What has been agreed today?
Member States have agreed today on practical new measures to support the digital economy when it comes to VAT compliance, which can currently place heavy burdens on small companies operating online. The new rules should help to accelerate growth for online businesses, in particular startups and SMEs. The measures include:
New rules allowing companies that sell goods online to take care of all their VAT obligations in the EU through a digital online portal ('One Stop Shop'), hosted by their own tax administration and in their own language. These rules already exist for online sellers of electronic services ('e-services');
For the first time, large online marketplaces will be made responsible for ensuring VAT is collected on sales on their platforms that are made by companies in non-EU countries to EU consumers. This includes sales of goods that are already being stored by non-EU companies in warehouses (so-called 'fulfilment centres') within the EU which can often be used to sell goods fraudulently VAT free to consumers in the EU.
To support start-ups and micro-businesses, the introduction of a yearly VAT threshold of €10,000 under which cross-border sales to other countries within the EU are treated as domestic sales for online companies, with VAT paid to their own tax administration. This goes hand in hand with other initiatives such as single invoicing rules. Our aim is to make trading in the single market as similar as possible to trading at home for these companies. On top of this, companies selling cross-border with less than €100,000 cross-border sales will benefit from simplified rules;
The removal of the current exemption from VAT for imports of small consignments worth not more than €22 from outside the EU, which leads to unfair competition and distortion for EU companies.
These new rules will have a major effect for companies selling goods and services online that will now be able to benefit from fairer rules, lower compliance costs and reduced administrative burdens. Member States and citizens will benefit from additional VAT revenues of €7 billion annually and a more competitive market in the EU.
Why is the EU tackling VAT for e-commerce?
Current EU VAT rules (the 'VAT Directive') were agreed between all Member States before the rise of the internet and the boom in online sales, and especially cross-border sales. The rulebook clearly needs to be updated if we want to encourage online businesses and the digital economy to expand cross-border and to thrive. Businesses and national tax administrations have pointed to such problems as:
The complexity and cost of VAT obligations: companies that sell goods online pay around €8,000 in VAT compliance costs for every EU country into which they sell. This is a significant cost which can prohibit growth for online traders, in particular SMEs;
Revenue losses for Member States: it is estimated that €5 billion of VAT is lost each year in the EU due to non-compliance on cross-border online sales. This figure is projected to rise to €7 billion by 2020;
Not a level playing field: under current rules, imported goods bought online from non-EU countries are exempt from VAT if they cost below €22. Companies based outside the EU can fraudulently mark expensive goods such as mobile phones and tablets as costing not more than €22, meaning that no VAT is paid. This puts EU businesses at a clear disadvantage to non-EU businesses.
The Commission therefore committed as part of the Digital Single Market strategy and the VAT Action Plan to bring forward proposals before the end of 2016 to modernise VAT rules for cross-border e-commerce.
New rules for e-commerce sales
What will change for businesses that sell goods and services online?
Companies that sell e-services such as mobile phone apps can already sell to customers in other Member States while only registering for VAT in their home Member State. They account for all their VAT in a single quarterly return, through an online portal hosted by their home tax administration. VAT revenues are then transferred from the home tax administration to the relevant Member States to which the company has sold e-services to consumers.
The new rules mean that this simplification for e-services will be made available for online sellers of goods and other services as well. At the moment, companies that sell goods or services other than e-services online in other Member States are obliged to register for VAT in all the other EU countries in which they sell to consumers. This adds significant costs and burdens to their operating costs. A move to the single EU VAT portal will be up to 95% less costly for these businesses.
Online sales of goods will be taxed in the same way and at the same rates as their physical equivalents in shops, while the same VAT rate will be charged in the Member State where the EU consumer is based, regardless of where an online retailer is based.
Online companies selling goods and/or e-services cross-border for up to €10 000 yearly will now be able to treat these sales similarly to their domestic sales and therefore deal only with their national tax authority and domestic VAT rules. On top of this, companies selling cross-border with less than €100,000 cross-border sales per year currently need two pieces of evidence to identify the location of their customers. Once the new rules come into force, only one piece of evidence should suffice for these traders. This should provide SMEs with simpler rules (a 'soft landing') on their VAT obligations.
Finally, simpler invoicing rules as in the Member State of the company will mean that businesses will not have to worry about complying with invoicing rules in other Member States.
What will the impact be on trade?
Trade between Member States should increase as a result of the proposed simplifications and the decrease in cross-border VAT compliance costs. Domestic online companies and traditional high street businesses will also benefit as they can no longer be undercut by businesses charging a lower VAT rate or indeed charging no VAT at all.
