As we enter 2025, businesses supplying goods and services across borders will face significant changes in Value-Added Tax (VAT) rules worldwide. The upcoming reforms will impact VAT rates, introduce new taxation regimes in several countries, and redefine compliance for digital service providers. Let’s explore the most notable VAT changes affecting businesses globally, with Irina Cherkashina, Tax and Finance Manager at 1D3 DIGITECH.

VAT Changes 2025: Updated Rates Worldwide

VAT rates continue to evolve in response to economic needs and fiscal policies. Several countries will increase their VAT rates or adjust reduced rates starting in 2025:

• Indonesia: The standard VAT rate will increase from 11% to 12%.
• Israel: Israel will raise its standard VAT rate from 17% to 18%.
• Slovakia: Slovakia introduces an increased standard VAT rate of 23%. In addition, the current reduced rate of 10% will be replaced with a new reduced rate of 5% and 19%.
• Vietnam: The temporary reduced VAT rate of 8% has been extended for six months. Until June 30, 2025, most goods and services will remain under this reduced rate.
• Finland: The reduced VAT rate will rise from 10% to 14%.
• Estonia: The VAT rate will rise from 22% to 24% starting from July 1, 2025.

These rate adjustments signify a global trend of increasing VAT revenues to support government budgets and economic recovery.

Introduction of VAT Regimes in New Countries

Several countries will adopt VAT frameworks or extend VAT obligations to digital service providers in 2025.

Guinea-Bissau

The country will implement VAT starting January 1, 2025, as outlined in the VAT Code – Law No. 4/2022. The VAT system applies to digital service suppliers, including those engaged in cross-border activities that generate taxable income within the country, even if performed outside Guinea-Bissau. Non-resident digital service providers may fall under the normal or simplified VAT regimes depending on their turnover, with thresholds set at FCFA 40,000,000 (EUR 60,000) and FCFA 10,000,000 (EUR 15,000), respectively.

Rates include a simplified 5%, a standard 19%, and a reduced 10% for specific services like computer equipment and legal services. Digital service providers must comply with invoicing, reporting, and applicable VAT rate obligations under the new framework.

Philippines

Non-resident digital service providers (DSPs) supplying services consumed in the Philippines will be subject to 12% VAT starting from May/June 2025. Non-resident DSPs exceeding P3 million in annual sales must register for VAT, but the draft IRR suggests registration is mandatory regardless of turnover.

VAT applies to business-to-consumer (B2C) transactions, while business-to-business (B2B) VAT is remitted by Philippine resident business consumers. Non-resident DSPs may appoint third-party service providers for compliance, and further clarifications on documentation and VAT zero-rating are expected in the final IRR.

Sri Lanka

Sri Lanka plans to implement an 18% Value Added Tax (VAT) on digital services provided by non-resident suppliers to consumers, effective March 2025. This initiative aims to create a level playing field between foreign and local digital service providers, who have been subject to VAT since January 2024.

The VAT will apply to services such as streaming games, music, apps, films, e-books, e-journals, and internet services.

Peru

Foreign digital service providers and withholding agents must collect 18% VAT (IGV) starting December 1, 2024.

Digital services are broadly defined as any service that is made through the internet, platforms, or technology used by the internet and characterized as being essentially automatic. Examples include access to online images, movies, music, online magazines and newspapers, and remote conferencing services.

VAT Changes in the EU

New SME scheme (Starting 1 January 2025)

From 1 January 2025, the new SME scheme introduces a special VAT system to support small businesses. It allows eligible small enterprises to sell goods and services without charging VAT to their customers (VAT exemption). Additionally, the scheme simplifies VAT rules to reduce the administrative burden. However, businesses choosing the VAT exemption cannot reclaim VAT on goods and services they purchase to make these exempt supplies.

To qualify for the SME scheme, a small business must have a total annual turnover of EUR 100,000 or less (or the equivalent in national currency) across all EU Member States in both the current and previous calendar years. Member States can also set their own domestic turnover threshold, but it cannot exceed EUR 85,000 (or equivalent). The scheme is only available in EU countries that have incorporated it into their national laws. Non-EU businesses, including those based in the United Kingdom (including Northern Ireland), are not eligible to use the scheme.

