If you’re an EU business with B2C sales in other EU Member States or based outside the EU with B2C sales to the EU, 1 July 2021 will bring significant change.
The EU VAT e-Commerce Package aims to simplify cross-border trade and ensure VAT is charged correctly on cross-border B2C sales.
The change to the Distance Selling threshold means that VAT will be immediately due in the Member State of consumption and this could lead to a requirement for several additional VAT registrations. This will add cost and complexity to businesses and so the package introduces a One Stop Shop (OSS) to ease the burden.
OSS has many benefits but it’s not simple.
It’s important that companies prepare and make informed decisions now as to whether or not OSS is right for their business.
Our One Stop Shop infographic will help you understand the key changes the new EU VAT e-Commerce Package will bring including:
· Union OSS, Non-Union OSS and Import OSS
· OSS record-keeping requirements
· Excise goods eligibility
· Place of supply rules
· Changes to distance selling thresholds
· Marketplace liability
· Low value consignment relief
· How to prepare for OSS
· The consequences of OSS noncompliance
As part of the changes, it’s important to understand which OSS applies to your business to ensure VAT compliance. Requirements vary for EU and non-EU businesses, for sales D2C or via an online marketplace depending on the final steps of the supply chain.
The three variations of OSS are:
· Union OSS
· Non-Union OSS
· Import OSS (IOSS)
As OSS isn’t currently compulsory it’s better to understand internal timeframes and implement OSS when your business is ready, rather than try and rush to meet the 1 July 2021 introduction date.
The main choice businesses with total intra-community sales of >€10,000 need to make is whether to use OSS or register in every Member State where they trade.
Download our infographic to understand the upcoming changes and how they could affect your business.
Sovos can help you prepare for OSS
Implementing the changes required to comply with the 2021 EU e-Commerce VAT Package into your ERP system could take significant time and resources. Sovos can help ease the tax burden and help you prepare for and understand the right solution for your business.
Our large advisory team can help you navigate the complexities of modern VAT compliance.
Update: 25 August 2023 by Carolina Silva
Croatia to Introduce E-Invoicing and CTC Reporting System
According to official sources from the Ministry of Finance, the Croatian tax authority will introduce a decentralised e-invoicing model alongside a continuous transaction control (CTC) real-time reporting system of invoice data to the tax authority. This move is part of the Fiscalization 2.0 project the authority announced earlier this year.
This is the outcome of a recent project where the tax authority analysed CTC clearance and reporting systems from multiple jurisdictions within the EU – i.e. Spain, France, Italy and Hungary – which all have the common purpose of combating VAT fraud. Further examination of the efficacy of such systems revealed that these procedures are successful in this fight and increase VAT revenue.
Upcoming obligations in Croatia
According to recent news, there will be a phased implementation of two obligations:
The fiscalization process, consisting of a requirement to perform real-time reporting of a certain set of data to the tax authority
These are two independent obligations for taxpayers and take place separately.
Trading parties will issue and exchange e-invoices and, in parallel, each party will deliver certain invoice data to the fiscalization system within a two-day deadline. The e-invoicing process and data reporting to the fiscalization system can both be performed through service provider access points.
Companies will not perform the e-invoice exchange through a centralised platform but through access points; they can outsource their e-invoicing and real-time reporting processes to service provider access points. To this end, the tax authority will make a directory of access points available.
The Croatian tax authority will use data obtained from the fiscalization of invoices to simplify and facilitate the existing VAT reporting obligations (i.e. forms, records and tax returns), ultimately replacing some of the current returns. Measures proposed are:
Pre-filled forms for small and medium taxpayers
Abolishing a certain number of forms and extending deadlines
Digitalisation of the submission and processing of VAT returns
What is next?
The proposed system should be implemented by the end of 2024, giving time for the necessary adjustments of the current legal framework to be made and for publishing further CTC documentation and specifications before the implementation begins.
Need help preparing for these upcoming changes in Croatia? Sovos can help.
Update: 13 February 2023 by Carolina Silva
Croatia’s Proposed CTC System
The Croatian Tax Administration has announced a new project called “Fiscalization 2.0”, which would implement a broad CTC system that combines e-reporting, mandatory e-invoicing, e-archiving and e-bookkeeping obligations.
Fiscalization 2.0
Fiscalization 2.0 seems to be an extension of Croatia’s current fiscalization system for cash transactions, called online fiscalization. The government is looking at other CTC systems in Europe, and specifically mandatory B2B e-invoicing, as the vehicle to achieve business automation and tax autonomation in the Croatian economy.
Based on the announcement, it is not clear yet what form of CTC system may be implemented and what the requirements will be.
Croatia’s proposed measures are:
The introduction of a system for reporting non-cash transactions to the tax authority. However, the scope of the obligation – if it covers the whole sector for B2B, B2G and B2C or not – is still unclear.
The potential introduction of a B2B e-invoicing mandate, combined with e-archiving and e-bookkeeping requirements.
The introduction of a free e-invoicing platform for small taxpayers.
The simplification of reporting obligations by reducing the number of forms the tax authority requires and pre-filling tax returns.
The project should be implemented by the end of 2024, giving the authorities enough time to produce necessary CTC legislation and documentation and prepare businesses to comply with the new requirements.
What is next?
Expect the Croatian Tax Administration to publish further documentation and specifications before implementation.
Currently, the tax administration is forming working groups to jointly study the best practices and find the right solutions for the new CTC system. Additionally, the tax authority is conducting a survey on the current state of e-invoicing in the country and expectations for the future.
Croatia was one of the first countries in the world to introduce a real-time reporting system for cash transactions to the tax authority. Known as the online fiscalization system, new requirements have been introduced to improve tax controls for cash transactions.
Croatia’s online fiscalization system
The system aims to combat retailer fraud by providing the tax authority with visibility of cash transactions in real-time and encouraging citizens to play a part in tax controls by validating the fiscal receipt through the tax authority’s web application.
Previously, the online fiscalization system required issuers to send invoice data to the tax authority for approval and include a unique invoice identifier code (JIR) provided by the tax authority in the final receipt issued to the customer. Registration of the sale could be verified by entering the JIR code through the tax authority’s web application.
