Due to the health crisis, the European Commission has postponed by six months the entry into force of the Marketplace VAT package on cross-border e-commerce, originally scheduled for January 1, 2021. This reform, also known as the “e-commerce VAT package” whose aim is to combat tax fraud more effectively, has been in force since July 1, 2021.

It’s a done deal. The reform of VAT on e-commerce in Europe has been in force since July 1, 2021. This reform, known as the “e-commerce VAT package”, was implemented because of the explosion in online sales, which reached 112 billion euros in France in 2020 (+8.5% on 2019), and the need to combat unfair competition from certain sellers based outside the European Union, who previously escaped paying VAT. According to the European Commission, the loss of revenue from these transactions represents more than 5 billion euros. The November 2019 report by the French General Inspectorate of Finance points out that 98% of sellers making sales via platforms were not registered for VAT in France, and therefore did not collect Marketplace VAT on these sales.

What is VAT?

Value Added Tax, better known as VAT, is an indirect tax targeting final consumption. It is applied to goods and services purchased by consumers, making the individual the final payer of this tax. Companies operating in the B2C (Business to Consumer) sector integrate VAT into the initial sales price excluding taxes, leading to the final price known as “all taxes included” (TTC). This operation is based on a specific VAT rate, expressed as a percentage of the pre-tax price.

Let’s take a simple example to illustrate this mechanism: imagine you buy an artistic creation for your home, displayed at a base price of €100. If the art is subject to 20% VAT, the final price you pay will be €120. In a different scenario, if the work benefits from a reduced VAT rate of 10% to encourage culture, the final price would become €110. When the calculation of the price including VAT leads to a figure with several decimals, the amount is rounded according to the country’s tax rules, which may vary slightly, but are intended to simplify invoicing.

This mechanism also applies to business-to-business (B2B) commercial relations, but with a significant nuance: the purchasing company can recover the VAT it has paid on its purchases by deducting it from the VAT it owes on its own sales. So, although the company collects and pays the VAT, it does not constitute a definitive expense for it thanks to this recovery and adjustment mechanism.

First introduced in France in the middle of the 20th century, VAT has now been adopted in a multitude of countries, each with its own rules and rates, which can make it complex to manage, especially for international online sales. Variations in rates between different products and services, coupled with regional specificities, make VAT both a vital and complex tax matter for businesses worldwide.

Which companies are affected by the VAT Marketplace reform?

All non-EU and EU companies selling services and goods online to European consumers (websites, marketplaces, social networks, dropshipping).

What are the major changes brought about by this reform?

• A redefinition of the VAT regime for intra-Community distance sales of goods (for B2C sales)
• For distance selling, lowering the sales threshold to €10,000
• For the sale of goods and services, the introduction of the VAT one-stop shop
• The abolition of the import VAT exemption for small consignments (up to 22 euros) and of the import VAT declaration via the one-stop shop,
• Liability for VAT marketplace (marketplaces) on intra-EU imports and sales on behalf of their third-party sellers located outside the EU.

For VAT purposes, marketplaces are now considered to have bought and sold their products themselves.

One of the highlights of this reform is the VAT liability of marketplaces, in 2 cases: for BtoC online sales within the European Union on behalf of non-EU companies, or for distance selling of imported goods up to a value of €150, for European companies. This means that the marketplace will be responsible for collecting, declaring and paying VAT on behalf of sellers.

“In order to improve VAT collection on distance sales facilitated by the use of an electronic interface and to reduce the administrative burden for sellers, tax administrations and consumers, Directive (EU) 2017/2455 provides that electronic interfaces will be liable for VAT when they facilitate distance sales of imported goods of less than €150 or facilitate domestic supplies or intra-Community distance sales of goods made through them by a seller not established in the European Union.”(Extract from Article 53 of the Finance Act 2020)

Marketplaces are now considered to be suppliers of goods, subject to VAT in certain situations. As Julien Fontaine points out in the article “Marketplaces VAT liability from July 1, 2021”will be excluded from liability:

“1) B2B transactions,

2) B2C transactions, for supplier companies established outside the EU, when imported from an EU country (outside France) and destined for France, if the good is worth more than 150 or when they are imported into France and destined for another member state, regardless of the value of the goods.

