Under new European Union (EU) regulations, effective from July 1 this year, online marketplaces and their sellers will have significantly increased compliance obligations.
In this opening article of a new series, we focus (at a high level) on five key issues facing marketplaces ahead of this July 1 introduction date. Here are all of the other articles in this series:
When is the marketplace liable? This will be the burning question marketplaces across the globe are asking ahead of the July 1 VAT rule changes.
Well, let's answer. Marketplaces will be directly liable for calculating and collecting VAT on transactions they facilitate to EU-based customers in the following scenarios:
A robust process must be adopted to determine the correct liable party for the collection and remittance of VAT on sales (on a per line item basis) made via marketplaces. We refer to this determination as Line Item Liability Assignment (or LILA).
LILA is the real-time determination of liability at the line-item level. For example, in any given customer’s checkout basket there may be multiple differing products from different sellers and for differing amounts. It is conceivable that each line item also results in a different liability assignment. The marketplace could be liable for the collection and remittance of VAT on some products while sellers on the same marketplace may be liable for others.
Our LILA automatically calculates how thresholds, and the origin of the goods, may affect liability, including converting the sale currency to the threshold currency where applicable.
Just as the new rules bring additional compliance obligations for marketplaces, many sellers on these same marketplaces will also have new responsibilities.
The July 1 explanatory notes explicitly state (in section 2.1.10) that the marketplace “shall regard the person selling goods through an electronic interface as a taxable person and the person buying the goods as a non-taxable person, unless he has information to the contrary.”
The explanatory notes also state that the marketplace “should however have a verification process in place to assess whether the supplies of this underlying supplier would not qualify him as a taxable person.”
As a result of these obligations on marketplaces, there needs to be a rigorous seller onboarding process implemented by marketplaces. Once onboarded there also needs to be a regular reassessment of the sellers and on the products they are selling.
If it emerges that sellers are non-compliant then the marketplace may in some EU jurisdictions become jointly and severally liable for their VAT.
Marketplaces will need to regularly check that their sellers have a valid VAT number for the correct EU member states. If asked by revenue authorities marketplaces will need to identify and remove non-compliant sellers from their platform, or risk possible fines.
Following on from our previous point there needs to be a regular reassessment of the products sold by sellers as product classification has a significant impact on how VAT is applied.
Marketplaces must know what type of products are sold on their platform so they can ensure that VAT is correctly assigned and calculated. This approach applies to products that attract standard and reduced VAT rates. Enter product classification.
The Combined Nomenclature (CN) codes system is commonly used to classify products. Our solution includes AI tools to map seller descriptions and product data to CN codes, which are then mapped to VAT rates at product onboarding or through periodic review.
It should be noted that certain products, regardless of value, are also factored into this tool as marketplaces are not liable for goods subject to excise duty (e.g. alcohol, perfume), nor for goods subject to special schemes (e.g. second-hand schemes).
Marketplaces may now have to issue invoices that comply with a complex new set of rules. There is the potential to have 27 EU invoicing requirements to comply with.
As tax liability will now be assigned at a line item level, a basket of goods may require multiple invoices to be issued to the same buyer. This is due to the possibility that liability may be dispersed among various sellers and the marketplace itself, each requiring a separate invoice.
In scenarios where the marketplace is a deemed reseller of goods, it will be legally required to issue a back-to-back invoice for each transaction when the goods are in the EU.
The July EU rule change extends the successful Mini One-Stop Shop (MOSS) system, introduced for the sales of B2C cross-border digital services in January 2015, to the new One-Stop-Shop (OSS) covering all B2C goods and services. Registration for OSS is optional.
The rules also introduced the Import One-Stop-Shop (IOSS). IOSS can be used by sellers (within the EU and outside) with sales of goods that do not exceed €150 in a consignment.
Pre-registration for both the OSS and IOSS opened in most EU jurisdictions on April 1, 2021. Registration for IOSS is also optional. By opting to register for IOSS it provides a much better customer experience.
Registration will bring obligations for marketplaces to file quarterly OSS and monthly IOSS returns to the EU tax authorities where the VAT on the relevant sales is due. The simplification for businesses means a single registration and a single VAT return.
Transaction data will also need to be stored as tax authorities may ask to see records of the details about each transaction linked to a specific marketplace seller.
We believe that these VAT reporting obligations for marketplaces, and their sellers, can only be met by applying technology to determine the correct VAT treatment of sales of goods at the time of checkout.
We will explore all of these issues in greater detail in the coming weeks as this series of articles continues.
For more information on Taxamo's offering check out the Taxamo Marketplace page here: https://www.taxamo.com/marketplace.html
The information contained in this publication (“Information”) has been provided to you for general information purposes only and we recommend that you obtain professional advice before acting or refraining from action as a result of the Information. Taxamo accepts no liability for any loss occasioned to any person acting or refraining from action as a result of the Information.
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