The Future of VAT Compliance in Germany: Digital Reporting, E-Invoicing and the Importance of Accurate VAT Determination
The Ongoing Challenge of Combating VAT Fraud
VAT fraud has long been one of the greatest challenges facing tax authorities across Europe. One of the most damaging forms is carousel fraud, which exploits the VAT exemption for cross-border supplies within the European Union. Typically, goods are sold between businesses in different Member States without VAT being charged. The illicit operator then sells those goods domestically, collects VAT from its customer, but disappears before remitting the VAT to the tax authority. In many cases, the goods are repeatedly traded through a chain of businesses before being exported again, allowing fraudulent businesses to generate multiple illegitimate VAT refund claims while causing significant losses to government revenues. These schemes are often highly organised, operate across several jurisdictions, and are difficult to detect using traditional VAT return data alone. As VAT fraud continues to evolve, tax authorities are increasingly turning to digitalisation, transaction-level reporting and advanced data analytics to identify suspicious activity much earlier and prevent fraudulent refunds before they are paid.
Germany’s Introduction of Mandatory Electronic Invoicing
Germany has already taken a significant step towards a more digital VAT environment through the introduction of mandatory electronic invoicing for domestic business-to-business transactions. Since 1st January 2025, domestic businesses have been required to be able to receive electronic invoices, while the obligation to issue structured electronic invoices will be phased in over the next couple of years depending on the size of the business. Electronic invoicing provides VAT authorities with a standardised, machine-readable source of transaction data and creates the digital infrastructure necessary for more automated VAT compliance. Although the primary objective of e-invoicing is to improve efficiency and reduce administrative burdens, it also establishes the technological foundation for future digital reporting requirements and enables greater transparency across the VAT system.
Germany’s 26-Point Action Plan Signals the Next Phase of VAT Reporting
In July 2026, the German Federal Ministry of Finance and the Federal Ministry of Justice published their 26-Point Action Plan Against Tax and Financial Crime, outlining a series of measures designed to strengthen the fight against tax evasion and organised financial crime. One of the most significant VAT-related proposals is the introduction of an electronic VAT reporting system, allowing the German VAT Authorities to receive transaction data much earlier than under the current periodic VAT return process. The proposal aligns with the European Union’s VAT in the Digital Age (ViDA) initiative, which will introduce mandatory digital reporting for intra-EU cross-border B2B transactions from 2030. However, the wording of the Action Plan suggests that Germany may be considering a broader reporting regime that extends beyond the minimum requirements of ViDA. Rather than limiting digital reporting to cross-border transactions, the government refers more generally to an electronic reporting system (“elektronisches Meldesystem”) to combat VAT fraud. While no draft legislation has yet been published, this has prompted considerable discussion about whether Germany could eventually introduce digital reporting for domestic B2B transactions as well. Such a development would provide the German VAT authorities with significantly greater visibility over domestic supply chains and further strengthen efforts to detect carousel fraud at an early stage.
Other Key Measures in the Action Plan
While the introduction of digital VAT reporting is one of the most significant VAT-related measures included in the Action Plan, several other initiatives have also been proposed to strengthen tax enforcement, improve transparency and increase the ability of authorities to investigate financial crime. These measures extend beyond VAT reporting and reflect a broader focus on improving access to information, strengthening deterrence and enhancing the effectiveness of tax investigations.
One proposed measure is the extension of the mandatory retention period for accounting records from the current eight years to fifteen years. The aim of this extension is to ensure that relevant documentation remains available for longer periods, allowing authorities to better preserve evidence and support investigations into complex tax offences.
The Action Plan also proposes stricter penalties for serious organised tax crime. Such offences are intended to be classified as criminal offences carrying a minimum prison sentence of one year, with the maximum penalty increased to up to fifteen years. In addition, the current exemption from criminal penalties available to tax evaders through a voluntary disclosure (Selbstanzeige) is intended to be completely abolished, representing a significant shift towards a stricter enforcement approach.
Further measures include mandatory electronic cash register requirements for cash-intensive industries, the increased use of AI-supported data analytics by tax authorities, and an obligation to mirror tax-relevant cloud data on servers located in Germany. Together, these proposals demonstrate the broader objective of the Action Plan: to provide tax authorities with faster access to reliable information, improve their ability to identify risks and strengthen the overall fight against tax and financial crime.
Why Accurate VAT Determination Has Never Been More Important
As tax authorities continue to expand their access to transaction data and strengthen their analytical capabilities, businesses will need to place greater emphasis on the accuracy and consistency of the VAT information generated within their own ERP systems. As tax administrations continue their digital transformation, their role is increasingly shifting from reviewing periodic VAT returns towards analysing large volumes of transaction-level data. Modern tax authorities are becoming data-driven organisations, using sophisticated analytics and artificial intelligence to identify inconsistencies, unusual trading patterns and potential fraud. As a result, the quality of the data submitted by businesses has become just as important as the submission itself. Incorrect VAT determination within an ERP system can quickly result in inaccurate invoices, incorrect digital reporting and inconsistencies between business records and the information received by the tax authority. Errors that may previously have remained unnoticed until a later audit could instead be identified almost immediately through automated validation processes. Ensuring that VAT is correctly determined at the point a transaction is created is therefore becoming an essential component of effective VAT compliance and risk management.
Preparing for the Future of Digital VAT Compliance
The future of VAT compliance is becoming increasingly clear. Germany’s move towards electronic invoicing, together with the proposals contained within the 26-Point Action Plan, demonstrates a clear commitment to modernising VAT administration and using digital reporting to combat VAT fraud more effectively. Whether domestic digital reporting is introduced in the near future or at a later stage, businesses should already be considering whether their existing systems are capable of supporting this increasingly data-driven compliance environment.
SAP-Integrated VAT Determination for the Digital Future
At Meridian Global Services, we help organisations prepare for the future of digital VAT compliance by ensuring VAT is determined accurately before transaction data leaves your SAP system. Our VAT determination solutions, Arco and VAT Add-on, provide the same powerful automated, rules-based VAT decision-making capabilities for complex business transactions, helping companies determine the correct VAT treatment consistently and reduce compliance risk. While Arco is delivered on the SAP Business Technology Platform (recently renamed to Business AI Platform – BAIP), the VAT Add-on provides the same functionality within an on-premise SAP environment, allowing businesses to choose the deployment model that best aligns with their IT strategy and compliance requirements. Both solutions operate within the SAP ecosystem, supporting seamless integration with existing processes while helping your company maintain control over its data and strengthen data sovereignty. As VAT reporting becomes increasingly digital and real-time, ensuring that accurate, reliable VAT data is generated at the point of transaction is essential for maintaining compliance and confidence in the information shared with tax authorities.