The digital economy is blooming as never before. The Internet allows constant delivery of online supplies to consumers all over the world at any time of a day and night. Current VAT rules are not customized to such innovative business solutions - what results in challenges in the collection of VAT and creates burdensome VAT compliance obligations for companies. In this context the European Commission has taken actions to modernise the VAT system and proposed major changes. Is your company prepared?
Quick refreshment on the current EU VAT rules concerning e-commerce
Current VAT treatment of e-services
From 1 January 2015, supplies of telecommunications, broadcasting and electronic services (e.g. websites services, supply of music, films, apps, e-books) are always subject to VAT in the country where the customer is resident - regardless of whether the customer is a business entity (B2B) or a private consumer (B2C).
The status of the buyer will determine whether the supplier needs to charge VAT or not. In case the customer is a business entity (B2B sale), no VAT is charged as there is a reverse-charge mechanism available (which means that the buyer is responsible to pay VAT in its own country). However, VAT has to be charged on the sale to private consumers (B2C sale) at the local rate of the country where the customer is resident (VAT rates in EU countries varies from 17-27%).
The Mini One-Stop-Shop (MOSS) regime was introduced to avoid VAT registrations in each country where the customers are located to reduce the VAT compliance burden. In the home country (or in case of a non-EU business, in the chosen EU country), the company registers for MOSS with the local tax authority and reports all different VAT rates for the various countries in one single quarterly VAT form.
Current VAT treatment of online sales of goods
More and more companies use a digital technology to sell online their tangible products such as clothes, shoes etc. The European VAT regime applicable to cross-border sales of goods also distinguishes between B2B and B2C transactions.
In case of B2B sales across EU, the recipient is obliged to self-account the VAT under the reverse charge mechanism at the VAT rate applicable in its country. The transactions are known as intra-EU sales and intra-EU acquisitions of goods.
With respect to transactions to private customers in EU (so called distance sales), businesses are obliged to register for VAT purposes in the EU Member State of arrival of goods as soon as their sales to that country exceed the given thresholds (the VAT registration thresholds for distance sales in EU vary between 35.000 EUR to 100.000 EUR). As long as the distance sales threshold is not exceeded, the supplier has the option to charge the applicable VAT rate of the country of dispatch and does not require a foreign VAT registration.
What are the most important implications of the proposed VAT reform?
On 5th December 2017, the European Commission has approved the Directive 2017/2455 and the Council Regulation 2017/2459, which aim to modernise the VAT regime for cross-border e-commerce players and reduce the administrative burden for businesses arising from different VAT regimes. These are the most important changes:
- Threshold for supply of e-services - as of 2019
In order to reduce the burden for micro-businesses established in the EU, online companies selling e-services for up to EUR 10 000 yearly will have an option to apply to their sales the VAT rules from the country of their establishment. The supplier will need to account for VAT at the rate of the customer’s country once the annual EUR 10 000 threshold for such cross-border supplies is exceeded. Note that currently there is no threshold available for such traders.
A second new yearly threshold of EUR 100,000 will apply to small and medium-sized enterprises and will simplify the rules for identifying where the customers are established. As of 2019, only one piece of evidence will be required to establish customer’s location (e.g. customer’s invoicing address, IP address, Mobile Country Code etc.).
- B2C sales of goods from EU to EU private consumers (distance sales) - as of 2021
European Commission proposes to extend the use of MOSS for sales of goods to private customers within the EU (distance sales). It means, that the businesses will be entitled to deal with their VAT obligations across EU through one online portal hosted by their own tax administration and in their own language (as currently available for supply of e-services).
The current country-specific EU distance sales thresholds (EUR 35,000 or EUR 100,000) will be replaced by one EU-wide annual threshold of EUR 10,000. The VAT of customer’s country will have to be charged once annual EUR 10 000 threshold of such cross-border sales is exceeded. Please note that this threshold is only available for EU established entities. Therefore, it seems that all non-EU established entities, that sell goods from EU country to private customers, will need to account for VAT at the rate of the customer’s country from the very beginning.
- B2C sales of goods from outside EU to EU private consumers (imports) - as of 2021
Based on the current rules, import into EU of small consignments with a value not more than EUR 22 is exempt from VAT. The current system suffers massive fraud and is unfair with respect to EU businesses which have to apply VAT regardless of the value of the goods sold. Therefore, to reduce the abuse of law in this respect, Commission has decided to remove this exemption as of 1 January 2021.
In principle, such imports will be subject to VAT at the rate of the customer’s Member State. In order to simplify the fulfilment of VAT compliance, Commission proposed to extend the MOSS for certain B2C imports. It will apply for goods not subject to excise duties with a value of less than EUR 150 per import. The non-EU businesses will be able to designate an EU intermediary (such as a courier, postal operator or customs agent) to deal with their VAT compliance in the EU.
Note that the imported goods subject to excise duties or with a value exceeding EUR 150 will still require a full customs declaration.
- B2C via an online marketplace - as of 2021
As of 1 January 2021, online marketplaces will be regarded as commissionaires who have bought and further sold the products traded on their platforms and thus will be liable to pay VAT in the Member State where the customer is located. Based on the new rules this will apply to electronic marketplaces including platforms or portals that facilitate either distance sales within EU by businesses not established in the EU, or facilitate distance sales of goods imported into the EU with a value not exceeding EUR 150.
Having in mind all the above mentioned new regulations, I would recommend all companies selling goods to private consumers in EU to review their ongoing business set-ups and start preparing for the upcoming changes.
If you are interested in the above topics, I invite you to sign up for our seminar on which will discuss the new upcoming VAT changes proposed by European Commission. Seminar will be held on 6th november 2018 at our PwC office in Oslo (free of charge). Please sign up here.
Jeg heter Diana Geilhufe og jobber som senior manager i Advokatfirmaet PwC. Jeg har jobbet med internasjonale indirekte mva-spørsmål i mer enn 10 år. Mitt arbeidsfelt er merverdiavgift, med særlig fokus på internasjonale forhold og grenseoverskridende transaksjoner. Til daglig jobber jeg med å bistå norske og multinasjonale selskaper fra en rekke bransjer (shipping, akvakultur, e-handel, bilindustri, industriell produksjon) med et bredt spekter av merverdiavgift rådgivningstjenester, bl.a. vurdering av mva-behandling av grenseoverskridende transaksjoner, spørsmål knyttet til mva-registrering og rapporteringsforpliktelser i Norge eller utenfor Norge. Ta gjerne kontakt med meg dersom det er noe du lurer på.
My name is Diana Geilhufe and I work as Manager at PwC Tax and Legal Services. My area of expertise covers international VAT advisory service. I assist clients with assessment of VAT obligations in Norway as well outside Norway. I specialize in analysis of cross-border transactions, including restructuring of supply chains from the VAT perspective. I have been with PwC since 2010, first 5 years at PwC in Poland before joining PwC Norway in 2015.
I would like to blog about my international experiences in this area. Please feel free to contact me, if you have any questions, comments or input.