By Alex Baulf, Senior Director, Global Indirect Tax at Avalara, shares his outlook for what promises to be a busy year ahead for e-commerce financers
As the COVID-19 pandemic reshapes our world, more consumers have begun shopping online in greater numbers and frequency, turbocharging the shift to e-commerce.
Let’s look at Europe as an example. According to the 2021 European Ecommerce Report, 71% of Europeans shopped online in 2020, up from just 66% in 2019, before the pandemic.
In markets such as the UK, Denmark, Switzerland, and the Netherlands, at least nine in 10 people made purchases over the internet in 2020.
It’s predicted that European digital commerce activity surpasses the $1 trillion mark this year. Many trends are emerging with this heightening activity, impacting finance and taxation professionals.
Here are three trends that I believe are worth following closely in 2022.
Launch of the European Union’s e-commerce package
In recent years, one of the European Commission’s key objectives has been to simplify VAT for companies carrying out cross-border sales of goods and services online.
In short, the new system, which launched in July 2021, is built to ensure that VAT on such transactions is paid correctly to the member state in which the supply takes place, in line with the principle of taxation in that country.
The changes are designed to plug some of the €5 billion haemorrhaged through e-commerce VAT fraud, with EU nations looking to close import loopholes and have marketplaces do some heavy lifting when collecting VAT.
Moreover, due to these flagship reforms, some organisations can now report all of their pan-EU cross-border sales on a single VAT return in their home country instead of needing multiple VAT registrations across the region.
This is a massive change for businesses across Europe and the world. For some organisations it has come as a blessing because it has simplified importation processes – but for others, it has been a source of upheaval, with firms having to find an intermediary and charge VAT at the relevant local rate at the point of sale across the EU member states.
That said, although 1.2 million sellers were impacted, e-commerce marketplaces have also responded and taken some of the administrative burdens away from companies and governments (one of the scheme’s key objectives). Indeed, they have offered a cushion to most online vendors by being the ones to charge, collect and remit the VAT from customers using their IOSS registration number.
Uptake of IOSS registrations has been slow
IOSS, an abbreviation for Import One-Stop-Shop, allows a taxable person to register in a single member state to declare and pay all European Union VAT due on imported goods within the scheme’s scope (goods valued at under EUR 150).
However, while some marketplaces have been quick to react, the general uptake of IOSS registrations has been somewhat more sluggish.
When the European Union’s VAT changes came into effect in the summer of 2021, we predicted that around 26,000 companies would need to register for VAT in an EU member state for the first time. According to data from the European Commission, less than a third (about 7,500 businesses) have signed up globally. The European Commission estimates that this represents 90% of regular imports into the EU – but we expect that there will be a long tail of smaller businesses across the globe making up the remaining 10%, as well as businesses making more infrequent or ad hoc sales to European consumers.
This is a severe shortfall and something which we hope shifts in the right direction this year. If we see this happen, more must be done to ensure businesses are made aware of significant legislative changes.
Failure to do so will result in many companies missing out and facing potential compliance risks that could prove costly.
E-commerce package concerns
Those firms that have been able to plan for the new regime have largely experienced a smooth ride so far, but there remains a considerable amount of confusion that will take some time to settle.
Border issues are one of the main sticking points, with some challenges around double taxation. In some extreme cases, goods have been blocked at customs, with customers having to pay import VAT to authorities to receive them, even though this had already been paid at the time of sale.
There are also concerns surrounding fraud. While we need to see more firms register for IOSS, the challenge is to prevent the fraudulent use of IOSS numbers, which the European Commission is aware of and exploring solutions to address.
The next couple of years will continue to see the expansion of e-commerce in Europe and around the world. With new taxation regimes such as those deployed by the European Union built to better manage the online commercial sphere, organisations need to remain vigilant and comply with new rules and regulations. This means staying abreast of key trends and challenges, and those who do will be better placed to ride the e-commerce wave for many years to come.