e-Commerce: today’s indirect tax challenges

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Key indirect tax issues — challenges for businesses supplying goods digitally

The term “digital” is predominantly associated with the supply of services electronically and the consequent indirect tax challenges that arise. But businesses in manufacturing, wholesale and, of course, retail must be able to reach distant markets in the pursuit of an omni-channel presence.

This relentless quest for distant markets and the supply chain connections required in an omni-channel environment often cause businesses to miss indirect tax consequences and compliance obligations. The penalties are costly and diverting.

Indeed, Donato Raponi, head of the value-added tax (VAT) unit at the European Commission’s Taxation and Customs Union Directorate-General, declared that “VAT has been identified as one of the top-3 barriers to cross-border e-commerce.” Companies have to spend around €8,000 annually per Member State to register and account for VAT. The current system is seen as complex and costly, with increased compliance risks and legal uncertainty for online merchants.

Is there an alternative?

No wonder then that businesses have considered ways to mitigate the cost of multi-territory VAT compliance under the distance-selling regulations.

On 20 October 2015, the VAT Committee of the European Commission published an updated set of guidelines in response to specific questions raised by the UK and Belgium about the application and operation of Articles 32, 33 and 34 of the Principal VAT Directive.

The questions concerned arrangements implemented to obviate the requirement to register for VAT under the distance-selling regulations via an interpretation of the term “goods dispatched or transported by or on behalf of the supplier” under Article 33. In summary, the structure sought to separate the supply from the transport of business-to-consumer (B2C) sales of goods to customers in distant Member States so that the requirement to register for VAT in the customer’s country would not arise.

The UK noted in its submission that “whilst these arrangements offer customers the options of collecting the goods in person or arranging delivery themselves, customers invariably request delivery by another legal entity ‘supposedly under a separate contract.’ Often, this transport company is associated with the supplier. The UK considers that, ultimately, the customer is ordering goods from the supplier and wants those goods delivered to him. The arrangements put in place between the supplier and the transport company are merely an alternative way in which the supplier has his goods delivered to the customer. The introduction of the transport company for the purposes of delivering the goods does not prevent those goods from being ‘dispatched or transported by or on behalf of the supplier.’ Consequently, the UK considers that VAT is due in the Member State of delivery.”

The VAT Committee has essentially agreed with the UK and Belgian view. Specifically, it has agreed that, for the purposes of Article 33, goods shall be considered to have been “dispatched or transported by or on behalf of the supplier” anytime the supplier “intervenes directly or indirectly in the transport or dispatch of the goods.” The supplier shall be regarded as having intervened indirectly in the transport or dispatch of goods when one of these conditions applies:

  • The supplier subcontracts the transport or dispatch of the goods to a third party that delivers them to the customer.
  • A third party dispatches or transports the goods, but the supplier bears the responsibility — totally or partially — for delivering the goods to the customer.
  • The supplier invoices and collects the transport fees from the customer and further remits them to a third party that arranges the dispatch or transport of the goods.

In other cases of intervention — particularly when the supplier actively promotes the delivery services of a third party to the customer, puts the customer and the third party in contact, and gives the third party the information needed to deliver the goods — the supplier shall likewise be regarded as having intervened indirectly in the transport or dispatch of the goods.

These guidelines are the views of an advisory committee and do not constitute an official interpretation of EU law and do not necessarily have the agreement of the Commission. Nevertheless, they are very persuasive and clearly reflect the views expressed by tax authorities in most Member States.

In this climate of tax transparency and accountability and the potential for reputational risk, it is perhaps a brave online seller that would ignore such a warning shot.

The Digital Single Market Strategy

Feedback from businesses selling online B2C is that the complexity of VAT registration, VAT returns, Intrastat obligations, non-UK bank account requirements and associated guarantees presents a real barrier to entering markets that could otherwise be profitable. The risk of getting it wrong can outweigh the decision to enter new markets.

The European Commission is clearly cognizant of this and has launched a public consultation to help identify ways to simplify the indirect tax consequences of cross-border e-commerce transactions in the EU.

In the context of the Digital Single Market, the Commission is working to minimize burdens attached to cross-border e-commerce arising from the different regimes within the EU. It wants to provide a level playing field for EU companies, big or small, and see that VAT revenues flow to the country where the consumer is based. The Commission is clearly enforcing this in its response to the representations of the UK and Belgium above.

Indeed, in the context of the Base Erosion and Profit Shifting (BEPS) debate, which affects the global tax position of multinational companies, the EU is arguably making great strides toward verifying that taxation for VAT purposes at least arises where the supply is delivered.

Since January 2015, supplies of telecommunications, broadcasting and electronic services to EU customers are subject to VAT where the customers have their permanent address or usually reside.

This rule has generally been welcomed because it aligns EU rules with the destination principle, but it has given rise to significant challenges for suppliers that have to deal with varying VAT rules in potentially all 28 Member States.

The Mini One Stop Shop (MOSS) regime, which allows suppliers of services to register online, file a single EU-wide VAT return and make payments to a single authority, has provided some relief. However, in terms of providing a medium for non-EU-established businesses supplying B2C electronic services to levy VAT on their supplies, the response has not been as successful as the desire of Member States to work together to see that such taxation takes place.

The same level of complexity applies to cross-border trade in goods to consumers as well, considering that the destination principle applies when the threshold provided by each EU Member State is exceeded without the possibility to report to one single Member State.

To address this disparity and barrier to a truly EU-wide market, the European Commission released a survey in 2015 titled “Public Consultation on Modernising VAT for cross-border e-commerce” that sought views on the following topics:

  • The current VAT rules for B2C cross-border supplies of goods and services
  • The implementation of the 2015 changes to the VAT place-of-supply rules and extension to the MOSS compliance scheme for goods ordered online both within and outside the EU
  • The EU’s commitment to the Digital Single Market Strategy for Europe, which includes:
  • The extension of the current single electronic registration (i.e., MOSS) and payment mechanism to intra-EU and non-EU sales of goods
  • The introduction of a common EU-wide simplification measure (i.e., a VAT threshold)
  • Single VAT audits of cross-border businesses
  • The removal of the VAT exemption for importing small consignments from non-EU suppliers

The survey closed in December 2015, and the UK Government has recently released its response to the issues outlined in the consultation. The Government wholly supports implementing the 2015 changes to the VAT place-of-supply rules for goods, as well as the extension to MOSS for goods ordered online both within and outside the EU.

When this article was published, the outcome of the consultation had not been issued. But, with notable exceptions for the smallest of the small and medium-sized enterprises (SMEs), the MOSS for goods is expected to be introduced, with the European Commission making proposals on the matter in the summer of 2016.

This review will mean significant changes for retailers and manufacturers involved in the supply of goods digitally, with the emphasis on building a new simplified regime and a level platform for the supply of goods and services digitally. How long the world will stand still once the method of taxing them catches up is up for debate, however.

On 7 April the European Commission adopted its Action Plan on VAT, setting out, among other measures, proposed actions to adapt the VAT system to the digital economy. It also provides clear orientation towards a single European VAT area in relation to the VAT system for cross-border supplies.

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