Germany Racing to Enact EU E-Commerce VAT Rules

Trust Bloomberg Tax for the international news and analysis to navigate the complex tax treaty networks and global business regulations.

By Jabeen Bhatti

German ambitions to swiftly implement new European Union measures preventing the loss of sales tax over e-commerce platforms may place an “immense” burden on e-commerce giants like Amazon.com and eBay Inc. and give them little time to adjust, attorneys say.

Germany’s Federal Court of Auditors, an independent government body responsible for pointing out structural deficits in the area of tax collection, last month said that while they welcomed European Union steps to safeguard nations’ tax revenues in e-commerce, they believe those regulations will take too long.

Instead, they took an unusual approach and called for Germany to swiftly pass a national law ahead of the EU measure, which starting in 2021 will require companies like Amazon and eBay to pay VAT for third-country merchants selling to countries within the bloc.

But tax attorneys said Germany’s fast action could come too quickly for companies, which will need to build technical and administrative infrastructure to comply.

Outsourcing the burden of VAT collection from national tax authorities to e-commerce giants such as Amazon and eBay—which have never before been liable for third-parties’ failures to pay sales tax—places immense technical and administrative burdens on their operations, Hans-Hinrich von Coelln, an attorney and tax adviser focusing on indirect tax with EY in Berlin, told Bloomberg Tax.

“From the perspective of the state, this is an effective measure, but from the perspective of the company, it’s rigorous —they’re not only being forced to take on further administrative responsibilities, but also take it upon themselves to develop technical solutions to the problem,” he said. “This extra administrative burden, in addition to the financial risk, will become enormous.”

Billions Lost

The European Union estimates that about 50 billion euros ($61.64 billion) in VAT is lost in the bloc every year because of cross-border sales national authorities can’t track, almost half of which could be claimed by German institutions.

Online sales contribute to a large share of those losses, mostly because online sellers don’t require a physical presence to sell their goods in the EU, and current VAT regulations in the EU, last updated in 1993, are ineffective in today’s digital market, said Roger Gothmann, co-founder and director of Taxdoo, a Hamburg-based firm that offers automated sales-tax services for online retailers.

And national authorities such as those in Germany don’t maintain bilateral tax agreements with nations like China or Hong Kong, where a large proportion of online sales outside of the EU take place. There is likely to be no repercussion for sellers if they don’t pay sales tax, Gothmann said in an email.

“These measures could solve the current problem,” he said of the EU’s new guidelines. “Online sellers from non-EU countries such as China and Hong Kong are hardly tangible for German fiscal authorities.”

Undue Burden

But Von Coelln with EY fears the new measures enter into murky waters of who should face the burden of collecting delinquent sales tax.

“The distinguishing characteristic of this proposal is that neither the party that has made the sale, nor that which has received it, has to pay value-added tax, rather a third party, specifically the platform operator, as if it was actually their sale,” he said. “It’s a drastic measure that we haven’t seen before.”

In doing so, online retailers that offer private sellers a platform to sell their goods will have to reorganize their business’s technical and pay models to align with the new standards by 2021 if they want to protect their own interests and livelihoods within the EU digital market, he added.

On the Agenda

The call from Germany’s Federal Court of Auditors shows that the reform is already on the agenda in Germany—which may pose even more administrative issues for companies and authorities alike, Von Coelln said.

“It’s unclear within the context of value-added tax, which is already considered to be harmonized in Europe,” he said. “Germany will in addition react with national steps, for example, more field audits.”

“It’s a deep cut and a far-reaching change that not only has to be considered from the side of the state, but also from the company’s side,” he said. “One would be well-advised to create some sort of transition period so everyone can adjust.”

Moreover, offloading the tax burden onto e-commerce giants technically not involved in the sale may present legal questions that will have to be answered in court, he said.

“Legal questions will definitely be posed about fundamental freedoms—is this an excessive burden on a taxpayer? Does this violate a prohibition on excessive taxation? Is the state burdening taxpayers too much with this operation?” he said. “It will be interesting to see whether courts will concern themselves with these questions.”

To contact the reporter on this story: Jabeen Bhatti in Berlin at correspondents@bloomberglaw.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

Copyright © 2018 The Bureau of National Affairs, Inc. All Rights Reserved.

Request International Tax