By Karen Lynch
The cost and complexity of managing VAT, a sales tax applied to goods and services purchased in the EU, currently imposes a significant burden for many businesses, the Commission says.2 On average, companies selling goods online pay around 8,000 euros ($8,500) a year in VAT compliance costs for every EU country in which they do business,3 according to Deloitte, though small and mid-sized enterprises’ (SMEs’) costs are generally lower, at about 4,000 euros ($4,200) per country.4 The Commission estimates its proposed one-stop approach could cut administrative costs up to 95 percent.5
“We'd like to see the ‘one stop shop’ concept for VAT payments introduced as soon as possible,” Amazon has said. “The cost of filing for VAT in 28 different countries for selling or even for simple storage of goods is a major barrier to small firms making the most of the single market.” 6
This administrative challenge was further elaborated in a report published by the Commission, in which businesses identified the complex legislation and administrative procedures in different countries as the biggest VAT-related barrier to cross-border trade. Currently, merchants add VAT to their retail prices and then remit the funds to national tax authorities. The rate varies by country, but is typically about 20 percent or higher.7 Import-export traders must register for VAT in each country and then submit regular VAT filings. Local language requirements compound the issue, often requiring the help of consultants and logistics companies. “The compliance burden for businesses is therefore high,” the report concluded.8
Under the proposed legislation, companies would register in a single EU member state, collect country-specific VAT on each purchase in all member states, and pay centrally with a single VAT return detailing sales per country. An electronic government exchange would pass on the information and tax paid to the country in which the purchase took place.9
An additional proposed change that may affect non-European e-commerce merchants is the elimination of the VAT exemption on low-value items (under 22 euros, or about $23) coming from outside the EU.10 “While many U.S. exporters of small online-purchased goods to the EU aren’t happy about the elimination of the VAT exemption, they hope the move will be offset by changes in the way customs duties and VAT are collected,” according to Bloomberg BNA, a tax trade publication.11 It is also argued that the impact will be dampened by a greater degree of consumer certainty about pricing, according to the Jones Day law firm.12 That is because the prices paid online for an import from outside the EU would no longer be subject to unexpected charges that can occur when VAT is imposed without notice upon import.
In general terms, the EU is one of the United States’ largest trading partners. For U.S. e-commerce merchants, research shows that the EU could represent an increasingly attractive market. Online sales of goods and services in Europe were projected to grow 12 percent in 2016, to 510 billion euros ($539 billion).13 Popular e-commerce products and services include clothing and footwear, electronics, home furnishing and appliances, travel and entertainment and telecommunications.
Cross-border sales within Europe constitute 18 percent of the continent’s overall e-commerce market, according to the European Commission’s report, and purchases from non-European companies make up 22 percent of the cross-border spend, or approximately 20 billion euros ($21 billion).
Removing administrative burdens could increase cross-border B2C e-commerce between 1.2 percent and 2.6 percent, the Commission’s report said.14 The volume of sales could increase as prices decrease due to reduced administrative overhead, it said, with cross-border prices falling by up to 4.5 percent.
This growth potential, particularly for SMEs, was cited by the Commission as a motivation for modernizing e-commerce VAT. So too was the goal of leveling the playing field between EU and non-EU merchants by eliminating the VAT exemption on non-EU low-value sales. Some 150 million parcels are imported VAT-free into the EU each year, “creating major distortions,” according to the Commission. “EU businesses are put at a clear disadvantage since, unlike their non-EU competitors, they are liable to apply VAT from the first eurocent sold.”15 Another Commission goal is to close the gap between the VAT owed to member states and the amounts actually collected.
Non-European companies looking to enter or expand international trade in the EU should be updating their enterprise resource planning (ERP) systems, internal processes and administrative organization, Deloitte recommends.16 Pricing strategies may also need to be analyzed, as the VAT exemption ends on low-value goods from non-EU merchants.
The e-commerce VAT proposal comes amid various changes to European VAT and customs on import-export trade.17 In 2015, for example, the EU began establishing a one-stop-shop for VAT on e-services such as mobile phone apps. A preliminary proposal addressing VAT for B2B trade across EU borders has been released for industry consultation, with implications for international supply chain management.18
Europe’s e-commerce market is increasing at double-digit rates, making it a growing international trade target for companies outside the EU. A recent proposal may streamline Europe’s VAT system for companies selling online. However, any benefit may be partially offset by the impact of a concurrent plan to eliminate the existing VAT exemption for non-EU companies on low-value goods.
