Explanatory Memorandum to COM(2016)757 - Amendment of Directive 2006/112/EC and Directive 2009/132/EC as regards certain VAT obligations for supplies of services and distance sales of goods

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dossier COM(2016)757 - Amendment of Directive 2006/112/EC and Directive 2009/132/EC as regards certain VAT obligations for supplies of services and ...
source COM(2016)757 EN
date 01-12-2016


1. CONTEXT OF THE PROPOSAL

• Reasons for and objectives of the proposal

The European Commission is committed to ensuring the free movement of goods and services and to ensuring that “individuals and businesses can seamlessly access and exercise online activities under conditions of fair competition”. In terms of the current VAT rules, the May 2015 Communication A Digital Single Market Strategy for Europe 1 and the April 2016 Communication on an action plan on VAT: Towards a single EU VAT area - Time to decide 2 have placed a high priority to overcoming barriers to cross-border e-commerce arising from onerous VAT obligations as well as an inherent lack of neutrality which harms EU business. The proposals will modernise the current VAT rules that apply to e-commerce activities and help making VAT future-proof.

There are in essence three reasons to act:

• First, the complexity of VAT obligations has consistently been identified as one of the key reasons why a business will not engage in cross-border e-commerce, and therefore it means that the single market cannot be accessed by many businesses. It has been estimated that the costs of complying with VAT obligations are on average EUR 8 000 annually for each Member State which a business supplies to. This is a significant cost for business, in particular SMEs.

• Second, the current system is not neutral as EU businesses are at a clear disadvantage to non-EU businesses which can legitimately and through high levels of non-compliance make VAT-free supplies into the EU. Given that VAT rates can be as high as 27%, there is a substantial distortion in favour of non-EU business if VAT is not applied.

• Third, the complexity of the existing system as well as the current exemption for the importation of small consignments means that Member States lose valuable tax revenues. It is estimated that between VAT foregone and non-compliance from cross-border e-commerce such losses are currently as high as EUR 5 billion annually.

In preparing this proposal the Commission as part of the Better Regulation agenda carried out a regulatory fitness check of the existing Mini One Stop Shop (MOSS) which applies to B2C supplies of electronic services as well as the 2015 changes to the place of supply rules for such services. The proposal takes due account of this assessment. In particular, the proposal will address shortcomings and barriers faced by SMEs and micro-businesses. In quantitative terms, the introduction of an intra-EU cross-border threshold in 2018 will take 6 500 businesses out of the current MOSS system leading to a potential cost saving for these businesses of EUR 13 million. The introduction in 2018 of simplified evidence requirements will benefit an additional 1 000 businesses. The threshold which will also apply to goods when the MOSS is extended in 2021 will benefit 430 000 businesses with potential savings to these businesses of up to EUR 860 million.

The REFIT aspect of the initiative also relates to the main objectives of the new initiative, which is 'minimising burdens attached to cross-border e-commerce arising from different VAT regimes'. In terms of deliverables, the proposal is expected to reduce VAT compliance costs for businesses by EUR 2.3 billion a year from 2021 while at the same time increasing VAT revenues for Member States by EUR 7 billion. Further, the extension of the MOSS in 2021 also takes on board certain shortcomings identified under the REFIT assessment of the 2015 initiative such as the need for home country rules in terms of invoicing requirements, coordination of audits, communications with taxpayers and indeed including a threshold for suppliers of goods as well as services.

• Consistency with existing policy provisions in the policy area

The general objectives of the proposal are the smooth functioning of the internal market, the competitiveness of EU business and the need to ensure effective taxation of the digital economy. The proposal is consistent with the future application of the destination principle for VAT as set out in the recent VAT Action plan supported by Council 3 .

In addition to the VAT Action Plan, the proposal has been identified as a key initiative in the Digital Single Market Strategy 4 ('DSM Strategy') as well as the Single Market strategy 5 and the E-Government Action Plan 6 .

2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY

• Legal basis

The proposal is based on Article 113 of the Treaty on the Functioning of the European Union (TFEU). This article provides for the Council, acting unanimously in accordance with a special legislative procedure and after consulting the European Parliament and the Economic and Social Committee, to adopt provisions for the harmonisation of Member States' rules in the area of indirect taxation.