What’s new for Croatia’s online fiscalization system?
The government has introduced a new requirement for fiscal receipts to make citizen participation easier and increase the level of control of tax records and evidence.
As of 1 January 2021 a QR code must be included in fiscalized receipts for cash transactions. Consumers can now validate their receipts by entering the JIR via the web application or by scanning the QR code.
As part of the tax reform, a new procedure for fiscalization of sales via self-service devices came into force on 1 January 2021.
To implement the fiscalization procedure via self-service devices, the taxpayer must enable the use of software for electronic signing of sales messages and provide internet connection for electronic data exchange with the tax administration.
When implementing the fiscalization of self-service devices only the sale is fiscalized and sent to the tax administration, no invoice is issued to the customer.
Secondary legislation specifying the process and measures for data security and exchange has still not been published despite the requirement having gone live, but is expected in the near term.
VAT accounts for 15-40% of all public revenue globally. We estimate that the global VAT gap – i.e. lost VAT revenue due to errors and fraud – could be as high as half a trillion Euros. The GDP of countries like Norway, Austria or Nigeria are at a similar level and this VAT gap is big enough to significantly impact the economy of many countries. For this reason, tax authorities globally are taking steps to boost lost revenue through VAT digitization.
Up until recently, VAT requirements have traditionally followed three broad categories.
1. Invoice and storage requirements
At a high level, the requirements that apply during the processing of business transactions break down into requirements related to:
The form of invoices: Most countries no longer have such requirements but in some cases businesses still use pre-printed paper invoices from the tax authority. This gives the tax authority tight control over invoice numbering and integrity.
Minimum content requirements: Most VAT countries only recognise an invoice for VAT purposes if it contains certain information. This would include name of the supplier and buyer, type of supply etc. In addition to VAT and other indirect tax laws, commercial and other laws can also dictate invoice content.
Tax determination: For every invoice, suppliers must determine the applicable law and, on that basis, decide the applicable tax rate. Application of certain tax rates also requires reference to an article in the VAT law to be stated on the invoice.
Timing: The moment an invoice must be issued is often set by the VAT law.
Record keeping: An “original” invoice should be archived by each trading partner. This evidences the underlying supply. Archiving requirements often further specify how long it should be kept, location and specific features – such as human readability – that must be present to ensure auditability.
2. Periodic reporting requirements
These are reports for business transaction data in summary or aggregate form or full data from individual invoices. Historically such reporting requirements have often been monthly, with certain less-common reports being quarterly or yearly.
3. Audit requirements
These occur when, during the mandatory retention period for invoices and other records and books, which is typically seven to ten years, a tax authority request access to such records to assess their correspondence to reports.
The trend toward continuous transaction controls (CTCs)
The requirement types listed above, and their relative importance for both business and tax authorities, have changed significantly in recent years. The overall trend is clearly toward various forms of CTCs.
This radically different mode of enforcement, known as the “clearance model” began in Latin America over 15 years ago. Other emerging economies, like Turkey, followed a decade later. Many countries in Latin America now have stable CTC systems where a large amount of the data required for VAT enforcement is based on invoices and other key data is harvested (and often pre-approved) directly at the time of the transaction.
Europe and other countries went through a stage where original VAT invoices could be electronic without changing the basics of the VAT law enforcement model. This phase of voluntary e-invoicing without process re-engineering is often known as “post-audit” e-invoicing. In a post-audit system, the tax authority has no operational role in the invoicing process relying heavily on periodic reports transmitted by the taxpayer. Being able to demonstrate the integrity and authenticity of e-invoices from the moment of issuance until the end of the mandatory storage period is key for trading partners in post audit regimes.
Largely due to the staggering improvements in revenue collection and economic transparency from countries with existing CTC regimes, countries in Europe, Asia and Africa have also started adopting similar schemes. This rapid adoption of CTCs in many additional countries doesn’t follow the same simple path of quick migration of the early adopters. In fact, as the trend spreads around the world, it’s becoming increasingly clear there will be many different models adding to the complexity and challenges faced by multinational companies today.
Given the complexity of international VAT and the potential risk, pitfalls and associated costs, finance directors face a predicament. Unlike direct taxes, which tend to be retrospectively determined, VAT is effectively calculated in real-time. It’s linked to various aspects of the supply chain. If the related transaction has incorrect VAT calculations or erroneous codes, these errors can result in unintended financial consequences. These include fines, loss of the right to deduct input VAT etc.
For most finance departments their first and only involvement with VAT is when they are processing sales or purchase invoices. In the absence of a customer purchase order, there is often little, or no appreciation of what sales invoices are coming through until they need raising. However this may be too late. The transaction completing crystalises the VAT liability and the taxpayer cannot make any retrospective changes.
Incoterms and VAT
One component of VAT determination for goods is an understanding of if they are moving across a border and if yes, who is responsible for moving them – supplier or customer.
Within international trade the Incoterms issued by the International Chamber of Commerce are used to determine which party has responsibility for which aspect of the movement.
Within the EU the Incoterm used doesn’t determine the correct VAT treatment of a movement of goods. Although it can help to understand the intention of the parties. Most contracts for the supply of goods within the EU do, nevertheless, mention incoterms. In many cases contracts quote “Delivery Duty Paid” (DDP) even though it is often inappropriate. If a French company sells goods DDP to a German customer then the incoterm implies that the French supplier is responsible for all taxes due on the delivery. But if this is a B2B transaction, meeting the exemption conditions, then it’s the German customer who accounts for the acquisition tax.
While the UK was a member of the EU, incoterms weren’t really relevant for VAT. It also had little impact on the ability to move goods within the EU. It also had little impact on the need for EU VAT registrations since in many cases the customer would account for acquisition tax.
Unintended Consequences
But now, post-Brexit, UK companies may have “DDP” contracts with EU customers where there are potentially unintended consequences:
DDP requires the UK seller to export the goods from the UK and then import them into the EU. This gives rise to import VAT and possibly duty which may not be catered for in the budget.
