Since 2015, the European Union has been gradually implementing a series of reforms designed to create a Digital Single Market across the EU. In setting its reform agenda, the European Commission looked beyond areas traditionally associated with the regulation of technology and digital services, and proposed changes in sectors that it believes have a significant effect on the pattern of EU cross-border digital trade. One such area was tax policy.
By 2021, the EU will implement a series of measures that are designed to significantly improve how companies operating online calculate VAT in the EU. This is the result of a unanimous vote of approval from the EU legislative bodies for a package of proposals that will incentivize cross-border trade, combat VAT fraud (especially by non-EU actors), ensure fair competition for EU businesses, and provide equal treatment for online publications.
The European Commission launched its Digital Single Market (DSM) strategy in May 2015. We have written a number of articles following the DSM's progress: at its inception, one year in, and in 2017 following a mid-term review.
The DSM strategy is broken down into three "pillars" and 16 "Key Actions". Key Action 8 targeted the application of VAT rules to the trade in digital goods and services.
The Commission identified the issue of dealing with a number of different national tax systems as a significant obstacle to cross-border commerce. It planned to tackle this administrative burden by extending a single system for VAT to the online sale of physical goods, as well as introducing a common EU-wide VAT threshold to assist smaller e-commerce businesses.
Since 1 January 2015, with the entry into force of so-called "place of supply" rules, VAT on all telecommunications, broadcasting, and electronic services across the EU has been levied in the jurisdiction where the customer is based, rather than where the supplier is located. Essentially, the Commission planned to extend this regime to online sales of physical products.
The Commission also planned to remove a VAT exemption for the importation of small consignments from suppliers in third countries outside the EU.
Under the new package of legislative proposals issued under DSM Key Action 8 (which consists of two directives and one regulation), the following will progressively come into force for European businesses:
New simplified VAT rules
VAT on cross-border sales by small and medium-sized enterprises (SMEs) that fall under an annual €10,000 threshold will be managed in accordance with the rules of the SME's home country. In addition, SMEs will be able to take advantage of simplified processes for cross-border annual sales of up to €100,000. It is expected that this measure will benefit more than 430,000 businesses across the EU.
A one-stop shop
Online businesses that sell to consumers will soon be able to access a one-stop shop portal – in their own language – to help them comply with their VAT obligations. This is a significant development from the current situation whereby businesses must make VAT registrations in each EU Member State where they sell. The obligation to make separate VAT registrations has often been viewed as one of the biggest obstacles that discourage businesses from making cross-border sales, so the one-stop shop will no doubt be invaluable for SMEs.
The one-stop shop is due to come into effect in 2021, in order to give EU Member States time to create the relevant IT infrastructure to support the online portal.
Greater responsibility for online marketplaces
Online marketplaces will have a responsibility to check that the appropriate VAT is collected on sales that take place on their platforms, where such sales are made by non-EU businesses to EU consumers. Notably, this will include goods that are stored by non-EU businesses in EU warehouses (or fulfilment centers), which allows such businesses to sell VAT-free goods to EU consumers.
While it is difficult to measure the value of VAT fraud, the European Commission has estimated that the VAT gap (i.e., the difference between the expected VAT revenue and the amount actually collected) represents almost €160 billion in revenue losses each year. Member States will be empowered with a new arsenal of powers to tackle VAT fraud. There will be an online system for information sharing within the EU's existing network of anti-fraud experts (otherwise known as Eurofisc). Import information will also be shared between tax and customs authorities in all Member States to reduce the number of goods which circumvent the payment of VAT by being diverted to the black market.
Fairly apportioning tax revenues
VAT will be paid in the Member State of the end-customer, which will lead to a fairer distribution of tax revenues across the EU. This apportionment is already in place for e-services, and reflects the main goals of the DSM strategy (see our January alert for an update on the DSM strategy).
Around 150 million parcels are imported free of VAT into the EU each year, which the EU believes has an adverse impact on EU businesses. The current VAT exemption on imports of small consignments from non-EU countries into EU Member States will be abolished, which will reduce the disadvantage that some EU businesses currently face. Registration in the VAT one-stop shop for trusted non-EU traders will be available, with such traders able to designate an intermediary who is familiar with the EU VAT system to deal with VAT compliance for sales of goods under €150.
There's still some way to go before businesses feel the benefits of these measures; full implementation won't take place until 2021. These measures are expected to have a very real effect on businesses; in each Member State where a business has customers, that business currently incurs average VAT compliance costs of €8,000 per annum. While larger businesses can often absorb such costs, SMEs are not as well-equipped. It is hoped that these measures will reduce SMEs' costs by 95% – this translates to overall annual savings of €2.3 billion for EU businesses. Such savings will no doubt support the Commission's overarching aim to " make it easier and less costly for businesses to engage in cross-border commerce".
Digital Single Market
For more information about the Digital Single Market:
- Overview and Summaries: DSM at its inception in 2015, one year in (2016), and following a mid-term review in 2017
- 2018 EU Work Programme
- Key Action 1 – Regulating Cross-border e-commerce
- Key Action 2 – Enforcing Consumer Protection Rules
- Key Action 3 – Cross-border Parcel Delivery
- Key Action 4 – Ending Geo-blocking
- Key Action 5 – European E-Commerce Markets: Competition Initiatives
- Key Action 6 – European Copyright Reform Status Update
- Key Action 7 – Tune in, catch up: EU changes to TV and radio transmission rules
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
© Morrison & Foerster LLP. All rights reserved