT amount payable (in some particular cases such as sales of new cars some supplementary information could be imposed);
• A few simplification schemes for some categories of traders (such as small traders) or invoices (very small amount);
• The possibility under certain harmonised conditions to ask a third party or his client to issue invoices on his behalf and under the supplier's responsibility.

Under what conditions could traders use electronic invoices?

According to the proposal, each trader would be able to use electronic invoicing on condition that:

• The authenticity of origin and the integrity of the content of the invoice was guaranteed, using an electronic signature;
• It was possible, during the whole storage period, to have access and to read the data and that the integrity of the data was ensured.

The issuer would be free to use whatever technology he wanted, provided that he fulfilled general conditions on security. If a tax administration thought it was appropriate, it could of course check that the issuer complied with the rules but the burden of proof would be on the tax administration to prove non-compliance and not the contrary, as is the case today. Concretely, this would also mean that traders would no longer have to seek prior authorisation or notify tax authorities in advance before using electronic invoices.

Member States would still have the option of imposing a system of prior notification during a transitional period (until the end of 2005), but only on condition that they could not refuse permission for electronic invoicing or impose any waiting period.

In what circumstances would the new rules apply?

Only in those cases where it is compulsory, for VAT purposes, to issue an invoice, that is to say where there is a taxable supply of goods or services from one taxable person to another (except for a few exceptional cases like distance selling between Member States and sales of new cars). It would therefore cover supplies within the same Member State, supplies between Member States and exports to countries outside the EU (even if exempted from VAT). In all these cases, the rules regarding the list of compulsory mentions and the technical requirements would apply.

In practice it is very unlikely that traders would use different invoicing systems for business-to-consumers (B2C) sales and business-to-business (B2B) sales - they would probably use the same invoicing systems for both (with sometimes perhaps fewer items mentioned on B2C invoices because, for example, private consumers do not have VAT numbers).

The new rules would not cover imports from outside the EU, because these fall under Customs rules.