After 2021, all goods bought online by EU consumers from sellers outside the EU will also be subject to VAT, in line with current EU sales practices. While there may be a decrease in sales from outside the EU as a result of a more level playing-field in this market segment, trustworthy sellers from outside the EU should welcome the measures since it brings certainty over final pricing to their EU customers. Currently, a significant number of parcels are refused by consumers once they arrive in the EU as they are faced with additional VAT and clearance fees from postal or courier operators.
Why is the threshold under which small business can apply national rules set at €10,000?
The new rules strike the right balance between reducing burdens for small business while ensuring that the threshold did not create distortions to the Single Market arising from differences in VAT rates. A threshold that was set too high could also have a distortive effect. Setting the threshold at €10,000 will give a boost to 430,000 businesses across the EU representing 97% of all micro-businesses trading cross-border. At the same time, 6,500 of the smallest companies selling e-services through the One Stop Shop system will now be relieved from VAT obligations in other Member States.
How will businesses be informed of the new rules?
A portal which provides information to traders and tax administrations already exists, with general information on the rules applicable to e-services and on how to use the One Stop Shop. To help businesses to comply with these rules, it includes comprehensive information on the individual VAT rules for e-services in all Member States. The Commission is improving this portal and an updated version will go live during the first quarter of 2018, well ahead of the new system being extended to online goods and services other than e-services.
What impact will this have on tax administrations in Member States?
The assessment of the existing One Stop Shop has already proven its effectiveness as a means of collecting taxes from traders located in other Member States. This is particularly relevant in the digital economy as businesses no longer need a physical presence in the market. Extension of the current rules to tangible goods should lead to increased compliance rates.
What role will online market places have in VAT collection under the new scheme?
Today's agreement introduces for the first time an EU-wide VAT liability for online marketplaces. At the moment, goods can be sold online in the EU by non-EU companies who make use of the storage facilities or 'fulfilment centres' of the online platforms within the EU. Because the goods in the fulfilment houses normally belong to companies from outside the EU, it can be difficult to obtain the VAT due on those goods. By introducing liability for online marketplaces, tax authorities will now be able to claim the VAT due on those sales from such fulfilment houses from these online marketplaces that facilitated the transaction. The Commission will engage with online marketplaces to ensure that there is full clarity on the role of online marketplaces when the reforms are introduced in 2021.
Given the fact that the majority of international online trade is carried out via online market places (estimated at 70-75%), these companies will also continue to have an important role in the new set-up for e-commerce rules, similar to their current role for e-services. Significant simplifications for VAT compliance are already offered to these online market places via an extended single online registration and VAT reporting tool within the current VAT One Stop Shop for e-services. This will be extended to online goods and will help to reduce administrative burdens and allow company resources to concentrate on core-business activities (e.g. sales, delivery, better customer experience, etc.).
Why are you removing the VAT exemption on imports of small consignments from non-EU countries?
Small consignments imported into the EU that are worth less than €22 are currently exempt from VAT. With around 150 million parcels imported free of VAT into the EU each year, this system is open to massive fraud and abuse, creating major distortions against EU business. Firstly, EU businesses are put at a clear disadvantage since unlike the non-EU businesses they are liable to apply VAT from the first eurocent sold. Secondly, imported high-value goods such as smartphones and tablets are consistently undervalued or wrongly described in the importation paperwork in order to benefit from this VAT exemption.
Compliant EU companies – both online and traditional – are therefore put at a significant disadvantage, leading to mounting VAT losses in the EU. Removing this VAT exemption has been strongly requested by European e-commerce organisations, while other OECD members have taken or are about to take similar measures.
Registration in the VAT One Stop Shop will be open to trustworthy sellers from outside the EU. All such traders will be able to designate an EU intermediary (such as a courier, postal operator or customs agent) to deal with VAT-related compliance where they make sales of goods of a value of not more that €150. It will be efficient because a large number of consignments are usually of low value and since most intermediaries are already familiar with the EU VAT system and procedures and have good relations with customs and tax authorities.
What impact will this have on customs administrations in Member States?
The clearance of small consignments from trusted non-EU traders or marketplaces who register with the VAT One Stop Shop will be simplified in terms of customs procedures. Consignments valued up to €150 will no longer be stopped at customs for VAT clearance and VAT collection for these goods will be managed separately on a self-assessment basis. This marks an important change in the world of customs, moving from clearance per transaction to clearance on overall sales. However, the new VAT rules will in no way interfere with other customs rules and regulations concerning safety and security, nor with the existing customs simplification measures already in place.
What will change for express carriers and postal operators following the removal of the VAT exemption?
Postal operators and couriers will indeed see additional reporting obligations. But this will be counteracted by significant simplifications. Operators will also be able to act as intermediaries for non-EU traders in the VAT One Stop Shop. Most importantly, operators will be able to make periodic reports to tax authorities for VAT purposes, as opposed to the individual declaration for each package at the moment. As the rules are only foreseen to come into effect in 2021, operators should have sufficient time to prepare. In any case, and independently from any changes to VAT rules, the new Union Customs Code (UCC) already foresees important changes for small packages on the grounds of safety and security.
