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VAT rules for e-commerce

Deloitte Malta tax alert

Introduction

On 01 December 2016, the European Commission published its legislative proposal to drastically change the VAT rules for online sales of goods and services in Europe, over the 2018-2021 period.

This proposal is part of the Digital Single Market Strategy, one of the pillars of the Juncker Commission policy. It aims to realise a single market wherein e-commerce businesses have easier access to clients on a cross border basis. One of the key difficulties which such businesses face is the complex VAT legislation when doing business cross border. Also for tax authorities, monitoring these business flows is not easy due to this complexity.

The proposal is based in part on a study conducted by Deloitte for the European Commission. Deloitte first took a snapshot of the economic importance of e-commerce, as well as the compliance with the legislation by companies and the monitoring by governments. Building on the analysis of the currently successful Mini One Stop Shop (‘MOSS’) for certain online services, Deloitte analysed which policy options were available to the European Commission to simplify the administrative framework for businesses while ensuring that governments collect their revenue.

The changes are proposed in the context of an industry that grew by 18% in 2015 and that realized an EU wide turnover amounting to €540 billion (of which €96 billion cross border sales). The Commission’s proposals aim to further boost this growth by reducing the administrative and compliance costs for e-commerce businesses, with specific detail for SMEs and micro-businesses.

Simplifications

In practice, the first simplifications will be introduced as of 2018 and will be limited to providers of online electronic services. The changes aim to address certain issues that appeared during the evaluation of the VAT rules for electronically supplied services introduced in 2015.

At that time, all suppliers of online services were obliged to apply the VAT rate of the country of the customer when supplying in a B2C context. They could pay over this VAT through a unique portal in their own member state, called the Mini One Stop Shop or MOSS. The evaluation, which was carried out by Deloitte in a dialogue with both businesses and national tax authorities, showed that the system and its roll-out on a European level was in general quite successful.

As of 2018, it is foreseen that EU businesses selling cross border electronic services not exceeding a yearly turnover threshold of €10,000 can opt to apply the rules of their home country, including possibly the exemption for small businesses. This rule allows a simplification for a large number of micro-businesses which can stay out of the MOSS regime in this way.

Another simplification targets small enterprises selling online services (like videostreaming or selling apps) whereby their yearly turnover from cross border sales stays below a threshold of €100,000. Going forward, these companies will only have to collect one piece of evidence to demonstrate the location of the customer which defines the applicable VAT rate, whereas today they need two corresponding indicators (e.g. Billing address, IP address, etc.).

As of 2021, these rules and the MOSS portal currently existing for online services will be extended to the online sale of goods. This is a tremendous step towards simplification for a large number of small and large businesses that today are obliged to have VAT numbers in different EU member states and meet corresponding reporting obligations and incur administrative costs.

Other changes include that businesses will be allowed to apply the invoicing rules as foreseen by their home country rather than the country of the customer. Also, the audit on businesses reporting VAT via the MOSS portal will always be effected by the tax authorities of the country where the business is established, allowing companies to deal with audits in a familiar environment and in their own language.

Equal treatment for EU businesses

An important change that will come into effect in 2021 is the abolition of the different thresholds that exist for (VAT exempt) imports of goods for private consumers in the EU and for sales to consumers across EU borders. This mainly aims to remove the current unfair competition from non-EU businesses that can bring goods free of VAT within the EU. It is estimated that tax authorities are losing on a yearly basis up to €4.8 billion in VAT due to businesses not meeting their tax obligations in this field.

Going forward, businesses and tax authorities do not need to take into account these thresholds anymore, simplifying tax administration. For micro-businesses, the possibility to treat sales up to a yearly threshold of €10,000 as subject to their home country VAT regime will still apply.

Possibility to lower VAT rate for electronic publications

As part of the changes dealing with cross border e-commerce, the European Commission also proposes to allow member states, as of 2018, to tax electronic publications at the same VAT rate (in Malta – 5%) as the printed equivalent. This allows the removal of an existing discrimination suffered by e-books and online journals and periodicals.

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