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Roger Gothmann and Christian Königsheim Taxdoo
Roger Gothmann and Christian Königsheim, co-founders and managing directors of Taxdoo
Forecasts project e-commerce to account for 20 percent of overall retail selling in the EU within the next few years. Online sellers are increasingly trading across borders and confronted with VAT obligations that require automated processes.
The world is on an online shopping spree. In the past decade, rapid advances in digital technology and improved supply chains have paved the way for business-to-consumer (“B2C”) e-commerce to become a mainstream retail channel. By 2020, over 2 billion shoppers worldwide are expected to transact close to 14 percent of their retail consumption online, which would equate to a market volume of $3.4 trillion. In Europe, online buying and selling transactions are growing exponentially, and the European Ecommerce Report 2017, published last summer by the Ecommerce Foundation, predicted the European Union's (“EU”) e-commerce sector to be worth 602 billion euros by the end of 2017.
European cross-border e-commerce has seen particularly strong growth in recent years, and based on Eurostat data for 2017, 33 percent of online shoppers bought or ordered goods or services from sellers in other EU countries. This translates into ever-growing numbers of transactions, and each purchase ultimately presents online sellers with a multitude of actions and responsibilities. The fulfilment of online orders across borders is not just a simple process of packaging something up and sending it on. It involves complex (international) logistics processes that come with no less complex VAT implications.
To handle every detail of the business, e-commerce, like any other industry in this age, has to balance continuously growing customer expectations on the one hand and a plethora of data to process on the other. E-commerce has to rely increasingly on automation in all aspects of the value chain. Warehousing and the growing deployment of machines is one example, all in the name of optimizing availability of products and making delivery as quick and smooth as possible.
However, the rise in cross-border business has created a whole new set of challenges that revolve around ensuring compliance with EU VAT regulations. In this context, sellers are forced to find viable solutions to keep on top of the sheer amount of transactions. Manual processes are no longer a solution. Business owners, at any given time, need to be able to rely on and produce complete and correct data for reporting purposes. Wrong assessments of VAT issues will result in fines and back taxes which can have major implications for e-commerce businesses.
Two aspects of cross-border e-commerce in the EU alone make the case for VAT automation as they create additional challenges for online sellers: distance selling thresholds, and the use of warehouses abroad (cross-border fulfilment).
In the case of the distance selling EU VAT rules, online sellers need to be up to date with their cross-border sales in real time. Under the regulations of the EU VAT Directive, the general rule of selling to private individuals in other EU member states at their home country's VAT rate only applies up to thresholds starting at 35,000 euros. This means that once sales to any given country in the EU have exceeded this state's annual distance selling threshold, online sellers are obliged to VAT register in that country and pay VAT at that country's VAT rate to the respective tax authorities.
This, at first glance, seems simple enough. However, the finer details of this regulation create certain issues for e-commerce retailers—not least a considerable amount of additional work—that in practice need to be handled as effectively as possible. As the VAT duties in the country that online sellers sell to start with the sale that exceeds the threshold, the sellers have no choice but to monitor their EU cross-border sales to private customers on a delivery-by-delivery basis: they also need to ensure they are making the right calculations. The basis for assessing whether VAT thresholds have been breached or not is the net sales in any given calendar year. E-commerce businesses therefore need to deduct the VAT rates that apply in the country of destination, currently ranging from 0 percent to 27 percent, from their final prices in order to come up with the right figures. Also, daily currency exchange rates have to be considered, since each country's distance selling threshold is denoted in its local currency.
Matters are further complicated when sellers use warehouses abroad, not only to cut costs (i.e., cheaper warehouse charges) but also to be closer to customers and guarantee short delivery times. Services such as the Fulfilment by Amazon (“FBA”) program, which make an international warehouse network available at a mouse click, have been coming into play since 2015. Amazon currently has fulfilment centers in eight European countries, with more to come: at the same time, there are also a growing number of other fulfilment providers that make it easier than ever to use warehouses abroad. However, while access to international logistics structures has become convenient, the resulting VAT obligations are cumbersome.
To use warehouses abroad, goods need to be shipped there in the first place. This process involves two transactions with VAT implications: one, the intra-Community movement of goods (i.e., a seller shipping from one country to himself in another) which is exempt from tax, and the other, the intra-Community acquisition (i.e., the seller receiving his own goods in the warehouse abroad) which is subject to VAT in the country of the warehouse (including a corresponding right of the deduction of VAT). The supply of goods needs to be declared in the seller's home country as well as in the warehouse country, which triggers multiple reports and filing obligations. Sellers need to include the intra-Community movement of goods in their home country's VAT return and to provide a recapitulative statement that is shared between all member states. Also, the taxable intra-Community acquisition needs to be declared in the country in which the warehouse is located. Furthermore, fiscal authorities across the EU demand the documentation of intra-Community movements of goods—so- called pro forma invoices.
But there is more: should an online seller's international deliveries of goods exceed certain thresholds, additional reports to the relevant countries' statistical offices need to be filed (Intrastat reporting). Bearing in mind that online marketplaces first and foremost focus on providing a satisfactory service for their customers, platforms such as Amazon mainly aim at delivering orders as quickly as possible, which, in turn, means goods will be allocated from one country to another based on the utilization of warehouses and expected local demand. Online sellers using the FBA program will therefore be confronted with numerous transactions (supplies of goods) with VAT implications as described above—and accounting will have to reflect and record each and every one of them.
What happens if all these obligations that come with EU VAT rules are not met? The following case study of an FBA seller—based on a real example—shows how severe the consequences can potentially be.
The German company “Seller X” joins the FBA program on January 1, 2016 and uses foreign warehouses in Poland and the Czech Republic. With an annual revenue of around 5 million euros, the seller has already crossed distance selling thresholds in five other EU countries. However, due to inadequate structures, Seller X is unaware of the VAT regulations in the EU and simply applies German VAT to all purchases.
At the beginning of 2018, Seller X is audited by the German financial authorities. The auditors come across the company's cross-border activities and inform their peers in the other EU member states. Since Seller X uses warehouses abroad and has exceeded several distance selling thresholds, further audits are started by the respective authorities.
In a first step, Seller X is asked to provide a detailed overview of warehouse transfers and sales in 2016 and 2017, requiring considerable effort in collecting and analyzing the data. After declaring the correct numbers in each country, the overdue VAT needs to be paid. Furthermore, depending on each country's legal requirements, additional late fees and penalties of as much as 240 percent of the VAT owed apply.
Can Seller X be reimbursed for his mistakenly paid German VAT? Yes—but only after the VAT owed in all other countries is paid and the respective invoices to Seller X's end customers have been amended.
Performed manually, VAT compliance is very time-consuming, and hence expensive. Real-time monitoring of sales to multiple European countries to comply with distance selling thresholds, including determining the correct VAT rates for each product and country, for example, or recording transactions including sales, refunds or movements of goods to ensure fulfilling all requirements related to the use of warehouses abroad, all poses considerable challenges to any e-commerce business.
However, starting with the data aggregation process, the analysis and monitoring of data, the filings in the respective countries, and the transfer of data to the seller's accounting systems, there does exist considerable room for automation.
To be successful in the long run, a successful e-commerce business needs to pay close attention to international VAT rules. The risks involved are substantial and can easily threaten a company's existence. Due to the sheer amount of data, a manual approach is not adequate. Automating VAT compliance will save resources and safeguard the smooth operation of an e-commerce business in the long run.
Roger Gothmann and Christian Königsheim are co-founders and managing directors of Taxdoo, an automated VAT solution and digital tool for online sellers. They can be contacted at: firstname.lastname@example.org
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