what the brand new VAT guidelines are altering in Europe

Update from the article published on May 20, 2021

Adapt to the digital age. The European Union has revised its approach to value added tax (VAT) to facilitate online sales between European Union countries and strengthen the fight against tax evasion. The rules, updated for the first time in almost 30 years, entered into force on 1 July 2021. E-merchants now benefit from standardizing procedures at Community level, which allows, in absolute terms, to reduce administrative burdens and avoid additional costs when they want to engage in activity beyond their limits. The conditions of competition will be fairer with non-EU companies, because, unlike today, they will have to pay taxes on every sale.

In the spring of 2021, Patrice Pillet, Head of the VAT Department at the European Commission’s Directorate-General for Taxation and Customs Union, returned to Maddyness about the changes companies can expect. To understand all about it, we are republishing this interview.

What is the philosophy and ambition behind this adaptation? How useful will the latter be for e-commerce in Europe?

Patrice Pillet: The current European rules on value added tax (VAT) were last updated in 1993, long before the advent of the digital age. They are excluded from the needs of companies, consumers and administrations regarding online shopping in another country. Meanwhile, the e-commerce explosion has transformed retail around the world and accelerated even more since the Covid-19 pandemic.

Long before this crisis, the European Union began working to adjust the rules governing VAT to respond to this growing power. As early as 2015, they were updated for online services: since then, they can be taxed in the country of residence of the consumer. This measure was accompanied by a mechanism aimed at making it easier for companies to meet VAT obligations, called the Mini One Stop Shop (MOSS). They represent a digital portal, which allows suppliers to register for tax payments in one Member State while collecting it on all their sales within the EU. This new system has proven itself: it generated additional revenue of 5.6 billion euros for member states in 2019 alone.

Can you explain the various changes that e-merchants can expect from July 1 in terms of VAT?

PP: Based on the success of this experiment and to ensure that European Union companies are on an equal footing with non-EU ones, the new reforms will take effect on 1 July 2021. They will make fairer, simpler and more transparent rules for online business and European consumers. First, VAT will apply to all goods sold online in the EU, regardless of price. Currently exempt are those imported into the EU and costing less than 22 euros. But studies have shown that unscrupulous sellers outside the Community are abusing this exemption: they deliberately mislabel their products, such as mobile phones, in order to benefit from it. This hole in the racket costs the national treasury a whopping 7 billion euros every year. This is a general scam. As of this summer, the exemption disappears for goods worth less than 22 euros. This means that VAT will be applied systematically and that European companies will no longer suffer from these unfavorable practices.

Then, the online retailer currently has to register in each of the Member States in which it operates in order to pay VAT above a certain turnover threshold – which varies from country to country. From 1 July, these thresholds will be replaced by a threshold common to the whole of the EU: above € 10,000 sold in one country, the seller will have to pay VAT in the latter. To simplify the task of these e-commerce companies, a digital portal called “One Stop Shop” has been set up that allows them to manage all their VAT liabilities across the EU. Instead of struggling with complex procedures in countries other than their own, e-merchants can register in their own country and in their own language. They can then declare and pay VAT corresponding to their sales made in the EU through a quarterly declaration. One Stop Shop will take care of redirecting taxes to the country to which each sale applies.

Finally, a “One Stop Shop” will be established for sellers from countries outside the European Union. This will allow them to easily register for VAT. It will also ensure that the tax finds its way to the Member State that has to collect it. This means increased transparency towards consumers: when you buy a product from a seller outside the EU, VAT must be part of the price you pay. No more phone calls from customs asking for a surcharge when your order arrives at its destination. Large companies such as Amazon, eBay and Rakuten are already registering on the platform. One Stop Shop has been doing very well since 2015 for electronic services and its expansion to the sale of goods online will bring many benefits to EU retailers. Similar reforms have been implemented in other countries, such as Canada, Australia or New Zealand.

What will this adaptation change, if we take into account the case of the French company?

PP: Businesses will quickly realize that the new rules will facilitate their VAT procedures when selling in other Member States … while enabling them to make better use of the benefits of the single market. A company that sells clothes online, based in France and with a turnover of between 35,000 and 100,000 euros – the most common amount – in another EU country, currently has to declare itself in the latter. This makes it difficult to expand beyond one’s own borders, as it has to deal with the obligations of each Member State in which it operates … and often in a language other than its own. These obstacles are becoming increasingly apparent as companies have diversified and changed their business model in light of the pandemic.

Example: A French company sells T-shirts to customers in Germany and Italy. It is sold every year for 100,000 euros of goods in the first country and 35,000 euros in the second. Therefore, he must immediately contact the administrations of these two countries in order to pay VAT on the spot. This compliance, which is an administrative burden, entails additional costs. That money could be used to internationalize it, especially since the pandemic has shown us that ease of doing business will be crucial in the development of e-commerce. With these new rules, this French company can fulfill all its obligations in France without having to be identified for tax purposes in Germany or Italy.

In addition to facilitating trade, the new rules should make it possible to better combat tax evasion. By what means? Are there quantified targets?

PP: The most reserved estimate suggests that there is a € 7 billion VAT deficit for Member States. This can mainly be attributed to the exemption I mentioned earlier for products sold by non-EU traders at a price below 22 euros. This type of fiscal loss is unacceptable, at a time when governments need reliable revenue streams that will allow states to better recover from the crisis.

The new rules represent a major change for European businesses in the way they manage their VAT obligations and needs. Thanks to them, business will be much easier. Combating tax evasion as well as improving the consumer experience across the EU. This reform is also a good example of successful cooperation between the European Commission, the tax and customs administrations of each Member State and the shareholders of different companies, who were consulted throughout the process. The engagement of the latter was particularly important, as the whole system is based on the participation of companies.

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