DDP also requires the UK seller to account for local VAT unless the extended reverse charge applies – and for this, a local VAT registration may be required resulting in yet more cost and possibly a delay in delivery.
Renegotiate Incoterms
Now the only possible course of action is to renegotiate incoterms. This will take time and will only work if the goods haven’t already been delivered.
If the goods have been delivered but the required VAT registration is not in place there is the possibility of penalties and interest for late registration and late payment of VAT.
Automation can help here. A tax engine can process order information and determine the correct tax code. This is when placing the order and not when raising the invoice.
If this gives an unintended result, there may be time to renegotiate the incoterms or arrange the relevant VAT registration.
Take Action
Need help reviewing your VAT position and contracts post-Brexit? Find out how Sovos can help your business simplify VAT determination for every transaction, in any jurisdiction.
As vice president of product management for VAT EMEA, Ayhan leads product and solution strategies in his region with an emphasis on SAP. He manages a team comprised of a large group of tax experts that turn product vision into reality at the right time to meet the continuous changes of the global value added tax environment.
Ayhan was the chief technology officer at Foriba, which was acquired by Sovos in 2019. Here he led a team of 150+ people from product, project, and support organizations. At Foriba, he developed a management philosophy that the best results come when product strategy is led by the customers and designed by the experts. He continues to impress upon his teams the importance of listening to the customer and understanding their needs as the backbone of innovation.
A problem solver at heart, Ayhan credits his ability to solve complex problems with unusual methods obtained during his pursuit of his bachelor’s degree in nuclear physics from the Istanbul Technical University.
Outside of the work, Ayhan spends his time with sailing, cycling, and slowly but surely converting his vinyl record collection to audiophiles.
It’s good to see light at the end of the tunnel. Nonetheless, it’s too little, too late for many smaller – but also plenty of larger – companies. Thousands couldn’t weather the storm because they were particularly dependent on human contact. Others were affected disproportionally simply because COVID-19 hit them just as they traversed a difficult period in their life cycle. As we see the first successes of anti-COVID-19 vaccines, businesses and markets are gaining confidence that by the last quarter of 2021, countries will be back at a new cruising speed. With a few notable exceptions, many of the world’s strongest economies will take years to recover from the aftermath.
Internet to the rescue – but flaws remain
As with all crises, the past year has accentuated weaknesses and accelerated failures. Whilst it must be acknowledged that the COVID-19 crisis would have been far worse without the internet and the current state of technology adoption worldwide, remaining pockets of legacy processes where companies were lagging in their digital transformation have become highlighted as employees struggled to balance health concerns with the imperative to keep things running in deserted offices and data centers.
One area where inefficiencies have been exposed is on-premises software. Many companies have started adopting cloud-based software to support different categories of workflows and connections with trading partners; however, many larger companies have been reluctant to move core enterprise systems – such as ERPs, logistics or reservation systems – to the cloud. The reason behind this reluctance is often that legacy systems have been highly customized. Whilst many enterprise software vendors offer public-cloud versions that present many benefits over on-premises deployment in theory, the practical challenges of adapting organizations and processes to ‘canned’ workflows designed around standard best practices have often outweighed them.
Another set of challenges are more intricate. Manual processes still dominate in order and invoice management across companies of all sizes globally. Where workflow software allows accounting personnel to access the system remotely, approvals and postings could be managed from home offices, but the prevalence of paper in many vendor and customer relationships still required people to manage scanning, printing, and mailing or – yes – faxing key documents from offices with limited access.
These problems will be harder to overcome, as expensive industrial-strength machines for the processing of paper documents cannot easily be put in home offices. The answer to this challenge doesn’t lie in creative ways to convert people’s kitchens into scan or print centers, but in finally taking the big leap towards end-to-end data integration.
The good, the bad and the ugly of tax as an automation driver
Interestingly, if COVID-19 isn’t enough of a reason to take that automation leap, businesses can expect a helping hand from tax administrations. Many countries had already started large-scale programs to push continuous transaction controls (CTCs). Such as mandatory real-time clearance of digital invoices. The current global health crisis is pushing tax administrations to accelerate these programs. We have seen announcements of plans towards such compulsory e-invoicing or digital reporting of accounting data in countries like France, Jordan and Saudi Arabia. In addition to several countries including Poland and Slovakia who stated their intent to follow in the footsteps of countries in Latin America and also European frontrunners like Italy and Turkey. Even in Germany, which has long resisted the call of CTCs, a significant political party has proposed decisive action in this direction.
These initiatives are still often motivated by the need to close tax gaps. However the need for resilience in revenue collection is clearly another driver. Also, examples from countries like Brazil have shown that CTCs massively improve governments’ ability to track and monitor the economic effects of a crisis down to the smallest sectoral detail. This gives them granular data that can be used for surgical fiscal policy intervention to guide the most severely affected activities through a crisis.
With all circumstances conspiring to give businesses a reason to get across that last mile towards full automation – the interface between their and their trading partners’ sales and purchasing operations – you would think that companies are now putting plans in place to get ready for a fully digital, much more resilient set of processes and organizational structures.
Unfortunately, the way that CTC mandates get rolled out and the way that companies respond to them have historically rather slowed down investment in business process automation and the adoption of modern cloud-based enterprise software.
CTC mandates are unbelievably diverse, ranging from a full online second set of accounting books to be maintained through – among other things – additional classification of supplies in the government-hosted system in Greece, to a completely different setup including service providers and transaction payment reporting being designed in France. Representatives from China are talking about blockchain-based invoicing controls, whilst countries like Poland and Saudi Arabia prepare for centralized, government-run invoice exchange networks. Mandate deadlines tend to be too short, and tax administrations make countless structural adjustments – each typically also with short deadlines and only available in local language – during implementation periods and for years thereafter.
Tax administrations could however claim with some legitimacy that deadlines are always too short, almost regardless of how much transition time taxpayers are granted, because many businesses structurally prepare too late. The global trend towards CTCs, SAF-T and similar mandates has been apparent to companies for years, yet many are ill-prepared; particularly many multinational businesses continue to consider that VAT compliance is a matter to be resolved by local subsidiaries, which step by step creates a massive web of localized procedures which rather than corresponding to corporate best practices were designed by tax administration offices.
