European Commission proposes far-reaching EU legislation on VAT and e-commerce
On December 1, the European Commission published multiple legislative proposals in the field of VAT and e-commerce. In case this ‘e-commerce VAT package’ is indeed adopted – partly or wholly – it will have a major impact on e-commerce companies carrying on business in the EU.
In this newsflash, we will discuss the four most important elements of the Commission’s proposals:
- The removal of the import VAT exemption for small consignments
- The removal of the current intra-Community distance selling threshold, and the introduction of a VAT threshold for small e-commerce businesses
- The extension of the existing VAT MOSS (Mini-One-Stop-Shop)
- The removal of the differential VAT rate treatment of supplies of e-publications
Below, we will discuss these elements in further detail in the mentioned order. In addition, we will address the potential implications of the proposals for e-commerce companies which are (or intend to be) active in the EU.
1. Removal of the import VAT exemption for small consignments
Subject to certain conditions, EU VAT legislation currently allows small value consignment shipments sent from non-EU countries to customers in the EU to go untaxed. This ‘import VAT exemption for small consignments’ usually applies to small parcels not exceeding a value of € 22.
The Commission has now proposed to remove the import VAT exemption for small consignments. One important reason for this is that the VAT exemption for small consignments supposedly leads to unfair competition – as e-commerce companies shipping goods from a location within the EU cannot make use of it. Further, the Member States miss out on large sums of import VAT.
If adopted, the removal of the import VAT exemption for small consignments is likely to have a significant impact on EU and non-EU based e-commerce companies currently shipping products to (private) customers in the EU from a non-EU warehousing location. As they would no longer be able to benefit from the VAT exemption, the (consumer) price of their products would increase.
2. Removal of the current intra-Community distance selling threshold, and the introduction of a VAT threshold for small e-commerce businesses
Following current applicable VAT legislation, e-commerce companies shipping products from one Member State to private consumers in other Member States (e.g. via online webshops) are required to charge VAT in the Member State where the transport of the goods ends. However, these ‘distance selling rules’ only apply in case such e-commerce companies exceed a certain yearly turnover threshold.
The Commission has now proposed to abandon the so-called ‘distance selling threshold’, so that the distance selling rules would apply from the first supply onwards. However, the Commission also wants to introduce a common VAT threshold for small e-commerce businesses – which would not only apply to distance selling of goods, but also to certain categories of services (e.g. electronic services). If for such transactions, e-commerce companies remain below the yearly threshold of € 10,000, they do not need to charge VAT in the ‘Member State of consumption’ (often the Member State where the goods are transported to or the private customer resides). Instead, they can charge and apply the VAT of their own Member State.
In our opinion, the newly proposed VAT threshold is beneficial in particular for start-up e-commerce companies. However, the removal of the existing distance selling threshold would compel many e-commerce companies currently operating within the EU to revise their business and tax processes (see below under ‘implications of the proposals’).
3. The extension of the VAT MOSS (Mini-One-Stop-Shop)
The current ‘VAT Mini-One-Stop-Shop’ (hereafter: VAT MOSS) allows companies which provide telecommunications, broadcasting and electronic services in multiple Member States to report and pay VAT in only one Member State (i.e. the Member State of registration). This takes away the need for such companies to register for VAT purposes in each of the Member States separately.
With a view to the above administrative advantages, the Commission has proposed to extend the current VAT MOSS to various other categories of transactions. These include the distance selling of goods to other Member States (e.g. via online webshops) by e-commerce companies based within the Community. Following the Commission’s proposals, the VAT MOSS will also apply to distance selling of goods imported from third countries and territories with an intrinsic value not exceeding € 150. For e-commerce companies currently engaged in these categories of transactions, we believe the extension of the VAT MOSS would be a welcome change.
4. The removal of the differential VAT rate treatment of supplies of e-publications
Under current EU VAT law, Member States enjoy the possibility of applying a reduced rate to the supply of publications on physical means of support (e.g. print, CD-ROM). However, as regards the supply of so-called ‘e-publications’ (e.g. e-books, online newspapers), they are required to apply their standard VAT rate. In order to create a level playing field, the Commission has now proposed to remove the differential VAT rate treatment of e-publications. The primary consequence would be that Member States are also allowed to apply a reduced rate to such e-publications.
Implications of the proposals
The Commission notes that the e-commerce VAT package is primarily intended to reduce administrative burdens and to simplify cross-border e-commerce activities within the EU. Even though we agree that the proposals indeed may lead to some simplifications, they are by no means exclusively beneficial for e-commerce companies active on EU markets. As explained above, the new EU VAT legislation would lead to higher consumer prices in some situations – i.e. in case of goods coming from non-EU countries which currently fulfill the conditions for the VAT exemption for small consignments. Moreover, if the proposals are ultimately adopted, many e-commerce companies will need to revise their administrations, ERP systems and business processes (e.g. invoicing) to take into account the new VAT rules on (for example) thresholds and VAT rates. Further, in connection with the VAT MOSS, e-commerce companies may also be required to change their VAT registrations and develop new compliance standards (e.g. VAT return filing procedures). In sum, the far-reaching proposals of the Commission on e-commerce and VAT are likely to have a considerable impact on e-commerce companies which are carrying on business in the EU.
The (proper) way forward
In addition to the above practical considerations, we would emphasize that the e-commerce VAT package consists of proposals which still need to be reviewed and adopted by the other EU institutions. It therefore remains uncertain which elements will ultimately become applicable legislation. Notwithstanding this, it is important to be prepared for the changes that the proposals may bring about. If you expect your business to be affected by the changes mentioned, we advise you to contact your Baker Tilly VAT Compliance Advisor in order to discuss the proper way forward.