The SME scheme makes compliance easier for small businesses in three key ways:

• Single Registration: Small businesses only need to register once in their home country (the Member State of Establishment or MSEST). They are then assigned a unique ‘EX number’ that works across all EU Member States where they claim VAT exemption.
• Single Quarterly Report: Instead of filing separate VAT returns in multiple Member States, businesses can submit a single quarterly report summarizing their turnover across all participating countries.
• Simplified Invoicing: The scheme reduces invoicing requirements, making it easier for businesses to handle transactions.

This simplified process is designed to reduce the administrative burden on small enterprises and help them focus on their core operations.

Participation in the SME scheme is optional, and businesses can decide whether to opt in based on their specific needs. This flexibility allows small enterprises to evaluate whether the benefits of the scheme align with their operational and financial goals

VAT changes for Virtual Events

Starting January 1, 2025, the European Union will introduce new VAT rules for virtual events and live-streamed activities, aligning their tax treatment with digital services. Under these changes, the VAT for such events will be determined based on the customer’s location.

For B2C transactions, event organizers will charge VAT at the rate applicable in the consumer's Member State. This ensures VAT aligns with the local rates of the participant’s country. With the upcoming EU VAT rate reform, also effective from January 2025, Member States may apply reduced VAT rates to certain virtual events if similar rates apply to in-person attendance.

To simplify compliance, event organizers can use the One Stop Shop (OSS) system to handle VAT collection across the EU, eliminating the need to register for VAT in each customer’s country.

For B2B transactions, VAT will not be charged at the point of sale. Instead, it will be handled through the reverse charge mechanism, consistent with the treatment of other B2B services.

Final Text Adoption of the VAT in the Digital Age (ViDA) Reform

The European Union has been working to modernize its VAT regulatory framework in response to the growth of e-commerce and the digital economy. This transformation addresses the global shift from offline to online sales and the emergence of new business models, prompting legislative updates to simplify compliance, improve fairness, and reduce bureaucracy.

In December 2022, the EU introduced the VAT in the Digital Age (ViDA) package. Its primary goal is to reduce the VAT gap and enhance collection efficiency, leveraging measures like the One-Stop Shop (OSS) scheme. While the changes promise cost reductions and expanded opportunities for some businesses, others may face increased compliance responsibilities and reduced flexibility.

Key Components of the ViDA Package:

Digital Reporting Requirements (DRR):

• Mandatory B2B e-invoicing for cross-border transactions by 2030.
• Real-time digital reporting for EU-level intra-community trade by 2030.
• E-invoices standardized as the default format.
• Harmonization of domestic reporting systems by 2035.
• Removal of EC Sales List submissions by 2030.

Platform Economy:

• Deemed supplier rules extended to platforms for short-term rentals and passenger transport.
• Mandatory compliance by 2030, with optional adoption by 2028.
• Exemptions for SMEs and clear guidelines for platform fee reporting.

Single VAT Registration:

• Expanded OSS to cover new transaction types and merchant stock movements by 2028.
• Broader application of the Reverse Charge Mechanism by 2028.

Legislative Process and Timeline:

Following nearly two years of debate, the EU Council agreed on the ViDA package on November 5, 2024. The finalized version will be approved by the end of 2024, with the legislation effective in January 2025. Changes were made to the original proposals, requiring consultation with the EU Parliament and a unanimous Council vote.

ViDA represents one of the most comprehensive reforms in the EU VAT system, streamlining compliance, enhancing tax collection, and aligning the regulatory framework with the digital age's demands.

VAT Changes 2025: Conclusion

As 2025 approaches, significant VAT reforms across the globe are reshaping compliance requirements for businesses, particularly digital service providers. Changes in VAT rates, the introduction of new regimes in emerging markets, and the EU's comprehensive updates under ViDA emphasize a global shift toward modernization and revenue optimization.

For businesses, these updates offer opportunities for simplified processes, such as the EU's SME scheme and OSS system, while also posing challenges like navigating increased compliance burdens and new reporting obligations. Adapting to these changes will be crucial for businesses to remain competitive and compliant in an evolving international tax landscape.