Adapt to Any Environment EU VAT Regime Catching up with E-Commerce

adapt to any environment EU VAT Regime Catching up with E-Commerce

Johannes Laxafoss Global Head of Tax, TMF Group

May 2017

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Savvy shoppers have, for the past few years, planned their big spending to coincide with big sales like November’s Black Friday and Cyber Monday, which in 2016 saw more than US$1 billion in online sales generated from mobile devices in the U.S. alone. It appears the European Commission is also working hard to deliver a Cyber Monday-style deal of its own for value added tax (“VAT”) taxpayers trading online; the project is called “Modernising VAT for cross-border e-commerce.”

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The Current Model The Future Model

Currently in the European Union (“EU”) the VAT EU lawmakers realized the burden of the abovementioned regime for services offered online to private regimes may be a serious obstacle for entrepreneurs individuals1 differs from the one for goods. (especially SMEs) looking to expand, and understand that it may prevent them from gaining access to the single market. In fact, 54 percent of potential online cross-border sellers say dealing with foreign taxation is a key problem for them.4

When services are offered online (or in supply rules in a slightly different manner The European Commission therefore digital form) to an individual located in a to the regime for digital services in that, as started work to modernize the VAT regime different EU Member State to the seller, long as the amount of sales is below the for e-commerce cross-border traders. VAT is chargeable where the customer registration threshold in the country where On December 1, 2016, the Commission 54% of potential is located. This triggers an obligation for the customer is located, the seller need presented its proposal for a Council online cross-border the seller to register for VAT purposes in only account for VAT on the goods from Directive, amending the existing VAT sellers say dealing 54% with foreign taxation 5 those countries, and sellers are bound by where they were dispatched. This may be Directive and Directive 2009/132/EC. is a key problem for the VAT regime of the customer’s country different from where the seller is actually them. from the very first sale.2 This leads to a established. After breaching the distance The following are the main changes we significant increase in compliance costs, selling threshold3 the seller/company then expect are intended to make e-commerce especially for small and medium-sized must register and account for VAT in the traders’ lives easier in respect of VAT. enterprises (“SME”s) trading online. country where the customer is located. To ease the burden on entrepreneurs the As with digital services, this can lead to European Commission introduced the multiple VAT registrations across the Mini One Stop Shop (“MOSS”) concept. It EU; and bearing in mind the necessity essentially allows companies to register to deal with tax authorities in many in only one country and pay VAT to one countries, with different languages, state, which subsequently redistributes cultural barriers, etc., it can significantly appropriate fractions to the relevant increase operational costs for traders with jurisdictions. cross-border sales to private individuals. Today there is no simplification scheme For the supply of goods to private in place—such as the MOSS—for distance individuals, the EU introduced the concept selling. of distance selling. It deals with place of

1 As private individual we mean a customer who does not hold a valid VAT number. European Commission, Flash Eurobarometer 413, 2015. 2 For example they are bound by audit rules of that country. Document no. COM (2016) 757 final. 3 35,000 euros or 100,000 euros or equivalent in the local currency per year calculated from January 1. As the current VAT registration threshold is 15.000 euros.

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Extension comparing two belgian companies (with turnover of € 10,000) of Mini One Stop Shop to Distance Selling

Currently the benefits of the operate only locally expands, has 5,000 euros MOSS are enjoyed only by those turnover from sales in other offering digital services, leaving countries commodity traders behind. But once the legislation is passed, Operates only locally does not have to Has some portion of intra-community register for VAT in Belgium transactions, in order to benefit from the the MOSS is expected to also MOSS must register for VAT in Belgium cover transactions performed Can offer its services without VAT6 and sell its services with VAT

under the distance selling Increases its final prices and makes it regime. The MOSS itself is a less competitive relatively new concept, but its users have raised doubts and observed flaws in the solution To overcome this unfairness the European Commission is to propose the introduction of which would also be rectified in a common cross-border exemption threshold. The idea behind this is that as long as the company is below the 10,000-euro threshold it will not have to register in other countries, the changes to the legislation. even if it is selling goods in a scheme that is considered to be distance selling. In the above example the Belgian entity with cross-border presence would not have to register in countries where its customers are located. One of the main issues with the MOSS as The plan is for the threshold of 10,000 euros to apply to digital services from January 1, raised by taxpayers is its use for SMEs. To 2018, and to the distance selling regime from January 1, 2021. benefit from the MOSS as a taxpayer, the general rule is that you need to be registered for VAT in the main country, i.e., country of establishment. Consequently, companies at the moment must voluntarily register for VAT to be eligible for the MOSS. However, this registration triggers an obligation to also charge VAT on domestic transactions. It can lead to a situation where a company would become less competitive, simply due to its 4 European Commission, Flash Eurobarometer 413, 2015. 5 Document no. COM (2016) 757 final. expansion into other markets. 6 As the current VAT registration threshold is 15.000 euros.

