An often overlooked European success story is how hundred of thousands of European small companies have thrived thanks to the Internet. With a few clicks on the keyboard, the smallest European firm can now export to consumers across the EU, and the rest of the world.
Unfortunately, this success is now under threat. European governments are revising the EU Value Added Tax (VAT) framework, originally intended to “support e-commerce and online businesses,” in a way that will hurt small European online businesses big time.
Rather than reflecting the new e-commerce promise, European governments risk imposing old, outdated rules on our new online market reality. The European Commission’s original VAT proposal, tabled in December 2016, did include many improvements, including a much needed EU wide portal for online VAT payments. However, the current text imposes new taxes and administrative burdens on tens of thousands of exporting European micro-businesses.
The proposal sets a pan-European, low 10,000 Euro threshold for applying VAT on cross-border sales. Once a seller has sold 10,001 Euros worth of goods to another EU country, he or she is faced with a Kafkaesque bureaucracy of complying with 28 different national VAT rates for all subsequent sales in the EU.
Some 150 different VAT rates apply to products across the EU Member States. The same product may be covered by a standard VAT rate in one country, by a reduced rate in another, and may be exempt in a third. Whew – what a mess! Making sure a seller charges the right VAT rate and complies with the invoicing and other rules of the country of the customer requires tailored local legal advice. Such advice is costly – and we fear that small European sellers will stop selling to other EU Member States to limit their liability.
The European Commission has long complained that “only 7% of SMEs online sell cross-border” and promised to “help cross-border e-commerce to flourish”. Yet its proposed ultra low ceiling will increase the VAT bureaucracy for European small sellers and limit choice for European consumers. This goes against the objectives for a thriving EU Digital Single Market.
An alternative, equally ill-designed approach, is to make online marketplaces liable for collecting and remitting VAT on behalf of their business users. But marketplaces often do not have structured product data and don’t know all possible VAT rates. Product descriptions, in the vast majority of instances, fail to attribute the right VAT rate. Most marketplaces never have physical possession of the products nor are they party to the contract between the seller and buyer. In most cases, they do not handle payments, delivery, etc.
Forcing marketplaces into strict control over the trade third parties conduct on their sites would effectively mean an end to the open marketplace model that proved so successful in enabling small businesses to trade online. The alternative is a closed marketplace model, where small business users become mere suppliers of the platform, without the liberties attached to independently running their businesses.
The EU VAT negotiations look set to conclude in coming months. Currently small European businesses will be sacrificed by a Kafkaesque EU VAT bureaucracy. Hopefully, the EU will update its VAT framework to reflect the new e-commerce reality. This would be in line with the objectives for a thriving European Digital Single Market and benefit small EU businesses and European consumers.