INSIGHT: France—Major Anti-VAT Fraud Measures

France has become the first EU member state to require online marketplaces to collect value-added tax (VAT) on sales by third-party non-EU sellers. The “split payments” measure is proposed for January 2020, and leapfrogs other marketplace liability measures already agreed by the 28 EU member states for implementation in January 2021.

The announcement is part of a range of anti-VAT fraud measures aimed at tackling France’s estimated 21 billion euro ($23.7 billion) missing VAT. Two other initiatives were announced: a warehouse fulfilment house registration scheme; and live e-invoice reporting for business-to-business (B2B) and business-to-consumer (B2C) transactions. The latter measure follows the success of schemes at curbing tax fraud in Brazil, China and Italy, among other countries, through government pre-approval in real time of sales e-invoices.

The sweeping reforms will affect any B2B or B2C business selling into France. The upgrades in invoice, accounting, treasury and tax reporting automation will be substantial to meet the tax authority’s transactional reporting and payments requirements. Given the relative short notice time for preparations, and limited technological detail, affected businesses should review the flexibility of their existing finance and IT environments to pivot towards the new requirements.

Millions of New E-commerce Retailers; Billions in Missing Taxes

France, as a member of the EU VAT regime, currently requires domestic and foreign (“nonresident” or “remote”) sellers of goods to consumers to register for a French VAT number. They are obliged to levy the sales tax at 20%, the French VAT rate. Sellers must then remit the taxes, with a supporting VAT return, once a month to the French tax office.

However, this traditional model is being undermined in France, and across the whole of the EU, by the rise of online marketplaces. These wildly successful platforms have enabled millions of small retailers to go international without the need for investment in local shops, warehousing, or significant inventories. However, these new traders fall under the radar of the French and other tax authorities since they have no local subsidiary, offices, presence or employees to track for tax collections purposes.

In the EU, governments have struggled to control the ballooning instances of VAT fraud by foreign online sellers using the marketplaces to sell across borders. The EU estimated that 5 billion euros per annum goes missing from online sellers failing to declare VAT fully, or at all: this evasion is estimated to rise to 7 billion euros by 2019.

Most of the fraud is believed to come from non-EU merchants, particularly Chinese sellers. A 2016 study by Copenhagen Economics reports that 65% of consignments being imported into the EU from non-EU businesses sent through the postal channel are not compliant.

After over a decade of attempting to reduce these lost taxes—the EU VAT Gap has barely shrunk below 150 billion euros—the EU member states agreed a range of major reforms for 2021 to make compliance harder and evasion tougher. This includes making marketplaces liable for any unpaid VAT on non-EU sellers, although what this means in practice remains to be seen.

The EU is also going to force marketplaces to take on legal title and VAT obligations for goods they facilitate the sale of for non-EU merchants on their platforms. This “deemed supplier” obligation makes the marketplace the tax principal, and the marketplace will have to charge EU VAT and remit it to the tax authorities across the EU.

France Pushes Ahead of EU with Split Payments

France has now jumped the gun on this by proposing for 2020 that marketplace facilitators must implement a VAT split payment system for their non-EU third-party merchants. In a split payment system, a customer’s payment is split between the value amount of goods (paid to the supplier) and VAT amount (paid to the tax authorities). This involves a facilitating marketplace identifying where French VAT is due, calculating it—including classifying the standard rate or one of the three reduced rates—and remitting it directly to the tax authorities.

Initially, the obligation will only apply to U.S., Chinese and other non-EU sellers on the French platforms. The major marketplaces targeted include Amazon FR, Cdiscount, Fnac, and eBay.

The challenging element of this plan is how the merchant subsequently reports to the French authorities on which sales have already had French VAT levied by the marketplace, and which have not. This could require a much more complex transaction-level reporting regime not yet envisaged in the plans. Failure to do so would create a roadmap for further VAT fraud and cause long disputes on reconciling VAT payments.

European countries have been flirting with split payment mechanisms for several years; Italy and Austria currently have limited schemes. Romania’s recent attempt to launch a system was blocked by the European Commission, which polices compliance of the EU VAT Directive rules, as being a disproportionate measure in terms of cost/benefits.

Plans for Live E-invoice Reporting on B2B and B2C Transactions

Secondly, France announced the launch of a consultation with industry on introducing a real-time invoice reporting regime. This would follow the success of the Italian SdI initiative, which imposed submission of B2B and B2C invoices to the tax authorities at the start of this year. Under the Italian scheme, invoices will only go to a customer once the Italian tax agency has received and approved the invoice in real time.

The French consultation will likely be short, and the tax authorities will be anxious to launch in 2020. France will be able to use the already active business-to-government (B2G) e-invoice submissions portal, Chorus Portal Pro.

Other EU countries will almost certainly follow France and Italy. Spain and Hungary launched similar schemes which did not require the tax authorities’ prior live approval of the sales invoices. Portugal and Greece are likely to be next in 2020.

Fulfilment House Due Diligence Scheme

Lastly, France is seeking to replicate the U.K.’s fulfilment house due diligence scheme. This requires warehouses handling non-EU importers’ goods to maintain basic records and checks on the VAT and duties compliance for their customers. The U.K. scheme, launched in June 2018, obliges fulfilment houses to register with HM Revenue and Customs, and to document basic controls, including checking for valid VAT numbers of their non-EU customers.

Planning for the Death of the VAT Return

Persistent VAT fraud is threatening to undermine the 50-year-old EU VAT regime. France’s reforms are essentially the latest step in transitioning away from the monthly or quarterly VAT return and remittance system. In its place, marketplaces and payment providers are being co-opted into the tax collection role. And all businesses are having to upgrade their finance systems to produce live transaction data for real-time analytical analysis by the tax authorities.

Planning Points

What companies can do now to prepare:

• Establish sales and supply chains into France and other EU member states likely to be affected (Greece, Portugal, Poland and others have similar plans under discussion);

• Evaluate ability to provide key transactional and tax data, from invoices to customer information, according to the new French standards;

• Consider investment in VAT engine and reporting software if current enterprise resource planning or accounting software is not going to stand up to the new obligations;

• Ensure this covers other countries’ plans for marketplace or other businesses live reporting, to ensure that only a single, coordinated platform solution is deployed. This is essential to avoid extra expense and inconsistent reporting on cross-border transactions.

Richard Asquith is Vice President of Global Indirect Tax, Avalara.

The author may be contacted at: richard.asquith@avalara.com