New VAT Rules for Cross Border E-Commerce

On the 1st December 2016, the European Commission (EC) published its legislative proposal to change the VAT rules for online sales of goods and services in Europe, over the 2018-2021 period.  The main aims of the proposal are to facilitate cross-border trade, combat VAT fraud, reduce the administrative and compliance costs, ensure fair competition for EU […]

Written By Stephen Balzan

On December 5, 2016
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On the 1st December 2016, the European Commission (EC) published its legislative proposal to change the VAT rules for online sales of goods and services in Europe, over the 2018-2021 period.  The main aims of the proposal are to facilitate cross-border trade, combat VAT fraud, reduce the administrative and compliance costs, ensure fair competition for EU businesses and to provide equal treatment for online publications. 

Current EU VAT rules were agreed between all Member States before the rise of the internet and the boom in online sales, and especially cross-border sales. The EC wants to update the VAT rules  with a view of encouraging online businesses and to have the digital economy expand cross-border and to thrive. Businesses are currently facing problems such as the complexity and cost of VAT obligations which are prohibiting the  growth for online traders, in particular SMEs.  Likewise national tax administrations in the EU are experiencing revenue losses. 

On the other hand there is no level playing field: under current rules, imported goods bought online from non-EU countries are exempt from VAT if they cost below €22. This puts EU businesses at a clear disadvantage when compared to non-EU businesses. 

The Commission therefore committed as part of the Digital Single Market strategy and the VAT Action Plan to bring forward proposals before the end of 2016 to modernise VAT rules for cross-border e-commerce.

The Commission also pledged to address the unequal treatment of paper versus e-publications, including e-books and e-newspapers, for VAT purposes. Legal constraints often result in the VAT rate on e-publications being higher than the one on the corresponding printed version. The proposal will allow Member States to align VAT rates for e-publications with their printed equivalents across the EU. 

A summary of the main changes that are being proposed are: 

Option to stay out of MOSS 

In practice, the first changes 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 (MOSS). 

The MOSS is an online portal which simplifies VAT obligations for businesses selling goods and services to consumers throughout the EU, allowing them: 

  1. to register for VAT electronically in a single Member State for all sales of goods and services;
  2. to declare and pay the VAT due on all these sales of goods and services in a single electronic quarterly return;
  3. to work with the tax administration of their own Member State, and in their own language, even though their sales are cross-border. 

This system is already in place for companies selling e-services across borders within and to the EU since 1 January 2015.  It is now being extended to help online companies selling goods and other services cross-border. 

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 therefore stay out of the MOSS regime. 

Providing evidence of the location of the customer 

Another simplification targets small enterprises selling online services whose annual turnover from cross border sales is below €100,000.  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.). 

New rules and MOSS to be extended to online sale of goods 

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

Other changes which will simplify compliance and administration 

Other changes include that businesses will be allowed to apply the invoicing rules as applicable in 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. 

Abolition of the different thresholds for exempt importation of goods by private customers 

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 by 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.  Thus, businesses and tax authorities will as from 2021, will no longer be required 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. 

Equal vat treatment for electronic and printed publications 

The EC is also proposing to allow member states to tax electronic publications at the same VAT rate as the printed equivalent with effect from the year 2018.  The applicable vat rate in Malta is 18%. This allows the removal of the discrimination which currently exists today between e-books, online journals and periodicals when compared to printed matter. 

How can we help?  

For further information, please contact one of the firm’s tax partners, Stephen Balzan on [email protected] or Elaine Camilleri [email protected]. ACT can help you understand the changes to the tax rules and how these can impact your business.  

Apart from its offices in St. Julian’s Malta, ACT operates from a second office in Gozo, which is situated in the capital city of Victoria.  For an appointment in our Gozo office, please call on 00356 21378672 or send us an email on [email protected]. 

Disclaimer: This article contains general information only and is not intended to address the circumstances of any particular individual or entity. ACT, by means of this article is not rendering any accounting, business, financial, investment, legal, tax, or other professional advice or service. This article is not a substitute for such professional advice, nor should it be used as a basis for any decision or action that may affect your finances or your business. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. Before making any decisions or before taking any action that may affect your finances or your business, you should consult a qualified professional adviser. ACT shall not be responsible for any loss whatsoever sustained by any person who relies on this article.