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Determining the Buyer’s VAT Status in EU E-Commerce Transactions

Jan. 18, 2022, 9:45 AM

In cross-border e-commerce transactions, the value-added tax (VAT) status of the customer helps determine who is liable for VAT in which country. However, due to the application of tax fictions, the person who is seen as the customer in a commercial and civil sense can be the supplier for VAT purposes, and vice versa, which can make the invoicing and VAT position look very different.

In cases of VAT fraud and abuse, inadequate identification of a supplier or customer may even result in the loss of tax revenue being recovered from bona fide traders elsewhere in the chain.

It is therefore vital for e-commerce businesses to be in control of the know-your-customer (KYC) and know-your-supplier (KYS) processes in place, so that they can submit a correct VAT return and also obtain protection against tax co-liability, tax assessments and penalties for VAT losses in fraudulent or irregular chains.

It should be noted that the requirements for VAT are not necessarily in line with the KYC and KYS requirements from other statutory regulations (such as anti-money laundering).

In this article we look at some of the issues relating to KYC and KYS for VAT purposes, in particular the VAT status of the customer and the role of the VAT identification number.

VAT Identification Number

According to the EU VAT Directive, member states must ensure that taxable persons are identified and assigned an individual number. In transactions between VAT traders, the VAT number is used for invoicing, reporting, verification and identification. This enables tax authorities to track goods and services through the chain and to verify the existence of the establishment as well as the status of the supplier and customer.

Traders can validate the VAT number of their counterparty in a transaction on a public European Commission website, to check whether the number is active and whether the business name and address given corresponds to the Commission’s register. The VAT number is therefore an important part of a properly functioning VAT system and is also a direct indication of whether the customer exists as a trader and is active as such.

This is of great importance for tax purposes, since as a rule transactions with customers who cannot be classified as entrepreneurs (for example, private individuals, government authorities, customers with a special status such as embassies and international organizations) require a different tax treatment. In fraudulent chains it is vital for the trader to carry out the relevant checks itself, to prevent bona fide traders being dragged into and even being held primarily responsible and liable for VAT losses in the chain (which will often be considerable).

In many cases this system works well, but it is certainly not completely watertight. For example, in many EU member states, small business owners are only required to register with the tax authorities above a certain turnover threshold; and in some southern member states, a local VAT number is not always activated with regard to transactions with other EU parties. This puts internationally operating e-commerce companies that do business with these types of entrepreneurs in a difficult position.

Moreover, increasing numbers of small entrepreneurs, hybrid entrepreneurs and other special buyers and suppliers are joining the sharing economy and gig economy, and this problem is only growing. Unfortunately, the EU-level review of specific rules for small entrepreneurs, applicable in 2025, has not been used as an opportunity to solve this.

The situation for goods is different and often even more complex than for services.

Cross-Border E-Commerce Services

The VAT status of the buyer is important for determining where (i.e. the country) the transaction takes place, who has to pay the VAT, and the charging and remittance of VAT. If the foreign customer is a taxable person for VAT, the supplier can in principle invoice without VAT and the VAT will be “shifted” to the customer (reverse charge). The latter must then declare the VAT in its own country. The supplier then does not have to pay VAT to the tax authorities.

If the foreign buyer is not a taxable person for VAT, the supplier must charge and remit the VAT.

In which country the VAT is due depends on the nature of the service. The main rule is that VAT is due in the country of the service provider, but for electronic services there is an exception and VAT must be paid in the country of the recipient. The service provider can register locally for this or can file a consolidated return for the entire EU through the “One-Stop Shop” return of the provider’s home country.

The supplier can use the evidential presumptions from the EU VAT Implementing Regulation to determine the VAT status of its customer. In short, the supplier can assume that the customer is not a taxable person if the customer does not provide the supplier with a VAT number. When the customer does communicate a VAT number the supplier can, if it successfully validates the number, assume that its customer is in principle a VAT taxable person.

If the customer reports that its VAT number is still in the process of being requested, the supplier may rely on “any other evidence” regarding the VAT status of the customer, “provided that he carries out a reasonable level of verification of the accuracy of the information provided by the customer, using normal commercial security measures such as those relating to identity and payment checks.” This is always subject to the proviso “unless he [the supplier] has information to the contrary.”

The VAT number is therefore not a material condition for the application of the VAT reverse-charge mechanism.

Cross-Border E-Commerce Goods Transactions

Since 2020, the availability of a valid VAT number from the buyer is a material condition for the application of the zero rate on intra-Community supplies of goods to VAT taxable persons. Without a valid VAT number from the customer, the supplier cannot apply the zero rate and must invoice and pay VAT in its own country. However, this does not relieve the customer from its obligation to declare an intra-Community acquisition in its own country of establishment.

The absence of a VAT number from the customer therefore potentially leads to double taxation. This need not be a problem insofar as the customer is entitled to deduct and can also reclaim the VAT levied twice from both tax administrations. However, some EU member states take the view that there is no right of deduction for VAT charged by the supplier due to the absence of a VAT number from the customer. This would then have to be rectified by a corrective invoice issued by the supplier at the time when the customer is able to provide a valid foreign VAT number.

For cross-border supplies to consumers and other non-taxable customers in other EU countries—so-called distance sales—the supplier must pay VAT in the country of the customer. As with services, this can be done through local registration or the One-Stop Shop.