Karen Lynch is a journalist who has covered global business, technology and policy in New York, Paris and Washington, DC, for more than 30 years. Karen also is a principal at Content Marketing Partners.
1. “Implementation Calendar,” European Commission Taxation and Customs Union;https://ec.europa.eu/taxation_customs/business/vat/digital-single-market-modernising-vat-cross-border-ecommerce_en
2. "VAT Aspects of Cross-border E-Commerce – Options for Modernization", Deloitte for European Commission; https://ec.europa.eu/taxation_customs/sites/taxation/files/vat_aspects_cross-border_e-commerce_final_report_lot1.pdf
3. What Do New EU VAT Rules on E-Commerce Mean for our Business?Deloitte;https://www2.deloitte.com/content/dam/Deloitte/be/Documents/tax/TaxAlerts/CustomsFlashes/Customs%20Flash%20-%20What%20do%20new%20EU%20VAT%20rules%20on%20e-commerce%20mean%20for%20your%20business%20-%2013%20December%202016.pdf
4. VAT Aspects of Cross-border E-Commerce – Options for Modernization,Deloitte for European Commission;https://ec.europa.eu/taxation_customs/sites/taxation/files/vat_aspects_cross-border_e-commerce_final_report_lot1.pdf
5. "Commission Proposes New Tax Rules to Support E-Commerce and Online Businesses in the EU",European Commission; http://europa.eu/rapid/press-release_IP-16-4010_en.htm
6. "Our Wish List for a DSM that Supports Small Firms and Consumers Online", Amazon; https://www.amazon.eu/p/feature/a7y6gzy8ppth4xh
7. "2017 European Union VAT rates", Avalara VATlive; http://www.vatlive.com/vat-rates/european-vat-rates/
8. "VAT Aspects of Cross-border E-Commerce – Options for Modernization", Deloitte for European Commission; https://ec.europa.eu/taxation_customs/sites/taxation/files/vat_aspects_cross-border_e-commerce_final_report_lot1.pdf
9. "Guide to the VAT Mini One Stop Shop,",European Commission; http://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/taxation/vat/how_vat_works/telecom/one-stop-shop-guidelines_en.pdf
10. "Modernizing VAT for E-Commerce: Questions and Answers,"European Commission; http://europa.eu/rapid/press-release_MEMO-16-3746_en.htm
11. "EU Seeks VAT Changes to Boost E-Commerce, Digital Publications",Bloomberg BNAhttps://www.bna.com/eu-seeks-vat-n73014447782/
12. "European Union: Modernizing the European VAT System for Cross-Border B2C E-Commerce", Mondaq; http://www.mondaq.com/unitedstates/x/562730/sales+taxes+VAT+GST/ISS+Issues+2017+Summary+Proxy+Voting+Guidelines
13. "European B2C Ecommerce Report 2016", Ecommerce Europe; https://www.ecommercewiki.org/Prot:European_B2C_Ecommerce_Report_2016
14. "VAT Aspects of Cross-border E-Commerce – Options for Modernization,"Deloitte for European Commission; https://ec.europa.eu/taxation_customs/sites/taxation/files/vat_aspects_cross-border_e-commerce_final_report_lot1.pdf
15. "Commission Proposes New Tax Rules to Support E-Commerce and Online Businesses in the EU,",European Commission; http://europa.eu/rapid/press-release_IP-16-4010_en.htm
16. "Customs Implications of Modernizing VAT for Cross-border E-Commerce and Online Business in the EU",Deloitte; https://www2.deloitte.com/nl/nl/pages/tax/articles/customs-implications-vat-e-commerce-and-online-business-eu.html
17. "Action Plan on VAT",European Commission Taxation and Customs Union;http://ec.europa.eu/taxation_customs/business/vat/action-plan-vat_en
18. "VAT: EU Commission Announces Three Consultations,"KPMG; https://home.kpmg.com/uk/en/home/insights/2017/01/tmd-vat-eu-commission-announces-three-consultations.html