Where in the world: the future of EU e-commerce taxation
By Christiaan van der Valk, Sovos
The COVID-19 pandemic has caused digital e-commerce to soar. With the closure of physical shops and more people at home than ever before, accelerated use of online shopping via Amazon, eBay, Rakuten and other online marketplaces has become customary. Shopping in this way is straight forward for the most part, as goods crossing international borders into the EU can be imported without incurring additional VAT charges if they fall below the Low Value Consignment Relief (LVCR) threshold. This is about to change, though.
As we have already seen, goods coming into the UK may now include more costs following Britain’s exit from the European Union (EU). But this change in tax doesn’t rest solely on Brexit – it’s part of the wider EU e-commerce VAT package which was implemented by the UK in January 2021, with legislation in the rest of Europe set to follow on 1 July 2021. This reform sees the expansion of the One-Stop-Shop (OSS) reporting mechanism which will have a big impact on online marketplaces and direct-to-consumer vendors.
Under this new legislation, digital marketplaces may be deemed as individual suppliers who are responsible for overseeing the collection of VAT owed by the customer. This technicality means that they would be liable for the collection and reporting of VAT required to support the transaction.
As the UK continues to unravel its legislation from the EU, the introduction of new VAT regulations means suppliers and buyers must all be aware of what’s required in this new era of cross-border trade.
A change in practice
The new legislation represents a marked change – global tax borders, internal and external, have long been determined by custom controls intended to enforce minimum levels at which goods are charged for VAT – anything below this is exempt. What’s more, in cases where it was difficult, or indeed impossible to check goods at the border, items would be transferred tax free with taxes being collected in the country of the service provider. This system enables a number of items to escape VAT collection.
In the digital realm the number of low-value goods falling with the Low Value Consignment Relief threshold has increased exponentially – but the “tax take” has not seen similar growth.
The situation was the same for electronically delivered services such as games or music downloads where sellers established outside the EU ignored the requirement to charge VAT in the member state where the customer normally resides. In 2015 the EU introduced legislation in the form of the mini One Stop Shop (MOSS) to make it easier to charge and report local VAT on such services.
The introduction of the e-Commerce package on July 1 2021 extends this principle to the B2C supply of goods, including those of low value, and is something that online sellers shipping even small goods into the EU must be aware of.
Caution for sellers
Where a seller ships goods from outside the EU to a customer within the EU and chooses to account for the VAT due then the Import One Stop (IOSS) applies where those goods enter the EU in consignments with a value of not more than €150.
The seller will account for the VAT due on its monthly IOSS VAT return and will also be required to maintain a transaction register electronically which must be made available to a tax authority on request.
The above rules apply to sellers established anywhere – inside or outside the EU. The IOSS liability is determined by the “ship from” which must be outside the EU.
Where a supplier established outside the EU chooses to use the IOSS then it will be necessary to appoint an EU established intermediary unless the supplier’s country has a fiscal arrangement with the EU as is the case with Norway.
Where the above goods are sold via a platform, such as Amazon, then the liability to account for the VAT shifts to the platform – so called marketplace liability. The underlying seller makes an out of scope sale to the platform which then reports its sale on IOSS.
This system, which has been introduced to streamline cumbersome processes, has actually created complexities and problems across taxation systems, not least because each individual member state can implement these rules according to their own specific tax reporting systems. As a result, loopholes are beginning to emerge; for example, intermediaries are looking around for the most lenient member states to register in,which defies the principle of harmonisationthe system set out to achieve.
Technology for clarity
The roll-out of this policy does point to a wider trend in taxation across the EU – a patchwork of overlapping tax regulations exists with marked differences between the member states. The introduction of the e-commerce package, alongside the OSS/IOSS amendments – which create more confusion whilst clarifications are still needed on the role of intermediaries – only adds to the complexity, alongside the impact of Brexit.
Technology offers a solution to alleviate the burden on businesses and suppliers alike. Storing clean documents relating to transactions, imports and sales in a clear and concise way will enable vendors to respond to shifting tax regulations with confidence, which is critical in minimising the burden and risk involved with non-compliance. Businesses should consider the value of investing in automation when it comes to tax decisions, a necessity as we move into an increasingly borderless trading environment.
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