According to tax experts, the VAT e-commerce package is causing confusion.
The implementation of the VAT e-commerce package, according to tax directors, has increased the risk of fines for non-compliance while also increasing the complexity for sellers and marketplaces.
Nicoletta Petrosino, global indirect tax manager at Nestlé in Switzerland, claims that since the implementation of the VAT e-commerce package, things have gotten more complicated, not easier.
"This is really not a simplification… it’s caused more confusion ," Petrosino says. "The only way to say that it is a simplification is if you close your eyes and you blindly say, okay, the marketplace is responsible for this [VAT], I don't care anymore, but this is still not best practice," she says, adding that this is still not best practice.
As the one-year anniversary of the EU VAT e-commerce package's implementation approaches on July 1, the concerns have grown louder.
The package was introduced by the European Commission with the goal of combating VAT fraud and closing the payment gap in the European Union. The regulations aimed to make VAT rules for cross-border business-to-consumer (B2C) e-commerce transactions more straightforward.
Online sellers, including marketplaces and platforms, were required to register for VAT under these regulations. For all intra-community distance sales of goods and cross-border supplies of services in the EU, online sellers must register in one EU member state.
The Commission also established an Import One Stop Shop (IOSS) to reduce red tape on EU-wide distance sales of low-value goods from non-EU third countries by establishing a €150 ($161) threshold for VAT payment by the marketplace, if below the threshold, or the seller, if above the threshold.
The compliance burden was also shifted to online marketplaces, which were designated as 'deemed suppliers' for VAT purposes. The online marketplaces were treated as if they were receiving and supplying goods themselves, despite the fact that they were only facilitating transactions.
A new €10,000 ($10,711) threshold was set below which distance sales of goods in the EU would still be subject to VAT payments in the member states where they were made.
The VAT e-commerce package set a €150 intra-community distance sale threshold for low-value goods. This meant that marketplaces would be responsible for VAT compliance for sales below the threshold, while online merchants or underlying suppliers selling products would be responsible for sales above the threshold.
Companies have discovered that, despite this rule, there is still confusion and errors between marketplaces and online sellers when it comes to enforcing product price points, particularly for mixed-priced items.
Many sellers' systems are set up for business-to-business (B2B) sales reporting, but they must account for each item sold to individuals on marketplaces. This makes it more difficult for those sellers to comply.
Due to misaligned VAT reconciliations or mismatched sales reports, it also causes problems for online sellers and marketplaces. Fines for non-compliance are more likely as a result of this.
According to Petrosino, the fact that VAT liability has been transferred to third parties such as marketplaces does not absolve businesses of their compliance obligations. Rather, it makes it difficult to implement accurate control and reconciliation systems.
"You cannot blindly trust a third party [marketplace] for your VAT payment in the end even if they are first ones responsible for it," Petrosino says.
Another point of contention between marketplaces and online merchants is determining the VAT rate to apply to products.
In each member state, marketplaces may apply their own classification and VAT rates to products sold on their platforms. This results in a disagreement on rates between marketplaces and product owners over how they classify their goods and who is responsible for the tax liability.
In some cases, marketplaces claim that sellers provided them with incorrect information, thereby absolving them of responsibility in the event of a VAT audit, which is another point of the parties' legal agreements.
Most tax experts agree that the VAT e-commerce package is a good idea in principle, and that its goal of combating fraud is well-intentioned.
Few would argue, however, that its practical implementation has been fraught with difficulties, adding to rather than reducing complexity.
Take, for example, the One Stop Shop (OSS) or the Import One Stop Shop (IOSS). The OSS system does not allow businesses to report the transfer of their own goods between warehouses, whereas the IOSS system can only be used for sales under $150, but not for sales over $150.
The OSS, according to Dennis Appelhoff, tax manager at Metro Markets in Dusseldorf, is ideal for small businesses with a single centralised distribution warehouse from which they ship all of their goods.