Navigating VAT Challenges: A Deep Dive into EU eCommerce Taxation

18/01/2024 - EU Tax Compliance Navigating VAT Challenges: A Deep Dive into UK eCommerce Taxation Image by storyset on Freepik

If you already checked our blog post Navigating VAT Challenges: A Deep Dive into UK eCommerce Taxation, then you know that 2024 started rough for many eCommerce sellers, especially for those selling over Amazon in the UK and the EU.

If you are one of the Amazon sellers who received an email with the subject: “Your disbursements have been deactivated in all stores you operate worldwide from DD.MM.YYYY as we have indicators that you might not be EU-established for VAT purposes.“, or similar, you are one of many businesses that found itself in the position from which there is no easy exit due to unclear VAT regulation and guidelines that can be interpreted in various ways.

This topic has two sides that we need to discuss, UK and EU VAT regulation. To be more focused on each topic, we will divide this blog post into two, each covering one jurisdiction. We have already covered the UK and we will continue with the EU.

This is our longest blog post up to now, as we had to quote in our opinion - some key CJEU rulings, so please bear with us until the end.

EU established business

In the EU, there is a similar but different definition of a EU established business than in the UK. The EU VAT directive does not have a direct article that explains the difference between a EU incorporated business, a EU established business, and a EU non-established business. Due to this, we need to dig deeper within the EU VAT directive, and The Court of Justice of the European Union (CJEU) rulings. CJEU rulings can be used to identify the legal view of the EU towards the definition of established businesses from the VAT perspective.

Article 44 of the VAT Directive (Directive 2006/112/EC)

  • 1. Scope: Article 44 explains the place of supply of services to a taxable person and specifies that it is determined by the location where the taxable person has established their business.
  • 2. Establishment Rule: The place of supply of services to a taxable person acting as such, is where that person has established their business unless a fixed establishment exists elsewhere.
  • 3. Place of Supply for Services: In the absence of such a place of establishment or a fixed establishment, the place of supply of the services is the place where the taxable person who receives such services has their permanent residence or habitually resides.

Article 44 of the VAT Directive and Article 11(1) of Implementing Regulation No 282/2011 are the articles heavily used in the CJEU practice and their rulings. If we would use these articles alone and view them from the perspective of the UK VAT law that has implemented the term Non- established taxable persons (NETPs), we could make the conclusion that looks like those currently used by online marketplaces like Amazon.

Let’s shortly explain the UK VAT rules and HMRC guidelines:

A NETP is any person who is not normally a resident in the UK, does not have a UK establishment and in the case of a company is not incorporated in the UK.

HMRC would normally consider a company that is incorporated in the UK to have an establishment there as long as it can receive business supplies at it’s registered office.

For a company to have a UK establishment it would need to be incorporated in the UK and must be able to receive business supplies at the registered address in the UK. If a company is incorporated in the UK at the virtual office and can't receive business supplies, then the UK incorporated company would be a NETP.

Now, let’s get back to the EU and the CJEU rulings and the decisions that significantly impact EU law and have far-reaching implications for legal matters across member states.

We would like to state a few CJEU rulings where Article 44 of the VAT Directive and Article 11(1) of Implementing Regulation No 282/2011 have been mentioned and used for the final decision:

We encourage everyone who would like to better understand the CJEU approach in making a judgment in their cases, to read these judgments.

For those who are not keen to dig deep into the complex and hard-to-understand legal language, we have taken a few paragraphs that are, inour opinion, relevant to the understanding of the EU's point of view towardthe meaning of the establishment for the VAT purpose.

Judgment of 16 October 2014, Welmory, C-605/12, EU:C:2014:2298, paragraphs 53, 54, 55, 56

53 According to the settled case law of the Court on Article 9 of the Sixth Directive, the most appropriate, and thus the primary, point of reference for determining the place of supply of services for tax purposes is the place where the taxable person has established his business. It is only if that place of business does not lead to a rational result or creates a conflict with another Member State that another establishment may come into consideration (see, inter alia, judgments in Berkholz, 168/84, EU:C:1985:299, paragraph 17; Faaborg-Gelting Linien, C 231/94, EU:C:1996:184, paragraph 16; and ARO Lease, C 190/95, EU:C:1997:374, paragraph 15).

54 That interpretation is also valid in relation to Article 44 of the VAT Directive.

55 As was the case under the Sixth Directive, the place where the taxable person has established his business as primary point of reference appears to be a criterion that is objective, simple and practical and offers great legal certainty, being easier to verify than, for example, the existence of a fixed establishment. Moreover, the presumption that the services are supplied at the place where the taxable person receiving them has established his business makes it possible both for the competent authorities of the Member States and for suppliers of services to avoid having to undertake complex investigations in order to determine the point of reference for tax purposes.

