The digital economy is growing at a fast pace and policymakers around the globe are trying to adapt to (and adequately capture) new ways of doing trade.
In the European Union, a first step towards the taxation at destination of digital services was achieved in 2015. Starting then, business-to-consumer sales of telecommunications, broadcasting or electronically supplied services (“Digital Services”) began being taxed at destination (irrespective of the provider’s place of establishment) and a simplified collection mechanism (called “Mini One-Stop Shop” or “MOSS”) began being applied for those services. The MOSS enables reporting VAT through a single web portal for all countries that Digital Services suppliers are selling into. Registered taxpayers submit a single quarterly online return and pay VAT covering all the countries through the portal. It is then the responsibility of the tax authority to divide up the VAT received and transfer it to the relevant Member States of the consumers. (For more details, see our earlier Legal Update.)
On December 1, 2016, the EU Commission went one step further and issued proposals aimed at facilitating cross-border trade, combating VAT fraud, ensuring fair competition for EU businesses and providing equal treatment for online publications. The Commission expects the proposals to be adopted by the EU Council in 2017. Entry into force will come in two phases, one in 2018 and one in 2021.
The four key actions are summarized below:
- Identical VAT rates between e-publications and paper publications
In the current state of play, Member States are allowed to tax printed publications such as books and newspapers at reduced rates or in some cases at zero rates. These rules do not apply to e-publications, which are taxed at the standard rate. This led to various infringement procedures against EU countries such as France and Luxembourg, for example (see cases C-479/13 and C-502/13 dated March 5, 2015).
In order to mitigate this discrimination, the Commission's proposals allow the Member States to align the rates on e-publications with those on printed publications. However, there is no obligation for a Member State to do so, and Member States will continue to have full control over the budgetary implications in this respect.
- Simplifications for EU start-ups and EU micro-businesses selling online
The Commission’s proposals also aim to make various simplifications in the field of e-commerce, to be effective as of January 2018.
Firstly, one single EU threshold is introduced for intra-EU digital services with end consumers. Indeed, digital services provided by taxpayers established in only one Member State for a total value, exclusive of VAT, that does not exceed 10,000 EUR in the current or the preceding calendar year will be located in the Member State of the supplier. This implies that the VAT rules of the supplier’s Member State will apply (including the VAT rate). The same rule will also apply to the intra-EU distance sales of goods, but from January 1, 2021.
Secondly, the identification of the place of supply for intra-EU digital services is simplified for those taxpayers that are engaged in digital services not exceeding 100,000 EUR in the current and preceding calendar year. While most traders need two non-contradictory pieces of evidence (for example, the IP address and location of the consumer’s computer, the address of the credit card’s consumer) for the identification of the location of their customers, the simplification would require only one piece of evidence.
Thirdly, the rules of the supplier’s Member State will be applied for invoicing requirements. As a rule, invoicing is subject to the rules of the Member State where the supply of goods or services is located for VAT purposes. This rule combined with the destination principle implies that EU companies active in the business of intra-EU distance sales of goods have to comply with the invoice requirements of each Member State where a consumer is located. In order to lighten this administrative burden, invoicing will be subject to the provisions of the Member State where the supplier makes use of the MOSS or the Special Scheme.
Non-EU business applying (and eligible) for the One-Stop Shop will also get some benefit of the simplification as they will only have to deal with the rules of the EU country they registered with.
- A new “MOSS” as the rule for e-commerce
Business-to-consumer intra-EU distance sales of goods are considered located in the Member State where the consumer is established (provided certain thresholds are exceeded or in case the supplier opted therefor). This use of the so-called “destination principle” for distance sales of goods creates substantial compliance costs to EU businesses as they have to (i) register for VAT purposes in each country in which a consumer is established, (ii) charge the local VAT rate, (iii) file a local VAT return, (iv) pay the local VAT to the local tax authorities and (v) comply with the local invoicing and record keeping requirements.
The Commission’s proposals contemplate gearing up the MOSS, as of 2021, to apply to intra-EU distance sales of goods. An input VAT deduction would then be possible.
- End of the VAT exemption for imports of small consignments
As of 2021, the existing VAT exemption for import of consignments not exceeding 22 EUR will disappear. The purpose is to fight against tax abuses (and likely raise additional revenues). Consequently, all consignments sold by non-EU businesses to EU consumers will be subject to VAT. Technically, the supply of goods will be located in the Member State in which the dispatch or transport of the goods to the consumer ends.
Those traders who would be able to register for the MOSS will receive an individual VAT number and will be able to submit by electronic means a quarterly VAT return to a chosen Member State of identification. They will be able to report supplies if the intrinsic value of the goods does not exceed 150 EUR. Eligible traders shall be limited to those duly authorized by the Member State of identification or established in a country with which the EU has concluded an agreement on mutual assistance. A non-EU business is duly authorized when it is regarded as “trustworthy” (i.e., it has financial solvency, it keeps records of supplies, it did not commit any serious infringement of customs legislation and taxation rules, etc.). Further guidance is expected on that aspect ahead of implementation. It is anticipated that postal operators and courier services companies will be playing an active role in collection as non-eligible traders will have to appoint an intermediary as the person liable for payment of the VAT.
- Simplification, really?
Taken at face value, the various proposals made by the Commission will surely bring some simplifications for a number of operators. Non-EU traders, who were already discriminated against by some of the provisions of the MOSS, will still face more burdens than most of their EU counterparts. For example, one can think of the following:
- Non-EU traders will not benefit from the non-registration thresholds introduced by the Commission for Digital Services (and, later, for distance sales of goods). Indeed, a US provider selling Digital Services to EU customers still has to register and collect VAT from the first euros of sale into the European Union;
- While non EU-traders (considered eligible) will be able to report under the extended MOSS sales of goods to EU-based customers, they will only be able to do this for goods of an intrinsic value of less than 150 EUR;
- Special attention will have to be given to eligible criteria to be met by non-EU traders to be able to enter into the extended MOSS. Negotiation of new sets of mutual assistance treaties and protocols or establishment of new standards shouldn't create obstacles or barriers to trade into the European Union.
This might not be simplification for all.