LAST MONTH, I wrote a piece for Financial Director describing the problems around the European Commission’s plans for rationalising VAT rules for cross-border e-commerce. It turns out that my article, which some felt to be rather critical, had problems of its own: I had severely underestimated the confusion into which the project is descending.
Since then, I have had the opportunity to hear (at an International VAT Association conference in Brussels) Donato Raponi, the commission’s head of VAT, outline his vision for the development of EU VAT over the next five years; and also observe the responses to his aspirations from tax authority officials and corporate tax managers.
He made a wide-ranging presentation; but I will focus on the elements most relevant to the e-commerce issue. First, he confirmed the commission’s intention to press ahead with a one-stop-shop for distance sales. A formal proposal will be released during 2016, most likely half way through the year. No surprise there, though some eyebrows were raised when he announced that the MOSS for digital services had been a success.
The digital MOSS caused (and continues to cause) something of a furore on its introduction, inspiring (as I explained in my previous article) the #VATMESS #VATMOSS campaign. Uptake of the MOSS across the EU has been far lower than anticipated, meaning that non-compliance remains rife. Even now, tax officials in several member states are recommending that smaller providers of digital services do not bother complying with the new regulations!
But it is the threshold problem that causes the most controversy. Right through this year, it has been widely reported that the commission planned to introduce an EU wide VAT registration threshold of €100K (near the UK’s current level). This would mean that companies using the MOSS would need to make sales of at least €100k in at least one member state before having to register in their home country – thus eliminating the objections of small businesses to the scheme, who were suddenly having to register domestically on the back of tiny cross-border sales. VAT Live, for example, stated in July that:
Andrus Ansip, vice president for the digital single market on the European Commission, explained that when the new rules were agreed to in 2008, a small minority of member states blocked plans for a threshold. He is drawing up new proposals for review after the summer, which could mean the introduction of the €100,000 per annum threshold in 2016.
Yet, to general surprise, Raponi announced that he expected the agreed threshold to be not €100K but €5K! If the UK wanted a threshold at all, it would just have to accept it. When questioned further, he upped the numbers: the threshold could, he conceded, be negotiated upwards in the European Council to maybe €10k, or perhaps €20K. But no more than that.
A threshold at that level would certainly catch thousands of UK businesses, making even quite low foreign sales, in the VAT net. This could become a political hot potato, perfectly timed for the UK’s EU referendum.
The EU VAT Action group – campaigners against the MOSS – would, for example, be horrified. But this might not be the worst of it. Officials then revealed that Denmark remained absolutely opposed to a threshold of any kind. At this point a representative of the Belgian tax authority confirmed that they also would oppose the introductions of thresholds to the digital MOSS or an extended distance sales one-stop-shop. As EU wide tax decision making has to be unanimous among member states for a proposal to be approved, gridlock looks probable.
We are used, in the UK, to the principle of levying very low or zero taxes when companies are small and going for rapid growth; not least because, as study after study has shown, costs of collection are greater than receipts generated.
But the cultural difference with some EU member states is profound. For many countries, the important point is that all businesses should fulfill their obligations as taxpayers: they have, as corporate citizens, a duty to contribute as soon as they begin to operate.
As I suggested in October, Germany may render the debate irrelevant. Officials confirmed my suspicion that the Germans oppose the intrinsic idea of a MOSS for distance sales. (‘With the Germans, it is always about principles’, said one, wearily). Germany simply does not accept the right of other member states to audit, and collect, VAT from companies operating in Germany – a necessary feature of a fully formed one-stop-shop system.
Germany matters. Some readers may remember the commission announcing with great fanfare not so long ago a ‘Standard VAT Return’, designed to harmonize the differences between VAT systems in the EU. The policy was even approved by the European Parliament last year. Nothing has been heard of the Standard Return for a while; when questioned, officials admitted that the Germans had queried the legal right of the Commission to even propose the policy. There will, we understand, be no standard return.
Finance directors of businesses making distance sales, trying to construct plans for the future, would, when the new proposals are made in 2016, do well to recall the fate of the Standard Return. VAT is a political issue; and Germany remains the great European power.
Standing behind all this is the question of what Europe needs from a VAT system. How can we balance sovereignty with efficiency? Is it even possible? Major corporations are less affected by the proposed one-stop-shop, but they too are unhappy with current EU VAT arrangements. Our VAT framework seems to them hopelessly outdated, still based on the interpretation of ambiguous law, rather than the implementation of technology-based process: the tension between law and process looks set to be the defining struggle in the future of VAT.
Nicholas Hallam is chief executive of VAT consultancy Accordance