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.
"If you’re a multinational company, things get a little bit complicated because you don't just have one warehouse… you to have a physical presence in different countries, which comes down to you having a permanent establishment (PE). If you've got a PE, then basically one stop shop is not usable ," Appelhoff says.
Businesses that benefited from the reform, according to Carolin Schmidt, senior tax manager at Taxdoo in Germany, are those that only have distance sales to other EU countries but do not store their goods there. This, however, does not account for the VAT implications of fulfillment procedures, which are common in today's e-commerce.
The complexity of marketplace or online merchant business models, supply chains, and the diverse source of EU customers do not appear to have been considered in these regulations.
The European Commission is pushing forward with discussions about VAT's future in the digital age. The idea of possibly extending the OSS to cross-border B2B transactions is at the heart of these discussions. This would entail a role for a single EU VAT number mechanism in terms of transaction monitoring and reporting.
Some argue that the commission is moving too quickly, given the difficulties businesses have had implementing the cross-border B2C VAT reporting regime.
"This is the problem that I personally foresee," Appelhoff says. "It's not always about shipping from a warehouse to the customer, but now you have drop shipments, which essentially are chain transactions for VAT purposes."
Marketplaces that act as middlemen may face even more confusion as a result of chain transactions, as they will be liable for VAT in multiple member states. This may be the case even if the goods do not leave the country and the customers and suppliers are based there.
Some market participants have proposed solutions to the problems that marketplaces and sellers face.
To simplify the VAT reporting process, a tax professional at a European marketplace provider suggested removing the €150 threshold entirely.
Another suggestion for combating fraud was for the European Commission to provide a clear definition of the intermediary who would be responsible for collecting VAT and paying it to tax authorities, in the hopes of providing market participants with certainty.
"We have to find a way to both tackle the fraud, but also to simplify the regulation and having both is pretty challenging," Petrosino says.
The VAT e-commerce package was adopted with the good intentions of simplifying the VAT registration and reporting process across the EU while combating tax fraud, according to tax professionals.
The possibility of the OSS being expanded to include cross-border B2B sales, which is thought to be under consideration by the European Commission, could add to the uncertainty for businesses. This could also increase the chances of hefty fines for non-compliance.
Before proceeding with more regulations, the EC should consult widely and work out some of the kinks in the rules. Otherwise, VAT in the EU could become more complicated.
By fLEXI tEAM