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ECOFIN Approves VAT Overhaul For Digital Economy

Tuesday, December 5, 2017

The European Commission has welcomed an agreement reached among EU finance ministers on the introduction of simpler and more efficient rules for businesses that sell goods online.

"This revamp of the rules will make our VAT system fit for the digital economy," said Toomas Toniste, Minister for Finance of Estonia, which currently holds the Council presidency. "By reducing red tape, we will achieve both cost savings for businesses and increased tax revenues for the member states. This was a major priority for our presidency." The proposals will also help to reduce VAT fraud involving distance sales in the EU, which is estimated to be worth EUR5bn (USD5.9bn) each year.

The new rules extend an existing EU-wide portal (the mini "one-stop shop") for the VAT registration of distance sales and establish a new portal for distance sales from third countries with a value below EUR150 (USD177.5). This is intended to reduce the costs of complying with VAT requirements for business-to-consumer transactions.

Most goods that are imported for distance sales currently enter the EU VAT-free, resulting in unfair competition for EU businesses.

VAT will be paid in the member state of the consumer, ensuring a fairer distribution of tax revenues amongst member states.

Additionally, online platforms will become liable to collect VAT on the distance sales that they facilitate. This was not foreseen in the Commission's proposals but was seen as an essential provision of the package by EU finance ministers meeting on December 5.

The one-stop shop will relieve online traders of having to register for VAT in each of the member states in which they sell goods. According to the Commission, such obligations cost businesses around EUR8,000 for every EU country into which they sell. The proposals would enable administrative burdens for companies to be reduced by 95 percent. The one-stop shop will generate an overall saving of EUR2.3bn for businesses, the Commission estimates, and a EUR7bn increase in VAT revenues for member states.

For start-ups and SMEs, the new rules introduce an important simplification. For those firms with yearly cross-border online sales below EUR10,000, businesses will be able to continue applying VAT rules used in their home country. Furthermore, the new rules remove an exemption for consignments from outside the EU worth less than EUR22. Around 150 million small consignments are imported free of VAT, and the current system is open to abuse. While EU businesses have to apply VAT regardless of the value of the goods sold, imported goods benefit from the exemption and are often undervalued in order to do so.

The package – a directive and two regulations – was adopted without discussion at a meeting of the Economic and Financial Affairs Council.

The new rules set out the following timeline:

  • Introduction by 2019 of simplification measures for intra-EU sales of electronic services;
  • Extension by 2021 of the one-stop shop to distance sales of goods, both intra-EU and from third countries, as well as the elimination of the VAT exemption for small consignments.

The rules also provide for enhanced administrative cooperation between member states to accompany and facilitate this extension.

The provisions that will apply from 2021 will be addressed in greater detail in a further Commission proposal under a non-legislative procedure. The Council approved a statement highlighting issues to be considered by the Commission in the implementing phase. The provisions that will apply from 2019 are already covered by the package.

The member states will have until December 31, 2018, and December 31, 2020, to transpose the corresponding provisions of the directive into national laws and regulations. The regulation on administrative cooperation will apply from January 1, 2021.

Following the agreement, Andrus Ansip, Vice-President for the Digital Single Market, said: "This is a new step to boost e-commerce in Europe, a few days after reaching an agreement to end unjustified geo-blocking for consumers shopping online. Companies selling abroad online will deal with VAT in the same way as they do for sales in their own countries. This will also make public services more efficient and increase cooperation across borders."

Following the agreement, Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation, and Customs, said: "Brick by brick and piece by piece, a new VAT system is being built that is fit for purpose and within which internet companies operating across borders can thrive. At the same time, we are making sure that non-EU businesses do not get preferential treatment when selling to EU consumers - both directly and through online marketplaces. Today's agreement also bodes well for the more fundamental VAT reform in the EU that is so urgently needed." For more information please consult the press release and MEMO.