Finally - a solution to the EC's VATMOSS VAT MESS?
Contributed by Russell Bedford International
30 January, 2017
Philip Eagle, tax partner at Russell Bedford International member firm Hallidays, Manchester, UK
Philip is a director with Russell Bedford's Manchester firm, Hallidays. A chartered accountant and tax expert, Philip is a member of the Institute of Taxation and has more than 15 years of experience. He is a specialist in all areas taxation in the UK. firstname.lastname@example.org.
The introduction in 2015 of new "place of supply rules" for digital and electronic goods extending the principle already applied to tangible goods in applying taxation at the point of consumption rather than supply introduced new and onerous compliance requirements for previously VAT-exempt small businesses. The European Commission's introduction of a "VAT Mini One-Stop Shop (VATMOSS)" in response to this, allowing sellers to pay VAT due in their home jurisdictions, with tax authorities responsible for transferring revenues to other Members States where due, failed to address the fact that many businesses operating below domestic VAT thresholds now found themselves obliged to register for VAT for the first time in order to meet their obligations abroad.
2018: a simpler VAT regime for micro- and digital businesses
Against this background, the EC's announcement, on 1 December 2016, of proposals to ease VAT compliance for digital producers, was welcomed with considerable interest. While detailed proposals on wider reforms for SMEs (part of broader commitments under the EC's Digital Market Strategy and EU VAT Plan) are not expected until later in 2017, the proposals of December 2016 appear to address the most problematic issues arising from the 2015 regulations, as well as introducing a new and simpler regime for online sales of digital goods and services (online streaming services, downloads, etc.).
The December 1st proposals introduce two thresholds applicable to micro-businesses and SMEs. From 2018, businesses with turnover below EUR10,000 per year will be able to apply the domestic VAT regime applicable in the jurisdiction in which their business is based effectively resulting in a total exemption for micro-businesses in all EU jurisdictions.
The second threshold applies to businesses with turnover above EUR10,000 but below EUR100,000. One of the most controversial aspects of the VATMOSS regime for suppliers of digital goods and services had concerned the evidence required to prove sales in EU locations. Existing regulation requires suppliers to provide two pieces of evidence (e.g., a billing or IP address), proving the location of the customer. In future, only one piece of evidence will be required from digital businesses with annual turnover below EUR100,000.
An even playing field for electronic publishers?
A further controversy following the introduction of 2015 place of supply rules concerned the divergent VAT rates applied to electronic and hard-copy publications, with many jurisdictions allowing reduced or zero-rated VAT on the latter (a loophole exploited to considerable and controversial effect by Amazon and others). In a move expected to eliminate such disparities, the EC's December 2016 proposal now allows Member States to apply comparable rates to electronic and printed materials from 2018.
Micro-businesses too had found themselves up against a longstanding loophole allowing the VAT-free importation of consignments with a value of less than EUR22 from non-EU producers the so-called "low-value consignment relief". Estimated to cost the EU up to EUR4.8 billion per year in lost tax revenues, this concession will be abolished from 2021.
2021 a new regime for tangible goods
While the above thresholds will apply, initially, to electronic goods and services only, the VATMOSS regime will be extended to online sales of tangible goods from 2021, promising an easier regulatory environment for all SMEs with thresholds below EUR100,000. Such businesses will only be required to provide one piece of evidence proving a customer's location, and will no longer be required to maintain multiple registrations in individual Member States.
Further proposals also envisage businesses being able to apply the invoicing regulation in force in their home country, and requiring audits of businesses using the VATMOSS portal to be undertaken only in the jurisdiction in which the business is established an initiative expected to result in considerable savings on translation and administrative costs.
More broadly, the EC's VAT Action Plan, currently in consultation, includes proposals for a specific "SME VAT Package", expected to be announced in late 2017. Consultation on the SME VAT Package runs to 7 March 2017, and is available here.
The current SME regime, in allowing exemptions or simplifications for businesses below a certain threshold, is seen as having several fundamental flaws suppliers from Member States may be subject to different VAT obligations to domestic suppliers, compliance is burdensome and costly, and there is considerable scope for fraud.
Proposals mooted under the VAT Action Plan are predicated on an intention to establish a "definitive" VAT regime for intra-community transactions, based on VAT being applied in the country of sale, rather than the country of production, and with VAT charged on both domestic and intra-EU supplies an initiative likely to involve the further extension of the one-stop shop mechanism.
Whatever the ultimate outcome, reforms thus far point to a clear and practical intention to reduce the obligations and costs often disproportionately burdensome for entrepreneurs, start-ups and SMEs.
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