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2018 Management Letter – VAT on e-commerce – offline sales from non-EU based traders

Mar 06, 2018

0 Executive summary
0.1
In earlier work we examined taxation regarding e-services (online sales) provided by traders located outside the European Union (non-EU based businesses). We found that only few e-commerce traders were registered to pay tax and that practically no checks were carried out. This was the driver for us to expand our audit work to non-EU based traders that deliver consignments (offline sales) to final consumers in Germany.

0.2
In general, non-EU businesses trade on e-marketplaces to offer their goods. The marketplace thus gathers relevant data on such traders’ turnover. In order to reduce delivery times, traders temporarily store their goods in fulfilment houses located in the target country. The customs administration imposes value added tax (VAT) on the import of goods. Once a customer has purchased an item over the internet, the consignment is sent from the fulfilment house to the customer. In Germany, VAT is due on consignments ordered over the internet.

0.3
We found that, as a rule, non-EU based online traders  did not comply with their duty to pay VAT in Germany, irrespective of whether or not they paid import VAT. The tax authorities only captured data on businesses that had voluntarily registered with the tax authorities or on which operational data or intelligence was available. Tax authorities are neither aware of the actual number of non-EU based businesses selling goods in Germany nor of their offline sales that are subject to VAT. Therefore, the number of non-registered online retailers is likely to be largely understated.

0.4
We also found that even registered non-EU based businesses did not comply with their duty to pay VAT in Germany. They often failed to file returns or pay VAT. Frequently, tax authorities did not succeed in enforcing their tax regime. This led to number of cases of VAT shortfalls since the tax due was higher than the import VAT paid.

0.5
We considered it imperative that the tax authorities ensure that VAT revenues be collected from offline sales. To this end, we recommended that the Federal Ministry of Finance ensure that e-marketplaces in the European Union are also subjected to taxation. Such e-marketplaces should be held liable to remit the VAT imposed on the businesses to the respective member state’s tax authorities. In addition to that, we recommended that the businesses designate a fiscal representative in the target country.

0.6
The Federal Ministry of Finance stated that a working group composed of representatives of the Federal Government and the Federal States was discussing our recommendations. The Ministry stated that the Conference of the Ministers of Finance of the Federal States had requested it to develop a provision governing the liability of e-marketplaces and to consider the pros and cons of an additional fiscal representative rule. The Ministry intended to submit a Bill in the first quarter of 2018. According to the Ministry, at its initiative, in December 2017, the European ministers of finance had adopted far-reaching measures to ensure that tax revenue from online trading be collected in full.

0.7
We welcome the steps taken at European level according to which e-marketplaces will be covered by taxation of non-EU based online traders. In order to address tax erosion prior to the implementation of the EU measures in 2021, we hold that timely action needs to be taken at national level. The duty to designate a fiscal representative for non-EU businesses and imposing on e-marketplaces the liability to remit VAT are appropriate instruments for enforcing tax claims.

 

Implement measures to prevent VAT losses in e-commerce as speedily as possible

The German SAI appreciates the measures adopted at EU level in December 2017 to ensure that tax revenue from online trading is collected in full. In the future, e-marketplaces will also have to share in the burden of responsibility. They will have the obligation to remit the VAT imposed on the non-EU based internet traders operating on their marketplaces to the tax authorities. In doing so, tax authorities will have appropriate means of inspection and enforcement to effectively impose their tax regime. However, the new EU regulations do not take effect until the beginning of 2021 and need to be transposed into national law beforehand. “That is why Germany should take national measures as speedily as possible already before 2021 in order to limit the scale of VAT losses for German tax authorities and significant distortions of competition at the expense of domestic traders”, said Kay Scheller, President of the German SAI. Holding e-marketplaces liable to remit VAT, a measure announced by the two government levels is considered an appropriate means for enforcing tax claims by the German SAI. As a supplementary measure to the liability rule, the SAI demands introducing a fiscal representative rule for non-EU businesses. That way, tax authorities would have a domestic professional contact.

Germany loses significant VAT revenue on consignments ordered over the internet. Tax authorities are not aware of the number of non-EU based traders selling their goods ordered on e-marketplaces in Germany. Usually, data are captured only on traders that register voluntarily for VAT or on whom inspection data is available. Thus, the tax authorities do not know the amount of the returns from online trading. Online traders known by the tax authority often undervalue their goods when importing them into the European Union, do not file  tax returns or simply do not pay VAT. As a result, Germany faces significant VAT losses. Also non-EU based traders that do not pay VAT gain a major competitive advantage over domestic traders.

Tax authorities have so far been largely powerless to put matters right. On the one hand, the tax authorities do not at all know against whom they should take steps in light of the high number of online traders operating in Germany. On the other hand, even if they know the traders they often cannot impose tax due since they do not possess effective means of enforcement against non-EU based traders.

In 2013 and 2015, the SAI already studied “the internet as a tax haven” and highlighted relevant shortcomings.

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