Marketplace Facilitators and Payment Processors Find Themselves in the Global Tax Compliance Crosshairs – Part III
The spread of the digital economy presents massive growth opportunity, but it also creates challenges for global taxation. As the VAT landscape responds to technological change, compliance becomes increasingly burdensome and costly, and the need for a complete solution for modern tax is more important than ever.
Parts I and II of this series, “Marketplace Facilitators and Payment Processors – The New Taxpayers?,” discussed efforts in the United States and Latin America, respectively, to catch marketplace facilitators and payment processors in the tax compliance net. This post addresses new burdens for such operators in the European Union and examines recent changes to the EU VAT framework applicable to the ever-evolving digital economy.
The VAT ecommerce package in the European Union
The VAT ecommerce package, adopted by the Economic and Financial Affairs Council in December 2017, is aimed at adapting the EU VAT system to the growing digital economy and facilitating VAT collection when consumers buy goods and services online. Key provisions of the package, concerning the VAT liability of online marketplaces or platforms, begin to come into effect in January 2021.
The “deeming provisions” for online marketplaces
Council Directive 2017/2455, which is part of the VAT ecommerce package, introduces so-called “deeming provisions” into the EU VAT Directive. Under these new rules:
1. Marketplaces that facilitate imports into the EU of goods valued at € 150 or less will be deemed to have received and supplied those goods.
2. Marketplaces that facilitate Business-to-Consumer (B2C) intra-EU supplies of goods by non-EU businesses will be deemed to have received and supplied those goods. Specifically, the online platform will be deemed to receive the goods from the online seller in a B2B transaction and then supply the goods to the online buyer in a B2C transaction.
In short, under these new rules, the marketplaces will be liable for VAT collection and remittance. Because the provisions effectively divide a single sale into two, proper tax determination requires that marketplaces understand each leg of the transaction and the applicable tax consequences. First, under a proposed amendment to the Directive, the “sale” from the marketplace to the online buyer (deemed B2C supply) is treated as the supply with transport. The marketplace would incur VAT liability in the country where the goods were located when transport began. The second is a fictional supply made from the seller to the marketplace (deemed B2B supply), which would be treated as a supply without transport.
New administrative burdens for marketplace facilitators
Directive 2017/2455 also introduces a new administrative burden for marketplaces that facilitate B2C supplies of goods or services within the EU. Specifically, such marketplaces must keep “sufficiently detailed” records of the supplies. These records must be made available electronically on request and must be kept for 10 years.
Clarifying the definition of marketplace facilitator
The VAT ecommerce package was initially criticized for lack of clarity. In response, implementing rules have been introduced to define what it means to be a marketplace facilitator. Under the rules, the word “facilitates” means “use of an electronic interface to allow a customer and a supplier, offering goods for sale through the interface, to enter into contact which results in a supply of goods through that electronic interface.” A business would not be considered to “facilitate” a sale when it doesn’t set the terms and conditions of the supply, is not involved in authorizing the charge to the customer, and is not involved in the ordering or delivering the goods. Businesses that only process payments or list or advertise goods would not be considered a facilitator.
Marketplace rules in EU member states
Member states must adopt and publish laws and regulations necessary to comply with these new requirements by December 31, 2020. However, some countries have already enacted marketplace rules:
- German legislation makes electronic marketplace operators liable for merchants’ unpaid VAT and requires that they collect information on third-party sales effective January 2019.
- Italy enacted a law that mirrors the marketplace provisions of the Directive and applies them to sales involving certain electronics, such as cell phones, laptops, and tablets.
Obligations for payment service providers
The European Commission proposed a Council Directive which would require cooperation between payment service providers (such as credit card companies) and tax authorities. Specifically, the proposal requires member states to ensure that payment service providers keep “sufficiently detailed” records of payees and payment transactions executed for each calendar quarter. This requirement applies when there is a cross-border transfer of funds by a payment service provider who executes more than 25 payment transactions to the same payee within the course of a calendar quarter.
The Commission reasons that the information, which would include the payee’s VAT and IBAN numbers, is necessary for tax authorities to detect and combat cross-border ecommerce fraud. The provisions would apply starting in January 2022.
How to comply with the demands of modern tax
In this era of digital transformation, international tax is continuously growing in complexity and nuance, pushing businesses into a race to stay ahead. Learn how Sovos can help.