Creating a virtuous circle towards tax automation during Covid-19
Which brings us back to why companies aren’t adopting flashy new releases of enterprise software packages in public cloud mode. Or further automating their trading partner exchanges, more quickly. All parties in this equation want the same thing. That is seamless and secure sharing of relevant data among businesses, and between businesses and tax administrations. However kneejerk reactions to regulatory mandates by businesses, and lack of tax administrations’ familiarity with modern enterprise systems, are creating the opposite effect. Companies panic-fix local mandates without a sufficient understanding of the impact of their decisions. Neither on their future ability to innovate and standardize. The enterprise resources come first to put systems in place post-haste. They then manage the problems stemming from adopting a patchwork of local tax-driven financial and physical supply chain data integration approaches. This comes from IT budgets that then don’t get spent on proper automation.
Several things can break this vicious circle. Businesses should change their way of addressing these VAT digitization changes as revolutionary rather than evolutionary. By being well informed and well prepared, it is possible to adopt a strategic approach to take advantage of CTC mandates rather than suffer from them. Tax administrations must do their part by adopting existing good practices in designing, implementing, and operating digital platforms for mandatory business data interchange purposes. The ICC CTC Principles are an excellent way to give the world economy that much-needed immunity boost, allowing businesses and governments to improve resilience while freeing up resources locked up in inefficient manual business and tax compliance processes.
Insurance Premium Tax (IPT) in Spain is tricky. There are national and regional tax authorities. Let’s not forget numerous IPT variations. Compliance requires in-depth and far-reaching knowledge – mountains of which have been added to our ebook.
We’re here to help. The Sovos IPT team has created this ebook to help explain the rates, exemptions, settlements and penalties.
Use this practical guide to stay on the right side of risk.
Understand IPT in Spain on a macro and micro level
Minimise compliance and business risk
Written by IPT experts who know Spain top to bottom
Download now to navigate the nuanced IPT landscape in Spain, no matter where your company is based within the country or from afar.
As well as IPT on a national and regional level, it breaks down the fundamental components of the Consorcio de Compensación de Seguros (CCS) and the Fire Brigade Tax.
Overview of IPT
IPT rates and exemptions, challenges, settlement and penalty regime
Overview of the CCS
CCS rates and exemptions, challenges, settlement and penalty regime
Overview of Fire Brigade Tax (FBT)
FBT rates and exemptions, challenges and settlement
IPT is complex and failing to comply can have serious implications.
At Sovos, we focus on the details to provide you with peace of mind. We’re global tax compliance specialists. Our team of regulatory specialists monitor and interpret regulations around the world, so you don’t have to.
From understanding and meeting the demands of national IPT regulations to delivering dedicated fiscal representation and payment solutions, our business is in helping your business meet its specific regulatory requirements.
Sovos is a market leader for IPT compliance in Europe, filing up to 30,000 tax returns annually valued at €600m+ for our insurance clients. We do this in over 100 countries and 19,000+ jurisdictions around the world.
Ease your IPT compliance burden
Whether it’s meeting the demands of specific country IPT declarations or providing dedicated fiscal representation and payment solutions, our combined approach of people, skills and software can help you stay ahead of the constantly changing filing requirements.
The EU introduces the E-Commerce VAT Package and OSS on 1 July 2021. The previous delay from 1 January 2021 was due to the COVID-19 pandemic. COVID-19 is far from resolved with many Member States still suffering significantly with wide-ranging restrictions in place in many countries.
Regardless, the European Commission’s current plan is to press ahead with the implementation of the package. The package has the potential to generate significant additional tax revenues. The EU Commission estimates an additional €7 billion of tax revenue for Member States annually.
Combine this with the significant shift to online purchasing by consumers as a result of the various lockdowns in place and a further delay would perpetuate the benefit of low value consignment relief (LVCR) that sellers of goods delivered from outside the EU enjoy. This relieves low value imports from VAT whereas currently a local supplier must account for VAT irrespective of the value of the goods. The introduction of the new package removes LVCR on 1 July 1 2021.
Removal of low value consignment relief (LCVR)
LVCR has recently been removed by the UK Government so that all imports into Great Britain are now liable to VAT, with suppliers and deemed suppliers being liable to register and account for VAT for B2C sales where the goods are below £135.
The EU equivalent scheme will provide a mechanism for suppliers and deemed suppliers to be able to account for VAT in a single Member State for imports below €150 via the Import One Stop Shop (iOSS). Other versions of the One Stop Shop (OSS) will also be available for intra-EU distance sales of goods and cross border B2C supplies of services by EU companies (Union OSS) and supplies of B2C services by non-EU suppliers (non-Union OSS).
Will businesses be ready for the EU E-Commerce VAT Package changes?
There is concern around the preparedness of both Member States and businesses for the e-commerce VAT package changes. The European Commission released some guidance in the form of explanatory notes and a customs guide. However many questions remain unanswered.
The final piece in the puzzle from the Commission is the guide to the OSS. This will update the current guide to the Mini One Stop Shop to reflect the upcoming changes the e-commerce package will bring. In addition to covering crucial issues such as registration, returns and payment. The OSS guide release date is uncertain and time is running out.
At a Member State level, there is continuing evidence that not all tax authorities are ready for the change. The Dutch government is introducing emergency measures to be ready in time. It appears that its system will involve manual intervention by the tax authority which is far from ideal.
Additionally, the German customs authorities recently announced that the new electronic customs declaration for goods below €150 will not be operational until 1 January 2022. However it’s not entirely clear what impact this will have on iOSS being available in Germany.
Simplification for Businesses
It’s clear that the new OSS mechanisms will provide a simplification for businesses. As a result of allowing VAT to be accounted for in a single Member State. However, there are complexities that businesses need to fully consider. Businesses need to ensure that OSS is the right solution for them, and they are compliant with the rules.
The requirement to display the VAT paid by the customer before completing the order will require systems changes. This poses a challenge for many businesses at a time when many are already dealing with the trials of COVID-19, and in many cases Brexit. Add in the record keeping requirements and it’s clear that the simplification is not simple.
