EU tax authorities could increase auditing of MOSS traders and distance sellers following a reporting from the European Court of Auditors (ECA).
On 16 July 2019, the ECA published its report on the vulnerability of E-commerce to evasion of VAT and customs duties.
According to the report, many challenges in collecting correct amounts of VAT and customs duties on e-commerce remain to be resolved. In particular, EU controls are insufficient to prevent fraud and detect abuse, while enforcement of collection is still not effective. However, recent developments and new provisions for 2021 address a number of weaknesses identified.
The auditors assessed whether the Commission had established a sound regulatory and control framework. In addition, whether Member States’ control measures helped ensure the complete collection of VAT and customs duties due on goods and services traded over the internet. They also considered the likely impact of the legislative changes of the VAT e-commerce package that will enter into force in 2021.
International cooperation is essential to ensure the completeness of revenue collection from e- commerce. The auditors note, however, that arrangements in place are not fully exploited and exchange of information between Member States and with non-EU countries is insufficient. In addition, the enforcement of the collection of VAT and customs duties is not effective. Member States are unable to provide sound and common estimates of the VAT gap, i.e. the difference between what should be collected and what is actually collected. Overall, tax authorities cannot ensure that the right amount of VAT is paid to the right Member State at the right time.
The auditors further point out the lack of effective controls on cross-border e-commerce. Checks carried out by the national tax authorities are weak and the Commission’s monitoring activities are insufficient, they say. For instance, the EU is unable to prevent abuse such as the deliberate undervaluation of goods below the thresholds for VAT and/or customs duty exemptions.
Regarding the new provisions that will enter into force in 2021, the auditors acknowledge positive developments. These aim to resolve some weaknesses of the current framework, including the gap in the VAT liability of intermediaries. However, important issues remain to be addressed. In particular, the auditors consider that undervaluations are very likely to continue under the new rules.
To address better the challenges identified, the report concludes with a number of recommendations to the Commission and the Member States. Among other things, the auditors ask them to:
- Carry out inspections on Member States’ controls of the low value consignment relief;
- Increase their audit activity on MOSS traders and distance sellers;
- Carefully check traders’ compliance thresholds for VAT/customs;
- Develop a methodology to produce estimates of the compliance VAT gap;
- Explore the use of suitable “technology-based” collection systems to tackle VAT fraud on e-commerce
This report sets out the weaknesses of the “e-commerce package” rules coming into effect from 2021. The main problem according to the report is the risk of “undervaluations” and it welcomes the directive on exchange of payment data between tax authorities as a useful way to tackle this issue. It will be interesting to monitor how many individual Member States decide to ramp up their auditing prior to the 2021 distance selling regime change.
If you are a MOSS trader or distance seller, contact our VAT experts for more information.