VAT package for e-commerce: how does the VAT reform impact relationships between marketplaces and suppliers?

Initially scheduled for January 1, 2021, the implementation of the VAT package for e-commerce has been postponed to July 1, 2021. This six-month delay, proposed by the European Commission in May 2020 due to the economic context related to COVID-19¹, and later approved by the EU Council, was confirmed by the 2021 Finance Act².

VAT Package: Key Measures Regarding Online Sales

Within this European VAT package³, two key measures concern the e-commerce sector and the online sale of goods in "B2C" transactions, both intra-EU and imports, by taxable persons established in the EU or in a third country:

• Extension of the Mini One-Stop-Shop (MOSS) to Electronic Services and Distance Sales'⁴
  Since 2015, a simplified system for declaring and paying VAT has been implemented for telecommunications, broadcasting, and television services, as well as for electronic services. This One-Stop-Shop will be extended to several electronic services. It will allow an e-merchant who wants to sell in multiple European markets to centralize their tax registration. The postponement of this system to July 1, 2021, could impact the strategies of some e-commerce players in the first quarter of 2021, who would have been required to register in each member state.

• VAT Collection by "Electronic Interfaces" / Marketplaces
  Platforms that connect buyers (end consumers) and sellers online will have to collect VAT on behalf of online suppliers. This measure will be postponed by six months at the request of marketplaces, which need to perform complex updates to their information systems and internal procedures.

This new measure involves an evolution of the role of marketplaces in terms of indirect taxation and the relationship between online platforms and their suppliers.

Marketplaces, the Future Right Arm of the Tax Administration

With the objective of combating fraud, marketplaces will have to directly collect and remit VAT on behalf of sellers based on their turnover. This measure applies to all marketplaces and platforms that "will, in certain situations, be considered for VAT purposes as the supplier of goods sold to customers in the EU by businesses using the marketplace or platform." Major international companies such as Amazon or Alibaba, and in some cases, peer-to-peer platforms like Etsy or Le Bon Coin, will have to comply with these new obligations. Companies selling their products and services through their websites, in addition to their distribution network, such as food or DIY retailers, are also concerned.

In practice, marketplaces will implement an upfront VAT control before payment. They will need to verify with their client businesses that they are properly registered in France. This will require adapting the accounting management of these businesses and aligning information systems with the new tax rules.

The role of marketplaces as intermediaries will evolve towards that of regulators with new fiscal obligations. By substituting the tax administration, they will become a verification body and a VAT collector. However, their role as the right arm of the administration requires raising awareness within a diverse ecosystem.

Fiscal Education of Suppliers: A New Role for Marketplaces

Foreign businesses or young entrepreneurs... Many stakeholders are not aware of the European and French VAT rules.

Marketplaces will be required to inform them about French and European tax regulations:

• VAT and the concept of taxable persons
• Liable taxpayers: the thresholds to be considered, exemption with VAT exemption based on turnover in the previous calendar year
• Value of small shipments: the removal of the exemption for shipments below 22 euros in 2021, a complementary measure arising from the VAT e-commerce package
• EU - Territorial VAT rules and the distance selling regime

To determine the VAT amount, collect it, and remit it to the tax administration, marketplaces will need to determine for each seller whether they are liable for VAT or not, in close collaboration with the financial department and the company's accountant. They will also need to regularly update a detailed file of the financial profiles of the sellers. Depending on their size, some companies have already anticipated the implementation of these new rules, while for others, it is a complex and burdensome process.

This VAT payment solidarity poses numerous risks for platforms: the risk of not being reimbursed, the risk of losing clients. A sorting process for registered suppliers will be necessary. Platforms could also lose customers due to commercial pressure. In the case of inconsistencies being raised, will they be required to report this information to the tax administration? This whistleblower role could erode trust between sellers and platforms. The European Commission plans to collaborate with marketplace sites in 2021 to clearly define their role within the new framework.

If marketplaces fail to cooperate with the tax administration, they risk being placed on a blacklist. It should be noted that since 2019, they are subject to an obligation to inform both sellers and the tax administration and can be sanctioned with fines or the collection of VAT. Moreover, since January 1, 2020, they can already be held jointly responsible for VAT payment in the event of failure to collect VAT from an operator. Since VAT remains an important source of revenue for the state, especially in the post-COVID-19 period, it is highly likely that the tax administration will apply these provisions strictly and not hesitate to penalize non-compliant operators.

Fighting Fraud, with a Primary Focus on Non-European Operators

This new system aims to combat VAT fraud by securing VAT collection for the tax administration upfront. Through this mechanism, the European Commission expects "an additional 7 billion euros in VAT per year." Thus, it will bring new tax revenue to the French tax administration. In France, in 2019, 98% of sellers registered on marketplace e-commerce sites (Amazon, Cdiscount) were not VAT-registered in France, according to a report from the Financial Inspection.

The underlying goal of the European Union is to better control "third-country sellers," non-European suppliers, especially Chinese operators. According to a 2017 study by the European Commission, 65% of shipments from third countries did not comply with EU VAT rules. Indeed, through various fraudulent mechanisms or "abusive practices," many businesses avoid paying VAT to EU member states. This new rule ensures fair competition between businesses within the EU. It also implies a reduction in the sale of low-cost Asian products, which will likely pass on the fiscal costs to the final consumer.

For the first time, online platforms will have to "take responsibility for collecting VAT." By delegating part of their mission, tax authorities are relying on platforms as intermediaries for verifying the fiscal obligations of online sellers. This shift in responsibilities and risks for online platforms introduces a new profession: fiscal education of operators. In 2021, marketplaces will become the right arm of the tax administration to monitor the tax obligations of e-commerce sellers. They will thus play an active role in the fight against VAT fraud and the protection of the single market from Chinese operators.