• Subsidiarity

The proposal is consistent with the principle of subsidiarity as the main problems which have been identified (distorting effects, high administrative costs, etc.) are triggered by the rules of the existing VAT Directive and associated acts. Given that VAT is a tax harmonised at EU level, Member States cannot by themselves set different rules and therefore any initiative to modernise VAT for cross-border e-commerce requires a proposal by the Commission to amend the VAT Directive. The proposal will clearly offer value over and above what can be achieved at Member State level given that the principle simplification is the MOSS system applying in all Member States and available to business to simply and efficiently account for tax due to all Member States. A soft law approach, such as Member States voluntarily applying a MOSS is not feasible as it is an exception to the normal rules and thus requires a coordinated approach underpinned by IT infrastructure.

• Proportionality

The proposal is consistent with the principle of proportionality i.e. it does not go beyond what is necessary to meet the objectives of the Treaties in particular the smooth functioning of the single market. As with the subsidiarity test, it is not possible for Member States to address the problems and problem drivers without a proposal to amend the VAT Directive. The proportionality of the proposal has a number of important aspects. Firstly, the two stage implementation of the proposal recognises that certain measures such as the threshold and simplified obligations can be introduced in 2018 without the need for any IT development. However, the implementation date of 2021 for the main elements of the proposal recognises that Member States will require a suitable period of time to ensure that the IT systems can be developed and tested. This also enables further consultation with business. Secondly, it is recognised that while there will be challenges for customs administrations given that the removal of the VAT exemption for the importation of small increases will lead to a significant increase in the number of parcels where VAT must be collected, this will be mitigated by the simplification offered through the MOSS import scheme for all parcels up to EUR 150 in value, the increase in VAT revenues for Member States of EUR 7 billion annually and the level playing field for EU business who are currently at a disadvantage.

• Choice of the instrument

The proposal requires amending four legal acts. The primary amendments will be made to Directive 2006/112/EC on the common system of value added tax 7 (the VAT Directive) and Regulation (EU) 904/2010 on administrative cooperation and combating fraud in the field of value added tax 8 . Relatively minor amendments will be made to Directive 2009/132/EC determining the scope of Article 143(b) and (c) of Directive 2006/112/EC as regards exemption from value added tax on the final importation of certain goods 9 and Regulation (EU) 282/2011 laying down implementing measures for Directive 2006/112/EC on the common system of value added tax 10 .

3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS

• Stakeholder consultations

The consultation strategy had two main purposes. The first was to assist with the analysis under REFIT of the implementation of the 2015 changes to the place of supply rules and the MOSS, and the second was to get the views of stakeholders on the Commission’s commitment in the Digital Single Market Strategy to modernise the VAT framework for cross-border e-commerce.

There were four main aspects to the consultation process:

Consultations and stakeholder workshops undertaken by Deloitte as part of the Study on Options for the modernisation of cross-border e-commerce (February 2015 – July 2016);

Fiscalis seminar (September 2015, Dublin) with Member States and business;

Targeted consultation with key stakeholders;

Open public consultation 11 .

The impact of the various options on SMEs has been a central objective of this impact assessment. Specific measures have been undertaken to understand and address the issues faced by SMEs which have informed this assessment both in quantitative and qualitative terms. In this respect, an online survey was specifically directed at small and micro-business and their representative groups and the Commission ensured that SMEs were represented at the stakeholder conference.

Further details can be found in Annex 2 Synopsis report stakeholder consultation of the Impact Assessment.

The concerns raised during the consultation process by businesses and business associations, including small and medium enterprises, mainly relate to the 2015 place of supply rules and application of the MOSS for the services concerned (need of a threshold, use home country rules for certain specific VAT obligations like invoicing and record keeping, audit coordination, etc.) and are largely reflected by this proposal.

• Collection and use of expertise

The Commission used the analysis carried out by Deloitte for the Study 'VAT Aspects of cross-border e-commerce – Options for modernising' (February 2015 – July 2016), Lot 1, Lot 2 and Lot 3. The Study is published on the Commission's website at the following page: ec.europa.eu/taxation_customs/taxation/vat .

