SEPTEMBER’S Fiscalis conference in Dublin on the future of VAT for e-commerce generated plenty of interest among e-retailers and tax professionals. And the European Commission (EC) has launched a public consultation on modernising VAT for cross-border e-commerce.
The project is being pushed as part of the EC’s overarching Digital Single Market Strategy. It looks, at first glance, as though there may be the momentum to establish a simplified system for charging and collecting VAT on cross-border B2C sales in the EU. This would be big news for retailers (and stressed-out finance directors) selling directly from their own country to consumers in other EU member states (‘distance sales’).
Currently, retailers have to register for VAT in relevant countries, file ongoing VAT returns – with different schedules and requirements – and deal with different tax authorities in different languages when sales thresholds, which differ widely between member states, are breached. The EC would like to streamline the process, not least because the current arrangement lends itself to leakage – VAT not being charged at all, or being paid to the wrong authority. The current annual EU VAT gap (the difference between what is collectible and what is collected) is €168bn (£124bn). It’s a staggering sum. The EC does not want e-commerce-related VAT (probably in excess of €100bn annually – and rising) to add to the problem.
The likely new arrangement would be based on the one-stop shop framework. Distance sellers would have just one VAT registration (in their home territory). All distance sales VAT filing to member states would go through the home territory, with non-domestic information and payments distributed by the home tax authority to other states, instead of by the retailer.
Naturally, the commission’s pitch for change is more about the benefits to business than the avoidance of fraud. And this is where things get murky.
Although there is no doubt that the current system is burdensome, and a drag on the single market, the commission seems to have overcooked its estimate of current costs in order to talk up potential savings. During the Fiscalis conference, the commission claimed (apparently with reference to cross-border e-retailers) that it “costs €8,000 annually per member state for registering and accounting for VAT – €6bn costs in total”. As a supplier of such services, these numbers shocked me. We think they overstate average annual costs across the market by anything from 200% to 400%. If you are paying that much, you shouldn’t be.
But the real problems with the one-stop shop project are more fundamental than a sexed-up prospectus. According to the consultation document, the new set-up will be based on, and expand, the mini one-stop shop for VAT on digital services. This framework, based on the principles above, came into effect in January 2015. Unusually for a technical VAT reform, the MOSS caused a controversy.
The reason was that small UK digital service providers, whose sales were nowhere near the UK VAT registration threshold, were suddenly obliged – because of the one-stop shop principle – to VAT register in the UK to meet their VAT obligations in other EU member states, where thresholds were often far lower. Unfortunately, ten months later, the threshold issue is still not resolved. Likewise with cross-border e-commerce: if a one-stop shop for VAT is going to work, there must be a higher common VAT registration threshold, most likely of about €100,000.
But national authorities have different ideas from the European Commission. Just days after the consultation document was released, the French government revealed that its 2016 finance bill proposes a reduction in its e-commerce VAT registration threshold from €100,000 to €35,000. This would mean more, and smaller, companies having to register for VAT in France: the exact opposite of what the commission wishes to achieve.
Indeed, the perception that one member state is benefiting at the expense of another – that the arrangements just aren’t fair – might present an insurmountable obstacle for the broader one-stop shop project. A properly functioning system will involve member states collecting VAT on each other’s behalf. But imagine the potential for conflict if Germany (with a VAT gap of only 10%) must rely on Greece (with a long-term historical VAT gap of more than 40%) to collect and pass on the VAT Germany is owed. Likewise, member states would depend on each other for tax audits. Trust – the very thing that is lacking – would be imperative.
With Germany unsurprisingly sceptical about the plan, it is difficult to see a one-stop shop in place soon. But perhaps this is no disaster. When I spoke at the E-Commerce Worldwide Cross-Border Summit, the impression was of companies moving beyond the standard distance sales model, to a faster, more agile approach to cross-border e-commerce, with delivery as king. Warehouses and shops are critical to these frameworks, and that development changes again the VAT obligations of dynamic businesses. It may be that the commission’s ‘modernising’ one-stop shop is a solution to a problem that has already had its day. ?
Nicholas Hallam is chief executive of VAT consultancy Accordance