Tax Planning International Review BNA-BLOOMBERG September 2017
The European Commission has identified the Digital Single Market as one of its top priorities. VAT is in the process of being reformed to reduce the burden on business and enable the right conditions for digital commerce across the European Union.
VAT and the Digital Economy: the European Union is Moving Forward
by David Hirsch
David Hirsch is Attorney-at-Law at the Paris Bar, France
The European Commission’s Digital Single Market (“DSM”) strategy is one of its top ten priorities. The DSM means an open market where it is easy for businesses and for people “to operate as effectively anywhere in Europe as it is at home.” Within this strategy, Value Added Tax (“VAT”) is notably being reformed to reduce the administrative burden for businesses.
Three Key Actions
Three actions were identified as key actions to build this “open Digital Market”:
• maximizing the growth potential of the digital economy (e.g., the European Cloud Initiative, extending the European Interoperability Framework for public services);
• creating the right conditions for digital networks and services to flourish (e.g., geo-blocking, portability of online content services, role of platforms in the market); and
• better access for consumers and businesses to digital goods and services across Europe.
The Draft EU VAT Directives
With regard to this last action, a legislative proposal was adopted to reduce the VAT administrative burden on businesses. This proposal is the “VAT for e-commerce Package” (the “Draft EU VAT Directives”, or the “Draft”), and is related to three topics:
• cross-border e-services;
• e-commerce of goods; and
We have outlined below how the Draft will change the current regime for these components of the digital market.
Current VAT Regime Applicable to Cross-border e-services, and the Draft EU VAT Directives
Before 2015, in a business-to-consumer (“B2C”) situation, from a territorial viewpoint VAT was chargeable by e-services providers in the European Union (“EU”) Member State in which they were established.
However, with effect from January 1, 2015, in order to eliminate distortion of competition arising from “VAT rate shopping” by consumers, the European Council introduced a new territoriality rule for the taxation of TBE services—telecommunications, broadcasting and electronic services (e-services). “E-services” are broadly defined by EU VAT Directives as services which:
• are delivered over the internet or an electronic network and the nature of which renders their supply essentially automated;
• involve minimal human intervention; and
• are impossible to provide in the absence of information technology.
As from January 1, 2015 the new regulation provides that TBE services are always taxed in the country where the consumer (i.e. non-business) customer belongs.
In this regard, it should be noted that whereas in a business-to-business (“B2B”) situation, the business recipient of TBE services is obliged to self-account for any VAT through the “reverse charge” mechanism in the country of establishment, under a B2C scenario, the service provider is obliged to charge VAT at the rate applicable on the provision of the service in the country in which the consumer is based.
The MOSS Scheme
Whereas the new legislation obliges any cross-border supplier of TBE services to consumers (i.e., B2C) to register for VAT in each EU Member State in which its services are received by local consumers in order to account for any VAT chargeable, multiple VAT registrations can be avoided by the supplier availing itself of a centralized VAT registration known as the Mini One Stop Shop (“MOSS”).
Two similar MOSS systems operate as follows:
• the EU scheme, for use by EU-established businesses; and
• the non-EU scheme, for use by non-EU-established businesses.
Use of the MOSS scheme is entirely optional for businesses. If availed of, it enables the declaration and payment of any VAT arising on the provision of TBE services to consumers in any of the EU Member States, other than the EU country in which the service provider is established.
Although the MOSS systems are a pragmatic solution to help eliminate distortion of competition based on differing VAT rates across the EU and to reduce VAT compliance costs, they are by no means perfect and criticism of them includes:
• the complexity of determining the consumer’s location for the TBE services, even if a presumption regime is available;
• compliance audits are performed by the tax authorities in the EU Member State where the customer is located;
• absence of VAT registration thresholds for small and medium-sized businesses.
These issues are regularly pointed out, and the Draft reform addresses some of them.
In 2018, a registration threshold for cross-border supplies of TBE services will be introduced to help small businesses, with the proposal that only businesses whose turnover exceeds 100,000 euros will be subject to the standard rules.
In 2021, the MOSS facility will be extended to cover other cross-border supplies to consumers.
Current VAT Regime Applicable to Cross-border e-commerce of Goods, and the Draft EU VAT Directives
VAT Regime Distinguishes Between B2B and B2C Sales
The European VAT regime applicable to cross-border sales of goods also distinguishes between B2B and B2C sales.
In both B2B and B2C situations, when a business supplies and ships goods from the EU to a customer located outside of the EU, no VAT is chargeable.
Also, whereas goods imported into the EU are generally liable to VAT (and sometimes customs duties) on import, there are certain exceptions for low value items in most EU countries (i.e., the small consignments exemption).
The cross-border supply of goods within the EU between VAT-registered businesses (B2B) generally obliges the recipient to self-account for any VAT arising (under the reverse charge mechanism) at the VAT rate applicable in the country in which the recipient is VAT-registered (intra-EU acquisition), as long as this registration was issued by a Member State other than that in which the supplier is VAT-registered.
In a B2C situation, where goods are supplied to a non-business customer in another EU country, the supply (known as a distance sale) is usually taxable in the country where the goods are located when they are being dispatched to the customer, unless the supplier has opted to register for distance sales in the country in which its customer resides.
However, once the annualized VAT registration threshold for distance sales to consumers based in any EU country is exceeded, the supplier must register in that country and charge VAT at the local rate applicable to the goods. The VAT registration thresholds for distance sales vary generally between 35,000 euros and 100,000 euros.
Criticisms of VAT Treatment
The following criticisms are often made regarding the VAT treatment of cross-border supplies of goods:
• a business often incurs VAT compliance costs in each EU country where it has customers, which can be particularly prohibitive for small and medium-sized businesses;
• the VAT exemption for the importation of small consignments, as well as high rates of non-compliance, means that EU sellers (both online and traditional businesses) are at a disadvantage to non-EU sellers.
Consequently, the Draft reforms also aim to modernize the VAT implications applicable to certain supplies of goods with effect from 2021 and this includes:
•the extension of the MOSS schemes to cover cross-border B2B supplies of goods by EU VAT-registered businesses. This will result in the charging and collection of VAT by EU-based suppliers based on the VAT rates applicable in the EU country in which the business customer is VAT-registered, assumed to be a different country than that in which the supplier is registered;
• the removal of the small consignment exemption;
• the abolition of the distance sales regime.
The MOSS will Become the OSS!
Following on from the introduction of the new legislation, the MOSS will simply become the “OSS”: a full One Stop Shop.
The European Commission’s intention is that the DSM will have the right tools to modernize VAT applicable to e-services, broadcasting services, cross-border sales of goods, including online sales, etc.
In the short term, it is also likely that the current obligation on EU Member States to apply the standard VAT rate to e-books and e-publications will be removed.
This VAT reform is a big step forward for businesses in the EU, in order to facilitate the digital economy and the digitalization of the pre-existing economy.
David Hirsch is a French attorney-at-law and specializes in VAT and Customs law.
With special thanks to the support of Ivor Feerick, Chair of BDO International VAT Centre of Excellence.
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