The aim of the study was threefold. Firstly, to provide an economic analysis of the VAT aspects of e-commerce under the current VAT rules (Lot 1). Secondly, to assess the impact of options under consideration for the modernisation of VAT aspects of cross-border e-commerce (Lot 2). Thirdly, to assess the implementation of the changes to the place of supply rules for telecommunications, broadcasting and electronic services (hereafter electronic services) and the associated MOSS which came into effect in January 2015 (Lot 3).

In addition, two meetings were organised with experts. A Fiscalis 2020 seminar was organised in September 2015 in Ireland where both VAT experts from Member States' and business participated. The main purpose of the Seminar was to assess the 2015 place of supply rules and the MOSS, as well as the options for modernisation of the VAT for cross-border e-commerce which were included in the inception impact assessment for the proposal. A second Fiscalis 2020 and Customs 2020 workshop was organised in April 2016 in Sweden where tax and customs experts of the Member States participated mainly to look into the import side of the proposal (removal of the VAT exemption for the importation of small consignments and extension of MOSS to importation of small consignments up to EUR 150).

Both meetings had a good outcome and the recommendations received during these meetings were further considered in this proposal.

• Impact assessment

The Impact Assessment for the proposal was considered by the Regulatory Scrutiny Board on 22 June 2016. The Board gave a positive opinion to the proposal with some recommendations that have been taken on board. The opinion of the Board and the recommendations are included in Annex 1 to the Staff Working Document for the impact assessment accompanying this proposal. The executive summary sheet is available at the following page: https://ec.europa.eu/taxation_customs/business/vat/digital-single-market-modernising-vat-cross-border-ecommerce_en .

• Regulatory fitness and simplification

This proposal is included under the REFIT programme, and in this respect an assessment of the implementation of the 2015 changes to the place of supply rules for electronic services and the implementation of the MOSS system for these services was carried out. This assessment shows that the MOSS has saved businesses EUR 500 million compared to the alternative of direct registration and payment – on average EUR 41 000 per business. This represents a 95% reduction in costs compared to the alternative of direct registration.

The assessment of the MOSS has also been very useful in ensuring that the new initiative recognises the positives and addresses any shortcomings of the 2015 changes. For instance, this proposal includes the introduction in 2018 of a cross-border threshold applying to services covered by the 2015 changes as well as a relaxation on the need for two pieces of evidence for suppliers of electronics service who have less than EUR 100 000 turnover (the so called soft-landing).

4. BUDGETARY IMPLICATIONS

The proposal is estimated to increase VAT revenues for Member States by 2021 by EUR 7 billion annually. It is estimated that the proposal will reduce administration burdens for business by EUR 2.3 billion annually.

The cost implications for Member States should be limited given that the extension of the MOSS is an evolution of an existing IT system.

5. OTHER ELEMENTS

• Implementation plans and monitoring, evaluation and reporting arrangements

Implementation will be overseen by the Standing Committee on Administrative Cooperation (SCAC). As with the 2015 changes, the SCAC will be supported by the Standing Committee on Information Technology (SCIT).

• Overview of the main provisions in the proposal

The main provisions of the proposal are:

the extension of the existing MOSS to intra-Community distance sales of tangible goods and services other than electronic services as well as to distance sales of goods from third countries;

the introduction of a simplified arrangements for global declaration and payment of import VAT for importers of goods destined for final consumer where VAT has not been paid through the MOSS system;

the removal of the existing intra-Community distance sales thresholds which are a cause of distortions in the single market;

the removal of the existing VAT exemption for the importation of small consignments from suppliers in third countries which disadvantages EU sellers;

the introduction of common Community-wide simplification measure including a VAT threshold for intra-Community distance sales of goods and electronic services to help small start-up e-commerce businesses as well as simplified rules for the identification of customers;

allowing for EU sellers to apply home country rules in areas such as invoicing and record keeping; and

greater coordination between Member States when auditing of cross-border businesses who use the VAT system to ensure high compliance rates.

