The European Union (EU) Commission has issued on December 2017 a report on `Vat Collection and Control Procedures` Tax Administrators (Vat Authority) of electronic commerce (e-commerce) transactions.
The first task of this EU group was to understand e-commerce in depth mainly focusing on its context, aim and scope. The EU Commission highlights that there are too many layers of intermediaries in executing such transactions, that it is very difficult to understand e-commerce administration. They highlighted four key functions in order to understand how one can deal with e-commerce information being:
- Introduction – The need to implement and merge safety into a technological evolutionary industry
- Trust – The need to provide a secure environment to encourage transactions through this platform
- Payment – Making money circulate through different platforms and intermediaries through a safety net
- Execution – To understand each player`s role in the industry to finalize an e-commerce transaction.
From the undertaken research by the European Commission, the main challenges faced by Tax Administrations have been narrowed to six. The first is the global reach of e-commerce which makes it much more difficult to track transactions in the global market. E-commerce has eliminated geographical boundaries even for small enterprises but the introduction of numerous intermediaries makes tax administration much more difficult since information needs to be gathered from numerous countries with different laws, reporting rules and vat rates.
The second problem is the non-registration of suppliers and intermediaries with the respective countries Tax Administrators. This can make it very difficult or impossible for countries to access and exchange information between countries in order to trace supplies, apply reverse charge where applicable and collect the applicable vat rates.
The third challenge is the under declaration of vat transactions by registered traders. Although penalties and repercussions for undeclared transactions are hefty, it is difficult and very time consuming for Tax Administrators to track undeclared transactions. With the implementation of timely exchange of information between countries helps in identification of these transactions but the issue of non-registered suppliers is a loophole in the system.
Disguised transactions as a result of criminal activity are another challenge and even though the fourth Anti-Money Laundering Directive has been implemented against the placement of fraudulent transactions and money into the industry, it is still a challenge for Tax Administrations to detect fabricated invoices and transactions.
One of the main issues faced by Tax Administrators is the access and exchange of information worldwide. In order to increase the availability of timely information, we need to identify `which info do we need`, `how to use it` and `how to collect it`. The latter three key questions can only be responded by the collaboration of each country implementing e-commerce facing other challenges including language barriers, lack of resources by other countries and lack of initiative by other Tax Administrators.
The last challenge is the enforceability of procedures by all Tax Administrators in order to decrease the rate of lost collection of Vat due to loopholes in the system. Each country has tax autonomy with regards to the implemented rules, rates and implementation of safeguards and monitoring procedures. This makes the effort and work of the EU Commission and other Institutions to minimize or destroy these challenges almost impossible.
The European commission proposed possible solutions in meeting these challenges. The EU Commission needs to put into force rules to aid the accessibility of timely and accurate tax information. On the other hand, we need to keep in mind that Tax Administrations are now facing problems to collect this information due to the newly introduced GDPR rules. In order to be compliant with GDPR, all Tax Administrators need to implement more enhanced security measures to ensure that the availability of personal data and financial information is not hacked, stolen or altered in anyway. There is a conflict between tax and other obligations, due to the essential enforcement of Data Protection and Anti-money Laundering legislation. These three sectors are all enforcing conflict of legality and of how companies and countries shall be compliant to all liabilities.
Tax Administrators need to have more tools to support online companies and help them to understand and identify tax transactions in different countries. The measures in place right now are not sufficient for the e-commerce worldwide industry and this is very challenging.
One can name lack of guidance in each understandable language so that a vat practitioner can understand the liability and vat implication of cross-border transactions resulting in unintentional compliance which is still a cost for the Tax Administrators.
The European financial industry is now facing a reform by the European Council Members to mitigate these challenges although it has been difficult to reach an agreement at EU level. All these challenges lead to a clear request from the industry for a customized and unified Vat Law eliminating cross-border differences and clear guidance to ease compliance.
In light of this proposition for uniform regulations, there was a request by the industry requesting the Tax Administrators to impose the request of information in proportion to the particular business`s size, nature and type of transactions. This proposition was met by the Commission`s Board being aware that the provision and collection of information is costly for businesses and they do not have the intention to substantially increase the costs burden on business or suppliers.
One of the setbacks is that in reality, no tax administrator can have up to date tax information on all the entrepreneurs in the sector due to the undeclared suppliers and transactions, resulting in tax collection being more complex.
The EU Commission has already proposed short term initiatives, but we are a long way from getting to the desired end goal. The proposed initiatives are:
- Access and exchange of “relevant data” in a language understandable by all
- Alignment of format requests between different Tax Administrators
- General exchange information on non-compliant traders and practices
- Education of users and sellers
- Facilitate registration and compliance online – the easier it is, the more compliance is successful. The demand is more than the request by businesses, so we need to filter what is the relevant data to be collected avoiding unnecessary databases of information for exchange.
- Encourage voluntarily disclosure and correction of errors.
The responsibility for vat compliance remains at the business but the Tax Administrators need to make sure that the online information kept by each business is secured to protect customers and the market. It was also proposed that the system of penalties should be proportionate to the particular infringement distinguishing between voluntary disclosures of errors once an error is detected compared to traced irregularities by the Tax Administrators. This is the only solution for voluntary compliance to be pushed forward and encouraged.
Shanice Finch is consultant with Erremme Business Advisors Limited and may be contacted on firstname.lastname@example.org