The taxation of the digital economy is probably today’s most topical and contentious global tax issue. As readers will be aware, in recent months the European Commission has announced detailed proposals aimed at taxing digital services based on revenues generated in the country of consumption. These proposals have mainly focused on changing the traditional corporation tax rules applying to such transactions.
It is important to remember, however, that there is already taxation on the consumption of digital transactions in the form of VAT. In this respect, significant changes were made to the EU’s VAT regime for digital services in 2015. Furthermore, in December 2017, the EU Member States unanimously agreed to further changes to the VAT rules affecting digital transactions, which are due to take effect across the EU, in part in 2019 and in the remainder in 2021.
These changes will affect the current EU VAT regime for supplies of digital services to consumers, as well as significantly changing the VAT regime for taxing online supplies of goods to consumers both within the EU and coming in from outside the EU.
The changes will affect the mega “tech” corporations and platforms, as well as the thousands of small businesses that also trade in the digital economy. In principle, any supplier making or facilitating sales to consumers outside of the supplier’s home jurisdiction could be affected in some way. As VAT is a tax on consumption, consumers may also be affected in terms of the price they pay for their online purchases.
Although this article focuses on the EU developments, these are representative of a worldwide trend of countries applying VAT and similar sales taxes to goods and services in the place of consumption. Given the global nature of the digital economy, businesses must keep up to date on tax developments across all markets into which they sell.
In 2003 the EU Member States introduced a requirement for non-EU based suppliers of telecommunication, broadcasting and electronically supplied services (collectively referred to in this article as “digital services”) to charge VAT to EU-based non-business consumers (i.e. B2C) in the EU Member State of consumption. This requirement was extended to B2C supplies of digital services by EU-based suppliers with effect from 1 January 2015. The net effect is that an Irish supplier, for example, is obliged to charge VAT on a B2C supply of digital services within the EU at the rate applying in its customer’s EU Member State and this VAT is due to the tax authorities in that EU Member State. This potentially means having to charge and remit VAT on such services in up to 28 EU Member States.
To help simplify the resulting VAT obligations for such suppliers, an EU-wide mechanism, known as the Mini One Stop Shop (MOSS), was also introduced in 2015. An Irish supplier of B2C digital services can file a single return and pay the associated VAT liability on these services to the other 27 EU tax authorities through a quarterly MOSS return filed on the Irish Revenue Online Service (ROS) portal. However, the supplier still has the obligation to identify where all of its customers are based, charge VAT at the appropriate rate in each Member State, and comply with the invoicing and record-keeping requirements in the Member State of consumption. There is currently no minimum threshold for cross-border B2C sales of digital services: a supplier of such services must begin to apply VAT in the relevant jurisdiction on the first euro of sales into that jurisdiction.
The package agreed by the EU Member States in December 2017 includes some practical measures to simplify the VAT administration requirements for B2C digital service providers, particularly small businesses and start-ups. The Commission estimates that these simplification measures will reduce VAT compliance costs by €2.3bn a year for online businesses trading cross-border within the EU.
The key measures that will take effect on 1 January 2019 can be summarised as follows:
Further administrative changes to MOSS are due to come into effect from 1 January 2021 (when they will also affect online sales of goods, as discussed below). These will include an extension of the MOSS filing date to the last day of the month following the end of the quarterly reporting period and a facility to make corrections in respect of transactions in prior periods through a subsequent return.
Significant changes to the VAT regime for B2C cross-border sales of goods to EU consumers (referred to as “distance sales”) will take effect from 1 January 2021.
Distance sales of goods within the EU
Under the current regime, an online B2C seller can apply VAT in its home country on its distance sales of goods until the point that they exceed the relevant threshold in the customer's EU Member State. For example, an Irish online supplier of clothing to French consumers is obliged to register for and charge French VAT on its sales to French consumers only once the value of such sales exceeds €35,000 per annum (the French VAT threshold). The supplier can continue to apply Irish VAT on its sales to French consumers up to that point.
From 2021, the individual thresholds in each Member State will be replaced by a single EU-wide threshold of €10,000. Therefore, the Irish online seller mentioned above will become obliged to charge French VAT on its sales to French consumers (and German VAT on sales to German consumers, and so on) once the total value of sales to all EU-based consumers (outside of Ireland) exceeds €10,000 per year.
