The first objective of the European Union is to achieve the creation of a single market allowing the realization of the 4 freedoms: the free movement of people, goods, services and capital. This objective cannot be achieved without harmonization of the laws of the Member States in order to guarantee compliance with the competition rules.
One of the mechanisms for achieving this single market is taxation. This is why since 1967, the European institutions have tried to take measures to supervise and bring together the different VAT systems within the European Union by providing for a system common to all the Member States: ” Member States shall replace their current system of turnover taxes with the common system of value added tax defined in Article 2. ”
Regulations to regulate VAT
However, despite the proliferation of regulations to regulate VAT at European level, we see that the different European systems remain very different with, for example, a difference between the VAT rates of each of the Member States: while in France the standard rate is of 20%, the standard rate in Denmark is 25%. VAT is a very complex system, and the European Union has failed to simplify it. For example, in France alone there are 9 different rates that apply in the territory.
The question arises, as an exporting company, of how to know which rate to apply, but also of knowing when to apply VAT because European rules provide for a VAT exemption system in certain cases, in particular in the event of importation or intra-community export.
VAT is therefore one of the major current challenges for the European Union to achieve the single European market, which is why the European institutions adopted new regulations on VAT in 2021. The last reform having taken place in 1993, the system we knew until then was no longer suited to the current economy. The institutions have decided to confront the issue of VAT with current technological developments. The European Union has no other choice than to take them into account in order to remain competitive on the international market: e-commerce now plays a fundamental role, it is all commercial transactions that are carried out through ‘intermediary of a website. The health crisis that we have known has motivated the European institutions to act, the European Commission has affirmed it </ a>: “ The coronavirus pandemic has also accelerated the boom in online retailing and re-emphasized the need for reform to ensure that VAT due on online sales returns to the country of the consumer . “
Other countries did not wait for the coronavirus crisis to adapt their VAT systems to the technological world. A ordinance governing the mail order sale . From now on “ the place of deliveries made by a mail order company which has reached the turnover limit of 100,000 francs by means of small shipments will be deemed to be on Swiss territory “, this implies that a company with a turnover of at least 10,000 francs must levy VAT on all its deliveries to Switzerland. This regulation eliminates the competitive disadvantage suffered by Swiss companies compared to foreign companies that send their goods to Switzerland.
The reform of the European Union’s VAT
The new European system entered into force on 1 st July 2021, it pursues 3 objectives: simplify the VAT regime applicable to cross-border e-commerce between business and consumer, fight against tax fraud and ensure fairer competition between operators located in the Union and those outside the European Union.
Until then, the place of taxation of the distance selling transaction depended on a threshold set by the State of destination. For example, if the amount of distance sales made by a company irLandes subject to VAT did not exceed the threshold set in the State of destination, so the company was subject to Irish VAT. Otherwise, the Irish company was taxed in the destination state. A very restrictive system for companies because they were forced to identify themselves with the VAT of this state and to declare it there as well as to be aware of the thresholds of all the states. The reform of the VAT of the European Union made the disappearance of this system.
Likewise, the VAT exemption is abolished for all goods with a value of less than € 22 imported into the EU from third countries. This system was a source of fraud, according to the European Commission: “ It emerges from certain studies and from experience acquired that this exemption is used in an abusive manner, by unscrupulous sellers established in third countries who affix labels fraudulent shipments of goods (smartphones, for example) in order to benefit from the exemption. ”.
Since 2019, European authorities have adopted a set of rules to modernize VAT for cross-border European e-commerce. First of all, the European institutions have decided to abolish the setting of a threshold by member states as to whether or not the company will be taxed in the recipient state. The European Union now sets a single threshold of € 10,000: distance sales between professionals and individuals will be taxed in the country of arrival as soon as the seller has made distance sales to this country of the European Union in over 10,000 euros. This means that a French supplier who sells goods for less than € 10,000 across the EU can charge French VAT. On the other hand, if he exceeds this threshold of € 10,000, he must invoice the VAT of the Member State where his consumer customer is located.
But this threshold only applies to taxable persons established in a single Member State of the Union. Will the old system continue to apply to companies that are not in the scope of this reform? In addition, does exceeding the single threshold mean that companies will have to continue to register in the recipient state (in which they are subject to VAT)?
The European Union wanted to simplify the tax system and its administration. A ‘one-stop-shop’ has been set up which is an electronic portal ‘ on which they can fulfill all their VAT obligations related to sales they make throughout the EU. This € 10,000 threshold already applies to electronic services sold online since 2019. ”. Companies will have to complete all the formalities to which they are subject on this portal, but it is the latter which will be responsible for transmitting the information to the State concerned.
The European Commission, with this new regulation, wanted to improve the international competitiveness of European companies
Regarding the VAT exemption mentioned above for goods with a value of less than € 22 imported into the EU by companies from third countries, this was abolished on July 1 by the new European Union regulations. Why ? The European Commission, with this new regulation, wanted to improve the international competitiveness of European companies. It brought out the fact that this measure was a disadvantage for our companies compared to competitors from third countries because it allows them to significantly reduce their prices. The European Commission says: “ it is estimated that fraud costs EU tax administrations € 7 billion per year, which places a higher tax burden on other taxpayers ” as companies from third countries take advantage of the € 22 franchise to illegally exempt themselves from VAT on all products they export to Europe, whatever the price.
Now, if the seller does not include the price of VAT in the sale price, the carrier may be forced to pay the VAT charges and claim against the recipient of the package by applying a handling charge. It is therefore necessary, as a consumer, to ensure compliance with standards by companies located in a non-EU country.
The question arises of the application of VAT for resale platforms. Amazon and Ebay have already taken up the issue and solutions exist.
But it should be noted that the exemption regime has not completely disappeared from European regulations. A new measure has been taken, appcable for imports with a value of less than € 150: these imports will be able to benefit from a VAT exemption thanks to the “ Import One Stop Shop ” (IOSS). The conditions for benefiting from this provision vary depending on whether or not the company is established in the EU.
The European Union wishes to further improve its VAT system and adapt it to current circumstances. On February 8, 2021, the European Commission launched a public consultation on the review of VAT rules applicable to financial and insurance services. The European authorities started from the observation that the VAT rules applicable to financial and insurance services are complex and difficult to apply, they are no longer adapted to current services. These shortcomings lead to legal uncertainty. The Commission announced in its Communication for fair and simplified taxation in support of the recovery strategy , that it prepare a proposal to reform the VAT system applicable to financial and insurance services. To be as close as possible to the players and to adapt as best as possible to the situations, it launched a public consultation.
The current system allows Member States in particular to authorize companies to opt for their taxation (Article 135 (1) (a) to (g)) and 137 of the directive 2006/112 / CE of November 28, 2006 ). But this regime does not allow a harmonized application of the regulations throughout the territory of the European Union.
Several hypotheses can be considered for the future project. It could take up the proposal to generalize the option system for taxation allowing any taxable person regardless of the Member State where he is established to opt for taxation. In addition, the project should integrate banking, financial and insurance activities into the scope of the system of groupings of resources; it should then redefine the financial operations covered by the exemption, in particular taking into account the case law of the CJEU. But nothing is certain about the rules that will be put in place, so we have to wait for the Commission proposal.
In conclusion, we note that this new regime aims to fight against fraud, making it possible to put companies located in a Member State of the Union and companies outside the Union on an equal footing at a competitive level. The European Union wanted to facilitate the administrative formalities around VAT, which improves the clarity and transparency of the system. We will see in the long term whether, as promised by the European Commission, this system allows states to increase their tax revenue on VAT.
EternosCorp remains at your disposal to assist you in adapting to this new VAT system.