Amcham Connexion, May 2018

New steps on the VAT digital journey

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On 5 December 2017, the Economic and Financial Affairs Council approved an extensive e-commerce VAT package. As part of the European Commission’s Digital Single Market strategy, this package will amend the current VAT system in order to better face a commercial reality where the internet and digital technologies have changed the way we live and do business. In particular, the proposed measures include:

  1. new rules allowing businesses that sell goods online to comply with their VAT obligations through a digital online portal, i.e. “One Stop Shop”, in their own language;
  2.  a yearly threshold of €10,000 under which cross-border sales to other EU countries will be treated as domestic sales for e-commerce companies as from 2018;
  3. the removal of the current exemption from VAT for imports of small consignments from outside the EU worth no more than €22; and
  4. the responsibility for online marketplaces to collect VAT on sales made on their platforms, by non-EU merchants to EU consumers.

This initiative, due to enter into force in 2021 (with the exception of the above-mentioned VAT threshold) fulfils a core commitment of the Commission`s Digital Single Market strategy, which acknowledges that the current EU VAT rules, agreed before the rise of the internet and the boom in online sales, are no longer fit for purpose. Today, according to data shared by the EU Commission, trade related to online sales in Europe is worth €550 billion each year, out of which up to €96 billion relates to cross-border trade. However, the potential of the online economy is thought to be much higher and only by creating a stable legal and economic environment in the EU internal market, can EU businesses thrive while appropriate VAT revenues accrue to the Member States.

Under the current EU VAT rules, companies selling goods online face annual VAT administrative compliance costs of up to €8000 euro for each EU country in which they sell. On their side, Member States face €5 billion of lost VAT revenue due to non-compliance on cross-border online sales. This relates in particular to goods sold online on the EU internal market by non-EU companies. Up to 70% of non-EU online traders, in the normal course of their business, store goods in the fulfilment houses of EU online platforms, pending the sale of such goods; this creates a problem for EU tax authorities as they often have difficulties in collecting the VAT due on goods owed by non-EU companies.

This will change starting from 2021 when online marketplaces become responsible for collecting VAT on sales made via their platforms by non-EU companies to EU consumers. To date, the practical aspects of this initiative have not been outlined and are due to be included in the implementing regulation of the agreed directive. However, the EU Commission has made clear its intention to involve the relevant stakeholders in developing the implementing regulation. Indeed consultation already began on 27 February, in relation to the fight against VAT fraud on cross-border online sales to final consumers, which intends to be complementary to the e-commerce VAT package.

Meanwhile, many believe that creating liability at the level of the online marketplace itself is in conflict with the overall principles that inspired the general VAT framework, considering that the person liable for VAT in a B2C supply of goods is usually the seller (unless the distance sales regime is applicable). Additionally, marketplaces do not often have at their disposal the information needed to establish the appropriate VAT treatment of a given sale of goods. A final criticism arises from a procedural perspective; taking into account that the proposal to allocate the tax collection liability to the online marketplace was not included in the EU Commission’s original proposal, the opportunity never arose to carry out a preliminary impact assessment that would have evaluated the potential (negative) effects of such a measure before its adoption.

All in all, these are times of change. The EU legislator has reacted to public outcry that for years has pushed for change. However, creating an up-to-date VAT system that is fit for the current digital economy is likely to be a complicated process and should actively involve all concerned stakeholders in order to avoid negative consequences in the interim.

As a globally integrated firm, EY is well positioned to assist all stakeholders in making their voice heard and ensuring their interests are taken into account at local and EU levels. If you want to be involved in the consultation process, please contact us.