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EU’s VAT Could Provide E-Commerce Guidance for Post-Quill World

POSTED ON Apr. 10, 2018
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U.S. states could learn valuable lessons from the EU's efforts to impose VAT on electronic sales between member states if the Supreme Court overturns its decision in Quill.

Richard Asquith, vice president of global indirect tax at Avalara in London, told Tax Analysts there are two reasons the states should look to the EU’s efforts to improve VAT collection on e-commerce should the  1992 decision in Quill Corp. v. North Dakota be overturned.

“In Europe, we are much better at collecting tax than in the U.S. We have big states to fund, so we have to be really efficient,” Asquith explained. “But also because the way VAT and [goods and services tax] work, as opposed to sales tax, there is a lot of fraud inside the VAT systems around the world, so we have adopted technologies and brought in marketplaces to share some of the responsibility.”

The Supreme Court is hearing a challenge to Quill — South Dakota v. Wayfair Inc. — which argues that the physical presence requirement is no longer valid in an era of interstate e-commerce. In Quill, the Court upheld National Bellas Hess Inc. v. Department of Revenue, in which the Supreme Court held that mail-order retailers are not required to collect and remit local sales taxes unless they have a physical presence in the state. State sales taxes, like the VAT and GST, are consumption taxes levied on goods and services spending.

Asquith noted that in recent years, EU states have been moving away from the requirement that businesses file VAT returns. “VAT returns, like all tax returns, are like looking into a rearview mirror,” he explained. “They are easy to manipulate retroactively.” To fight that manipulation, he said, tax authorities in some member states are now demanding e-filing for individual transactions. In those countries, sellers must now submit an electronic list of all their transactions, including tax calculations, to tax authorities to verify the tax calculations have been done correctly.

Some member states, such as Italy, Hungary, and Spain, have begun asking for real-time invoice reporting, Asquith said. Other member states are expected to move to real-time invoicing in the next few years through a direct link between a seller’s accounting software and tax authorities, he said. “What the tax authorities are looking to do is make sure that the other party on that invoice has done the same,” he explained. “And that’s how they catch fraud and errors. We think that the death of the VAT return will be in about five to 10 years.”

Countries such as Hungary and Brazil have taken real-time invoicing a step further and either accept or reject an invoice on a case-by-case basis, Asquith said. “That’s the direction we’re going,” he said.

Philippe Stephanny, senior manager with KPMG in Washington, said he has seen a recent trend toward increased cooperation not only within the EU, but also between the EU and third countries, which could have significant implications. As an example, he pointed to the recently signed agreement between the EU and Norway — which is part of the European Free Trade Association and the European Economic Area but not a member state — that includes a legal framework for facilitating cooperation in combating VAT fraud and recovering fraudulent VAT claims. Notably, the agreement to automatically share information includes electronically supplied services and provides for mutual assistance in the recovery of VAT claims, he said.

“If that is a success, the EU will probably push for other agreements with other jurisdictions,” Stephanny said. “And it could also serve as a model, perhaps for other jurisdictions outside the EU, which makes this really interesting.”

Some EU members — like some U.S. states have begun to do — are imposing joint tax liability on electronic marketplaces, Asquith said. “Tax authorities here have been doing that for a while,” he explained. “For example, in the U.K., Amazon and eBay are already potentially liable for any unpaid VAT on traders in their marketplace. And the EU is going to adopt that across the whole of the 28 states in 2021. That’s really radical.”

Richard Barrett, head of consulting at VATGlobal in London, observed that the joint liability being imposed on electronic marketplaces is part of a larger crackdown on VAT collection by member states. “This has been a real risk area for fraud in recent years, and the tax authorities are now taking measures to ensure a level playing field with local suppliers.”

Barrett added that it’s not just the electronic marketplaces that are facing difficulties as a result of recent EU compliance efforts. He said sellers operating through the electronic marketplaces are sometimes facing situations in which they are not getting information from the marketplaces easily or in a timely fashion. “Subsequently, they end up with unexpected VAT obligations which, if not addressed, can result in financial and reputational damage,” he said.

The EU is continuing with its efforts to combat fraud in the area of e-commerce. A consultation launched by the European Commission February 27 asks stakeholders whether the EU’s current framework for fighting VAT fraud provides tax authorities with the proper tools in the field of e-commerce. It also asks whether a harmonized approach would provide member states with better tools.

EU Attempts to Simplify VAT Scheme Through MOSS

While the U.S. Supreme Court in Quill opted to retain the physical presence standard for state sales taxes, it is harder for vendors to create a taxable presence in an EU member state, Barrett said. The EU’s VAT, unlike U.S. state sales taxes under Quill, lacks a physical presence requirement. “The VAT treatment applicable depends heavily on the flow of the goods rather than where a business may or may not have establishments,” he explained.

Beginning in 2003, the EU attempted to address the issue for vendors outside the union by adopting the principle that businesses selling electronic services must collect VAT in the place where the consumer is located, said Stephanny. Then, beginning in 2015, the EU changed its rules for the sale of electronic services between member states to mirror those for businesses located outside the EU, he said. “So wherever you are located as a vendor and you sell an electronic digital good — a digital service to a consumer — you always need to comply with the VAT rules of the member state where the consumer is located,” he said.

The EU knew the rule created a challenge for interstate electronic services sellers  which now need to comply with the rules of all 28 member states  so it offered simplified compliance through its mini one-stop shop (MOSS) scheme, Stephanny said. When a vendor of electronic services opts to join the MOSS scheme, that vendor registers in one state, which then transfers sales information to the member states where the consumption occurs.

The MOSS scheme does not require a supplier to be established locally, nor does it create an establishment, Barrett said. “Whilst theoretically the single registration reduced ongoing compliance costs significantly, there has been a lot of feedback from [small and medium-size enterprises] that the administrative burden is significant,” he said.

Asquith called the MOSS program a success, but he noted that only about 20,000 companies have registered for the scheme across the EU.

MOSS Scheme Expanding to Goods in 2021

Under the EU’s current VAT rules on distance selling of goods, if a vendor has sales into another member state of €35,000 or €100,000 (depending on the member state of consumption), the vendor needs to register in the country where the consumer lies, Stephanny said. That rule may create challenges for vendors because not every member state has the same threshold, he said. The rule applies only to intra-EU sales, and not to remote sales of goods from outside the EU to consumers in the EU, which may benefit from the low-value goods exemption.

To address this issue, the EU adopted a directive in December 2017 that says in 2021 the EU will replace the existing rules with a system in which the member state of consumption will be the place of taxation and remote sellers of goods will be able to use the MOSS scheme across the EU. As a result of the expansion of the MOSS scheme, member states likely will repeal the threshold for low-value imports, Stephanny said. A consequence will be that business-to-consumer remote sales of goods will almost always follow the same VAT treatment, he said.

The new directive includes special rules for business-to-consumer sales made by non-EU vendors to adapt the rules to business realities, such as sales through marketplaces and the use of carriers in shipping goods. Stephanny explained that many states have a threshold below which they do not bother accounting for VAT, but after 2021 cross-border sales of low-value consignments will be taxable in the member state of consumption. Currently, jurisdictions do not levy customs duties, VAT, and GST on these low-value consignments as a simplification measure. However, more and more jurisdictions are looking at doing so, he said.

Stephanny noted that the EU still has many questions to answer about the expansion of MOSS, adding that the VAT Expert Group is currently looking to suggest detailed implementation rules for the commission to consider. Another issue surrounding the cross-border taxation of sales in the digital economy is how jurisdictions can enforce these rules for vendors located outside the jurisdiction.