1 Aug 2019
EU’s E-commerce Regulations Need Improvement in Relation to VAT and Customs Duties Claims EU Body
In a Special Report published in July, the European Court of Auditors has examined the EU’s new rules on e-commerce which are scheduled to enter into force by 2021. The report raises various issues and concludes that many challenges surrounding the collection of VAT and customs duties remain yet to be resolved. The report includes a number of recommendations as to how the European Commission and the Member States might better address the challenges identified in the report and establish a sound regulatory and control framework affecting intra-EU trade, and e-commerce trade in goods coming from outside the EU.
On 16 July 2019 the European Court of Auditors (ECA) published Special Report no 12/2019. The report is titled “E-commerce: many of the challenges of collecting VAT and customs duties remain to be resolved”. As the EU's independent external auditor, the ECA looks after the interests of EU taxpayers.
The July report defines e-commerce as “the sale or purchase of goods or services conducted via the internet or other online communication networks”. It is the aim of the common market to ensure that businesses and consumers can buy and sell internationally over the internet as they do on their respective local markets. The report refers to the latest available statistics, which show that during 2017 one-fifth of EU businesses were active in online sales.
In general, for EU-registered traders supplying goods from one Member State to a consumer in another, the “distance-selling scheme” applies. This means that, up to a certain sales threshold (usually €35,000, but €100,000 in certain Member States), the trader applies the VAT rate of the Member State where it is registered. Above this threshold, the trader must register for VAT in, and apply the VAT rate of, the destination Member State (thereby incurring all the reporting and compliance obligations).
In the case of non-EU traders selling to EU consumers, Hong Kong companies may know that goods are imported into the EU and are subject to customs clearance. There is a low-value customs relief for goods worth €150 or less (small value consignments), meaning that no customs duties are due on import. There is also a VAT relief for goods of negligible value – those not exceeding €22 in value (or €10 in certain Member States) are not subject to import VAT.
Thus, when goods and services traded via e-commerce cross borders, Member States collect VAT and customs duties. Any shortfall in this collection affects the budgets of the Member States and the EU. The Commission carries out inspections of VAT and customs duties collected. It is also responsible for setting customs and taxation policies and for strategies and legislation in these areas. The European anti-fraud office is responsible for investigating fraud, corruption and other offences against the EU’s financial interests.
As Hong Kong traders may recall, the EU adopted the VAT e-commerce package in December 2017. The package is one of the priorities under the EU Digital Single Market Strategy. The VAT e-commerce package is intended to simplify the VAT regime for e-commerce and aims to tackle VAT fraud and improve VAT collection on internet sales.
Therefore, large online marketplaces will become responsible for ensuring that VAT is collected on sales of goods by non-EU companies (e.g. those based in Hong Kong) made to EU consumers and which take place on their platforms, pursuant to the new rules. If sellers from outside the EU do not comply with the rules, authorities will be sure that they can claim the tax that is due from online marketplaces which will be liable for the missing VAT. The new VAT rules for e-commerce will enter into force gradually until 1 January 2021.
The ECA identified a “risk of irregularities” occurring in the collection of VAT and customs duties in cross-border e-commerce. Losses in the collection of VAT on supplies of low value goods from non-EU countries are estimated to be as high as 5 billion EUR per year. There are no estimates available with regard to VAT losses in cross-border supplies of services.
For the audit, the ECA examined the existing VAT and customs legislation, particularly the e-commerce package, with a view to whether Member States’ control measures ensure the complete collection of VAT and customs duties in respect of e-commerce. The ECA found that, despite the recent legislation, the EU did not address all challenges regarding the collection of VAT and customs duties for goods and services traded over the internet.
Specifically, the ECA found the following weaknesses in the current framework:
- the new provisions which are scheduled to enter into force in 2021 do not address the issue of undervaluation;
- administrative cooperation arrangements between EU Member States and with third countries are not being used to their full potential;
- controls carried out by national tax authorities and the European Commission are insufficient;
- there is a risk that the EU cannot prevent abuse by intermediaries;
- enforcement of collection of VAT and customs duties is not effective.
In order to remedy the above shortcomings, in particular to strengthen the use of administrative cooperation agreements, increase the effectiveness of controls, and improve the enforcement of collection and the effectiveness of the regulatory framework, the ECA has recommended that:
- the European Commission monitor the extent to which third countries meet requests of the EU Member States pursuant to mutual administrative assistance agreements concluded in both customs and tax matters, and make use of structures and frameworks set up in the context of these agreements to address specific challenges resulting from trade in goods through e-commerce;
- the Commission inspect Member States’ controls of low value consignment relief;
- the Commission monitor the functioning of distance sales of goods within the EU and the functioning of the so-called Mini One Stop Shop (MOSS);
- the Commission assist Member States with developing a methodology for producing periodic estimates of compliance and any VAT gap on e-commerce;
- Member States provide timely feedback to the fraud signals received from other Member States;
- Member States increase their audit activity on distance sellers.
In general terms, EU customs law is laid down in the Union Customs Code (the UCC), while VAT is governed by the VAT Directive. The EU’s current arrangements for collecting VAT due on e-commerce differ between goods and services.