VAT for Online Platforms: UK and Germany Enact their Own Rules

Impatient with the European Union’s (EU) progress toward a uniform value-added tax (VAT) for electronic commerce, two economic powerhouses have set their own rules.

The EU has enacted a set of rules – the Digital VAT Package – aimed at modernising its VAT system for online platforms. However, as I noted in a previous post, Germany and the United Kingdom (U.K.) decided not to wait for the package to take effect and enacted their own rules on the VAT liability of online platforms.

The United Kingdom’s move was prompted by the fact that overseas businesses selling goods to U.K. consumers via online marketplaces did not always meet their U.K. VAT compliance obligations, leading to revenue shortfalls. Since 15 September 2016, the U.K. tax authority (HMRC) has been permitted to make online marketplaces jointly and severally liable for the unpaid VAT of overseas businesses that are non-compliant with U.K. VAT rules and use their platforms to sell goods to U.K. consumers (meaning multiple entities could be liable for the debt). As of 15 March 2018, the scope of existing joint and liability rules has been expanded to U.K. businesses.

Additionally, an overseas platform may be held jointly and severally liable not only after it receives a notice from the HMRC about a non-compliant overseas business trading via its website, but from the point in time when it knew or should have known that an overseas business fails to comply with the U.K. VAT law.

The German government also decided that it did not want to wait until the Digital VAT Package takes effect in 2021. Germany has enacted its own legislation to prevent revenue shortfalls caused by non-compliant sellers trading via online marketplaces. Under the new rules, the operator of an online marketplace will be held liable for any unpaid VAT on supplies that were legally established via its marketplace. This liability arises irrespective of the type of supply or the location of the supplier and the platform. The marketplace may avoid its liability if it has received a certificate from the seller showing that the seller is registered for VAT purposes. The new provisions on the liability of online platforms took effect for third-country sellers in March; the same provisions for any other seller take effect starting 1 Oct of this year.

The German rules closely mirror the provisions adopted in the United Kingdom and are quite different from the EU proposals. Both the U.K. and the German rules establish a secondary liability that will arise if the supplier fails to meet its compliance obligations, whereas under the EU rules, the platform is deemed to be the supplier of the goods (primary liability).

The rise of technologies that facilitate instant cross-border transactions is severely testing the EU’s VAT policy, leading to revenue shortfalls. Whether more countries will adopt the U.K./Germany model remains to be seen.