Despite many amendments since its introduction as a transitional regime, the EU VAT system today is fraud-sensitive, highly complex and unable to keep pace with an increasingly global and digital economy.
Against this background, and in a bid to close the estimated annual EUR 150 billion “VAT gap”, the European Commission agreed a VAT Action Plan aimed at replacing the transitional regime of intracommunity supplies introduced in 1992. It also agreed a series of measures to eliminate the VAT obstacles concerning cross-border e-commerce as part of the Digital Single Market Strategy. A definitive VAT system will help companies reap all the benefits of the Single Market and compete on a global stage. The reforms are set to cut the VAT gap by an estimated 80%, and should save businesses around EUR 1 billion in administrative costs currently associated with cross-border trade in the EU.
Michaël Vincke and myself examined the changes and challenges of this reform in their detailed discussion paper on EU VAT reform. Here, we highlight six of those areas, offering a brief look at what companies will need to consider before implementation starts in January 2019. Furthermore, KPMG offers a free online impact-assessment for businesses and their consultants. This smartphone enabled app requires no more than 5 minutes user input to automatically display a qualitative assessment of how, by when and why the respective business may be impacted by the new rules.
E-commerce via online platforms
Already today, a significant share of the e-commerce business is handled via electronic interfaces, i.e. online marketplaces and platforms. Currently, vendors need to take care of taxation of their supplies in the country of their B2C consumers. Under the new regime, however, they will only be deemed to have supplied goods to the marketplaces via which they sell their goods. The new rules will entail a major shift of administrative burden from the vendors to the marketplaces, who will in turn benefit (as deemed sellers) from the special new OSS regimes (see below).
EU to EU B2C supplies
As of 1 January 2021, the country-specific thresholds (between EUR 35,000 and EUR 100,000) for intracommunity distance sales will be abolished and replaced by one EU-wide threshold of EUR 10,000. This lowered threshold will without doubt significantly increase the number of companies required to charge VAT outside their home state. To limit their administrative burden, such businesses will be able to report and pay the VAT due on their EU-wide distance sales via the OSS in their home member state (or the state of registration for companies without an EU establishment).
Non-EU to EU B2C supplies
Distance sales of goods from outside the EU with importation of goods into the EU will also be subject to VAT in the member state of the consumer. In order to avoid distortion of competition between suppliers within and outside the EU, as well as for fiscal reasons, the Low Value Consignment Relief will be abolished, meaning that consignments with a value below EUR 22 will no longer be VAT-exempt. Similar measures will be implemented in Switzerland as of 1 January 2019.
Similar as for intracommunity distance sales, also business performing distance sales with importation in the EU may report and pay the VAT via an “Import One Stop Shop” (IOSS).
Intra-Union B2B supplies
The current system splits intra-EU cross-border supplies of goods into two separate taxable events (i.e. exempt at departure and taxable at destination). The practice will be replaced by a system of a single supply taxed in the member state of destination. The supplier will generally be responsible for charging, collecting and forwarding the VAT of the member state of destination. An exception only applies for sales to CTPs (see below). To ease administration, suppliers that are not established in the member state of destination will be able to report and pay the VAT via the OSS regime. As of 1 July 2022, the OSS should also allow companies to deduct the incurred foreign input VAT from the reported output VAT. Member states will then settle the respective VAT balances with each other directly.
MOSS, OSS and IOSS
VAT compliance hurdles for telecommunication, broadcasting and other electronically supplied services towards consumers were already drastically reduced in 2015 with the introduction of the “Mini One-Stop-Shop” (MOSS) regime, which we discussed in a previous blog article. The successful concept will be extended to what is being termed the “One Stop Shop” (OSS), one of the cornerstones of the definitive VAT system. As of 1 January 2021, the OSS regime will also cover the cross-border sale of goods to B2C consumers in the EU (i.e. distance sales). These are usually sales made via a web shop to residents of other member states.
For goods imported from outside the EU, the “Import One Stop Shop” (IOSS) will apply. Similar to OSS in many ways, IOSS will require a separate VAT ID number that identifies eligible consignments to the customs authorities. IOSS consignments will be exempt from import VAT at customs, as VAT will be paid through the IOSS return. Sellers without an establishment in the EU will generally be required to appoint an EU-based intermediary to make use of the IOSS scheme. As of 1 July 2022, the OSS should also cover intra-EU cross-border supplies of goods and should allow for deduction of incurred foreign input VAT.
Certified Taxable Person (CTP)
By certifying the reliability of tax payers, the planned CTP system will enable new fraud-sensitive simplification rules, including simplified VAT arrangements for call-off stock and chain transactions and easier proof of exemption for intracommunity supplies. Companies requesting CTP status must have an establishment in the EU and will also have to demonstrate that certain conditions are met – essentially those currently needed for certification as an authorized economic operator (AEO). Based on the current proposal, Swiss, UK and US companies without any establishment in the EU will not be able to obtain CTP status, even if they have Swiss AEO status, which the EU partially recognizes.
A legislative evaluation is planned for 2027 – five years after the initial implementation of changes – and should result in full implementation of the definitive VAT system. Companies often underestimate the time it takes to make complex changes to their accounting, ERP systems and other processes. Especially for Swiss, UK and US-based companies that cannot achieve CTP status, the new EU VAT rules may significantly increase the net working capital and impair VAT receivables. Furthermore, the new rules might require a far-reaching organizational and process adjustment.
As the time available before implementation of these regulatory changes is limited, companies should start now with their impact assessments and plan how to transform change into opportunity.