• Detailed explanation of the specific provisions of the proposal

Article 1 – amendments to the VAT Directive – provisions with effect from 1 January 2018

Point 1 of Article 1 proposes a clarification to Article 28 of the VAT Directive, reflecting discussions in the VAT Committee. The words including cases where a telecommunications network, an interface or a portal is used for that purpose are added to the provision, so as to clarify that this Article also applies where an electronic service is provided through an intermediary or a third party who is acting in his own name but on behalf of another person and who is using an electronic interface to make the supply.

Points 2 to 7 of Article 1 propose a number of improvements to the current special schemes for the taxation of electronic services supplied by non-established taxable persons to non-taxable persons laid down in Chapter 6 of Title XII of the VAT Directive. Those improvements, which do not require any changes to the electronic registration and payment system (the MOSS) allowing businesses supplying such services to register and to declare and pay VAT in a single Member State on all supplies to customers established in the Community (the Mini-One-Stop-Shop or MOSS) and which result from the evaluation of the MOSS including trade consultation, are the following:

Point 2: paragraphs 2 to 5 are added to Article 58 of the VAT Directive so as to introduce a threshold of EUR 10 000 below which the place of supply of services that may be covered by the intra-Community special scheme for electronic services remains in the Member State of the supplier. This should however be optional for taxable persons so as to allow them to use the MOSS anyhow, e.g. if during a calendar year their turnover is exceptionally below the threshold.

Point 3: Article 219a of the VAT Directive is amended to provide that the invoicing rules of the Member State of identification apply. As a consequence, suppliers should respect the invoicing rules of a single Member State instead of, as is the case today, of each Member State of destination to which supplies are made.

Points 4 and 5: taxable persons not established in the Community but having a VAT registration in a Member State (e.g. because they carry out occasional transactions subject to VAT in that Member State) can use neither the special scheme for taxable persons not established in the Community (the non-Union scheme), nor the special scheme for taxable persons established in the Community (the Union scheme). Hence, they cannot currently benefit from the simplifications offered by the MOSS and have to register for VAT in each Member State to which they supply electronic services. To allow such taxable persons to use the non-Union scheme, the proposal deletes the words and who is not otherwise required to be identified for VAT purposes in the definition of taxable person not established within the Community in Article 358a of the VAT Directive and adapts Article 361(1)(e) of the VAT Directive accordingly.

Points 6 and 7: Articles 369(2) and 369k(2) of the VAT Directive are amended to provide that the period for keeping records in the non-Union scheme and Union scheme respectively, is the period defined by the Member State of identification of the taxable person instead of the current period of 10 years, which largely exceeds the record keeping requirements of most Member States.

Article 2 – amendments to the VAT Directive – provisions with effect from 1 January 2021 – Extension of the MOSS

This Article contains the provisions required to extend the application of the current special schemes for the taxation of electronic services laid down in Chapter 6 of Title XII of the VAT Directive to other services as well as to distance sales of goods, both intra-Community and from outside the Community. Consequently, the definitions of electronic services in Article 358 of the VAT Directive can be removed but a definition of distance sales needs to be added (point 11). This Article also proposes a number of further improvements to the current special schemes. The proposed date of entry into application is 1 January 2021 as these changes also require laying down detailed implementing provisions and adaptations to the IT system for registration and declaration and payment of the VAT (the MOSS).

Contents

1.

1. Special scheme for taxable persons not established in the Community supplying services to non-taxable persons in the Community (non-Union scheme)


The proposal extends the special scheme for non-established taxable persons supplying electronic services to non-taxable persons in the Community (Chapter 6, Section 2 of Title XII of the VAT Directive) to other services. This requires the following changes to the VAT Directive:

– Adding a definition of Member State of consumption in Article 358a, providing that this is the Member State in which the supply of services is deemed to take place according to Chapter 3 of Title V of the VAT Directive (point 13).

