New Proposals Published with a View to Modernising VAT for Online Sales

On 1 December 2016, the European Commission presented a set of legislative proposals modernising the current VAT rules that apply to e-commerce activities. Once adopted, the new measures may prove to be a double-edged sword for Hong Kong traders selling online to the single market.

While the future rules will undoubtedly allow consumers and companies to buy and sell goods and services more easily online, they will also put an end to the VAT exemption currently applied to small consignments imported into the EU.

Hong traders selling goods over the internet will therefore need to carefully assess the possible opportunities and challenges to which this modernised set of EU VAT rules give rise.

There are four key aspects to the Commission’s proposals:

• New rules to allow companies selling online to manage all their EU VAT oblations in one place;

• Action against VAT fraud outside the EU;

• Simplified VAT rules for online start-ups and micro-businesses, and simplified procedures for cross-border sales made by SMEs; and

• The possibility of equal VAT rules for e-publications and their printed equivalents.

Keen to facilitate cross-border trade, among the European Commission’s most important proposals is the rolling out of an online web portal – the VAT One Stop Shop – as of 2021. This portal will allow businesses based in the EU to make one simple quarterly return for the VAT due on goods across the whole EU.

In contrast, under the current regime, EU companies must register for VAT, file returns and make payments in every EU country in which they make sales, at an estimated cost of around EUR 8,000 per country into which they sell.

The VAT One Stop Shop may prove to be a valuable asset for Hong Kong exporters with import-related businesses trading within the EU or which have registered in a chosen Member State of identification. The Commission estimates that the new measure will bring a 95% reduction in EU companies’ administrative burdens.

Much less attractive for Hong Kong traders selling low value goods online is the Commission’s announced proposal to end the VAT exemption applied to consignments worth less than EUR 22 exported from a non-EU country into the EU, as part of its action to tackle VAT fraud.

The Commission has identified numerous problems with the current VAT exemption such as the fact that it places EU businesses at an obvious disadvantage because unlike their non-EU competitors, they must apply VAT on all supplies, regardless of their value.

It has also noted that the current regime is easily and regularly abused as high-value goods imported into the EU via small consignments, such as smartphones and cameras, are often undervalued or wrongly described in the relevant importation documents in order to benefit from the VAT exemption.

A recent study has found that 65% of consignments from third countries do not comply with EU VAT rules, while around 150 million small packages enter the EU below the threshold. There is therefore felt to be significant unfair competition for compliant EU companies and a huge loss to EU governments.

E-commerce organisations have been placing pressure on the EU to remove the VAT exemption for some time now, while other OECD member countries have been considering taking similar steps.

Hong Kong’s online sellers of goods destined for the EU should take note that the Commission’s proposal foresees the end of the EUR 22 VAT exemption by 2021. In this scenario, non-EU companies selling products online to EU consumers may be eligible to pay VAT through the VAT One Stop Shop, provided such shipments have an intrinsic value below EUR 150.

Where the VAT One Stop Shop is not used, goods imported from third countries worth less than EUR 150 may nevertheless avail of a special import scheme for distance sales of goods.

Third county vendors can, and in some cases must, designate an EU intermediary (such as a market place, customs agent or courier) to manage VAT-related compliance. This intermediary will collect VAT from consumers in whose name the goods are imported and pay it to the appropriate authorities in the importing Member Sate. On the basis of monthly declarations, the intermediary will be able to report and pay import VAT electronically, on behalf of the buyer.

The Commission’s new proposals also include measures to simplify cross-border trade for start-ups, micro-businesses and small and medium sized enterprises (SMEs). For instance, businesses with cross-border online sales below a new yearly threshold of EUR 10,000 will be able to continue to apply the VAT rules that they apply in their home country. Online companies selling e-services up to a total value of EUR 100,000 in cross-border sales will also benefit from new simplified rules for identifying where consumers are based.

Lastly, the proposals also contain special measures for e-publications, such as e-books and e-newspapers. Currently Member States may tax printed publications at a super-reduced or zero rate for the purposes of VAT but not their electronic equivalents. To remove competitive distortions, the Commission has proposed to give Member States the possibility to align the rates on e-publications to those on printed publications.

Each of the Commission’s four proposals will now progress through the EU’s legislative procedure. The procedural rules which apply in the case of VAT are somewhat novel. It is entirely up to the Council of EU Member States to agree to the new rules, while the proposals will only be submitted to the European Parliament for consultation.