Tax Loopholes for Third Countries
In recent years, large amounts of value-added tax (VAT) revenue have not been paid, especially with regard to online sales on platforms such as Amazon and eBay. Online merchants from third countries on these platforms would not pay VAT on their e-commerce sales to the relevant financial authorities in the EU, which resulted in high tax losses.
Thus, a key objective of the EU reform is to secure tax revenue. For this reason, marketplaces have become subject to taxation for certain types of transactions:
- Transaction type 1:
- goods are sold on a marketplace;
- the movement of goods takes place within the EU;
- the online merchant is established in a third country.
In this case, a supply chain will be simulated from a VAT perspective and as a result, the marketplace becomes liable to pay tax on sales to end customers.
- Transaction type 2:
- goods are sold on a marketplace;
- the movement of goods starts in a third country;
- the sale with a value of a maximum of 150 euros ($176) is made to an end customer in the EU.
As before, a supply chain will be simulated from a VAT perspective and as a result, the marketplace becomes liable to pay tax on cross-border sales to end customers.
Four Pillars of the Reform
The reform consists of four pillars, described below.
- First, marketplace operators will be liable to pay VAT under what is known as the “deemed supply chains.” This structure will apply to online merchants from third countries, as well as those from the EU, when their goods are dispatched from a third country and sold through a marketplace to end customers in the EU. For marketplaces, this means that they will need to determine who is liable for VAT and to calculate the correct amount necessary for payment.
- Second, filing reports has just become more complex for a couple of reasons. On the one hand, marketplace operators are now liable for VAT. On the other hand, different procedures and the Import One-Stop Shop (IOSS) have been introduced for the EU and co-exist alongside local VAT registration procedures; the latter will in many cases become increasingly unnecessary.
- Third, current distance-selling thresholds will be removed. As a result, tax liabilities will arise in many EU countries. As such, it will be necessary for online merchants and for marketplace operators to determine the VAT rates that will be applicable in each and every member country of the EU. This is a difficult task as rates vary significantly from country to country. Marketplace operators must determine which tax rate is applicable, and also have to review whether some of the reduced tax rates are applicable to their product groups and in which member states. We will come to the importance of determining the right tax rate shortly.
- Fourth, operators of digital platforms will be liable for unpaid VAT occurring from e-commerce sales by online merchants on their platforms under certain circumstances. Independently from the e-commerce package, Germany has recently adopted such a regulation, as have France, Austria, and Great Britain. The various regulations in the different member states come with extensive recording and validation obligations for the marketplace operators, which shall ensure that merchants selling their goods in a certain country fulfill their tax obligations.
Importance of Tax Determination
As explained above, the right tax determination is essential. Marketplaces must ensure the correct tax determination on a transaction level to declare whether the online merchant or the marketplace itself is responsible for paying tax. Should a marketplace fail to do so, it faces the risk of being fined for not paying tax when it actually should have done.
This also means that the marketplace must ensure it pays the correct amount of tax in the above circumstances; for example, it must determine the tax rates for the products sold on its marketplace.
Overall, marketplaces face two major challenges: determining the right amount of taxes to be paid on an individual transaction level, and determining tax rates. In both cases, marketplaces are dependent on receiving the correct information from online merchants. Automated solutions for financial compliance are a potential way to address this challenge.
Deemed Supply Chain Regulation
Besides online merchants who make distance sales within the EU, marketplaces may also use the One-Stop Shop (OSS). From a VAT perspective, marketplaces and operators of electronic interfaces are going to be included in the supply chain of third-country online retailers in the EU; they are liable to pay tax in the recipient country of the goods.
This regulation reflects the fact that marketplaces located in the EU are often more accessible for European tax authorities than online merchants based in a third country. In order to reduce the administrative workload here and avoid the local registration of interface operators in all member states, operators of electronic interfaces use the OSS process.
When online sellers based in a third country sell their products through a platform to an end customer, the new regulations in place foresee that the platform operators are liable for VAT instead of the online merchant.
There will effectively be two supplies from a VAT perspective. The first one is the supply from the online seller to the marketplace (business-to-business transaction); the second one is the marketplace having a deemed supply to the end consumer (business-to-consumer transaction) that needs to be taxed.
More Data will be Requested in Future
In sum, marketplaces themselves will have to deal with the new regulation in order to avoid potential penalties.
Importantly, this is only the beginning of a larger development: Digital platforms will be increasingly included in supply chains, and we will see increasing obligations on their part in order to ensure that transactions carried out over a platform are tax compliant.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Roger Gothmann, PhD is co-founder and co-CEO, Anna-Katharina Heidbüchel is a German Certified Tax Adviser and Senior Manager Knowledge, and Moritz Lukas, PhD is VP Sales and General Manager, at Taxdoo, the automated platform for financial compliance in e-commerce.