3.6.    VAT procedures on cross-border online sales

In the EU, in principle, every supply of goods or services for consideration by a business is subject to VAT, which is typically levied at the standard rate of between 17% and 27% of the sales price depending on the Member State 127 . This VAT is – like a general sales tax – a tax on consumption, and by now there is a consensus amongst Member States that VAT revenues should, in principle, accrue to the Member State in which the consumption takes place. This makes sense because it ensures fair competition between domestic and non-domestic businesses selling the same goods and services. It also creates a level playing field for SMEs and other companies that cannot relocate to a lower-tax Member State and who may otherwise lose out to more mobile competitors. Finally, it ensures fair distribution of tax revenues between Member States, as they receive the tax on the goods and services consumed by their own residents.

However, unlike a sales tax that is charged only at the level of final consumption (typically the retail level), VAT is generally levied on the value added (the difference between the sales price and the cost for all purchases) generated by the suppliers involved in the supply chain. This approach minimises the risk of unreported turnover as each supplier has an incentive to report their sales, as otherwise they would not be entitled to claim back the VAT they have paid on their input. Nevertheless, since it cannot be assumed that all suppliers will voluntarily comply with existing VAT obligations, a set of registration and reporting obligations have been put in place as well, which involve an administrative burden for businesses, likely to be felt in particular by SMEs.

In addition, compliance with the VAT rules inevitably becomes more complicated and burdensome when a business engages in online cross-border transactions with customers located in other Member States or third countries. Since VAT (as a tax on consumption) is levied in the country of the customer and in accordance with that country's laws, different national VAT rules will apply and different tax authorities will be involved.

At the same time, digitalisation and the Internet have made industrial and commercial activity more international, while offering opportunities to businesses to shortcut traditional supply chains and interact directly with their customers, wherever they may be, without having to rely on wholesale and retail trading intermediaries. Even SMEs are therefore being given the chance to be international players, something they would not have dreamt of in the traditional “brick and mortar” world.

Indeed, as the online ordering of goods and services and the online supply of services turns from being the exception to being the rule, more and more SMEs would like to conduct cross-border e-business but are confronted with having to comply with tax legislation in all the countries in which they have clients, as well as the need to communicate – often in another language – with foreign tax administrations. 38% of traders with experience of selling online cross-border and 54% of potential online cross-border sellers mention dealing with foreign taxation as a problem 128 .

In general, a vendor making supplies of tangible goods to consumers in other Member States is required to register and account for VAT in each of those Member States. The situation is somewhat different for vendors of electronic services supplied to consumers in other Member States. Until the end of 2014, VAT on all telecommunications, broadcasting and electronic services was levied in the country where the supplier was located but now, since 1 January 2015, with the coming into effect of new rules, VAT on those electronic services is levied instead where the consumer is located (in accordance with the country of consumption principle).

However, in parallel with this change and in order to simplify compliance with the new rules, a mini "One Stop Shop" has been implemented, which will reduce the costs and administrative burdens for businesses concerned. Instead of having to declare and pay VAT directly to each individual Member State where their customers are based, businesses will be able to make a single declaration and payment in their own Member State. Suppliers will use a web portal in their Member State of establishment to account for the VAT due on sales in other Member States. In this way a vendor of electronically supplied services has to charge the VAT of the country in which the consumer is located, but is only required to register and account for VAT in their home country.

In contrast to this, for goods ordered online from a third country, the non-EU supplier generally benefits from a 'small consignment' import exemption (usually up to EUR 22) to ship its goods VAT free to EU private customers. This puts them at a competitive advantage over EU suppliers and market distortions have already been signalled in various Member States, notably in respect of close territories such as the Aland Islands and the Channel Islands which are not in the EU VAT area. Since 1999, the number of small consignments benefitting from the import exemption has increased from approximately 30 million parcels to 115 million in 2013 129 . That represents an increase of approximately 300%. If this trend were to continue in line with the growth in e-commerce, it is not inconceivable that it could reach 300 million parcels by 2020. In terms of VAT foregone at the level of the EU, it is estimated that there was a loss of between EUR 550 million and EUR 850 million to EU Member States in 2013. Before the exemption was removed by the UK for small consignments coming from the Channel Islands, the VAT foregone was estimated between EUR 650 million and EUR 900 million in 2011. Such a loss in VAT could translate into a reduction of nearly EUR 4.5 billion in turnover for EU business due to the un-level playing field. If this trend were to continue in line with the growth in e-commerce, it is not inconceivable that the VAT foregone could reach up to EUR 2.2 billion by 2020. Thus, a provision aimed at reducing administrative burdens for both tax administrations and business in respect of small-value supplies has turned into an expensive tax subsidy for big global players located outside the EU.

The Commission Expert Group on Taxation of the Digital Economy, in its final report of May 2014 130 , proposed that the EU should pursue the destination principle for all supplies of goods and services, and specifically recommended that a single electronic registration and payment system for VAT, hosted and managed by the Member State of the supplier, should be extended as a priority to cross-border B2C supplies of goods, and that the VAT exemption for the importation of small consignments from third countries should be removed with suitable simplification arrangements for the businesses affected.

While the single electronic registration and payment system is itself a substantial simplification, two issues need to be considered. The first relates to small start-up businesses which supply goods and services cross-border but which are covered by the current Member State level exemption thresholds for small business, which range from EUR 0 to EUR 110,000 depending on the Member State. Under the 2015 place of supply rules, such businesses are now required to charge and account for the VAT of the Member State of the consumer. There is a perception that this requirement may act as a barrier to trade within the Single Market and therefore some mitigating measures may be needed, such as a common cross-border exemption threshold. As regards the second issue, EU legislation on the mini One Stop Shop provides that controls and audits are to be carried out by the Member State of consumption. For both EU and non-EU companies, this may involve up to 28 different tax administrations auditing the same companies without any coordination and leading to information requests in multiple languages. Not only could this create disproportionate administrative burdens on business but it could also put at stake the efficiency of the audits themselves as well as the level of voluntary compliance (which is particularly sensitive where non-EU companies are involved). Some Member States have agreed audit guidelines which attempt through coordination to alleviate any unnecessary burdens on business. The Commission Expert Group has recommended that "home country control" should be considered, i.e. the supplier will only have to comply with the rules applicable in the Member State where they are established.

If all businesses selling goods and services cross-border could account and remit the tax due in the Member State in which they are established, rather than having to register and remit the tax in every Member State in which they do business, this would significantly simplify and reduce the burden of compliance for many businesses. The following costs have been reported 131 : for hiring accountants, a merchant needs to budget EUR 5,000 per year per country, many of which require the merchant to register for VAT when sales hit a paltry EUR 35,000 a year.

As regards direct taxation, the Commission has already delivered significant progress in the fight against tax avoidance and tax fraud through the implementation of its 2012 Action Plan to Strengthen the Fight against Tax Fraud and Tax Evasion. However the political debate has moved on and the earlier focus on improving tax compliance and administrative cooperation has now expanded to encompass those features of tax systems which contribute to aggressive tax planning. This is why the Commission will shortly present an Action Plan on a renewed approach for corporate taxation in the Single Market, under which profits are taxed where the value is generated, including in the digital economy. Further information on the challenge of the digital economy for direct tax systems is provided in Annex II.