There has been much coverage in the mainstream press and TV recently on the subject of perceived tax avoidance. The focus more recently has been on the amount of corporate tax and VAT businesses pay. The articles often demonstrated a lack of understanding about the fact that major multinationals have complex supply chains that include third party manufacturers, distributors etc, each taking a profit. Trying to make a connection between retail sales values in a jurisdiction such as the UK and the amount of corporation tax paid is therefore nonsensical.
A similar lack of understanding has arisen with VAT rate shopping. A number of B2C online businesses have been named for properly establishing in Luxemburg or France to take advantage of a reduced rate for certain sales of electronic services and infraction proceedings are looming against the Member States. Arguably this is an illogical approach given there is still such variance between standard rates within the EU – no level playing field regardless of how much tinkering is done around the edges.
The fact remains that businesses are free to properly establish themselves where they see fit within the EU and further afield. The suggestion that businesses should account for VAT where their customers are located is not unreasonable, but until the VAT system taxes transactions in this way as opposed to the place of establishment, it is a little naive to think businesses will risk being uncompetitive if operating online globally. VAT is arguably a cost etailers need to manage, and if they are able to reduce this by a few percentage points and still operate the business effectively in an overseas location, it is not difficult to see why they would do this.
The mechanics by which VAT is accounted for must be fit for purpose. Even if this is eventually achieved within the 27 EU Member States with a ‘one stop shop’, the EU is only a relatively small part of a much wider world, with VAT type systems pretty much everywhere but the US. Businesses still need to consider the question of how to account for VAT in the other 80+ countries worldwide where they may be trading, and they face an insurmountable VAT burden . For example, an online hotel bedbank businesses selling hotel rooms in every country worldwide potentially faces the following:
– VAT rules saying the supply is taxed where the hotel is located, regardless of where the business is etablished
– Multiple VAT registration liabilities – if it operates with a different legal entity selling global hotel rooms to consumers in its jurisdiction, the corporate group as a whole could technically be faced with 80+ VAT registrations worldwide per entity
– If the group has say 5 entities to cover broad global regions, 400 VAT registrations
– Each of the 400 registrations filing up to 12 returns per annum.
In practice it is unlikely such a scenario would arise but it demonstrates perfectly the fact that current VAT rules worldwide have not kept pace in a suitable way for a B2C online business. In summary they currently face being non competitive if not in a Member State with a low VAT rate, being non compliant depending on what they sell, or faced with a significant compliance burden. Until this changes, B2C businesses will surely continue to treat VAT as a P&L hit and seek to manage it in the most effective way possible, meaning they have a competitive business that contributes tax revenues.
First published in Tax Journal on Friday 2nd November 2012. If you would any further advice or assistance on this or any other VAT issue, please contact Julie Park on 01962 735350.