Failure to correctly apply the EU's VAT e-commerce regulations and automated reporting, according to tax experts, is causing businesses to be double taxed and face hefty fines for non-compliance.
Concerns center on the VAT e-commerce package for cross-border business-to-customer (B2C) transactions, as businesses assess the regulation ahead of its one-year anniversary on July 1.
Companies have either failed to understand or misinterpreted the rules, resulting in the submission of two VAT returns: one through the EU's One Stop Shop (OSS) system and another through their home member state's VAT reporting central processing mechanism.
"What you’re finding is that companies are obviously paying VAT but putting it through the OSS and also paying German tax as well," says Carolin Schmidt, senior tax manager at Taxdoo, a financial compliance platform based in Hamburg.
According to a tax expert at a European marketplace, a lot of companies' double taxation is due to merchants "who do not understand the rules."
The issue revolves around the implementation of the VAT e-commerce package system, which is designed to make compliance easier by allowing businesses to have a single VAT registration in the EU rather than one in each member state where they operate.
This should, in theory, allow online sellers to register in a single EU member state to supply all intra-community distance sales of goods and cross-border B2C services within the EU.
The European Commission has made a lot of information about the rules public, and marketplaces have done their best to keep their sellers informed. However, it appears that worries about business survival during the pandemic and the resulting global economic challenges have diverted some merchants' attention away from these changes.
Since 2003, the Commission has been attempting to implement the OSS mechanism. It was initially met with opposition from member states until a mini-OSS for electronic services was agreed upon, which went into effect in 2015.
Mutual distrust between EU national governments was one of the main sticking points, as they were concerned about investing resources in VAT collection only to have to rely on other countries to collect payments on their behalf.
The VAT e-commerce package, which went into effect in July 2021, was supposed to revolutionize EU tax collection.
It was envisioned that a single VAT registration would be available for all intra-community distance sales of goods, allowing businesses to pay rates based on the destination country of the goods purchased. It also shifted the compliance burden to online marketplaces, which were treated as 'deemed suppliers' for VAT purposes despite only facilitating transactions.
The rules failed to account for the complexities of business models and supply chains. This can be seen in marketplaces that have multiple warehouses in different member states, or in the common practice of online sellers using fulfillment centers.
The OSS was found to be of limited utility in some areas, as it did not allow businesses to register the transfer of their own goods between warehouses, intra-community supply of goods, or the country of acquisition and arrival of goods. It was also unable to track the delivery of goods by sellers to customers within the same country because it lacked a cross-border B2C component.
Due to the limitations of the OSS, Dennis Appelhoff, tax manager at Metro Markets, a Düsseldorf-based online marketplace, says that despite efforts to have a single VAT number, the company still has to register for VAT in each member state where it operates.
"So, there’s no benefit for us as a company," he adds, "because we still have to comply with all the local regulations and potential fines, etc."
According to Schmidt, businesses that use fulfillment centers like Fulfillment by Amazon or Zalando Fulfillment Solution frequently have their goods moved to warehouses in another member state, where they are stored before being shipped back to their home country for sale to customers.
"German tax advisers think that it is a local supplier, which is taxable in Germany, so they put through a VAT return. But, actually, it’s a distance sale of good as it’s a sale from the Polish warehouse [where goods are stored] to Germany, so it has to be put through the OSS."
"Then you end up with double taxation," Schmidt explains.
She claims that the uncertainty over which VAT return system to use is not limited to Germany, but also exists in other EU member states.
"The rules are very complex … [and] they will become even more complex in the future," Schmidt explains. "So this is something everyone just has to get used to."
Many online sellers simply did not understand the VAT e-commerce rules around EU and non-EU established suppliers, as well as the implications for tax liability, according to a tax professional at a European marketplace.
"We do see that because the rules were selective; a lot of people have interpreted them in different ways and this has resulted in double taxation," he adds.
It can be difficult for businesses to recover overpaid taxes, especially with the e-commerce package.
Some marketplaces are hesitant to hand over ostensibly excessive VAT payments to online sellers because they believe the issue should be handled directly with tax authorities rather than through them as deemed suppliers who are ultimately responsible for passing payments on to government tax departments.
Schmidt claims that reclaiming overpaid VAT can take a long time. However, the sooner a company realizes the error, the faster it can issue refunds and lessen the burden on businesses.
Businesses in the EU face more than just double taxation; a schism appears to be forming within the bloc between those member states that have implemented automated OSS returns and those that have not.
It is no secret that the EU's and national governments' technical implementation of the VAT e-commerce package has been difficult. This is especially true given the difficulties of implementing the regulations during a pandemic while also dealing with the rules' postponed implementation from January to July 2021.
As a result of the postponement, countries have failed to meet the EU's requirement for an automated OSS returns process, with the majority relying on manual submissions.
Only Austria and Germany appear to have implemented an automated system for uploading data to the OSS, though Spain has provided technical specifications for such a function.
Manual processes, as one might expect, take a long time for businesses to complete, increasing the risk of inaccurate reporting and system failure.
"If you have a really extensive and complex business, it will take you hours to input the [required OSS return] amounts," Schmidt says.
The OSS return also requires manual entry of the relevant tax rates for each jurisdiction, as well as various VAT input combinations depending on where goods are moved to.
Businesses will undoubtedly want to avoid non-compliance due to errors in their reporting procedures, and the automation of the upload process appears to be a way to guard against such errors.
Cashflow will be critical to ensuring companies survive as the global economic clouds darken for businesses, and anything tax directors can do to avoid double taxation could be crucial in the months ahead.
By fLEXI tEAM