E-commerce: Brussels interferes in the VAT
A number of fiscal aspects relating to international e-commerce have received the EU’s heated attention for years: the current VAT exemption (on goods with a customs value of up to EUR 22) and the current system of VAT payment for cross-border trade. Brussels wants to address both of these hot potatoes with the so-called VAT e-commerce package from 1 January 2021. How will the online selling business change? A rough outline.
No VAT is levied on goods sold under the exemption limit via the internet from outside the EU. However, VAT is payable on the same goods sold in the shops here. For some time, lobby groups have lobbied, on behalf of the European business community, against – what they see as – flagrant unfair competition. And finally, they have taken note: to correct this distorted situation and to achieve fairer competition, the VAT exemption for internet purchases under the 22 Euros threshold will be abolished from 1 January 2021. From that date, identical/similar goods from inside and outside the EU will be taxed equally to create a level playing field.
Of course, this decision will have big consequences both for the international business community and for customs administrations throughout the entire Union. Tax will have to be paid over an enormous quantity of goods that were previously unaffected – and they will all have to be digitally declared from thenceforth. For Customs, this logically means a substantial increase in the number of declaration lines to be processed and hence a greater work load. Moreover, there is another fiscal catch. There is reason to fear that some entrepreneurs – now that they must pay VAT over their initially untaxed goods – will still want to pay as little tax as possible. And a risk that they declare their goods at a customs value that is too low. This represents a serious risk of fraud, for which the authorities will have to remain alert.
In the right place
Then the second dilemma facing the EU: the VAT that is now paid over goods from outside the Union often ends up in a place where the goods in question are not actually consumed. It is not unusual for VAT to be paid in the member state where the e-commerce shipments enter the Union, and from where they subsequently often continue their journey to other countries. But these destination countries – where the products are ultimately consumed – will generally not see any of the money levied. Brussels also wants to change this undesirable situation from 1 January 2021. So the applicable EU system for VAT payment will be amended. This system will be replaced by a system of reallocation, which must guarantee that the VAT subsequently ends up in the right place(s).
VAT payment at purchase
Within this envisaged concept, an important place has been given to a new phenomenon: the so-called Import One Stop Shop (IOSS). If a non-EU supplier then opts for this IOSS option, this means that a consumer who purchases a product via a website must pay the VAT of one’s homeland at the moment of purchase. The VAT from this transaction then flows, in the first instance, to the e-commerce platform concerned – e.g. a Chinese online marketplace. If when the item ordered is declared at a certain moment to a European customs administration (as a rule by the representative of the non-EU supplier, such as its logistics service provider or a postal or courier service company), then one must declare that it falls under the IOSS scheme.* In this way, it is made clear that VAT has already been paid, and duty does not have to be levied over the goods again upon its import. The party who submits the declaration requires a special and unique IOSS-VAT number for this, which will be made available by that date.
Bag of euros
The online entrepreneur who receives the VAT is obliged to hand it over to the EU in the course of the following month. So the entrepreneur must submit a tax return – twelve times a year – to the tax authority of the member state where he is registered with his IOSS-VAT number** (this may be a different country to the one where the goods entered the Union). In short, the tax authorities concerned receive a bag of euros every month, plus an enclosure which states precisely how it must be divided over the various member states concerned. To verify whether the right amounts have been paid at the various tax administrations, they are compared with the relevant import data of the customs administrations. In Brussels, work is currently being performed to create a system to make this possible.
Work to be done
Before the new system is operational, the necessary work still has to be done – both at overarching European level and in the separate member states. So the EU must provide, for example, an efficiently running and secure database for the IOSS-VAT numbers. At a national level – in the Netherlands too – tax authorities and customs administrations will have to make sufficient efforts to ensure the communication of adequate information between each other. Brussels trusts that all this will be arranged before 1 January 2021, and it expects that the lion’s share of all the e-commerce shipments will be absorbed by the envisaged system from that date.
* Not every product will be subject to this. The condition for this is that the product in question that is sent directly to the addressee has a value of maximum 150 Euros and is not subject to excise duty.
* With an eye to limiting administrative costs, the entrepreneur will have to register only in one country. Moreover, he only has to pay VAT in that country.
As said, Customs will have to process tens of millions of extra declaration lines every year, if the VAT exemption lapses. The main reason for this is that postal operators will then declare shipments in the ‘normal’ way. Now they may still submit declarations by – as that is legally referred to – ‘any other act’. In practice, it amounts to a postal company not having to contribute any administrative declaration effort; simply pointing out ready containers containing postal items to Customs is sufficient. Soon the company will need to submit import declarations digitally.