European Commission Proposes New VAT Rules for E-Commerce and Online Businesses

You may remember that, on April 7, 2016, the European Commission adopted an action plan (Towards a Single EU VAT Area) setting out urgent actions to tackle a number of important VAT issues. As part of this initiative, on December 1, 2016, the Commission announced that it proposes to expand the scope of the so-called ‘Mini One Stop Shop’ (MOSS) for the collection and EU-wide distribution of VAT on certain e-services, to include sales of online goods and other services. The Commission also expressed the hope that it could further facilitate e-commerce for both consumers and companies (especially start-ups and SMEs) by introducing a range of proposals.

The simple reason for all this feverish activity is that the current rules for digital commerce were created well before the advent of the Internet and the boom in online sales. EU law is now trying to catch up with market practice.

What is the European Commission Proposing?

In short, the proposals include:

  • Expanding the MOSS procedure, currently covering e-services such as mobile phone apps, to include sales of all goods and services online.
  • Simpler rules for start-ups and micro-business selling online and cross-border, such that companies with cross-border sales of up to EUR10,000 annually will be subject to domestic VAT; and companies with annual sales of cross-border e-services below EUR100,000 will be eligible for simplified procedures for identifying customer location.
  • Combatting VAT fraud by removing the much-abused “small consignment” exemption for imports of goods costing less than EUR22.
  • Changing the rules for e-publications (e.g. e-books and online newspapers) to allow Member States to apply the same reduced or zero rates to both electronic and print publications.

Underlying Rationale

The European Commission has identified and attempted to quantify the cost of three key problems that the proposals are intended to address. These are:

  • Steep compliance costs: the Commission estimates that businesses incur average yearly VAT compliance costs of EUR8,000 in each Member State in which they trade. These costs are particularly onerous for SMEs. The Commission estimates that the new rules will reduce these costs by 95 percent.
  • Unfair competition: the small consignment exemption of EUR22 for imports is often used fraudulently when non-EU businesses mark expensive goods as falling within the threshold. It is estimated that up to EUR25 billion in trade - i.e., 25 percent of total cross-border business-to-consumer (“B2C”) sales of goods - is non-compliant. Such high rates of VAT fraud disadvantage all EU B2C sellers (including those not selling online) in comparison to non-EU sellers.
  • Revenue loss: the Commission estimates that EU Member States lose at least EUR5 billion each year in VAT revenues, due to VAT fraud and the VAT forgone from the small consignment exemption. It is estimated that this figure will rise to EUR7 billion by 2021.

In addition, the Commission has responded to the invitation of the Finance Ministers of the Member States to permit members to tax traditional, hardcopy books and newspapers at the same rate as electronic publications. Print sources frequently attract reduced VAT rates (e.g. the UK and Ireland zero-rate such supplies, and many other Member States apply reduced and super-reduced rates), whereas e-books and online newspapers are taxed at standard rates. (See our blog post, European Commission Proposes Reduced VAT on E-books for more information.) Member States will now have the option to redress this anomaly.

When Might These Proposals Take Effect…

The proposal on leveling the playing field between e-publications and print sources can enter into force immediately on approval by the European Council.

The Commission suggests that the proposals on e-commerce thresholds will take effect in 2018, with the other proposals described in this blog coming into place in 2021.

…And Will They Work?

The European Commission suggests that trade between EU Member States will increase as a result of the simplifications and reduce cross-border VAT compliance costs. In addition, it is hoped that domestic online companies and traditional high street businesses will benefit because they will no longer be undercut by businesses charging lower VAT rates or no VAT at all.

Given the sensible nature of the proposals, this seems likely. Although the current workings of the MOSS have had a mixed reception, the simplification involving the EUR100,000 threshold goes some way to addressing the concerns that have been raised. In addition, it is also likely that the UK - post-Brexit - will continue to adopt the simplifications to avoid a VAT trade barrier with the EU.

By Jon Trevelyan, Editor, Bloomberg BNA

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