E-commerce: New Business to Consumer VAT framework proposed by the EU


The EU has announced its intention to introduce a new VAT framework, to take effect from January 2015, which will affect the business to consumer e-commerce transactions now taking place across the Union.

The aim of the proposed change is to redistribute the revenues currently generated by VAT on business to consumer e-sales. It is hoped that change will result in the fairer redistribution of VAT across the EU. At present, taxing rights on such cross-border transactions are based on where the business, ie the supplier, is located. The charge in taxing rights will switch the taxing rights to the country where the customer is based.

The current taxing rights for business to business transactions will remain unchanged; the taxation rights remaining where the business supplier is based.

The step by the EU has been prompted by the approval of the OECD taxation scheme, following the Tokyo Global Forum on Taxation. The OECD considered that reform of the current system was required as a result of the considerable growth of e-commerce in recent years. The effect of that growth has had the effect of reducing corporate tax base and the VAT tax base. Under the existing system major e-commerce suppliers have located their e-commerce business in those countries in the EU with the lowest VAT rates. It is hoped that the new scheme will reduce this advantage and redistribute the VAT receipts more fairly through the Community.

As part of wide ranging simplification of the VAT regime throughout the EU, there is currently being implemented a single EU wide VAT register.  In future, non-EU businesses can make one application for VAT registration with the register of an EU member state of their choice and this single registration will be sufficient to cover the whole of the EU. This will replace the current system where businesses are obliged to register individually with each VAT registry in each country in which they operate.

A more sophisticated and dynamic VAT Information Exchange System (VIES) is in the process of being introduced. It is intended that when complete the VIES system will permit real time confirmation of an entity’s VAT status, which will enable companies to determine whether VAT should be applied to a transaction or not.