Failing to comply
Failure to comply with the rules can result in exclusion from the schemes. Consequently, business will need to register for VAT in all Member States where VAT is due. For e-commerce businesses currently registered for VAT in all Member States as a result of distance selling this would be a return to the current arrangements. However it’s likely that choosing to opt-in to OSS would cancel existing registrations in many countries. So there would be an additional cost and administrative burden in reinstating them.
For smaller businesses, removal from the scheme will be a significant increase in compliance costs. They are likely to currently only hold a registration in a small number of additional countries in addition to their home Member State. The new place of supply rules for intra-EU supplies of B2C goods don’t apply for certain EU established businesses. Those whose sales of intra-EU supplies of B2C goods and electronically supplied services are below €10,000. However many will exceed this, which will significantly increase their compliance burden in choosing not to use OSS.
Businesses therefore need to fully consider the impact of the new rules and determine whether OSS is right for them and if so, how they will ensure compliance with the rules. Additional guidance from the European Commission and tax authorities is urgently required given that a further delay seems unlikely.
Take Action
Get in touch to find out how we can help. In addition, watch our on-demand webinar to understand more about OSS and the upcoming EU VAT e-commerce package changes.
As vice president of sales for the EMEA region, Marc Hobell executes sales and growth strategies across product lines. He is a firm believer in doing the right thing for clients and partners the first time, every time. As Marc often impresses on his teams, focus on what needs to be done and do the right thing, not the popular thing.
Under Marc’s leadership, the EMEA commercial teams have continuously expanded through organic growth and acquisition integration.
Marc began his career in the Royal Navy before entering the private sector where he has spearheaded many different digital transformation projects with government departments and global commercial businesses.
When not in the office, Marc can be found spending time with his two, twenty something children and golfing. The recent adoptions of two labradoodles also means more days out on coast and forest walks have become frequent.
As vice president of product development for Sovos, Martin helps lead the way for the next wave of innovative products and solutions. He is passionate about software development and is an advocate for the DevOps culture. Approaching his role with a continuous improvement mindset, he believes that creativity is only bound by one’s imagination.
Martin has more than 20 years of product development and technology experience. Prior to joining Sovos, he co-founded TrustWeaver, a provider of cloud-based compliance services designed for electronic invoicing that was acquired by Sovos in 2018. As chief information officer at TrustWeaver Martin was responsible for the engineering, technical operation, 24/7, integration, support and internal IT teams.
A hands-on leader, he enjoys mentoring those who are early on in their careers. His best advice is to have conviction and a strong belief in what you are doing and set goals that are achievable and measurable, and you will find success.
When not in the office, Martin is most likely spending time with his family. He holds a Master of Science degree in computer science from Uppsala University in Sweden.
The basic principle of value added tax (VAT) is that the government gets a percentage of the value that is added at each step of an economic chain, which ends with the consumption of the goods or services by an individual. While VAT is paid by all parties in the chain, including the end customer, only businesses can deduct their input tax. For this reason, VAT requirements concerning invoices generally only apply between businesses.
Many governments use invoices as primary evidence in determining “indirect” taxes owed to them by companies. VAT is by far the most significant indirect tax for nearly all the world’s trading nations. Broadly speaking, it contributes over 30% of all public revenue. VAT as a tax method essentially turns private companies into tax collectors. The role of assessing the tax is critical which is why these taxes are sometimes referred to as “self-assessment taxes”.
The VAT Gap
VAT depends on companies meeting public law obligations as an integral part of their sales, purchasing and general business operations. The dependency on companies to process and report VAT makes it necessary for tax authorities to audit or otherwise control business transactions. But despite such audits, fraud and malpractice often cause governments to collect significantly less VAT than they should. The difference between the expected VAT revenue and the amount actually collected is the VAT gap.
In Europe, that VAT gap amounts to approximately €140 billion every year, according to the latest report from the European Commission. This amount equates to a loss of 11% of the expected VAT revenue across the EU. Globally, we estimate VAT due but not collected by governments because of errors and fraud could be as high as half a trillion EUR. This is comparable to the GDP of countries like Norway, Austria or Nigeria.
The VAT gap represents some 15-30% of VAT that should be collected worldwide. And these figures would certainly be much higher if lost tax revenue from unregistered business activity is added as the numbers only include bona fide, registered business activity.
Governments across the globe are enacting complex new policies to enforce VAT mandates. Through these mandates, they obtain unprecedented insight into economic data and close revenue gaps. Tax authorities are steadfast in their commitment to closing the VAT gap and will use all the tools at their disposal to collect revenue owed. This holds especially true in the aftermath of COVID-19 when governments epxect to face significant budget shortfalls.
VAT challenges and the cost of non-compliance
To close the VAT gap, countries are pushing tax authorities to comply with VAT requirements. As a result, they’re enforcing different legal consequences for irregularities. The consequences on noncompliance with VAT requirements can be huge. Most companies therefore want to be as certain as possible that they can quickly and easily prove their VAT compliance to avoid risks including:
Administrative fines
Sanctions under criminal law
Protracted audits
Spillover effects into other areas of taxation or accounting
Trading partner audits
Mutual assistance procedures
Loss of right to deduct VAT
Obligation to pay VAT over fraudulent invoices
At a time when the requirements from tax authorities globally are only set to increase, it’s clear that businesses need to be aware of the compliance challenges they face and prepare for what lies ahead.
The UK entered into a new relationship with the EU on 1 January 2021. The Transition Period ended and the EU-UK Trade and Cooperation Agreement (TCA) came into force. The UK fully implemented this into law but applied on a provisional basis by the EU. The European Parliament needs to ratify it. This is due by 28 February 2021. However there is a potential to extend this deadline.
However, irrespective of the status of the TCA, there have been a number of changes which have affected how goods move between Great Britain and the EU. It’s important to distinguish between Great Britain and the UK. This is because of the Northern Ireland Protocol which means that EU VAT rules continue to apply in Northern Ireland.
Even businesses that have carefully prepared are finding it challenging to navigate the new system.
There are a number of key factors that need to be considered.
