The EU faces major challenges in collecting the correct amounts of value-added tax (VAT) on goods traded via the internet. The existing VAT rules were designed decades ago, prior to the internet, and need to be brought in line with today’s reality where more and more businesses are selling online. According to the statistics, one in five businesses in the EU currently makes electronic sales.
The EU has been working on an update of the VAT rules. The European Commission has proposed new EU legislation in this area in two stages. The first set of measures entered into force in 2015 and covered telecommunications, broadcasting and electronic services. At the end of 2017, the EU member states agreed on a second package of VAT rules in the field of e-commerce. A small part of the changes took effect on January 1, 2019; a large part of the new rules will kick in on January 1, 2021.
VAT E-Commerce Reform
The VAT e-commerce reform aims to facilitate cross-border trade, combat VAT fraud and ensure fair competition for EU businesses. Any shortfall in the collection of VAT and customs duties affects the budgets of member states as well as the EU.
The new rules include an extension of the Mini One Stop Shop (MOSS), a single reporting scheme that already exists for digital business-to-consumer (B2C) services within the EU since 2015. Registration for the MOSS is voluntary. EU traders can register for the EU scheme of the MOSS in the member state where they have established their business or, when this is not the case, have a fixed establishment. Non-EU businesses can register for the non-EU scheme in any member state of their choice. If businesses do not register for the MOSS, they should register for VAT in each member state where the customer of the services is established.
As of 2021 other (non-digital) B2C services as well as B2C supplies of goods, the so-called distance sales, will also fall in scope of the MOSS. Distance sales are, contrary to the main rule for the place of supply, taxed in the member state or arrival. An arrangement for this type of sales entered into force back in 1993 to prevent VAT rate shopping. Where the distance selling rules originally targeted mail-order companies, over the years, they have become of great importance for businesses selling via the internet.
The extension to distance sales goes hand in hand with the abolition of the current distance sales thresholds, in line with the commitment to apply the destination principle for VAT. Businesses currently need to register in member states when exceeding national thresholds. These national annual thresholds vary from member state to member state, from 35,000 euros ($38,871) to 100,000 euros. Currently, businesses often unconsciously go over the thresholds. When becoming aware they retroactively need to register with the tax authorities in the relevant member state. Given this, simplification is welcome for businesses selling goods B2C within the EU.
The abolition of the current distance sales threshold does not mean that VAT is always due in the member state of arrival of the goods.
From January 1, 2021 the small threshold of 10,000 euros, implemented in 2019 as part of the smaller changes, will also apply to distance sales. Cross-border B2C supplies up to this threshold remain subject to the VAT rules of the member state of the supplier. Once the threshold is exceeded, cross-border B2C supplies become subject to the VAT rules of the member state of arrival.
Building on the Success of the Existing MOSS
The new rules are presented as “building on the success” of the existing MOSS. Indeed, on paper it sounds totally right to let businesses do their VAT reporting via one single point, which avoids foreign registrations and reporting obligations.
The question is whether now is the time to extend the MOSS? In practice a number of tax administrations in the individual member states appear to be not fully equipped. They are years behind with reviewing MOSS returns. As a result, businesses are uncertain on what to do.
Also, the EU auditors have stressed that arrangements in place are not fully exploited and exchange of information between member states and with non-EU countries is insufficient. There is a clear need for development.
As a welcome change, as of 2021 adjustments in returns can be made in the next periodical MOSS returns. Until now, adjustments have to be processed in the original MOSS declaration. This change does not extend the deadline for making corrections. The three-year period, measured from the VAT return in which the transactions were originally reported, remains applicable.
The extension of MOSS to distance sales within the EU does not apply to businesses established outside the EU. They will, where appropriate, have to register in all member states where they have supplies. It is unclear why the MOSS is not open to distance selling within the EU by non-EU businesses, while they are given the option to report B2C services via the MOSS.
Another disadvantage for non-EU businesses is that their customers may be confronted with “double taxation.” For goods from a third country that are imported into the EU, an exemption for small shipments may apply for the value up to 22 euros. This exemption will disappear with effect from January 1, 2021. This means that, in principle, VAT is due on every “delivery” that is imported into the EU. This is in line with the commitment to apply the “destination principle” for VAT.
An import scheme will be created covering distance sales of goods imported from third countries or territories to customers in the EU up to a value of 150 euros. Unlike today, business will need to charge and collect the VAT at the point of sale to EU customers and declare and pay that VAT globally to the member state of identification in the “Import One Stop Shop” (IOSS). These goods will then benefit from a VAT exemption upon importation, allowing a fast release at customs. The party that makes the declaration needs a special and unique IOSS-VAT number for this, which will be available by that time.
Before the new system becomes operational, the necessary work still needs to be done. For instance, a properly running and secure database for IOSS-VAT numbers should be in place. The tax authorities and customs services from the individual member states will have to make an effort to, among other things, adequately share information with each other.
If the IOSS is not used, a second “simplification mechanism” will be available for imports. Import VAT will be collected from customers by the customs declarant (this could be the postal operator, courier firm, customs agents) which will pay it to the customs authorities via a monthly payment.
If goods remain in the member state where they have been imported, only import VAT is due. If the goods are shipped from the member state where the goods have been imported to another member state, double taxation will occur. Not only will import VAT be due, but also VAT in member states to which the goods ultimately go based on the distance selling rules.
Another dramatic change is the introduction of a “fiction” for platforms. Under the new rules, platforms become responsible for paying VAT on the delivery to the customer when they facilitate the delivery. For VAT, they are supposed to purchase and supply the goods. The fiction applies in the following two scenarios:
- it applies to distance sales coming from non-EU countries up to a value of 150 euros, regardless whether the supplier is established in our outside the EU; and
- it applies as well to distance sales within the EU to customers when the supplying business is not established in the EU.
In the run up to 2021 online businesses selling into the EU will need to check:
- the extent to which they are affected by the new VAT rules for e-commerce;
- whether existing arrangements need to be adapted in the light of the new VAT rules; and
- whether registrations can be canceled or should be added.
Given the significant impact that the new VAT rules may have, it is recommended to timely initiate the process of the change and involve all stakeholders including IT, tax and legal.
Jan Sanders is a VAT Partner at PKF Netherlands.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.