The digital economy presents massive growth opportunities for regional businesses but also serves as an opportunity for additional public revenue. And as global marketplaces account for 57% of online sales, governments have decided that transactions from the world’s marketplaces, like Etsy and Alibaba, can no longer fly under the tax radar. For example, the U.S. now has economic nexus policies on the books requiring marketplaces to collect and remit sales tax on purchases made within their platforms. But the U.S. won’t be alone for much longer. The European Union (EU) will soon follow, making marketplaces liable for VAT reporting requirements beginning July 1, 2021.
As with many new VAT policies, questions around liability are bound to come up. Marketplace facilitators operating within the EU will need to understand the nuances around reporting before enforcement begins to mitigate non-compliance risks.
Modernizing VAT for E-commerce
Over the past five years, as retail giants like Amazon began shipping their products around the globe, tax authorities struggled to keep pace. In 2019, the EU was facing a 140 billion euros ($170 billion) VAT gap. Not only did the EU want to minimize this gap and make sure member states collected the appropriate VAT, but it also wanted to simplify VAT reporting requirements for companies selling to consumers across borders. The result is an EU program to combat the issue in two stages.
The EU completed the first stage in 2015, with a system called the Mini One Stop Shop (MOSS). Through MOSS, companies declare and pay VAT on business-to-consumer (B2C) supplies of telecommunications and broadcasting and electronic services within the EU.
The second stage is the VAT e-commerce package, introduced in December 2017 and originally scheduled to go into effect in January 2021. The VAT e-commerce package will build on the MOSS concept but extends the scheme to both intra-EU and imported goods and services provided to consumers.
In keeping with a global trend among tax administrations to place direct VAT responsibility on “natural” transaction aggregators, the second stage also makes marketplaces liable for VAT collection and remittance. If that wasn’t complicated enough, a single online sale on a marketplace platform will now be viewed as two VAT supplies: one from the online seller to the marketplace, and one “deemed” from the marketplace to the consumer. This construct, which makes life for EU taxing authorities a lot easier, applies both to imported goods below 150 euros ($182) and to marketplace sales between EU countries.
This requirement remains a challenge for marketplaces, as the VAT rates from EU member states varies. Successful compliance means that marketplace platforms can determine the correct VAT rates for every transaction made on the platform without any errors. So, suppose two consumers living in different locations within the EU purchased a product from a marketplace seller located in London. In that case, the marketplace will need to determine the VAT rate for the jurisdictions of not only the seller, but also the other two consumers to ensure compliance. This can be further complicated when a marketplace seller lists their items with VAT included, requiring marketplaces to reverse calculate the VAT rate to avoid overcharging VAT.
In addition, marketplace facilitators will be required to keep sufficiently detailed electronic records of supplies for 10 years. This record-keeping requirement is not to be underestimated as it adds a significant, entirely new administrative burden.
The EU has given retailers and marketplaces a bit of a reprieve by delaying implementation until July 1, 2021, due to Covid-19. There may also be a chance that key member states such as Germany and the Netherlands will push for an extension to the end of 2021. However, a few EU countries have already enacted various marketplace rules in advance of the mandate. In January 2019, German legislation made marketplaces liable for their merchants’ unpaid VAT and required that they collect information on third-party sales. In addition, Italy enacted a law in July 2019 that mirrors the EU’s forthcoming marketplace provisions and applies them to sales of certain electronics, such as cell phones, laptops, and tablets.
Tax Enforcement Post-Covid
Though the European Union is providing an additional six months to comply with the upcoming mandate, marketplaces still have a list of updates that need to be made before the mandate goes into effect.
The upside is most marketplaces have been working to understand and interpret these changes. Now, marketplaces are moving into an execution phase, which includes:
- Aligning relevant master data to enable identification of the taxable status of both sellers and buyers, which is necessary to determine whether a transaction is B2B, B2C, C2C or C2B;
- Aligning goods and services classifications and integrating tax determination logic with their platform to calculate the correct rates of VAT for each member state of destination and performing reverse-calculation, if necessary;
- Implementing required changes to the checkout process, so the accurate VAT information is displayed before the order is complete;
- Implementing invoicing requirements for member states that have specific requirements; and
- Establishing new compliance protocols to enable regular filing of VAT declarations, whether it’s a VAT return, iOSS return or OSS return.
In order to meet the EU’s requirements, marketplaces should consider implementing software or using expert managed services for VAT reporting. This strategy will protect marketplaces from any risks associated with non-compliance when countries are stepping up enforcement to uncover additional financial resources after suffering the economic impacts of Covid-19.
Moving forward, the EU will likely step up enforcement to ensure its member states have access to finances that are rightfully theirs, leaving no room for reporting errors. That said, marketplaces should have a strategy in place to stay ahead of the complexity, nuances, and potential penalties associated with not only the EU’s VAT e-commerce package, but for any future international tax mandates.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Christiaan Van Der Valk is vice president, strategy, at Sovos. Elected a World Economic Forum Global Leader for Tomorrow in 2000, Christiaan is an internationally recognized voice on e-business strategy, law, policy, best practice, and commercial issues.
Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.