Digitalisation has been rapidly changing the nature of government-business-citizen interaction. However, there are still regulatory barriers that make it difficult to fully benefit from the digital tools and contribute to the growth of the EU economy and reduce the VAT Gap.
Despite, receiving €602 billion in eCommerce revenue in the year 2017, it also cost EU member states €5 billion of VAT loss due to the fraud from non-compliant businesses. This “aggressive form of tax saving” by these businesses became convenient for them since each member state applies different standard VAT rules in their respective country; and the cross-border trade of eCommerce only complicates the process further as it requires the companies to be registered for VAT in each of the member states where they sell goods.
Hence, the Digital Single Market strategy was adopted to move from 28 national markets to a single market. It is expected to contribute €415 billion per year to the EU economy.
How digitalisation is changing the role of eCommerce with respect to VAT compliance?
As a part of the ‘Digital Single Market’ strategy, the European Council has adopted to the new rules in December 2017 that will aid the eCommerce industries to comply with VAT obligations. These new rules come into effect from 2019 and applicable to businesses providing goods and services directly to customers (B2C).
With the focus on creating a single market for the digital age, where free movement of goods, persons, services and capital is guaranteed, EU is tearing down redundant regulatory barriers and moving all the 28 national individual markets to a single one. By putting a single market online, it will give rise to the number of small and medium-sized businesses (which currently contributes to only 7% of the market) in the EU to sell cross-border online, and where citizens and businesses can seamlessly access online goods and services irrespective of their nationality and geographic location. This completed Digital Single Market Strategy can help Europe garner its position as a world leader in the digital economy.
Here is what e-commerce businesses need to know with respect to VAT obligations:
VAT obligations as an EU seller:
As an EU trader selling goods online to a European consumer, you have to consider the distance selling rules, under which the supplier is responsible for delivery of the goods to a private consumer in another EU member state. This rule applies if you fall into any of the categories of being a sole trader or if you are not registered for VAT or if you only sell through a marketplace.
The distance sales rules allow you to sell cross-border to another EU member customer, up until the threshold limit is met. You will apply the outbound country’s VAT rate on your sales up until then and once you exceed the threshold limit you will switch to the domestic tax rates of the buyer country and register for VAT in that member state.
VAT obligations as a non EU seller:
As a non EU seller, if you are drop-shipping your products from outside the EU, the responsibility of taxes and duties will depend on the importer of record, in which case if the customer is the importer of record, they will benefit from the VAT claim as well as be liable to pay import duties.
Now, if you want to avoid that, then you need to register for VAT in the first port of entry into Europe, in which case you will be able to reclaim your import VAT on your VAT return with the local VAT rate applicable within the registered country.
Also, while using fulfillment centers to store goods in the EU country, you need to be VAT registered there immediately as you have created a taxable supply there. Once you have VAT registered in one EU member state, you will fall under the distance sales rules and thus the threshold limit will be applicable to you too.
The consequence of non-compliance:
A Study requested by the Tax3 Committee and done by the Policy Department for Economic, Scientific and Quality of Life Policies, shows how non-compliance has resulted in member states losing upto €5 billion VAT revenues annually as well as the VAT foregone from the VAT exemption for the importation of small consignments. This loss is estimated to still rise up to €7 billion by the year 2020. There is more evidence found, as per a recent study based on real purchases, regarding 65% of consignments sold from a third country are non-compliant with EU VAT rules, and also up to €25 billion of non-EU trade has been estimated to be non-VAT compliant.
Alongwith placing the digital single market strategy in place, the EU recently also started cracking down on well known e-commerce sellers like Amazon and eBay for tax fraud, which can result in huge consequences for their business. Failing to comply can put your entire business under threat and you may become liable for any of the following consequences:
- Huge penalties
- Years of backdated payments being exposed
- Your seller account getting shut down
- A thorough investigation by the tax authorities
How modernising VAT for e-commerce helps to fight and prevent fraud:
The proposal of streamlining VAT rules for eCommerce is an important step in helping to fight and prevent fraud. Here are a few instances where this will improve the processes greatly:
Online marketplaces will be liable for collecting VAT
The European Commission will engage with online marketplaces to ensure that there is full clarity on their role when the reforms are introduced in 2021. By introducing liability, tax authorities will now be able to claim the VAT due on those fulfilment houses, from these online marketplaces, that facilitated the transaction.
Given the fact that the majority of international online trade is carried out via online marketplaces (estimated at 70-75%), these companies will also continue to have an important role in the new set-up for e-commerce rules, similar to their current role for e-services. Significant simplifications for VAT compliance are already offered to these online marketplaces via an extended single online registration and VAT reporting tool within the current One Stop Shop for e-services, which will be extended to online goods as well.
This should lead to greater cooperation and coordination by the various Member State Tax Administrations leading to a more efficient and effective audit regime. Audit resources can then be targeted at non-compliant businesses significantly improving the VAT reclaim process.
B2C supplies of electronic services and goods simplified
Currently, companies that are selling electronic services such as mobile phone apps are already eligible to sell to customers in other member states while registering for VAT only in their home member state. Their processes are streamlined, where they file all their VAT quarterly through an online portal hosted by their home tax administration. These VAT revenues are then transferred to the relevant member state where the company had sold its e-services. The new rules which have resulted in simplification for e-services will also be made available for online sellers of goods and other services as well.
