Value added tax breaks for online retailers in the EU

Photo: desk with calculator and receipts ; copyright: panthermedie.net/AndreyPopov

31/07/2017

The European Commission proposes an expansion of the MOSS Scheme to physical products and an additional simplification of cross-border trade.

For many online retailers, VAT presents a key barrier to trade. This is especially the case as it applies to online services to private end users (B2C). Here, the ostensibly infinite Internet appears not be as infinite as it seems. But now the responsible parties promise some relief: the European Commission intends to promote cross-border trade between member states and has introduced new tax regulations that aim to simplify consumer business. Now the Hamburg tax consultant and auditing team of Schomerus & Partner mbB talks about this topic. “The objective is to introduce a uniform, EU-wide portal featuring the member state-specific details as the only source for VAT due on online sales,“ explains Dr. Mario Wagner, tax accountant of the firm. He adds that this will make it much easier for small and medium-sized businesses as well as startup companies to sell their online goods and services in multiple EU countries.

The so-called “MOSS Scheme“ (mini one-stop shop), which previously only applied to the following services (telecommunication, television and radio broadcasting and electronically supplied services), subsequently will also apply to additional services starting in 2018 and presumably also include physical goods starting in 2021, i.e., comprising the entire cross-border B2B trade. Wagner adds that “this will also significantly reduce the costs for companies to ensure compliance with VAT regulations”. The European Commission expects overall savings of approximately 2.3 billion euros. Companies registered for the MOSS Scheme don’t have to account for VAT in every individual EU member state and based on the individual tax rates and regulations. Companies only have to submit one tax return to their respective responsible tax authority. This saves time and money.

MOSS: Don’t forget to register!

It is important to note that companies are not part of the MOSS Scheme unless they register! Companies need to file an application with the responsible tax authority prior to using the simpler MOSS scheme. “Ignoring the new regulations at this juncture is especially risky,“ warns Wagner. “If you made sales pertaining to the above-mentioned services involving Polish end users and you don’t pay the applicable Polish VAT rate, it is considered tax fraud in Poland. It also makes no difference if these sales are alternatively taxed in Germany without MOSS registration.“ The taxation of electronically supplied services and online stores, which are becoming increasingly important worldwide, has recently become a focus of tax authorities and a part of international efforts to improve tax fairness and comprehensive tax collection. This increases the risk that tax evasions – even if they are unintentional – are being discovered.

Bild: Dr. Mario Wagner, Kanzlei Schomerus & Partner; copyright: kanzlei-schomerus-partner

Dr. Mario Wagner is tax consultant at auditing and tax consultancy Schomerus & Partner in Hamburg, Germany.

New threshold and removal of VAT exemption

According to a press release, the European Union also plans further simplifications in addition to the expanded MOSS Scheme. It intends to introduce a new annual threshold of 10,000 euros. Companies falling below this threshold may continue to apply VAT regulations of their home country. This affects approximately 430,000 enterprises throughout the EU and thus 97 percent of all companies doing cross-border business. In exchange, the VAT exemption for shipments valued 22 euros or less is meant to be eliminated. “The nearly 150 million VAT-exempt packages that are imported each year into the EU make this system prone to fraud and misuse, causing significant distortion of competition at the expense of EU companies,“ explains Wagner.

Background of MOSS: Online service providers within the EU are subject to the so-called destination principle: sales have to be taxed where the added value is consumed. This means the VAT has to be paid individually at the respective tax rate of the end user’s country. This requires a considerable effort for the IT and accounting departments of the company in question. What’s more, the company needs to register for tax purposes in any EU country it supplies customers to be able to file a VAT return and issue invoices in accordance with the local regulations.

In essence, this rule applies to all online service providers that sell to end users – even small companies have to comply. The exception: companies that provide digital services (telecommunication, television and radio broadcasting and electronically supplied services) have already been able to register for the so-called MOSS Scheme (mini one-stop shop) for quite some time. It permits providers to fulfill their VAT obligations even across EU borders in their own country. The advantages of this process: one-time registration for up to 28 EU member states, a centralized process in a company’s home member state, no language barriers, while ideally eliminating the need to seek local tax advice in the respective EU member states.

Author: Dr. Mario Wagner, Schomerus & Partner Agency