New VAT Rules for EU Payment Service Providers: Part 1—The Rationale

The Cost of VAT Fraud

A special report produced last year by the European Court of Auditors estimates that European Union (EU) Member States lose approximately €5 billion of VAT revenue annually on cross-border business-to-consumer (B2C) e-commerce supplies of goods. Fraud is a major cause of this shortcoming, and the EU’s forthcoming rules changes regarding certain e-commerce transactions are designed to reduce instances of fraud. These VAT compliance changes, which take effect 1 Jan 2024, will have major implications on “payment services providers (PSPs)”, so it is important to understand the rationale for this rules update.

The Rationale for the VAT Compliance Changes

First, let’s look at some fraud risks that stimulated the new rules: Fraud can be committed on cross-border e-commerce transactions by undervaluing goods imported into the EU from other countries or by exploiting importation deferral schemes. When goods are traded within the EU, fraudsters may avoid VAT registrations in countries where their customers reside, even though they are legally obliged to fulfil their VAT compliance obligations at destination if their sales to another EU Member State exceed certain thresholds.

Second, let’s look at some shortcomings of the current approach: The current legal framework for e-commerce transactions creates a huge compliance burden for remote sellers: High-volume sellers need to be registered in all countries where their customers are located. The current approach is also prone to VAT fraud: low-value shipments of goods from third countries are free of VAT, which creates an incentive to undervalue such consignments.

Third, let’s consider the new approach: As I’ve reported, the EU has enacted new VAT rules for e-commerce transactions that take effect starting 1 Jan 2021. Although the new rules seek to close some of the loopholes causing losses of VAT revenue, they do not provide any means to tackle illegal VAT evasion. To prevent VAT fraud in the e-commerce sector, the EU has applied a “follow the money” approach by enacting the new obligations for PSPs. The objective of these new measures is to give Member States detection and control instruments to correctly assess VAT liabilities on cross-border B2C supplies. A 2016 survey about consumers’ preferred payment options showed that 94 per cent of online payments for cross-border purchases used payment intermediaries. It became clear that by involving these intermediaries in the VAT collection process and by comparing payment and transaction data, tax administrations would be in a better position to detect non-compliant sellers.

In part 2 of this three-part series, I’ll discuss which companies these new rules apply to and what transactional information those PSPs will need to record and submit to tax administrations.