Cross border trade online: how Brussels plans to change the rules

Should online retailers be able to stop someone from overseas buying from their site? On 25 May 2016 the European Commission set out proposals to ensure people and businesses can seamlessly transact online with fair competition and protection, wherever they're based. The vision is for a Digital Single Market. But is it as simple and fair as it sounds?

It's easy to see why some retailers might prefer customers close to home. Shipping costs, including the returns procedure, have been one of the main barriers to cross border sales. The Commission's recommendations around parcel delivery, with greater transparency of costs, should help drive down these prices. Other challenges with cross border transactions include foreign exchange, adding another layer of complexity and uncertainty, and then there's tax - my area of focus. 

For both sales of digital and physical goods to consumers in the EU, VAT has to be accounted for, but they have different regimes.

The digital regime is the easier of the two because, even though VAT is due in every Member State in which EU customers are based, the VAT can be accounted for via one return in one country, under what's called a Mini-One-Stop-Shop (MOSS) arrangement. The complication comes from having to understand the EU rules to decide where the customer belongs (this isn't necessarily where they're physically located when they make the download), and having the technology to do this. For many retailers, the costs of collecting the necessary information will make the sale uneconomic.

Currently, physical goods sold, together with the delivery of those goods to the customer, fall under the ‘distance selling’ rules. These require VAT to be accounted for in the country of the retailer until the retailer goes over a threshold in a territory where end customers belong, they then have to VAT register in that territory. For those under the thresholds, the key burden is monitoring sales to these territories versus the thresholds, whilst for those over them, the compliance burden of registering and filing returns can be onerous and only cost effective for large businesses. Fortunately, as part of its further proposals regarding the Digital Single Market, there is expected to be a proposal to bring physical goods within the MOSS regime, which would make things somewhat easier. You also avoid the uncertainty of the country of consumption which you get for digital goods.

There are also questions around where the retailer should pay direct tax - do their activities constitute a taxable presence? Tax authorities across Europe can take very different approaches.

So while the aspiration for a single digital market is a good one, there is still more cost associated with being tax compliant on cross border sales than domestic ones, so is it fair to compel retailers to sell across border given the additional costs involved in being compliant with the more complex tax rules. The tax system for digital commerce is not currently a level playing field and a digital single market will force businesses to walk onto that field even if they don't want to.

We look forward to the Commission’s further proposals to see if they can truly level that field.

John Steveni

PwC | Partner
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