1. Make sure an appropriate Economic Operators Registration and Identification (EORI) number is in place
An EORI number is essential for communicating with the customs authorities. So it is a must have for importing or exporting goods from the EU. Also from GB and Northern Ireland. A GB EORI is required for importing and exporting from Great Britain with an XI EORI required for Northern Ireland. It is only possible to have a single EU EORI and as the XI EORI is treated as an EU EORI number, the authorities in some Member States are cancelling EORIs issued in their country.
2. Make sure a customs agent is in place
In both the EU and the UK, non-established businesses will need an indirect representative for customs purposes. There is a shortage and demand is high so it’s essential that appropriate arrangements are in place in advance of imports and exports taking place.
3. Determine if TCA or other Free Trade Agreement (FTA) applies
The TCA was heralded as the solution to all problems, but it only applies in specific circumstances and the origin of the goods is key. This is a new area for many businesses and the rules can be complex so need to be fully considered.
4. Determine rate of duty if TCA or FTA does not apply
If the TCA or another FTA does not apply, it will be necessary to determine the rate of duty that will apply. The EU continues to apply the Common Customs Tariff but the UK introduced a new Global Tariff which applies from 1 January 2021 that needs to be considered.
5. Determine how to account for import VAT
The UK introduced postponed import VAT accounting which allows accounting for import VAT on the VAT return. This is not compulsory but provides a valuable cashflow benefit if applied. It has to be claimed when the customs declaration is submitted so appropriate instructions will have to be given to whoever is submitting the declaration.
The position varies around the EU. Not all Member States are offering postponed accounting and where it is available, the conditions for its use vary. It’s therefore essential to consider this to maximise cashflow.
There are many challenges to trading between the EU and the UK and goods can no longer move freely as they need to clear customs. Planning is therefore essential to ensure that goods can reach their destination without delay and commercial relationships do not suffer. Once the goods have reached their destination, it is necessary to consider the subsequent VAT treatment which needs to be done on a country by country basis especially for B2B supplies as rules can vary.
There is a plethora of misinformation and misconceptions surrounding Brexit and tax. The aim of this blog is to dispel such myths and clear up any confusion. We will dig deeper into news stories to explain the facts and keep you informed.
Brexit Myth 1 – Brexit’s unique taxation regime for EU imports
The story:
Immediately following the end of the transition period and the beginning of Brexit, the UK launched a ‘unique taxation regime’. This is in respect of importing goods for sale to private individuals.
A Dutch bike company posted an article on its website inviting readers to contact their elected representative in the UK. They asked them to complain about the new tax changes that prevented them from selling to UK customers.
Sellers established outside the UK charge UK VAT to private individuals where the shipment value is less than £135. As stated in a change to UK VAT law introduced on 1 January 2021.
The intention is to protect UK businesses from cheap foreign imports and to increase the tax take. The abolishment of ‘low value consignment relief’ (LVCR) achieved this. Ensuring payment of VAT on the real value of the goods.
For example, last year I could have gone on to Amazon to buy cycle parts. I might find that an EU cycle company would charge me £18 for a spare part. However, the same parts from a supplier in South East Asia might cost me £15.
This is because EU cycle parts companies must charge EU VAT (either NL or UK). Whereas the supplier outside of the EU could use Low Value Consignment Relief (LVCR) to legally bypass the payment of VAT. Some suppliers exploited this relief further by declaring that goods worth £30 were only worth £15. An example of fraudulent application of the LVCR.
But the decision to abolish LVCR is not a ’unique taxation regime’ launched by the UK. It already exists in several other countries including Australia, Norway and Switzerland and will soon be introduced by the EU.
EU vendors complained for years about unfair competition and the EU was also concerned by the loss of VAT revenue.
Taking this into account the EU launched a consultation period. The result was the E-Commerce VAT Package. It requires VAT payment by the vendor when importing goods into the EU and sold to private individuals; where the goods value is less than €150. The abolishment of LVCR is also part of this package.
The EU delayed the package, originally due for implementation on 1 January 2021, until 1 July 2021. As can be seen from the above, this will create similar issues as currently mentioned by some EU suppliers. They will, ironically, be the beneficiaries of this ‘unique taxation regime’. These suppliers will no longer face unfair price competition from suppliers outside of the EU.
The UK identified the same issues of unfair competition and tax leakage. On 1 January 2021 introduced legislation requiring vendors to account for VAT when importing goods with a value below £135 and sold to private individuals.
It is a fact that additional costs will incur in respect of customs formalities when importing goods into both the UK and the EU.
Brexit Myth 2 – UK goods shipped to the EU now liable for additional VAT charges
The story:
New rules mean goods shipped to EU countries are now liable for VAT when they enter the single market. A story appeared in Yahoo Finance with the headline “£34bn Brexit bill pushes companies to the brink”, where a tax reclaim company had estimated that levies could add £34bn ($47m) to the cost of UK trade with the EU.
The predication is that new post-Brexit VAT rules are adding billions of pounds to operating costs with import VAT. Possibly as high as 27%, imposed as a cost.
Darren Jones MP, the chair of the Commons’ Business, Energy and Industrial Strategy Select Committee, described the increased costs as a “kick in the teeth” for businesses and asked for the government to intervene.
But the £34bn ‘cost’ is just a myth.
The facts:
Any business importing goods into the EU need to pay import VAT on the relevant value. After importing the goods into the EU, they will normally be sold and be subject to local VAT – as is the case when importing goods into the UK and sold locally.
VAT is a neutral tax for business. So there is no real possibility of UK companies losing £34bn (or any VAT at all) if they act appropriately.
For example, a UK business imports goods into Germany from Great Britain and then sells them. Normally there is a requirement for the UK company to obtain a German VAT number and charge German VAT to its customer. It then offsets the import VAT it has paid against the output VAT it charges and remits the balance to the German tax authority.
When goods are imported ready for sale the import value is the same as the sales value. So, if a UK company imports goods worth €10,000 into Germany where no duty is applicable it will pay import VAT of €1,900. It will then sell these goods for €10,000 and charge €1,900 of output VAT. The import VAT is offset against the output VAT meaning all import VAT is fully recovered. There will, of course, be professional costs incurred in dealing with the German tax authority.
