Removal of Low Value VAT Exemption for Imports
Elizabeth Wilson 7 December 2016 No comments
As part of the European Commission’s measures to improve the VAT environment for e-commerce businesses, the EC has set out their plans to take action against VAT fraud committed by businesses outside the EU by proposing to remove the low value VAT exemption on imports. Currently, small consignments and packages valued at €22 or less can be exempted from VAT on their way in to the EU. The Commission have decided that this low value exemption will be scrapped as the current system “is open to massive fraud and abuse”, and creates “major distortions against EU business”.
According to the Commission, under current rules EU businesses are put at a “clear disadvantage since unlike their non-EU competitors, they are liable to apply VAT from the first eurocent sold”, and high-value items such as smartphones and tablets are “consistently undervalued or wrongly described in the importation paperwork”. It is estimated that around 150 million parcels are imported into the EU under this VAT exemption every year, all of which will become liable to VAT following last Thursday’s announcement.
The low value consignment concession was originally introduced by the EU in 1983 with the aims of reducing the administrative burden on EU Member States customs authorities as well as speeding up the delivery of lower value goods. The boom in e-commerce over the past 20 years has led to a dramatic increase of imports into the EU, and it is claimed that thousands of smaller non-EU retailers have taken advantage of the VAT exemption by mislabelling or undervaluing higher value goods. In 2014, the EU Commission projected that Member States were missing out on €5 billion of VAT revenues, €1 billion of which was attributed to VAT foregone from the concession.
Criticism of the low value exemption on imports is not a recent phenomenon. Almost a decade ago, online retailers such as Amazon and Play.com began to exploit this VAT exemption by shipping lower value items such as CDs and DVDs to the UK from the Channel Islands (a non-EU territory in the English Channel). In the UK, HMRC took action on the Low Value Consignment Relief on goods being shipped from the Channel Islands as it was believed to be costing the UK as much as £110 million per year in tax revenues and was also blamed for the closure of high street retailers such as Virgin Megastore, Woolworths and Zavvi. The UK government came under significant pressure to clamp down on this VAT avoidance and eventually removed the exemption for Channel Islands territories in 2012.
According to the Commission’s press release, a recent study based on real purchases has suggested that 65% of all consignments from non-EU countries were non-compliant with EU VAT rules. It is clear that such high levels of non-compliance will have distorted the EU marketplace and given non-EU businesses an advantage over their competitors within the EU. So, going forward import VAT will be applied to all goods reaching EU borders from non-EU territories. EU businesses should therefore benefit from being on a “level playing field” as non-EU businesses will now also have to incorporate import VAT into their pricing.
Additionally, registration in the VAT One Stop Shop will be available to ‘trustworthy’ traders from outside the EU. This is predicted to cut VAT compliance costs for non-EU businesses as traders will be able to designate an EU intermediary (such as a market place, courier, postal operator or customs agent) to deal with VAT-related compliance. Non-EU businesses will therefore not have to worry about registering in each Member State where they import as this is prohibitively expensive and understanding all the VAT rules can get extremely complicated. Businesses will also benefit from having an easier way to pay and distribute VAT payments across the various Member States.
Clearance of small consignments from trusted non-EU traders who register with the VAT One Stop Shop will benefit from simplified customs procedures. Consignments valued up to €150 will no longer be stopped at customs for VAT clearance and VAT collection for these goods will be managed separately on a self-assessment basis. Non-EU traders or their intermediaries will need to provide advance information on consignments in order to benefit from the simplification of the One Stop Shop. They will also need to keep records of supplies so that tax assessments can take place and if traders abuse the scheme they will be excluded and will need to make customs declarations for each consignment on importation.
The European Commission’s aims are indeed a step in the right direction and should be welcomed, however there are perhaps some fundamental issues that scrapping the low value exemption will not fix in one fell swoop.
Despite removing the exemption, businesses will still be able to undervalue or wrongly label products in order to pay as little import VAT as possible, thus still undercutting EU businesses. With the removal of the exemption, what is to stop a business still deliberately acting fraudulently? With the removal of the exemption, the importer will always be paying VAT, but an abusive importer may want to minimize his VAT liability.
The Commission appear to be replacing one import VAT regime with another that is potentially even more susceptible to VAT fraud as the €150 threshold for small consignments may be even more tempting for non-EU businesses to devalue expensive goods. For example, a smartphone can more conceivably be “under” valued at €149 than €22. It is true that VAT will still be collected and paid to Member States on these items but this new rule presents an opportunity for businesses to pay less VAT by devaluing expensive items to below the €150 threshold.
For example, if a business currently sells items to UK consumers for €200 + VAT @ 20%, but decides to devalue his goods to €150 knowing they will not get stopped at customs, there is a potential lost VAT revenue of €10 per item sold. So, under this measure, the VAT gap of lost VAT revenues may actually increase as there is a greater scope for more expensive items to be devalued to around or below the €150.
Furthermore, a lot of the Commission’s statement places an emphasis on ‘trust’ and helping ‘trustworthy’ businesses. However, ‘trust’ is a subjective term and it could be argued that these new implementations are not targeting the businesses that are most likely to commit VAT fraud and therefore non-compliance is just as likely to occur. So, how can the European Commission ensure each Member State regulates the new rules to the same strict degree and applies the same principles to ‘trustworthy’ businesses?
In order to counter some of these issues outlined above, we believe the Commission could go a step further by introducing measures such as the following:
- Increasing the pressure on the EU intermediaries (parcel carriers, customs agents, etc.) to make sure their customers are importing correctly: the intermediary is in the EU and can be more easily reprimanded for fraudulent or abusive behaviour of their customers. This could be by way of extension of the fiscal representation schemes currently in operation in a number of EU countries or the introduction of a Fulfilment House Due Diligence Scheme similar to that being introduced in the UK.
- Imposing harsher penalties for those caught deliberately abusing the system: this may act as a deterrent for those thinking about acting fraudulently or not complying with the rules. The ultimate deterrent would be barring a business from importing and selling in the EU.
- A less likely option would be to request from importers, say, a 2-year bond/deposit that is refunded in full at the end of the period, or partially refunded to the trader each quarter after they have filed their One Stop Shop VAT Return.
- The most obvious measure is to carry out tougher inspections of products and importation paperwork, and encourage better cooperation and coordination between Member States and their governmental agencies.
As mentioned above, the EU Commission’s proposal should be welcomed as it does start to address the problems facing EU e-commerce businesses in dealing with the low value consignment exemption. It should also hopefully generate extra tax revenues for EU Member States as well as help improve the competitiveness of EU businesses against non-EU importers.
However, there is still some way to go before the problems of VAT fraud, non VAT-compliance and the distortions in competition for EU businesses come close to being completely eradicated.