how is VAT then distributed to tax collecting entity?
The same way it is with any other payment system, by having the vendor pay the tax collecting authority. Again, the payment system is totally irrelevant here.
Seeing your clarification in the other response:
As for the issue of the exchange rate and convertibility on taxes, I can only speak from the local law here, but the defining section of VAT regulations says that if the sale "contract" specifies the exchange rate between the used currency and EUR, that is the rate to be used for the calculation of VAT due. If you wouldn't mention the current Bitcoin/EUR rate on the invoice, you move into undefined territory.
The same way it is with any other payment system, by having the vendor pay the tax collecting authority. Again, the payment system is totally irrelevant here.
Seeing your clarification in the other response:
As for the issue of the exchange rate and convertibility on taxes, I can only speak from the local law here, but the defining section of VAT regulations says that if the sale "contract" specifies the exchange rate between the used currency and EUR, that is the rate to be used for the calculation of VAT due. If you wouldn't mention the current Bitcoin/EUR rate on the invoice, you move into undefined territory.