How did we get here?
As part of the 2016 Action Plan, the European Commission (EC) initiated a series of policy measures with the aim of modernizing the European VAT framework and shifting from an origin to a destination-based taxation system. These measures are intended to reduce the VAT gap, remove obstacles for businesses and ultimately enable the proper functioning of the Single Market. The next step towards such reform is the implementation of the ‘2021 VAT e-Commerce Package’, which builds upon the set of measures adopted in 2015 and 2019 that covered telecommunications, broadcasting and electronic services (TBEs).
What are these changes related to?
- Extension of the One Stop Shop (OSS): Union and Non-Union Scheme, and the abolition of the Distance Sale Thresholds
The upcoming VAT rules extend the OSS currently in place for TBEs to all types of intra-EU B2C supplies of services and cross-border distance sale of goods carried out by EU suppliers, referred to as the Union Scheme. This removes the current obligation for suppliers to register in the Member State (MS) of consumption for services and in the MS of arrival of the goods when the distance sale thresholds are exceeded. Such thresholds are replaced by one EU-wide threshold, allowing smaller businesses to charge VAT in their MS of identification when the relevant supplies of goods and services are below EUR 10,000. On the other hand, the Non-Union Scheme extends the OSS to all types of B2C services supplied by taxable persons not established in the EU.
- Withdrawal of the current VAT exemption on low value imports and introduction of the Import Scheme
As from 1st July 2021, the existing VAT exemption on goods imported into the EU having a value of up to EUR 22 shall be abolished. Instead, an Import Scheme has been created, whereby the seller accounts for VAT at the point of sale for imports not exceeding the value of EUR 150. No VAT or customs clearance procedures are then applicable upon entry of the goods into the EU, thus allowing a fast release at customs.
- Sale of goods made via an electronic interface, such as a marketplace, platform, portal or similar means
In terms of the new rules, a marketplace which ‘facilitates’ (i) cross-border or domestic B2C sale of goods for non-EU sellers and/or (ii) B2C imports not exceeding EUR 150, shall become the ‘deemed seller’ for VAT purposes. Accordingly, the marketplace shall be the taxable person responsible for charging and collecting VAT on the sale of goods to the final customer.
When will these changes come into force?
Given the practical difficulties presented by the coronavirus pandemic, the entry into force of the VAT e-Commerce Package has been delayed to 1st July 2021 in order to allow businesses and MSs enough time to prepare for the changes.
Who will benefit from these changes?
Businesses carrying out cross-border sales of services and goods to final consumers can avoid multiple VAT registrations and therefore benefit from reduced VAT compliance costs. With the extension of the OSS, accounting for VAT in different MSs is made simpler which shall in turn encourage cross-border trade. The changes relating to the Import and Non-Union Schemes shall reduce distortion in competition by creating a level playing field between EU and non-EU businesses. The new deemed VAT supplier model in the context of electronic interfaces puts the VAT liability on the operators, which shall centralize and secure the collection of VAT for MSs. Finally, the EC anticipates that the changes relating to the VAT e-Commerce Package shall increase annual VAT revenues for MSs by EUR 7 billion.
How are these changes reflected into domestic law?
Amendments to the EU VAT Directive have been transposed into the VAT Act by means of eight legal notices, being LN 219 to 226 of 2020. In addition, other provisions relating to the electronic interfaces and the special schemes have been enacted under the Implementing Regulation No. 282/2011, which is directly applicable in Malta without the need to be implemented into domestic law.
What action is required by businesses?
In preparation for such changes, businesses need careful planning to ensure that their VAT obligations are understood, and their e-commerce and accounting systems are enabled. If managed properly, the upcoming VAT e-Commerce Package has the potential to ease burdens on businesses and reduce the administrative costs for VAT compliance. However, non-compliance would create significant issues and increases exposure to multi-country penalties and punitive measures.