As EU’s VAT reform ramps up, marketplaces must focus on compliance to avoid tax risk
Electronic interfaces, platforms and marketplaces form a key layer in the digital infrastructure behind e-commerce, serving as gatekeepers between consumers and producers of digital content or digitally sold products.
These gatekeepers offer third-party companies access to a global market by providing their own infrastructure. It is therefore not surprising that their growth is often driven by a strong influx of third-party companies, which can expand internationally with their products and content without having to build their own technological infrastructure.
An increasing number of online retailers use such platforms for their e-commerce businesses, which has made these platforms an integral part of compliance procedures.
The EU VAT reform
On July 1, 2021 there was a big change in the European Union’s Value Added Tax (VAT) law, impacting online retailers, marketplaces and their e-commerce businesses across the EU. Since 1993, the VAT law in the European Union concerning cross-border e-commerce was in large part unchanged and was originally introduced for mail order businesses that used catalogues.
But EU member states realized a few years ago that EU VAT law was no longer on track with the developments taking place in the e-commerce ecosystem.
In the worst case, non-compliance with these regulations will mean that VAT will not have been paid for thousands of transactions.
This has led to many problems for marketplaces like Amazon, as they have a significant number of third-party merchants based outside the EU. For example, third-party merchants account for about 50%-60% of Amazon Germany’s revenue, and more than half of these merchants based in China.
The VAT problems that arise from this led to enormous tax losses in the past, because third-party merchants, especially those from China, did not declare the VAT that was actually due in the EU, giving them a huge market advantage over the EU merchants. The EU has recognized this and initiated the VAT reform, which primarily places responsibility on the marketplaces.
The EU VAT e-commerce package, under specific circumstances, can make online sellers and marketplaces liable to pay VAT and leads to certain challenges and risks.
Since July, it has been key for marketplaces to determine the VAT due for every transaction and establish related processes such as VAT rate determination, invoicing, filing and reporting. This is applicable to marketplaces when they are liable to pay tax on transactions by sellers not based in the EU or for distance sales from non-EU countries.
Marketplaces have to be aware of additional indirect tax regulations to avoid massive tax and financial risks. Not adapting to the new regulations can result in paying VAT and interest retrospectively for the sales made on the platform. In Germany, this would mean paying 19% VAT on the net sales, with fines and interest added on top. In countries like Italy, the surcharges can reach up to 240%.
Broad range of VAT rates across the EU
It is not only necessary for online merchants to determine the VAT rate for their products, but marketplace operators, being liable for VAT under certain circumstances, also have to ensure the application of the correct VAT rate in every EU member state.