Thus, if the supplier does not have a valid VAT number from the customer, it has to make sure whether it is dealing with a non-taxable customer (VAT in country of customer) or still with a taxable customer despite the absence of a valid VAT number (VAT in country of supplier).

Remarkably, the VAT Implementing Regulation, the explanatory notes and the Guide to the VAT One-Stop Shop do not provide evidential presumptions or other guidance for this situation.

VAT Fictions for E-Commerce Platforms

For e-commerce platforms there are special VAT fictions so that, under certain conditions, for VAT purposes they are considered to be part of the chain of the underlying transaction effected through their platform, even if they only act as an intermediary bringing supply and demand together. As a result, the platform is deemed to purchase the underlying product from the seller and resell it to the final customer, with all the VAT implications.

Take, for example, an e-commerce platform that charges a fee to a seller which sells products through that platform and is free of charge for a buyer on the platform. The application of the VAT fiction means that for VAT purposes not the seller, but the buyer, is considered to be the customer of the platform. Moreover, the platform not only owes VAT on its own fee, but on the full price of the underlying transaction. A distinction between goods and services also applies to this VAT fiction.

For electronic services (e.g. apps, audio and video, software) offered via an e-commerce platform, the default rule is that the fiction applies unless the seller is explicitly designated by the platform as the one who performs the service and that is made clear in the contractual arrangements, the invoice and the proof of payment between the parties. Provided it is set up correctly, there is therefore some leeway to prevent the VAT fiction from applying.

If the VAT fiction does apply, then the same evidentiary presumptions apply to the e-commerce platform to determine the status of the final customer of electronic services.

For e-commerce platforms that “facilitate” distance sales and sales of goods held in stock within the EU by sellers established outside the EU, a fiction has also applied since July 1, 2021. There, the leeway is considerably smaller. Two conditions of this fiction are that the seller on the platform is a taxable person and that the buyer is a non-taxable person.

For the relevant e-commerce platform, a presumption applies that, unless it has contrary information, the seller qualifies as a taxpayer and the buyer as a non-taxpayer, in which case the fiction is applicable. The e-commerce platform cannot rely on the mere fact that the seller has not provided it with a VAT number.

The presumption for this specific situation therefore goes further than the presumption for services.

To prevent the e-commerce platform from falling under the VAT jurisdiction as a result of this specific presumption, it is important to collect relevant data to disprove the presumption. This information is also crucial for the set-up of billing and enterprise resource planning (ERP) systems for an automated set-up. The availability of a valid customer VAT ID and being able to link the VAT number to the transaction is after all the linchpin of many an automated tax determination such as “tax-engines” and the starting point the design for this.

Conclusion

It is clear that the VAT status of the customer and the presence or absence of its VAT number as proof of this status are essential for the correct application of VAT in e-commerce transactions. In most cases, the supplier who has a valid VAT number from the customer can safely assume that its customer is a taxable person and acts as such.

It is when a valid VAT number is not available that things become tricky. The existing presumptions of proof only provide support to a certain extent. For cross-border supplies of goods, presumptions of proof are lacking, and for distance sales via e-commerce platforms they are even to the disadvantage of the taxpayer.

Doing something “wrong” unintentionally may result in incorrectly invoicing with or without VAT, remitting VAT to the wrong country, and, in extreme cases, in double taxation. In addition, an unlevel playing field is a danger when market parties maintain different working methods due to unclear regulations.

E-commerce businesses therefore need to have their KYC and KYS processes in order to ensure that sufficient data is available for the correct application of VAT on each transaction.

The mere fact that a customer has not provided a VAT number is probably insufficient to assume that the customer is not a taxable person. It is better if the supplier designs the customer acceptance process in such a way that the customer actively indicates (for VAT purposes) that it is acting as a non-taxable person.

Even better is when a process is also set up to monitor parameters that may produce “conflicting information” and a protocol for what to do in such a situation. For example, a person who indicates that he is acting as a private individual and buys a few pallets of perishable goods may likely not consume all of them himself but will probably sell them on, and thus qualify as a taxable person.

The VAT number is a central hub in an automated tax and VAT set-up and thus one of the main drivers of its logic.

In the absence of a valid VAT number, the taxpayer status of the customer may be substantiated by (a combination of) other means of proof. These might include a chamber of commerce registration, the customer’s legal form, a website showing economic activities, or other information from publicly available or private sources.

The nature, quantity and value of the underlying transaction itself can also be an indication of the capacity of the customer. Consider, for example, services specifically aimed at entrepreneurs, such as electronic accounting packages or payment services.

Unfortunately, there is no one-size-fits-all solution, but customization is required that takes into account the specific context and circumstances of the individual business and its buyers and suppliers. In this, a fine balance must be found with the commercial aspects. After all, every extra click in the buying process reduces conversion.

Automation and real-time consultation of external sources can help optimize the process and make it as customer-friendly as possible. That process should actually start at the front-end when onboarding new customers and at the latest when closing the transaction, not only afterwards when a return has to be filed.

Depending on the situation, it may be wise to coordinate the processes with the tax authorities to ensure that everything reasonably possible has been done to achieve correct VAT payments.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Koert Bruins is Director, Indirect Tax, with Deloitte Netherlands.

The author may be contacted at: kbruins@deloitte.nl

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