56 Furthermore, the place of business is mentioned in the first sentence of Article 44 of the VAT Directive, whereas the fixed establishment is mentioned only in the following sentence. That sentence, introduced by the adverb ‘however’, can only be understood as creating an exception to the general rule set out in the previous sentence.

This CJEU judgment from 2014 can be found quoted in all other CJEU judgments that follow.

According to these four paragraphs, it can be concluded that EU VAT law does not make the difference between incorporation and establishment in the same way UK VAT law does. In the EU VAT law, establishment and incorporation are much more similar than in the UK VAT law, where there is a strict difference between incorporated UK, established UK and non- established UK companies.

Per our understanding, in case of Article 44 of the VAT Directive, the supply of services according to the general rule, to a company that:

  • is incorporated in the EU Member state;
  • has a business address in the Member state of incorporation;
  • has a VAT identification number issued by the Member state of incorporation;

would always be treated as an EU established business.

New VAT rules for online electronic interfaces implemented from 01.07.2021

An electronic interface (EI) should be understood as a broad concept. An EI could include a website, portal, gateway, marketplace, platform, application program interface (API), etc. Since 01 July 2021, electronic interfaces such as online marketplaces/platforms have new roles for VAT purposes in the EU. They may become “deemed suppliers” and will have certain record-keeping obligations.

An EI is considered a deemed supplier if it facilitates:

  • Distance sales of goods imported to the EU with a value not exceeding EUR 150; and/or
  • Supplies of goods to customers in the EU, irrespective of their value, when the underlying supplier/seller is not established in the EU (both domestic supplies and distance sales within the EU are covered).

If we now take the previous findings regarding the CJEU judgments, if a company is incorporated in the EU Member state, has a business address in the EU Member state of incorporation, and has a VAT identification number issued by the Member state of incorporation, it’s always considered as established in the EU. According to this, EU VAT law doesn’t have the same treatment of the companies that are incorporated within the Union and are considered as not established in the EU. Whereas, UK VAT law has a clear explanation of the UK incorporated business that is considered a non-established in the UK (NETP).

Where are we now and how to go forward?

New VAT Rules for online electronic interfaces in the EU have been implemented from 01.07.2021. Today, two and half years later, EU incorporated online sellers, selling over online marketplaces, are under huge pressure as their seller accounts have been blocked. They are requested to prove that their EU incorporated business is also an EU established business. Currently, according to communication from online marketplaces, there are no clear guidelines and documents that can be sent to the online marketplaces to identify the status of the EU incorporated company. If EU incorporated online sellers cannot provide relevant proof of their EU establishment, they will be forced to make the backdated VAT payments to the online marketplaces for all the transactions from 01.07.2021.

Most of the EU incorporated companies selling over online marketplaces have been registered for a VAT and their VAT numbers were available to online marketplaces. By being VAT registered, EU incorporated companies were charging VAT on the sales they made over the online marketplaces in the EU and they paid the VAT regularly to tax authorities in their countries of incorporation. This means that there was no VAT gap in the business model and VAT has been collected and paid by the VAT- registered EU incorporated online sellers.

As we already mentioned in the blog post covering the UK situation, this looks like one more fight between David and Goliath. Instead of acting as a partner and looking for a compliant and feasible solution that would solve this situation in a way that is beneficial for all sides, online marketplaces are acting inflexibly toward their online sellers.

A simple solution that could be implemented in solving the current situation, is for online marketplaces to request proof that EU incorporated sellers have their business address in the EU country of incorporation and have VAT number issued by the EU country of incorporation. These documents should be valid proof that EU incorporated online sellers are EU established for the purpose of VAT, which would put their transactions over the online marketplaces outside the scope of “deemed supplies”. If an online seller cannot provide proof that they are EU established, an online marketplace could request the proof that VAT has been submitted and paid in the EU on sales from 01.07.2021 (submitted VAT return statements and payment statements).

The EU should step up and provide the statement with clearer guidelines that could be used by online marketplaces to avoid blocking the sellers if they were compliant with the EU VAT rules and regulations. Online marketplaces are under pressure from the EU regulatory bodies but it looks like the hit will be again taken by the online sellers who will be forced to double pay the VAT on the same transactions, which is against the good tax and business practice.

This is a complex and serious situation that requires urgent action from the EU, online marketplaces and online sellers, as it could jeopardize many businesses to become insolvent.

This is also one more example of how complex VAT compliance in practice is. Be proactive by choosing the best technical solution and compliance management experts on the market. Become and stay compliant with ease.

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