EU | Update on VAT rules for e-commerce businesses

The EU has announced new rules to help e-commerce businesses simplify how they account for VAT.

The new rules are applicable to businesses selling both goods and services on a B2C basis and are intended to have effect at various stages up to 2021. They are part of the EU’s Digital Single Market strategy.

According to the EU, nearly €5 billion of VAT revenue is lost each year because of non-compliant e-commerce businesses, an amount that will likely continue to grow as the e-commerce sector increases in size. The EU therefore intends to make changes to help e-commerce companies enjoy simplified compliance burdens but also to tackle VAT fraud.

An outline of the changes is given below:

1. Online marketplaces liable for collecting VAT

This will see the likes of Amazon and Ebay having to account for VAT on supplies made by non-EU companies to EU consumers. This will take away from those suppliers using these marketplaces the need to register in countries where they make their sales (something that often doesn’t happen, which is the reason for a VAT gap existing).
Interestingly, Australia will be rolling out a similar provision in July 2018 so it will be possible to see how well this works in practice, albeit on a much smaller scale and with just one tax administration managing the relation with the online platforms.

2. Simplification measures for B2C supplies of electronic services and goods

Supplies of B2C electronic services and goods by a business are currently subject to VAT in the EU country where the customer belongs. For services, this rule applies from the first supply that is made (i.e. there is no threshold to breach) but for goods, there are different thresholds set by each EU Member State which must be exceeded before they apply.

From 1 January 2019 a €10,000 threshold will be imposed for supplies of electronic services which will allow businesses trading below it to continue to apply the VAT rules of the Member State where they established. This means that only businesses making higher levels of supplies will be required to account for VAT in the location of the customer and hopefully this will reduce compliance burdens for small enterprises. The same level of threshold will be applied to goods from 1 January 2021.

3. Extension of the one-stop shop for supplies of goods

The EU has determined that a “one stop shop” (OSS) approach creates a simpler and more efficient system for VAT reporting when it comes to e-commerce businesses. Currently, businesses supplying electronic services to individuals in the EU can submit VAT due via the “Mini One Stop Shop” (MOSS). The EU intends to extend the MOSS and allow EU businesses selling goods to also utilise it (by way of the more extensive OSS), thereby potentially reducing the VAT registration obligations of these businesses.

Additionally, another portal will be established to enable businesses from third countries making B2C supplies of goods with values below €150 to register and account for VAT on their supplies. This is because such businesses will be deemed to have both imported and made a local supply of the relevant goods. The rollout of both these schemes is not scheduled until 2021.

4. Elimination of the VAT exemption for small consignments

Currently goods imported into the EU with a value of less than €22 are exempt from VAT. This has been a major source of frustration for EU based companies in that the value of goods is often under-reported to benefit from the exemption. This leads to businesses from outside the EU benefitting from an unfair tax advantage as they are not required to charge VAT on their sales. Removing the exemption should therefore “level the playing field” and potentially provide more revenue to EU Member States, although increased compliance costs and checks may also arise.

These changes will have a significant impact for both e-commerce companies and tax authorities. This is particularly the case given the short time scales currently envisaged before implementation, although these may be subject to change if EU Member States cannot reach agreement on how the OSS for goods will operate. In particular, it will be interesting to see how country-specific compliance obligations (i.e. SAF-T returns, Spesometro, etc) are incorporated into the OSS. This is because the supply of goods is, by its nature, significantly more complicated than that of digital services and hence the existing MOSS template will probably need fundamental change. All this means that the timescales currently set out could well be extended for an indefinite amount of time.

Regardless, it will be important for businesses to fully understand the implications of these changes on their activity in the EU to make sure that they remain compliant. This will particularly be the case when activities and structures above and beyond the simplified delivery of goods from one country to another take place (i.e. warehousing, vouchers, returns, etc). Although the changes are some way off and may still be subject to change, please do not hesitate to contact your usual contact if you have any questions.