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Reforming VAT Rules for Online Sales in the EU

On December 5, 2017, the European Council adopted amendments to the legislation regulating VAT rules for online sales of goods and services in Europe, developed by the European Commission a year ago. These legislative changes were adopted within the framework of the strategy of “single digital market” and aimed at simplification of the payment of VAT on purchases of goods and services on the Internet by the European consumers.

The changes assume:

  • simplification of the current Mini One Stop Shop (MOSS) mode for cross-border telecommunications, broadcasting and electronic services
  • transition to taxation at the place of destination (location of the recipient) and simplified reporting through MOSS for remote sales of goods
  • introduction of an obligation to pay VAT for electronic interfaces (for example, platforms) that facilitates the delivery of low-value goods imported or sold in the EU by the suppliers from outside the EU

Since the new legislation consists of a two-tiered package of measures, it comes into force in two phases: in 2019 and 2021. From 2019, the changes will touch the MOSS system. There is an exception that allows micro-enterprises of the EU to pay for the supply of telecommunications, broadcasting and electronic services (TBE), the volume of which is below the threshold of 10,000 euros per year, in the country of their registration. In addition, many of these enterprises will receive the exemption from VAT payments in practice due to the fact that their supplies often fall under the system of benefits for domestic small and medium-sized enterprises (SMEs).

Another simplification aimed at reducing the administrative burden of SMEs in sales of B2C below 100,000 euros per year is the requirement of only one confirmation of the location of its customers and therefore, of the country of taxation. The next softening concerns the rules for billing: from 2019, the Member State in which the provider is identified within the MOSS will independently determine the need for billing for cross-border telecommunications, broadcasting and electronic services.

In 2021 the most significant changes concerning remote sales will enter into force. The new rules will allow the companies that sell goods through the Internet to fulfill their VAT obligations within the EU countries through a digital online portal (OSS), organized by their own tax administration in their own language. At the moment, these rules exist only for the providers of electronic services.

It is supposed to use two OSS systems in parallel for the declaration of all cross-border sales on the basis of the tax portal of the Member State. The first one will cover remote sales of the goods within the EU, B2C TBE services, as well as other B2C services provided by a taxable person outside its Member State. The second OSS will cover remote sales of goods imported from third countries or territories (outside the EU), which actual value is 150 euros or less. Taxable persons outside the EU will be able to use this OSS only if they designate an intermediary in the EU or if they are established in the country with which the EU has an agreement on mutual assistance and goods are shipped from the same country. For consignments with an actual cost of less than EUR 150, sent to the EU by the companies that have not chosen this OSS scheme, special agreements will be applied. In this case, the logistics intermediaries can declare and pay VAT in the Member State of destination in a simplified manner, and possibly, taking into account the standard VAT rate (if such is imposed by the Member States).

At the same time, there will be elimination of the current VAT exemption for the import of small lots for an amount not exceeding 22 euros from outside the EU, which leads to unfair competition and infringement of companies in the EU (which must apply VAT regardless of the value of goods sold). The responsibility of trading platforms for B2C deliveries of imported goods or suppliers not included in the EU

For the first time, large online trading platforms will be responsible for ensuring the payment of VAT on sales on their platforms, which are produced by the companies from third countries for the consumers in the EU. Electronic interfaces become the main responsible party for the deliveries made with their help, even if the actual supplier is registered as a VAT payer in the country of destination. The need to introduce this measure is caused by the use of mechanisms of cross-border fraud, in which the goods imported for remote sales enter the European Union without VAT, in some cases through such interfaces. In such cases, Member States find it difficult to contact the original foreign supplier in order to levy VAT.

With this approach, the EU imposes the responsibility on electronic interfaces for collecting VAT on sales of goods along with an already existing rule for electronic services that are sold through such trading platforms. Therefore, the EU joins other jurisdictions, such as Australia and India, implementing or considering such an approach. From 2021, some changes in the technical functioning of OSS will also come into force. This relates to the specific rules for the terms of filing the declarations (extended to 30 days after the end of the quarter), possibilities of adjustments of the past declarations and coordination of the audit of transactions submitted under the OSS. In order to implement these changes, the European Commission is charged with developing rules in accordance with the principles of effective regulation, including consultation with stakeholders and impact assessment. In particular, this will focus on creating the basis for the claimed provisions applicable to electronic interfaces, as well as for the timely introduction into the relevant customs systems that will have to support the import OSS as of 2021.

By the end of 2019, the European Commission will assess the readiness of these measures, which could lead to a full or partial delay in the changes of 2021 if the problems are discovered that prevent the correct application of the new rules.

These initiatives are the next step towards the creation of a single European VAT area in accordance with the recent proposals of the Commission on reforming the European VAT.