– Replacing the reference to telecommunication services, broadcasting services or electronic services by services in the title of Section 2 (point 12) as well as in Articles 359, 363, 364 and 365 of the VAT Directive (points 14, 16 and 17);

In addition, two further improvements to this scheme resulting from the evaluation of the MOSS are proposed (point 17):

– An amendment to Article 364 of the VAT Directive extending the deadline to submit the VAT return from 20 to 30 days following the end of the tax period;

– An amendment to Article 365 of the VAT Directive (points 14, 16 and 17) providing that corrections to previous VAT returns can be made in a subsequent return instead of in the returns of the tax periods to which the corrections relate.

2.

2. Special scheme for intra-Community distance sales of goods and for services supplied by taxable persons established within the Community but not in the Member State of consumption (Union scheme)


The proposal extends the special scheme for electronic services supplied by taxable persons established within the Community but not in the Member State of consumption (Chapter 6, Section 3 of Title XII of the VAT Directive) to other services supplied to non-taxable persons as well as to intra-Community distance sales of goods. This requires the following changes to the VAT Directive:

– Adding a definition of intra-Community distance sales of goods to Article 369a of the VAT Directive (point 20(a)). The concept is defined by reference to Article 33(1) of the VAT Directive. The proposal also clarifies Article 33(1) in line with the guidelines of the VAT Committee. Furthermore, as the suppliers making intra-Community distance sales of goods will have the possibility to use the MOSS and declare and pay VAT on all their distance sales in a single Member State, the proposal removes the current thresholds laid down in Article 34 of the VAT Directive below which distance sales remain subject to VAT in the Member State where the transport or dispatch begins (points 3 and 4). These thresholds are replaced by a threshold of EUR 10 000 for micro-businesses below which the place of the supplies covered by this special scheme remains in the Member State where the supplier is established (points 5 and 6). In accordance with Article 1, point 2 of the proposal, this threshold should apply as of 1 January 2018, for supplies of electronic services only. As of 2021, this threshold should become a global threshold applying to electronic services and intra-Community distance sales of goods. Hence, it should be removed from Article 58 and inserted in a new Chapter 3a (new Article 59c) in Title V of the VAT Directive. Finally, the obligation to issue an invoice for intra-Community distance sales laid down in Article 220(1), point (2) should be removed where this special scheme is used (point 9), as this obligation is linked to the current intra-Community distance sales regime requiring the monitoring of the national thresholds.

– Adding a definition of Member State of consumption to Article 369a of the VAT Directive (point 20(b)). This is the Member State in which the supply of services is deemed to take place according to Chapter 3 of Title V of the VAT Directive or, in the case of distance sales, the Member State where the dispatch or the transport of the goods to the customer ends;

– Amending the heading of Section 3 as well as Articles 369b, 369c, 369e, 369f, 369h and 369i, 369j and 369k of the VAT Directive following the extension of the scope of this Section (points 19, 21 and 23 to 28). In particular, references to the taxable person not established in the Member State of consumption are replaced by the taxable person making use of this scheme, as the requirement not to be established in the Member State of consumption does not apply to intra-Community distance sales of goods;

– Extending the content of the VAT return in Article 369g(1) of the VAT Directive, so as to include also data concerning distance sales of goods (points 24). Taxable persons carrying out both supplies of services and distance sales of goods under this special scheme should be able to declare both types of supplies in the same VAT return. The new Article 369g(2) of the VAT Directive provides that where a single taxable person supplies goods from different Member States under this special scheme, the VAT return shall provide a breakdown of these supplies per Member State of consumption for each Member State of dispatch. This provision is similar to the existing provision for electronic services in the second paragraph of the current Article 369g of the VAT Directive, which now becomes paragraph 3 of Article 369g.

In addition, as for the non-Union scheme, the proposal extends the deadline to submit the VAT return from 20 to 30 days following the end of the tax period in Article 369f of the VAT Directive and, in Article 369g i of the VAT Directive, provides that corrections to previous VAT returns can be made in a subsequent return instead of in the returns of the tax periods to which the corrections relate (points 24).

Finally, a clarification to Article 14(2)(c) of the VAT Directive is proposed (point 1), similar to the clarification proposed to Article 28 of the VAT Directive (point 1 of Article 1), so as to clarify that this Article also applies where online sales of goods are made through an intermediary or a third party who is acting in his own name but on behalf of another person and who is using an electronic interface to make the supply (e.g. an electronic platform).

