VAT – Very Active Transition... more changes on the way
Indirect Tax Matters March 2020 Edition
2020 VAT changes implemented (nearly)
From January 2020 the so called 'four quick fixes’ were introduced to update, and ‘simplify’ the EU wide VAT rules for cross border supplies of goods. They aim to introduce consistent treatment and prevent double or non taxation of supplies. Although the process started many years ago with the proposal having been adopted by the EU in December 2018, so far this year 14 Member States have had infringement proceedings commenced against them for failing to implement these rules as required by the Directive. The new rules introduced mandatory reference to the customer’s VAT number and requirements for documentary evidence to support zero rating an Intra Community Supply. On a practical level many businesses may struggle with some of the new rules.
So as both businesses and various Members States struggle to fully implement the new rules, businesses must now also ensure that preparations have started in anticipation of the VAT changes coming over the next few years. The overall aim of the European Commission is to move the VAT system to a ‘destination principle’ which means that VAT on goods and services will be paid to the Member State where they are consumed with a view to reducing the VAT gap created by ‘carousel’ and ‘missing trader’ fraudulent activities.
VAT e-commerce rules for 2021 published – ‘taxing the digital economy’
On 13 February 2020, the Commission published Implementing Regulation (EU) 2020/194 which provides the detailed rules for cooperation and exchanging information between Member States in relation to the working of the expanding MOSS regimes.
“MOSS” (Mini One Stop Shop) was introduced with the aim of reducing the administrative burden for businesses engaged in the supply of telecommunications, broadcasting and electronically supplied (TBE) services to non-taxable customers. Prior to MOSS a business could have had a VAT registration obligation in multiple jurisdictions, by opting to use MOSS a business can report sales for all EU jurisdictions via a return made to one Member State. There are currently two types of MOSS scheme, one for businesses established within the EU and the second for those established elsewhere, both relate to supplies made to consumers within the EU and are very similar. Businesses do have to follow certain rules, such as sourcing and retaining pieces of evidence regarding where the customer is located to determine the country where tax is due.
A threshold of €10,000 was introduced in 2019 whereby the place of supply could be treated as being where the supplier was established (only if EU based and established in one Member State). If this threshold is breached, the place of supply shifts to where the customer is established and therefore a registration in the customers Member State or a MOSS registration is required. Rules regarding the two pieces of evidence as to the location of the customer were reduced to only one item of evidence where the total supplies of TBE services to EU resident customers does not exceed €100,000 in the current and in the preceding calendar year. Additionally, for invoicing purposes, the rules in the Member State of identification (for MOSS) became applicable rather than the rules applying in the Member State to which the supplies were made.
Increasing scope of (M)OSS – end of distance selling VAT rules
The new rules coming into force from 1 January 2021 are referred to as the VAT e-commerce package (a.k.a. the digital economy) and will significantly expand the scope of the MOSS scheme. The scope of transactions that will have to be reported through the EU MOSS scheme will be increased to include not just TBE services, but also other B2C services and B2C supplies of goods. The non EU MOSS scheme will also be extended to include other non TBE services. This is a fundamental change to the EU VAT system and will have a wide reaching effect on many suppliers, hence the ‘Mini’ is being dropped and it will referred to as the One Stop Shop (OSS).
Currently, supplies of goods sold and dispatched from a business in one Member State to a customer who is not registered for VAT and is located in another Member State are treated as being supplied in the country from which they are dispatched unless the supplier has breached the ‘distance sales threshold’ in the customers country. Many countries, including Ireland, had adopted the lowest threshold available of €35,000, whereas some countries, such as Germany, The Netherlands and Luxembourg have applied the maximum threshold of €100,000.
From 2021 EU based suppliers will report these supplies, which were referred to as ‘distance sales’ but will from 1 January 2021 be defined as ‘Intra-Community distance sales of goods’, under the revised ‘One Stop Shop’ which will eliminate the requirement for multiple VAT registrations in different jurisdictions. The principle of taxing in the country of destination will also apply to all other services supplied B2C (as well as TBE services currently taxed this way), which will all be reported through the OSS. The threshold of €10,000 will apply to the total value of both TBE services and ‘distance sales’.
With respect to the supply of goods B2C from outside the EU to non-taxable persons (generally consumers) within the EU, any Customs Duty or VAT is generally collected as the goods are imported. The current exemption from declaring import VAT on goods of negligible value (less than €22) will be abolished from 2021. Customs Duty exemption (where applicable) for goods valued less than €150 will still be applicable.
The 2021 rules introduce new VAT rules applicable to a taxable person who facilitates supplies by way of an ‘electronic interface’ (e.g. a website) such as a ‘marketplace’, ‘platform’, ‘portal or similar means’ – essentially any goods sold to a person in the EU via the internet. These new rules relate to the online sale of goods by a vendor outside the EU. If the goods are imported from outside the EU and have a net value in excess of €150 the online platform will be deemed to have bought and sold those goods. These new deeming rules will also apply to all online platform sales if the goods are located in the EU at time of sale.
Import OSS (i-OSS).
Due to the removal of low value consignment stock there will be a significant increase in the number of transactions where VAT will be due on imports. Such goods will fall under a new category of ‘distance sales of goods imported from third territories or third countries’ and these will be dealt with by way of a new scheme – Import OSS (i-OSS).
These ‘distance sales’ from outside the EU, with a max value of €150, will be a VATable supply in the EU Member State where the transport ends where the i-OSS is used. In such cases the import will be treated as VAT exempt allowing for faster release at customs. To avail of the exemption the i-OSS VAT identification of the supplier or its intermediary must be provided to the relevant customs authorities. If the i-OSS scheme is not used, the declarant, i.e. the customs agents or logistics firm, will have to collect the VAT due from the customers and remit the VAT due on the imports.
New EU VAT rules and Brexit
The Brexit Withdrawal Agreement provides that the UK will leave the EU VAT regime at the end of this year on 31 December 2020. After this date any UK suppliers will be considered non-EU sellers and may have to register in an EU state to file non-union MOSS/i-OSS returns. Conversely, for any EU suppliers with UK customers they will have to consider whether the supplies to the UK customers will trigger a non-resident UK VAT registration obligation as these supplies will no longer be reportable via MOSS.
These new rules are a fundamental shift towards to the principles of taxing at destination. This article provides only a high level overview of some of the implications. We are happy to discuss how this impacts your business specifically.