New European VAT rules for cross-border e-commerce proposed

by Davide Anghileri

The European Commission, on December 1, published a series of proposals designed modernize and unify throughout Europe the value added tax (VAT) rules for cross-border business-to-consumer (B2C) e-commerce. The proposal follows up on priorities announced in the Commission’s Digital Market Strategy in May 2015 and its VAT Action Plan, announced in April 2016.

With these new rules, the Commission seeks to simplify the EU legislation on VAT, providing practical new solutions to support the digital economy. In this way, the heavy burdens of VAT compliance placed on small companies operating online will be reduced.

“Companies big and small that sell abroad online will now deal with VAT in the same way as they would for sales in their own countries. That means less time wasted, less red tape and fewer costs,” said Pierre Moscovici, Commissioner for Economic Affairs, Taxation and the Customs Union, announcing the proposal.

The existing VAT rules were set up before the rise of the digital economy and need to be updated to eliminate the complexity and cost of VAT obligations and to reduce revenue losses for Member States, the Commission said.

The new VAT scheme is also designed to create a level playing field between imported goods bought online from EU and non-EU countries and eliminate to the unequal treatment of paper versus e-publications, including e-books and e-newspapers.

The measures include the introduction of an EU-wide portal for online VAT payments (the One Stop Shop) to handle all VAT obligations in the EU, hosted by each tax administration in its own language.

The One Stop Shop already exists for online sellers of electronic services, but would be extended to distance sales of goods within and outside the European Union and to all services.

The Commission would provide the basis for the underlying IT infrastructure and secure the cooperation between Member States to ensure the success of the undertaking.

VAT threshold

The proposal introduces a yearly VAT threshold of €10,000 on annual cross-border sales. Online cross-border sales under that amount are treated as domestic sales, with VAT paid in the Member State of the supplier (and hence located in the Member State where the consumer resides).

Setting the threshold at €10,000 will give a boost to 430,000 businesses across the EU representing 97% of all micro-businesses trading cross-border, the Commission said. Moreover, 6,500 of the smallest companies selling e-services through the One Stop Shop system will be relieved from VAT obligations in other Member States.

VAT fraud from outside the EU

Small consignments imported into the EU that are worth less than €22 are currently exempt from VAT. This creates a disadvantage for EU business. Therefore, under the proposal, the current VAT exemption for imports from non-EU countries under €22 is removed.

Moreover, the use of the One Stop Shop will allow for VAT to be declared and paid on imported goods ordered online and thus will drastically simplify VAT collection. As such, there is no need to maintain this VAT exemption, the Commission said.

Evidence of customer location

Currently, taxable persons making intra-Community supplies of telecommunications, broadcasting, and electronically supplied services are required to have two non-contradictory pieces of evidence to identify the location of their customers.

This requirement has turned out to be particularly burdensome for micro-businesses and small and medium enterprises that are providing services. The reform provides that, from January 1, 2018, taxable persons with total annual supplies under €100,000 must only produce a single piece of evidence. It is estimated that this measure will benefit about 1,000 businesses.

The Commission also intends to introduce uniform invoicing and record keeping rules throughout the Member States. The reform removes existing requirements to keep records for a ten-year period.

E-publication VAT rate

The proposal also allows Member States to apply the same VAT rate to e-publications, such as e-books and online newspapers, as applied to printed equivalents.

General benefits

Member States and citizens are expected to benefit from additional VAT revenues of €7 billion annually and a more competitive market in the EU. In fact, reduced administrative costs for businesses trading across the European Union will be €2.3 billion annually, the Commission said.

The proposal will be submitted to the European Parliament for consultation and to the Council for adoption.

Davide Anghileri

Davide Anghileri is a PhD candidate at the University of Lausanne, where he is writing his thesis on the attribution of profits to PEs. He researches transfer pricing issues and lectures for the Master of Advanced Studies in International Taxation and Executive Program on Transfer Pricing.

Anghileri, a Contributing Editor at MNE Tax, previously worked as a policy advisor to the Swiss government on BEPS issues. He can be reached at danghileri@yahoo.it.

Davide Anghileri

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