3.

3. Special scheme for distance sales of goods imported from third countries or third territories of an intrinsic value not exceeding EUR 150 (the import scheme)


A new Section 4 is added to Chapter 6 of Title XII of the VAT Directive creating a special scheme for distance sales of goods imported from third countries or third territories (point 29). This Section has the same structure and is based on the same principles as the special schemes of Sections 2 and 3 of Chapter 6.

Article 369l lays down the definitions applying to this Section. The definition of distance sales of goods imported from third countries lays down the scope of this special scheme, which covers sales of goods in consignments of an intrinsic value 12 not exceeding EUR 150, the place of supply of which is governed by Article 33(2) of the VAT Directive. It currently provides that where goods sold on distance are imported into a Member State other than the Member State in which the transport to the customer ends, a supply of goods is deemed to take place in the latter Member State. To allow the use of the special scheme also in situations where the Member State where the customer is located and the Member State of importation are the same, a second subparagraph is added in Article 33(2) creating a taxable event in that Member State where the special scheme is used (point 2(b)). A definition of what is an intermediary is necessary, as it should be possible for vendors not established within the Community to designate a person established within the Community to fulfil their VAT obligations under this special scheme in their name and on their behalf. Which Member State can be the Member State of identification depends on whether or not the vendor is established or has a fixed establishment in the Community and whether or not an intermediary has been designated by the vendor. Finally, the Member State of consumption refers to the Member State where the transport to the customer ends.

Article 369m provides who is eligible to use this special scheme. According to the proposal, a vendor not established in the Community should designate an intermediary except if he is duly authorised by the Member State of identification or if he is established in a country with which the EU has concluded an agreement on mutual assistance. The list of countries concerned should be established subsequently in a Commission Implementing Regulation.

Article 369n provides that VAT shall become chargeable at the time when the payment has been accepted. This provision is needed to determine which supplies should be included in the periodic VAT return.

Articles 369o to 369x replicate the provisions of the two other special schemes concerning identification, VAT returns, VAT payments and record keeping. To be noted that Article 369s contains a provision specific to the import scheme stipulating that Member States should not impose any further declarative obligations on top of the periodic VAT return.

Where VAT is declared under this special scheme, no VAT should be payable anymore upon importation of the goods. It is therefore necessary to provide for an exemption for such imports. This exemption is inserted in Article 143(1) of the VAT Directive. To allow customs to identify these consignments upon importation a valid VAT identification number proving that VAT is declared under the special scheme should be provided to customs at the latest upon lodging of the import declaration (point 7).

Even though this scheme primarily targets distance sales to final consumers, it cannot be excluded that taxable persons purchase goods online for business purposes outside the Community from a vendor using this special scheme. To allow these taxable persons to exercise the right of deduction of VAT paid on such purchases, a new point (g) is added to Article 178 laying down the conditions for exercising the right of deduction (point 8).

4.

4. Special arrangements for declaration and payment of import VAT for distance sales of goods from third countries or third territories where the import scheme is not used


Simplification measures are introduced for goods in consignments of a value for which VAT is not accounted for via the import scheme set out in section 3 above (point 30). For such imports, Member States should allow the person presenting the goods to customs in the Community (typically the postal operators or express couriers) to report and pay import VAT due on these consignments electronically on the basis of a monthly declaration, on behalf of the person for whom the goods are destined. To further simplify the declaration, these goods should systematically be subjected to the standard VAT rate, unless the person for whom the goods are destined specifically request the application of a reduced rate. In this case however, a standard customs declaration would be required.

Article 3 – amendment to Directive 2009/132/EC

Title IV (Articles 23 and 24) of Directive 2009/132/EC provides for an exemption for imported goods of negligible value not exceeding a total value of EUR 10 up to EUR 22 (amount to be decided by each Member State). As the use of the special scheme (and thus of the MOSS) will allow for VAT to be declared and paid on imported goods ordered online and thus will drastically simplify VAT collection, there is no need to maintain this VAT exemption. The proposal therefore removes this exemption as from 1 January 2021, which is the proposed date of entry into force of the import scheme.