The ‘One-Stop-Shop’(OSS) for supplies of goods extended
The new rules extending the existing EU-wide portal- the mini ‘One-Stop-Shop’ (OSS) for the VAT registration of distance sales, will result in a cost reduction of complying with VAT requirements for business to consumer (B2C) transactions. Thus, VAT will be paid in the member state of the consumer, ensuring a fair distribution of tax revenues.
Also, the OSS proposal will relieve online traders from registering for VAT in each of the member states where they sell goods, enabling the companies to reduce their administrative burden by 95%, and allow company resources to concentrate on core-business activities. The commission estimates that the One-Stop-Shop will generate an overall saving of €2.3 billion for businesses, and a €7 billion increase in VAT revenues for member states.
This new rule has really simplified things for start-ups and SMEs where a business will be able to continue applying VAT rules in its home country if it makes less than €10 000 in yearly cross-border online sales.
Also, sellers from non-EU countries or their intermediaries will need to provide advance information on consignments to benefit from the simplification of the One Stop Shop.
The elimination of VAT exemption for small consignments
Under the current rule, small consignments imported into the EU, which are worth less than €22 are currently exempt from VAT and with around 150 million parcels imported free of VAT into the EU each year, this system is open to massive abuse and fraud. Many businesses undervalue their goods while importing to benefit from this tax exemption.. This results in a great disadvantage towards the EU businesses as they have to pay taxes for each transaction.
The removal of the small consignments exemption will mean that VAT will apply on all imports from non-EU countries. The online sellers will no longer be able to under-declare the value of the goods, and thus, will no longer be able to benefit from the exemption.
The timeline for these rules to come into effect
This proposed action plan which was put forward in December 2017 will start taking effect from 2019 onward, giving businesses enough time to become VAT compliant. These are the following timelines to introduce the new rules in the EU:
- Simplification measures for intra-EU sales of electronic services to be introduced by 2019
- Extension of the One-Stop-Shop to distance sales of goods to be introduced by 2021, both intra-EU and from third countries, as well as the elimination of the VAT exemption for small consignments.
- To transpose the corresponding provisions of the directive into national laws and regulations, the member states will have until 31st December 2018 and 31st December 2020 to do so.
Impact of these changes on online business
As Toomas Tõniste, Minister for Finance of Estonia, said, “This revamp of the rules will make our VAT system fit for the digital economy. By reducing red tape, we will achieve both cost savings for businesses and increased tax revenues for the member states.”
Let’s see the impact of the simplified VAT rules for online businesses:
- Trade between the Member States should increase as a result of the proposed simplifications and the decrease in cross-border VAT compliance costs.
- With other businesses not charging lower VAT rates or no VAT rate at all, domestic online companies will also benefit as they will no longer be undercut.
- All goods bought online by EU consumers from sellers outside the EU after 2021, will also be subject to VAT, in line with current EU sales practices. These measures will bring certainty over final pricing to their EU customers.
- Currently, a significant number of parcels are refused by consumers once they arrive in the EU as they are faced with additional VAT and clearance fees from postal or courier operators. This should alter for the better.
- The existing One Stop Shop has already proven its effectiveness as a means of collecting taxes from traders located in the other Member States, which is particularly relevant in the digital economy since traders don’t need to have a physical presence. Also, the extension of the current rules for tangible goods should lead to increased compliance rates.
What will it mean for your business?
The adaptation of the new rules will have a substantial effect on both eCommerce companies as well as the tax authorities, especially considering the very short time frame to integrate the changes into the system. However, the execution can change if the EU Member States don’t reach on a unanimous agreement on the operation of the One Stop Shop (OSS) for goods.
Supplying of goods is more complex than the supply of digital services. Thus, the existing Mini One Stop Shop (MOSS) template will need to be altered for the OSS. The most interesting thing to see will be the incorporation of the country-specific rules such as SAF-T returns, Spesometro, etc in the OSS. As a result, the timing for these rules to come into effect is expected to be delayed.
Regardless of the time, it takes for the rules to come into effect, businesses will have to understand the impact on their operation and will have to make necessary changes in order to stay compliant. Especially when the operations run beyond the structure of simplified delivery of goods from one country to another such as the utilisation of warehouses.
Let’s see what other impacts these changes may have on your business:
- Online sales of goods will be taxed in the same way as their physical equivalents in shops, while the same VAT rate will be charged in the Member State where the EU consumer is based, irrespective of the online retailer’s physical location.
- Online companies selling goods and/or e-services for up to €10 000 yearly cross-border will be able to treat these sales similar to their domestic sales and thus, get to deal only with their domestic VAT rules and their tax authority.
- Currently, companies selling cross-border with less than €100,000 cross-border sales per year need two pieces of evidence to identify the location of their customers. With the new rules, only one piece of evidence will be needed. This will provide small start-ups and SMEs with a simpler process to manage their VAT obligations.
- The simpler invoicing rules for a business in a member state will mean that companies will not have to worry about complying with invoicing rules of other Member States.
How can Cash Back Help your Business?
With so many changes being adapted to better the future of ecommerce trade, reclaiming VAT can be a tricky process and non-compliance can result in severe impact on your e-commerce business. That is why it makes sense to get help from an international VAT compliance expert like Cash Back, to help you streamline your VAT recovery through automated processes and local VAT experts increasing your bottom line by claiming VAT for you correctly. Connect with us today!
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