Reflections on the EU VAT Reform for Platforms

As I travel to London for the ITR (International Tax Review) Indirect Tax Forum to discuss the global platform economy, my four-hour journey provides a perfect opportunity to prepare for the session and organize my thoughts.

Estonia's Objections to ViDA

Last week, the proposed ViDA reforms encountered a roadblock. Estonia objected to the new rules for taxing short-term rentals and passenger transportation within the platform economy. According to these new rules, these services will be taxed, but the service provider will not be able to deduct input VAT. This approach goes against the principle of VAT neutrality and leads to tax cascading.

New Zealand's Take: A Flat-Rate Solution

Interestingly, New Zealand implemented similar rules just two months ago. Starting April 1, 2024, digital platforms must collect GST on ride-sharing, food deliveries, and short-term rentals in New Zealand. However, unlike the proposed EU rules, New Zealand offers a flat-rate credit approximating the recoverable input tax. Platforms collect GST but return 8.5% of the GST collected to the service provider. Essentially, only 6.5% of the 15% GST charged on platforms is collected by Inland Revenue if the underlying supplier is not GST registered.

Beyond Deemed Supplier: Alternative VAT Solutions for the Platform Economy

The ViDA rules for the platform economy aim to level the playing field, preventing unfair competition between "VAT-free" rental services facilitated through platforms and those subject to VAT provided by traditional businesses. However, it may be argued that the distortion of competition isn't caused by the platform model itself, but by inconsistencies in national VAT rules. For example, short-term rentals facilitated by platforms may escape taxation due to:

• Registration thresholds: Service providers below the national threshold aren't required to collect VAT.
• Exemptions: Some member states exempt short-term rentals altogether.

These issues can be addressed by amending existing national legislation, without resorting to a "deemed supplier" regime that holds platforms fully responsible for tax collection. Additionally, the recently implemented DAC7 Directive offers tools to identify non-compliance among service providers. As DAC7 is relatively new, its effectiveness in tax collection, compliance, and combating avoidance remains to be fully evaluated.

The OECD has proposed alternative, less disruptive models for platform involvement in VAT collection:

• Educating platform sellers on their VAT/GST obligations.
• Facilitating information sharing with tax authorities through data reporting.
• Establishing formal cooperation agreements with tax authorities.
• Implementing a "deemed supplier" model (as a last resort).

By opting for the most intrusive option, the EU raises the question: could other methods achieve the desired outcome with less disruption for platform operators?