3) B2C transactions, for suppliers established in the EU, when imported from an EU country (outside France) and destined for France with a value exceeding €150 or when imported into France and destined for another member state, if the value of the goods exceeds €150″.

Generally speaking, this reform imposes a number of rules on marketplaces, starting with flow identification. They will have to be able to identify the country of departure of the parcel, the country of arrival of the parcel and the place of establishment of the seller. They will also have to revise their general terms and conditions, in particular to inform stakeholders (professionals and consumers) about them.

Marketplaces will also be required to keep a record of transactions carried out, which must be kept for 10 years from December 31 of the year in which the transaction was carried out. This register may be requested by the tax authorities in the event of an audit.

Cooperation or sanctions: particular vigilance is exercised with regard to companies operating from abroad.

To encourage companies to take these obligations into account, the tax authorities have drawn up a “blacklist”, the aim of which is to list platforms that fail to cooperate and comply with the rules of positive law. This list is even more important for monitoring the transactions of foreign platforms with no warehouses in Europe, which manage to conceal the existence of imports from abroad to Europe, in particular by means of untraceable payment services and by using a variety of corporate names.

Impact and prospects of VAT reform on e-commerce

The implementation of e-commerce VAT reform in Europe, effective from July 1, 2021, represents a crucial step in adapting tax frameworks to the ever-changing e-commerce landscape. This reform aims to simplify the VAT collection process for cross-border sales, while combating tax fraud and creating a level playing field for all market players, whether based within or outside the European Union.

The changes introduced by this reform, notably the lowering of the turnover threshold for distance selling, the abolition of the VAT exemption for small shipments, and the increased accountability of marketplaces, are significant. They call for particular attention on the part of the companies concerned to ensure their compliance with the new regulations. In particular, marketplaces now play a central role in collecting and remitting VAT, underlining the importance of rigorous management and total transparency in their operations.

Beyond compliance, this reform also offers opportunities. It encourages companies to review and optimize their supply chains and sales strategies to maximize their efficiency within the new regulatory framework. Moreover, by levelling the playing field, it can encourage innovation and expansion in Europe’s Digital Single Market, benefiting the digital economy as a whole.

However, the success of this transition will largely depend on companies’ ability to adapt quickly and effectively to the new requirements. This includes updating IT systems, training teams, and establishing clear processes for VAT management. Commitment to tax compliance and cooperation with tax authorities will also be essential to successfully navigate this altered landscape.

FAQ

How are marketplaces affected by this VAT reform?

Marketplaces are now considered the suppliers of goods sold on their platforms in certain cases, notably for distance sales of imported goods valued up to €150, and for B2C online sales within the European Union on behalf of non-EU companies. They are therefore responsible for collecting, declaring and remitting VAT on these transactions, which means updating their internal systems and processes.

What are the obligations of companies selling online after this reform comes into force?

Businesses selling online to consumers in the EU need to ensure they are compliant with the new VAT rules. This includes registering for VAT in the EU countries where they sell (if necessary), using VAT one-stop-shops to declare and pay VAT, and keeping detailed records of sales to facilitate any tax audits. Non-EU companies should pay particular attention to these rules, as they may need to register for VAT in the EU for the first time.

What should European consumers do to check that VAT is correctly applied to their online purchases?

Consumers don’t usually have to take any specific steps to ensure the VAT compliance of their online purchases. However, they can pay close attention to the total price of their purchases, which should include the applicable VAT. If in doubt about the legitimacy of a seller or the transparency of the prices displayed, consumers can seek further information on the seller’s website or contact customer service directly. Online sales platforms and marketplaces are also required to inform consumers about VAT.