Regulatory updates - EU

The 2025 annual report on taxation highlights a strong shift across EU Member States towards the digitalization of tax administration, the harmonization of VAT  reporting, and the adoption of e-invoicing as an indirect tax compliance tool. 

One of the highlights in the report is the recently adopted Value Added Tax (VAT) in the Digital Age (ViDA) package. ViDA, a major step toward streamlining tax processes across Europe, introduces mandatory EU B2B e-invoicing and standardized EU Digital Reporting Requirement (DRR). This replaces fragmented national rules and enables real-time reporting of transaction data to the tax authorities. 

The VAT gap increased slightly compared to previous assessments. The EU-wide gap in 2022 was 7% of the VAT Total Tax Liability (VTTL), a slight increase compared to the 6.6% reported in 2021. 

The smallest VAT gaps were recorded in:

• Portugal (1.3%)

• Hungary (2.3%)

• Austria (3.0%) 

The highest VAT gaps occurred in:

• Romania (30.6%)

• Malta (25.9%)

• Slovakia (14.6%)

• Lithuania (14.6%) 

Possible factors contributing to the increase are COVID-19 related, but the long-term view is that trends in VAT compliance are positive through the introduction of targeted policy instruments being implemented across the EU. 

Member States are adopting policy measures such as mandatory electronic reporting obligations, online cash registers, and reverse charge mechanisms to improve VAT collection and reduce the VAT compliance gap. Traditional audits remain important in closing this compliance gap, but emphasis is now on digital infrastructure in tax administration to prevent issues like missing trader fraud and increase overall compliance.  

Many Member States are modernizing their tax systems with the EU’s support. The trend is towards automated validation and cross-matching of taxpayer data, leveraging technology to enhance compliance checks. Several Member States have introduced or are introducing mandatory e-invoicing, real-time reporting, and other digital auditing tools. 

Cross-border co-operation continues to strengthen the enforcement of different tax reforms at both the EU and national levels. The EU, using support systems such as the Technical Support Instrument, is helping member states’ projects to enhance their tax administration digitalization.  

The directive aims to improve the collection of VAT on imported goods, by making suppliers responsible for VAT paid upon importation. This approach creates stronger incentives for suppliers outside the EU to start using the VAT import one-stop shop (IOSS) for VAT obligations such as reporting and collection. One significant change is the elimination of the 150 EUR threshold for IOSS, making it possible to apply IOSS to all sales of goods imported into the EU, despite their value.

The directive was published in the Official Journal of the EU on July 25, 2025 and will enter into force from August 14, 2025, with the rules becoming applicable from July 1, 2028.

On June 27, 2025, the EU Council announced its agreement on a partial negotiating mandate for a significant customs reform package. This initiative responds to increasing trade volumes, particularly in e-commerce, growing EU standards, and changing global trade dynamics. The reform aims to strengthen protection of the Single Market, improve duty collection efficiency, and enhance controls without creating excessive burdens for authorities or businesses.

Key elements of the proposed reform include:

• The creation of a new EU Customs Authority, a decentralized agency that will coordinate national customs authorities and manage risk at the EU level;
• The establishment of an EU Customs Data Hub, providing a central online platform where businesses can submit information once, while giving authorities real-time visibility of trade flows;
• Enhanced trader programs, including a new "trust and check traders" scheme for businesses offering maximum transparency, while maintaining the current Authorised Economic Operator (AEO) program with additional support for small and medium-sized enterprises;
• A modernized approach to e-commerce, with tailored rules and systems to address the sector's rapid growth and unique challenges.

Furthermore, the Council has also introduced clarifications to customs processes and proposed a new handling fee for small consignments sent to the EU through distance selling.

The Council will now begin negotiations with the European Parliament, though certain aspects of the reform, including the location of the new authority and tariff details, will be addressed at a later stage.