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VAT on cross-border e-commerce sales to be paid in EU country where consumer is based

VAT payments due on cross-border sales made over the internet in the EU will be calculated on the basis of the VAT rate that applies in the EU country in which the final consumer of the goods is based, under new proposals outlined by the European Commission.05 Dec 2016

The move will bring the VAT framework for e-commerce into line with that which currently applies to e-services.

At the moment, VAT on online cross-border sales is calculated based on the rate that applies in the EU country where the establishment supplying the goods and services is based.

Under the Commission's proposals (28-page / 412KB PDF), a 'one stop shop' digital portal will be set up by tax authorities across the EU to allow businesses based in their jurisdiction to register their VAT obligations for online sales they make across the EU in one place.

Currently, businesses spend €8,000 on average in compliance costs to meet their VAT obligations in each individual EU country into which they sell goods and services over the internet, according to the Commission.

Under the proposed new rules, businesses will be able to apply the local VAT regime in the country they are based for the first €10,000 in online sales of goods they make each year. The move is designed to benefit micro-businesses that trade cross-border.

Plans to reduce the evidence companies need to provide to demonstrate the location of their customers when making cross-border online sales are also included in the plans.

From 2018, providers of cross-border e-services with less than €100,000 cross-border sales in a year will be able to provide just one piece of evidence to show where customers are based, for the purposes of adhering to their VAT obligations. Currently those businesses need to provide two pieces of evidence. In 2021, the simplified evidence framework will also apply to cross-border online supplies of goods, according to the proposals.

The proposed new directive would also, if introduced as drafted, see the removal of the existing VAT exemption for the importation of small consignments from suppliers based outside of the EU. Under the current framework, imported goods bought online by EU consumers from suppliers in non-EU countries are exempt from VAT if they cost below €22.

The Commission said some non-EU businesses currently abuse the exemption by "fraudulently mark[ing] expensive goods such as mobile phones and tablets as costing less than €22, meaning that no VAT is paid".

The rules would also allow, but not oblige, EU countries to set reduced VAT rates for electronic publications. Under existing rules sales of e-books and e-newspapers, for example, must be charged at the standard VAT rate applicable, but printed equivalents can benefit from VAT reductions.

Pierre Moscovici, EU commissioner for taxation, said: "Online businesses operating in the EU have been asking us to make their lives simpler. Companies big and small that sell abroad online will now deal with VAT in the same way as they would for sales in their own countries. That means less time wasted, less red tape and fewer costs. We're also simplifying rules for micro-businesses and startups, allowing them to tap new markets more easily. Our proposals mean that European governments stand to gain an additional €100 million a week to spend on services for their citizens."

The Commission said it believes its proposals will enable EU member states to grow total VAT revenues by €7 billion a year by 2021, and also cut "administration burdens for business" associated with VAT compliance by €2.3bn annually.