There are now 27 EU Member States and the VAT rules are not unified. It’s therefore possible that a UK business could incur import VAT and not have the requirement to charge output VAT so that offset isn’t possible.
In this case there is a refund mechanism to enable the UK company to recover the import VAT. Once again, there is a cost associated with this. However, Member States can refuse to accept a claim so that the import VAT is a real cost.
In short, import VAT is not a £34bn cost if businesses manage their affairs efficiently and compliantly. Changing incoterms so that the customer is the importer would solve all these problems. A full and thorough analysis of the position would enable UK businesses to recover import VAT and remain compliant, thereby reducing the possibility of penalties.
Similar principles apply to sales to private individuals. UK companies making such sales should also be able to benefit from the principle of tax neutrality if they act appropriately.
As manager, regulatory analysis and design, Filippa Jörnstedt oversees Sovos’ center of excellence for the EMEA region. A strong believer in the power of collaboration, Filippa encourages her teams to work across business functions and disciplines when it comes to solving complex problems.
During her time at Sovos, Filippa has played a key part in the design of Sovos’ Continuous Transaction Control (CTC) solutions while guiding clients in multiple countries through the challenges of CTC rollouts. As a respected industry voice, she is a frequent speaker at industry conferences.
Filippa views curiosity as a powerful ally in the journey to solve complex tax issues around the world. Knowing the law is essential but so is understanding what is driving governments as they seek to design the future of tax collection and tax enforcement. Understanding the macro-trends while trying to anticipate what comes next will better prepare you to meet short-term changes.
When not in the office, Filippa fills her free time traveling. A self-professed history nerd, she has lived in several different countries and speaks five languages.
The EU-UK Trade and Co-operation Agreement (TCA) was finally agreed on 24 December 2020. A week before the end of the transition period. Fully implemented into UK law, but the TCA remains provisional. It needs to be ratified in the European Parliament. Therefore it applies on a provisional basis until 28 February 2021.
The TCA covers several areas in addition to trade between the EU and UK dealing with investment, competition, State aid, maintaining a level playing field, fisheries and data protection. It was some of these areas that proved to be the most difficult to resolve during the negotiations.
How is the TCA different to the Customs Union?
The TCA provides for trade in goods between the UK and the EU to be on a zero tariff, zero quota basis. However, only if the goods meet the appropriate rules of origin. This reflects the reality that the TCA is not a replacement for the Customs Union. The Customs Union meant that once goods were in free circulation in the EU, they could move from one Member State to another without further payment of customs duty.
The TCA is different, and the origin of the goods is key. There are specific rules on determining origin and a system of self-certification is in place. For example, if goods are of Chinese origin, they won’t be covered by the TCA. So would be subject to whatever rate of customs duty applies in the EU when exported from Great Britain to the EU. This is in addition to customs duty that would apply in the UK based on the UK Global Tariff unless there was the application of an appropriate suspensive relief on arrival into the UK.
Mutual Assistance Provisions
The TCA also covers mutual assistance around VAT. These mutual assistance provisions may have an impact on the requirement for UK companies to appoint a fiscal representative in those countries where it’s required. However, until Member States formally change their requirements, it’s important that businesses meet their legal obligations as they currently stand.
Failure to appoint a fiscal representative when required may result in penalties imposed for not trading compliantly. In some cases could interrupt commercial transactions to the detriment of both the company and its customers.
The mutual assistance provisions may also have an impact on the requirement for UK companies to appoint an intermediary for the purposes of the Import One Stop Shop (IOSS). IOSS is proposed for implementation on 1 July 2021. The EU has a mutual assistance agreement with Norway. This means that Norwegian companies don’t need to appoint an intermediary for the purposes of IOSS. It’s hoped that the EU will extend this to companies in Great Britain.
VAT Position of Trade Between UK and EU
The VAT position of trade between the UK and the EU was largely known before the TCA was signed and is therefore not significantly impacted by the TCA. It was the UK ceasing to be a Member State and leaving the EU VAT area which determined the changes.
As a result, many businesses were able to take proactive action rather than awaiting the finalisation of the TCA. If a business did not take action to ensure ongoing VAT compliance, it’s essential to take the appropriate steps now. Furthermore, if businesses had a Brexit action plan, it is imperative that it’s implemented fully to remove risk.
The presence of a Customs border between the UK and EU means that goods cannot flow freely as they did in the past. Taking the appropriate steps to allow the goods to move is not the end of the story. Ensuring VAT compliance once the goods have arrived in the EU is essential. As is recognising that not all Member States have the same requirements.
Take Action
All businesses should review their current trading arrangements. Business need to ensure they are compliant and also that they’re trading in the most efficient way.
As vice president of consulting and compliance services for Europe, Andrew Hocking ensures the professional and accurate delivery of service between Sovos and our clients. He believes that our customer experience should be at the heart of everything we do and is passionate about meeting our client’s current needs while helping them prepare for the future.
Andrew led the transformation of Sovos’ consulting and compliance services as an integrated technology function across multiple tax lines and launched Sovos’ European customer success function, ensuring that all clients have multiple contacts dedicated to their experience and satisfaction.
Collaboration and building meaningful relationships are important to Andrew. He believes that problems are best solved together, and that the most effective collaboration is built on trust.
When not in the office, Andrew enjoys exploring different parts of Europe with his family, trying new recipes and wine. Finding time to squeeze in some cricket, rugby or golf are also high on his priority list.
We recently launched the 12th Edition of our Annual Trends Report. We put a spotlight on current and near-term legal requirements across regions and VAT compliance domains. The report, “VAT Trends: Toward Continuous Transaction Controls” is authored by a team of international tax compliance experts and provides a comprehensive look at the regulatory landscape as governments across the globe are enacting complex new policies to enforce VAT mandates, obtain unprecedented insight into economic data and close revenue gaps.
Central to this year’s edition is our focus on four emerging tax mega-trends with potential to drive change in the way multinational businesses approach regulatory reporting and manage tax compliance.