From 2021, the VAT due to tax authorities in other EU Member States can be remitted through MOSS (in the same manner as already applies for digital services) rather than the supplier having to register for VAT in each Member State. However, the challenges that this change will pose for online retailers should not be underestimated, as they will potentially need to know the VAT rate applicable to their products in all of the EU Member States in to which they sell. Given the multitude of rates that can apply, updating the supplier’s system to capture this data and requirements will be a significant task.
Distance sales of goods from outside of the EU
The changes taking effect in 2021 will also significantly impact the VAT treatment of goods sold to EU consumers from locations outside the EU.
Currently, no VAT applies to the import into an EU Member State from outside the EU of a package of goods by a consumer in the EU where the package has a value of less than €22. This relief will be abolished in 2021.
The low-value relief was intended to reduce the cost and challenge of having to collect VAT on such a high volume of small packages. However, it has created distortions of competition in favour of non-EU sellers and has been open to abuse, with the opportunity to under-declare the value of the goods in a package and a low risk of detection.
Collecting VAT on imports
It is estimated that 150m parcels are currently imported into the EU annually free of VAT under the low-value relief, representing approximately 60% of total consumer imports into the EU, and this is increasing at a rate of 15% each year. Therefore, the abolition of this relief in 2021 will present the challenge of how to collect VAT on these imports. The current model whereby the postal or logistics company delivering the goods pays and then collects the import VAT from the consumer (where the value exceeds €22) could simply not cope with the additional obligation to collect VAT on lower-value imports in all cases. In response to this, the provisions contain a number of new VAT reporting and payment mechanisms for imports with a value of up to €150.
Online sellers can elect to charge VAT on goods to be imported into the EU and remit this through a One Stop Shop (OSS) registration. However, this will apply only to consignments of up to €150 in value (excluding excisable goods). The OSS will be available to both EU and non-EU based vendors, but in the case of non-EU vendors the appointment of an EU-based intermediary who will take responsibility for paying the VAT will generally be required. Where the VAT has been charged and paid at the point of sale, it will no longer be collected at the point of import. It is envisaged that the seller will quote its OSS VAT registration number on the package to evidence that the VAT has been paid, and this will be checked/ validated by the customs authorities at the point of import.
If the vendor does not use the OSS, VAT will continue to be administered by the party importing and delivering the goods to the end consumer. These operators will be in a position to pay the import VAT to Revenue on all packages with a value of €150 or less on a monthly basis. Above that threshold full VAT and customs duty will be due and a full customs declaration will be required.
VAT obligations for marketplaces
It is estimated that approximately three of every four online sales of goods internationally are facilitated through an online marketplace or platform. From 2021, an electronic marketplace that “facilitates” the import of goods with a value of up to €150 into the EU or intra-EU sales of goods by non-EU traders will become liable to charge and remit the VAT on the supply of goods on its platform. For example, goods sold by a Taiwanese vendor to consumers in Ireland over an online sales platform will be subject to Irish VAT, and the online platform will be required to register and charge the Irish VAT due on the sale. These rules will also apply to platforms that facilitate sales of goods within the EU by non-EU vendors. The platform can avail of the OSS regime referred to above to remit its VAT across the EU.
Making the platform liable for the collection of the VAT, rather than each vendor, has a clear attraction for tax authorities. However, it will create significant additional VAT administration and compliance obligations for platforms. There are a number of practical points that will need to be clarified, and the European Commission intends to publish the text of an Implementing Regulation before the end of 2019 to provide further detail.
There will be significant changes to the EU VAT requirements for many online businesses. Although the most fundamental changes are still a number of years off, businesses should begin to consider what to do now.
The first step is to consider whether your business will be affected by the changes. If it sells goods or services online to EU consumers, the answer is probably “yes”. It is also worth bearing in mind that the term “consumer” is potentially wider than just individuals and might include any non-business or non-VAT registered entity.
The business will then need to consider what transactions will be impacted and what changes will be required to its IT systems and processes to deal with these new requirements. The business will also need to determine the VAT rates applying to its products and keep up to date with VAT developments across all the EU countries into which it sells.
There will also be commercial considerations around pricing and contracting. When signing new contracts and/or agreeing pricing with customers today, businesses will need to take care to consider the impact of these future changes to ensure sufficient commercial protection once the new rules come into effect.
Overall, the new rules will present new challenges for businesses, and the earlier these are considered, the better the chances of implementation being as seamless as possible.
This article first appeared in Irish Tax Review, Vol. 31 No. 3 (2018) © Irish Tax Institute and is reproduced here with their kind permission.