Will prices for consumers go up?
The projected rise in VAT revenues for Member States will occur thanks to more trade and easier rules for businesses, rather than extra VAT on consumer goods. In fact, the new rules should lead to a decrease in prices on goods thanks to increased competition and fewer administrative burdens. Following the abolition of the VAT exemption for imported small consignments, there may be a slight increase in prices on imported goods from outside the EU up to a value of €150. This is because VAT will always be applied on certain goods which are currently exempt (up to €22) or which are currently undervalued or misrepresented when reaching EU borders (non-compliance). However, this increase in price should be counterbalanced by more efficient delivery times and consumer certainty that the price paid online will not need to be topped up by extra charges on delivery.
The EU VAT 'One Stop Shop'
What is the VAT One Stop Shop?
The One Stop Shop is an electronic system that allows online companies selling telecommunications, broadcasting or electronically supplied services (in short 'e-services') established in the EU or in non-EU countries to declare and pay VAT in a single Member State in a quarterly VAT return for all their sales to final consumers in the EU. That Member State then distributes the VAT amounts received between the Member States where e-services are bought and consumed. It has been in operation since January 2015.
Is the current VAT One Stop Shop working?
The evaluation of the current One Stop Shop for sales of e-services has shown that businesses and tax administrations alike are very satisfied. VAT compliance costs for businesses have decreased by €500 million, or about €41 000 per company, compared to the alternative of having to register and account for VAT in each and every Member State where customers are based.
In 2015, approximately €3 billion of VAT was paid via the One Stop Shop for e-services, representing about 70% of the total sales of e-services. This shows that direct registration in each Member State was chosen only by a small minority of generally large businesses who are already registered for other reasons.
That said, the evaluation of the current One Stop Shop has revealed a number of areas for possible improvement, including the €10,000 threshold for micro-businesses. A number of those improvements which do not require changes to IT systems are proposed to apply as of 2018.
How will companies registered in the One-Stop Shop be audited?
EachMember State will need to ensure that One Stop Shop registered businesses based in their country are compliant. At the same time, cross-border enforcement will need to be improved. For businesses, their primary contact will now be the tax administration in their own Member State that will ensure that audits are coordinated with all Member States where a company has consumers.
VAT fraud and non-compliance in e-commerce
How much VAT fraud and evasion is there in the e-commerce sector?
It is estimated that Member States currently lose €5 billion VAT revenues annually due to non-compliance as well as the VAT foregone from the VAT exemption for the importation of small consignments. This is estimated to rise to €7 billion by 2020.
A recent study based on real purchases found that 65% of consignments from third countries were non-compliant with EU VAT rules. It is also estimated that up to €25 billion of non-EU trade is non-VAT compliant.
There is also evidence of abuse of the existing intra-EU distance sales (€35,000 or €100,000 for each Member State). Such abuse can involve sellers taking advantage of differentials in VAT rates between Member States (as high as 27%) or indeed not charging any VAT at all. These sellers exploit the lack of cooperation between Member States which harms citizens in terms of tax to fund public services and businesses in terms of their competitiveness.
How will the proposals help to fight and prevent fraud in e-commerce?
The proposals are an important step in helping to fight and prevent fraud in e-commerce. Fraud is facilitated by exceptions and the complexity of the current system. Addressing these should ensure greater compliance rates.
This will mean that:
Compliant businesses will be able use the significantly less costly One Stop Shop to pay VAT due to Member States, leading to higher voluntary compliance rates. This will be particularly important when a seller does not have a physical presence in the Member State of the consumer.
There should be greater cooperation and coordination by Member State tax administrations leading to a more efficient and effective audit regime. Audit resources can then be targeted at non-compliant businesses.
The removal of the small consignments exemption will mean that VAT will apply in all cases to imports from non-EU countries. Online sellers will no longer be able to benefit from the exemption by under-declaring the value of the goods.
Sellers from non-EU countries or their intermediaries will need to provide advance information on consignments to benefit from the simplification of the One Stop Shop. They will also need to keep records of supplies so that tax assessments can take place. If such sellers abuse the scheme they will be excluded from the scheme and will need to make customs declarations for each consignment on importation.
The removal of the current distance sales thresholds will provide greater clarity. Member States will only need to control the new EU-wide threshold covering all sales to consumers in other Member States.
When will the new rules come into force?
There are two implementation dates for the proposal. The extension of the One Stop Shop rules to distance sales of goods both from third countries and intra EU as well as to services other than e-services come into force in 2021 to give Member States time to update the IT systems underpinning the system. This has to be done by each Member State according to agreed specifications. But everything which does not require IT development, including the new cross-border threshold to help smaller businesses, can be introduced on 1 January 2019.