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The Home Country Abolishment Audit Principle of the VAT Exemption for the Importation At the moment, distance sellers and also companies that operate through of Small the MOSS system must be aware of the VAT rules of the country of their Consignments customers: this extends to record- keeping, and rules of audit proceedings.

Currently, imported goods with a small value (usually up to 22 euros) benefit from VAT exemption. Taking into account that goods sold online within the EU are often This requirement often increases of the country of establishment operational costs in different EU markets may affect the portion of VAT that within the 22-euro limit, there is a as the trader must appoint someone is transferred to the country of the distortion of competition between familiar with the rules of its customers’ customer. It may create tensions between country, who also speaks the local Member States on audit procedure; for goods sold online from outside of language. This can involve up to 28 example is it is difficult to imagine the the EU and those sold within. (soon 27) different tax administrations Greek tax authorities managing German auditing the same company without any tax matters. coordination. To overcome these differences, the With the ever-increasing popularity of online trading, To tackle this, the European Commission European Commission suggests a this trend is expected to continue. Therefore, is planning to introduce the home country compromise which should really be seen to protect EU-located traders, the European audit principle, whereby the supplier as the first step in the process in respect Commission suggests the removal of the exemption. would comply with the rules applicable in to the invoicing rules. At the moment the The plan is for goods below 150 euros in value to the Member State of establishment. This taxpayer must comply with invoicing rules be subject to a special scheme. According to this actually may be a hard pill to swallow for and record-keeping rules that are binding scheme, the seller from the third country will be some Member States. All countries have in the state of the customer. After passing obliged to appoint an intermediary (established in 7 different approaches when it comes to the proposal, the taxpayer will have to the EU Member States) who will be responsible for VAT audits, risk calculation and measures observe and comply with rules only in the VAT obligations of the seller (similar to a fiscal 7 Unless the seller is duly authorized by the Member State of the representative). VAT will, in such cases, be payable to prevent abuse of the law. Bear in mind the country of its establishment. Pending identification (this is a new definition and applies to non-EU that the accuracy and effectiveness of proposal approval, this change is set to sellers. In some circumstances can be chosen by the seller) or the moment the payment from the customer is if the seller is established in a country with which the EU has accepted. Thus no VAT will be payable upon import. the audit carried out by the tax authorities enter into force from January 1, 2018. concluded an agreement on mutual assistance.

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We can help with:

VAT REGISTRATION FILING RETURNS

Taking Registration of your company for VAT across the We can provide that single point of contact to globe. coordinate multiple filing requirements across a number of jurisdictions for accurate, timely returns advantage Fiscal representation: Non-EU companies operating that mitigate the risks associated with non- in Europe can appoint TMF Group as a fiscal compliance. of the rising representative to act on your behalf to deal with VAT related issues. opportunities PAYMENT ON RETURN VAT RECOVERY SUBMISSION Our experts can help with the identification of Our In-country presence allows you the flexibility to recoverable VAT across the markets in which you make payments to local tax authorities, including operate, liaising with local tax authorities to support cases where certain jurisdictions require payment to claims or information requests and decreasing the be made via a local bank account. turnaround time for settlement.

While detailed implementing regulations COMPLIANCE have not been drafted, now is the time for businesses to familiarize themselves We can help you define a robust framework to help you meet your VAT/GST obligations, which are often with the proposed rules and assess the mandated by local tax laws. We also support you in maintaining compliance with: impact these changes will have on their Registration thresholds Additional European reporting requirements: Intrastat and European Commission Sales List business. Invoicing, VAT treatment, FX rates etc. (ECSL)

Local bookkeeping standards Additional local reporting requirements such as Italy’s black list country report or Romania’s ‘394 Support for tax inspections Our global team of in-country VAT and GST experts Supplier/Customer List’. deliver a service that reduces the complexity and administration burden that comes from operating in today’s business world.

TMF Group strives to give you transparency, control and an understanding of the ever changing tax jurisdictions around the globe, improving your risk management and your cash flow. TMF Group is the global expert that understands local needs.

10 11 Want to talk about what you’ve read here? Contact your local TMF Group office; details found at tmf-group.com [email protected] tmf-group.com/venturefurther

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