The Four Tax Mega-Trends
The mega-trends include:
Continuous Transaction Controls (CTCs) – Countries with existing CTC regimes are seeing improvements in revenue collection and economic transparency. Now, other countries in Europe, Asia and Africa are moving away from post-audit regulation to adoption of these CTC-inspired approaches.
A shift toward destination taxability for certain cross-border transactions – Cross-border services have historically often escaped VAT collection in the country of the consumer. Due to a large increase of cross-border trade in low-value goods and digital services over the past decade, administrations are taking significant measures to tax such supplies in the country of consumption or destination.
Aggregator liability – With the increase of tax reporting or e-invoicing obligations across different taxpayer categories, tax administrations are increasingly looking for ways to concentrate tax reporting liability in platforms that naturally aggregate large numbers of transactions already. Ecommerce marketplaces and business transaction management cloud vendors will increasingly be on the hook for sending data from companies on their networks to the government, potentially even inheriting liability for paying their taxes.
E-accounting and e-assessment – Combining CTCs with obligations to synchronize entire accounting ledgers makes onsite audit necessary only in cases showing major anomalies across these rich data sources. Over time, the objective is for VAT returns and other tax reports to be prefilled by the tax administration based on taxpayers’ own, strongly authenticated source system data.
According to Christiaan van der Valk, lead author of the report and vice president of strategy at Sovos, continuous transaction controls have emerged as the primary concern for multinational companies looking to ensure tax compliance despite growing diversity in VAT enforcement approaches. Tax authorities are steadfast in their commitment to closing the VAT gap. As a result they will use all tools at their disposal to collect revenue owed. This holds especially true for the aftermath of COVID-19, when governments are expected to face unprecedented budget shortfalls.
Beyond the mega-trends, our report includes a major review of country and regional requirement profiles. These profiles provide a snapshot of current and near-term planned legal requirements across the different VAT compliance domains. The report also examines how governments have embraced digital transformation to speed revenue collection, decrease fraud and narrow VAT gaps.
“VAT Trends: Toward Continuous Transaction Controls” is the most comprehensive report of its kind. It provides an objective view of the VAT landscape with unbiased analysis from tax and regulatory experts with years of experience navigating the world’s most complex tax environments. If you are a tax, IT or legal professional working with multi-national companies, we strongly encourage you to download and become familiar with the subject-matter contained within. The pace of change for tax and regulatory environments is accelerating and this report will get you prepared.
The European Union’s VAT E-Commerce Package has been delayed until 1 July 2021. Consequently, in the New Year businesses will have to contend with both Brexit related VAT changes and the impact of the One Stop Shop – amounting to two new set of rules for VAT reporting in 2021.
Treatment of B2C goods and services after 1 July 2021
From 1 July 2021, the EU introduces new rules extending the Mini One Stop Shop (MOSS) to B2C supplies. The rules apply where VAT is due in a Member State other than that in which the supplier is established and intra-EU B2C supplies of goods. These rules are currently available for VAT accounting on B2C sales of Telecommunications, Broadcasting and Electronic Services (TBES). The new system, known as the One Stop Shop (OSS), had an original launch date of 1 January 2021.
How will OSS work?
OSS will abolish current distance selling thresholds. In addition, all intra-EU supplies of B2C TBES services plus intra-EU distance sales of goods will operate under the same €10,000 limit. When this limit is exceeded, VAT will be due in the Member State of delivery. This is regardless of the level of sales in that country. Important to note is that this threshold applies to EU established companies and will not apply to UK businesses.
A single VAT return accounts for Any VAT due can be accounted for via a single VAT return, submitted in the Member State of Identification – the country in which the business is registered for OSS. Any company established in the EU will use the country in which they operate as the Member State of Identification. If there is no business establishment in the EU, then a Member State can be chosen. Provisions also apply to non-EU businesses supplying services in the form of the non-union OSS scheme. OSS is not compulsory – businesses can choose to have a registration in all Member States where VAT is due.
Union scheme – goods dispatched from within the EU
The dispatch of goods from physical locations, such as warehouses in the EU, will continue to be treated as distance selling. If any thresholds are exceeded, VAT will be due in the Member State of delivery.
Consequently, OSS will be available to all sales of goods, regardless of their value. OSS accounts for VAT in the Member State of Identification at the rate in place in the country where VAT is due. That is the Member State of Consumption. Any VAT owed will be paid to the Member State of Identification, and OSS returns must be submitted.
Import OSS (IOSS) – goods dispatched from outside the EU
If the UK is not treated as a Member State at the time in which goods are dispatched from its territory, the sale will not fall under the Distance Selling regime. The goods will be treated in line with their intrinsic value, with differences above and below €150.
Goods imported from third countries or territories to customers in the EU up to an intrinsic value of €150 will be covered by an import scheme. Like the system being implemented in the UK from 1 January 2021. This import scheme accompanies the abolition of the current VAT exemption for goods in small consignments of a value of up to €22. However, if goods have a value above €150, VAT cannot be accounted for under IOSS and a full customs declaration will be needed.
Marketplaces
Goods imported from third territories or third countries in consignments with an intrinsic value of less than €150 using an electronic interface such as a marketplace, platform, portal or similar means, will also be treated differently. This applies to sales via platforms such as Amazon. Under the changes, the platform will be deemed to have received and supplied goods in their own right. Interestingly, it’s irrelevant whether the goods are supplied by EU or non-EU suppliers. The marketplace rules also apply to non-EU sellers supplying goods via a marketplace where the goods are already located in the EU at the time of sale.
What next?
Until the application of the new rules, Member States must transpose the new rules of the VAT Directive. The Directive is already in place into their national legislation. Some Member States already are doing this. Though as yet unconfirmed, many believe OSS could be further delayed. Both the Netherlands and Germany have concerns about preparedness for the July 2021 start date.
For UK businesses, Brexit makes things particularly complex. After the implementation of OSS, UK businesses can make use of the e-commerce package changes. However, during the 6-month delay in 2021, registrations and fiscal representatives could be necessary for a short time. It’s essential businesses plan their supply chain with all the upcoming changes in mind.
Take Action
Get in touch to find out how we can help your business with the new rules.
