ViDA: The future of VAT reporting - a game changer?

A - What changes are coming?

Pillar 1 introduces two major reforms: the mandatory implementation of electronic invoicing as the default invoicing system and the replacement of the current VAT European Sales Listings (ESLs) with real-time digital reporting requirements. These reforms are not merely technical updates but represent a fundamental transformation of how VAT compliance is managed.

1. Mandatory e-invoicing

Electronic invoicing will soon become the norm for cross-border transactions within the EU. A valid e-invoice, compliant with the European standard (EN16931)[1], will become a material requirement for VAT deduction. Invoices to be issued will also have to include new elements such as the IBAN number of the supplier’s bank account, the date of payment, and a unique sequential invoice number for corrections. Additionally, the timeline for issuing invoices is being drastically tightened. Currently in most cases in Luxembourg, businesses generally have until the 15th of the month following the supply to issue their invoices. Under ViDA, this window shrinks to only 10 days from the date of the chargeable event. This accelerated timeline will require companies to streamline their invoicing processes significantly as both the issuer (seller) and receiver (customer) will have to be able to issue/receive, read and store these invoices.

2. Digital Reporting Requirements (DRR)

Currently, when supplying services or goods to a business established in another EU Member State, the supplier is required to obtain the VAT number of its clients. The VAT number is used as evidence to demonstrate that the customer is a “taxable person” from a VAT perspective and that the supply is therefore deemed to be taxable in the Member State of the recipient (or arrival of the goods). If such VAT numbers have been obtained, the supplier should in principle file an ESL. Such listing includes the country, VAT number and amount supplied to each of these clients and enables the authorities to confirm that the services/goods are deemed to be taxable outside of Luxembourg. Otherwise, in the absence of a valid VAT number, the supplier would generally be required to apply Luxembourg VAT on its supplies. Currently in Luxembourg, such return must be filed either on a monthly or quarterly basis and always by the 15^th of the month following the reporting period. In practice, this timeframe is too long to enable the authorities to efficiently identify and stop VAT fraud schemes.

The DRR will replace these ESLs and will require real-time reporting of invoice data. DRR will cover Business to Business (B2B) cross-border supplies of goods and services (like the ESLs) but can also be extended by the Member States to cover:

• B2B cross-border acquisitions of goods and services;
• Domestic supplies (for both suppliers and recipients).

For suppliers, this means submitting data at the time of issuance of the invoice or when the invoice should have been issued. Buyers, in cases of self-billing or other scenarios, will have to report the transactions within 5 days of the invoice date. Unlike the current system, this shift to real-time reporting represents a significant leap in complexity and reactiveness.

A reliable e-invoicing system is needed for the DRR obligation to work. In practice, a supplier will have to issue an e-invoice within 10 days of the supply (rather than by the 15^th of the following month). Failure to do so could result in penalties and affect the supplier's VAT recovery. Simultaneously with the issuance of the e-invoice, the supplier will have to file the DRR. The client, on the other hand, must ensure that the received e-invoice meets the new standards to claim VAT deductions. If its Member State of establishment introduces it, the client might have to report the purchase in its own DRR within 5 days of the issuance of the e-invoice by the supplier. Considering the risk for the client in terms of VAT recovery, this will require updating contracts to include provisions for compliance with e-invoicing standards and establishing clear procedures for handling invoices.

B - Timeline and implications for businesses

Although a formal approval is expected in early 2025, the changes introduced under Pillar 1 will take effect from 1 July 2030. Member States that already announced or had domestic real-time reporting systems in place before 1 January 2024 will have until 1 January 2035 to align with the new EU-wide model. This phased approach aims to accommodate existing national systems while ensuring convergence toward a standardised framework.

The transition to mandatory e-invoicing and DRR introduces several hurdles and challenges for businesses across various functions, including finance, accounting, IT, and legal departments. These include:

System and process upgrades: Adapting to structured e-invoicing formats compliant with EN16931 will require significant investment in technology and infrastructure. Businesses will need to replace traditional invoice formats such as PDFs or paper invoices with fully structured electronic invoices. Ensuring compatibility with customer and supplier systems —many of which may be at different stages of readiness — adds another layer of complexity. The implementation of real-time reporting also requires substantial system upgrades. Existing accounting and ERP systems must be equipped to process and transmit data in real-time while maintaining robust data security. This integration is not only a technical challenge but also a resource-intensive process that demands careful planning and execution.

Stricter compliance timelines: The new 10-day deadline for issuing e-invoices for cross-border transactions requires a fundamental rethink of invoicing workflows. Delays in issuing invoices could lead to compliance breaches, penalties, and VAT recovery issues. Businesses with complex supply chains, particularly those engaged in international trade, will face heightened pressure to meet these tighter timelines. In addition, the DRR will imposes a level of detail and immediacy far exceeding the current ESLs.

Contractual and operational adjustments: The requirement for valid e-invoices as a condition for VAT deduction necessitates a review of existing contracts and Terms of Business (ToBs). Companies must ensure that agreements with suppliers and clients explicitly address compliance with the new invoicing standards. Failure to do so could result in disputes or challenges from tax authorities, potentially jeopardising VAT recovery. Moreover, businesses must prepare for the increased likelihood of errors in invoicing and reporting, which could lead to disputes with counterparties. These situations are already a reality with the current ESLs system and will only increase with DRR. Robust procedures for detecting and correcting errors will be essential to mitigate risks.

Coordination across departments: Implementing these changes will require close collaboration between IT, finance, legal, and operational teams. IT teams must ensure system readiness, while finance and accounting departments need to align processes with the new requirements. Legal teams will play a crucial role in updating contracts and ensuring compliance with revised regulations. Effective cross-department coordination will be critical to minimise disruptions and ensuring a smooth transition.

C - Steps to prepare for the changes

Given the scale and complexity of the changes under ViDA Pillar 1, businesses should take proactive steps to ensure compliance and mitigate risks:

1. Conduct an initial assessment: Begin by evaluating how the new requirements will impact your current processes, systems, and workflows. Identify gaps and areas requiring improvement;
2. Monitor legislative updates: Stay informed about further developments, guidelines, and clarifications from the European Commission and Member States. Regular updates will ensure you remain ahead of compliance requirements and deadlines;
3. Seek expert advice: Consult VAT experts or advisors to navigate the technical and legal aspects of the new and/or local requirements. Their insights can help you develop a comprehensive compliance strategy tailored to your business needs;
4. Invest in technology: Upgrade your invoicing and reporting systems to meet the requirements for structured e-invoicing and real-time reporting. Ensure the accuracy and integrity of your data through robust validation processes;
5. Revise contracts and ToBs: Review and update contracts with suppliers and clients to include provisions for compliance with e-invoicing standards and reporting obligations. Clearly outline responsibilities and procedures to mitigate disputes;
6. Train staff: Educate employees on the new requirements and their implications for day-to-day operations. Focus on building awareness and technical proficiency in handling e-invoicing and DRR.

While the transition to mandatory e-invoicing and DRR presents significant challenges, it also offers potential benefits. Standardised and automated processes can enhance efficiency, reduce fraud risks, and simplify VAT reporting. By investing in the necessary infrastructure and processes, businesses can position themselves to capitalise on these opportunities while ensuring compliance.

The shift to a digital VAT framework under ViDA represents a turning point for businesses operating within the EU. Preparing early and adopting a proactive approach will be key to navigating this complex transformation successfully.

Notes:

[1] The European standard EN 16931 establishes a common semantic data model for electronic invoices, ensuring interoperability across EU member states. This standard is used currently for the issuance of invoices for B2G transactions in Luxembourg.