Regulation’s Role In Technology Adoption
Has cross-border eCommerce VAT tax evasion reached such a point, that it is now eCommerce time to get regulated?
Many readers may be familiar with Gartner Group’s Hype Cycle, providing a framework for technology adoption. Gartner’s framework focuses on technology adoption, not on Government regulation of emerging technologies. When new technologies are introduced and adopted, there is a process of understanding the impact of these technologies on society. Subsequently Government introduces regulations to deal with aspects of the technology that may have undesired implications if not regulated. Take for example air traffic. If Governments didn’t regulate air traffic, we’d probably be witnessing accidents of airplanes on a regular basis. Namely, there would be no way to ensure that airplanes do not fly into each other’s route.
eCommerce is a fact. 51% of Americans think shopping online is the best way to shop. In Europe, 71% of the EU Internet users aged 16-54 bought or ordered goods or services for private use online in 2017. Forrester estimates that cross-border eCommerce “will make up 20% of eCommerce in 2022, with sales reaching $627 billion”. It’s a reality. Some of the most successful companies worldwide today are eBusinesses: Google, Amazon and Facebook are dominant examples. In addition to these giants, the online business environment has given rise to a whole new service industry of businesses delivering services related to those of the giants. Today’s blog will focus on one specific type of eBusiness, namely eCommerce websites that sell physical products, such as Amazon or eBay. In fact, nowadays almost every seller of physical products also sells via its website.
Key Challenge in eCommerce: VAT Tax Evasion
eCommerce has made the world more equal. Today you no longer need to be at a specific physical location in order to be able to buy the local products. You can order them online, and have them shipped to your home. Companies worldwide benefit from new markets that have opened up to them. This however introduces Law Enforcement challenges.
Cross-Border eCommerce VAT Tax Evasion: The Problem
Most businesses want to do business legitimately, according to the rules. EU rules state that VAT is due in the country where the consumer is located. Thus if an eCommerce website sells products to consumers in an EU Member States, VAT is due in that country. You can imagine how complex this can become, given that websites from around the world sell their products to consumers in the EU. The rule is that the seller (in this case: eCommerce company or the trader that uses an eCommerce marketplace platform) has to collect VAT from the consumer based on the VAT rate that applies in the consumer’s country, and pass this amount to the local tax agency. Just like any other brick-and-mortar shop in that country does. Standard VAT rates in the EU range from 18% (Germany) to 27% (Hungary). “Institutionalized” eCommerce websites such as Amazon act lawfully and collect VAT. But many eCommerce websites – especially smaller businesses or businesses from remote countries – will not collect VAT, thereby introducing two problems: (1) loss of tax revenue in the EU (the so-called “tax gap”), and (2) unfair competition. The European Commission estimates the cross-border eCommerce VAT tax gap to be at least EUR 5 billion annually in VAT revenues. Enough to call for action?
Cross-Border eCommerce VAT Tax Evasion: Regulation
Brick-and-mortar businesses in the EU collect VAT from their clients, and therefore their prices are 18-27% higher. Without enforcing VAT collection legislation on foreign eCommerce websites, we create unfair competition in favour of companies that do not play by the rules, and do not contribute to the local economy (employment, taxes). Why can Chinese websites sell to EU consumers without VAT, while EU websites are required to collect VAT (and thus sell for a higher price) and pay taxes?
The European Commission is busy working on a plan to regulate VAT collection for cross-border eCommerce. According to this plan, in 2018 only businesses with cross border sales of more than EUR 100 000 will be subject to the standard VAT rules. By the end of 2021, IT systems shall offer facilities for EU sellers and non-EU sellers to declare and collect VAT for goods that are sold online to EU clients.
Some Countries Do Not Wait For The EU
Some EU plans however take long time to implement, and we’ve seen in the past that deadlines may shift. A related example is the deadline for implementing the Union Customs Code (UCC), which is now being shifted from 2020 to 2025. Some countries therefore implement their own measures to avoid cross-border eCommerce VAT tax evasion.
Germany and the UK Force Traders From Non-EU Countries To Register For VAT
“Germany forces traders from non-EU countries to register for VAT”; announced a blog post by Dr. Carsten Höink. The blog author reveals that “as of 1.1.2019, the operators of online platforms / electronic market places will be liable for VAT if the trader sells goods on the platform but fails to pay the VAT on a domestic sale to the revenue authority”. Websites such as eBay and Alibaba will be impacted directly: if sellers on such platforms do not pay German VAT, German authorities may hold eBay, Alibaba and their peers liable. In his blog, Dr. Carsten Höink points out that a similar approach exists in the UK already.
With these initiatives Germany and the UK take concrete measures to make eCommerce in their jurisdiction more fair. At the same time they will reduce the degree of tax evasion in their countries. The rest of the EU will follow in a few years.
Now that eCommerce has become the standard, regulation is catching up.
Key Challenge in eCommerce: IPR Infringements
A second major challenge in eCommerce is infringement of Intellectual Property Rights. But I’ll leave this topic for another time. Today’s topic is all about eCommerce VAT Tax evasion, or: how to promote VAT tax compliance in cross-border eCommerce.