In both 2018 and 2017, the media repeatedly reported how online dealers, particularly from the Far East, have enjoyed a price advantage by avoiding VAT taxation in Europe. German legislation is now catching up and a bill has been drafted to oblige operators of electronic trade platforms to pay VAT.
The ministerial draft bill for the Annual Tax Act 2018 proposes that two new provisions be added to the VAT Act – sections 22f and 25e. Section 25e VAT- Act-Proposal (VAT-P) is considered particularly robust as it stipulates that operators of electronic marketplaces can be held liable for the VAT obligations of its users.
Who is the operator of an electronic marketplace?
The basic definition of an electronic marketplace and an operator is difficult to clarify. Pursuant to section 25e VAT-P, an electronic marketplace is a website (or any other instrument where information is made available via the internet) that enables a third party (who is not the operator of the marketplace) to carry out taxable transactions. Section 25e (6) VAT-P defines the operator of an online marketplace as the one who maintains the electronic marketplace and enables third parties to carry out transactions over it.
The meaning of "any other instrument" in section 25e (5) VAT-P is questionable. This may refer not only to large common trade platforms, but also to simple communication platforms or apps used to maintain business contacts, such as WhatsApp and Skype. It is hoped this issue will be clarified in the course of legislative procedure. Primarily, it should be clarified that third parties in this case must be in a position to provide information to an indefinite circle of addressees. This will prevent communication platforms, which are highly problematic to regulate, from becoming the focus of the tax office's attention, and would stop the act from being impossible to enforce from the outset.
Strict liability for operators of electronic trade platforms
An important new feature contained in the bill is the introduction of strict liability for the operators of electronic marketplaces pursuant to section 25e (1) VAT-P. In principle, operators are liable for any non-payment of VAT for deliveries from an undertaking, which were legally established over the online marketplace. According to the rationale of the act, the operator of an electronic trade platform – as the provider of a modern medium – is to be made liable for VAT generated by activities carried out on the platform. According to the explanatory memorandum of the law, this provision is in the interest of the general public, and is required for the collection of VAT taxation.
Strict liability is excluded under section 25e (2) VAT-P if the operator did not know, or did not have the means to know with the diligence of a prudent businessman, that the market participant has not fully complied with his tax obligations in Germany. The duty to provide evidence of a lack of knowledge and compliance with the diligence of a prudent businessman lies with the operator. The tax office assumes the operator has knowledge if it does not possess a certificate of taxation as stipulated in section 22f (1) sentence 2 VAT-P.
"Should have known" is an indefinite legal term created by the ECJ regarding liability for VAT evasion. Thus very strict requirements have been set out for exculpating the operators of online marketplaces, which may be impossible to fulfil.
Section 25e (3) sentence 1 VAT-P excludes strict liability in the event the user has not been registered as an entrepreneur with the online marketplace and the operator has fulfilled its record-keeping obligations pursuant to section 22f (2) VAT-E. Meeting record-keeping obligations is essential for the protection of the operator.
It would be hard to object to this section if another obstacle were not placed on exculpation. In section 25e (3) sentence 2 VAT-P, the operator of the electronic marketplace must monitor the trading behaviour of users not registered as entrepreneurs. As it can be assumed on the basis of the user's trading behaviour, and in particular on the type, quantity and amount of transactions, that he is an entrepreneur, the exclusion of liability pursuant to section 25e (3) sentence 1 VAT-P ceases to exist.
Hence, online platforms must assist tax authorities by monitoring trading behaviour or they will be held financially liable. If this principle is upheld in the final draft of the bill, it will be crucial to define the criteria for the algorithms necessary to search users.
Ultimately, under section 25e (4) VAT-P the tax office must inform the operator that a user has not fulfilled its tax obligations if other measures do not promise any immediate success. In this case, the operator is basically liable – upon receipt of this notification – to pay the user's VAT. Hence, tax authorities can ensure that an entrepreneur managing sales via electronic trade platforms is completely deprived of its commercial interests. Even arrears payments, temporarily owed to the tax authorities, could threaten the entrepreneur's existence if it is deprived of its ability to make sales. Whether this is actually desired from a regulatory point of view is something lawmakers should again weigh up in the course of further legislative procedure. Online merchants are therefore advised to proactively contact the tax authorities in the event of temporary payment difficulties in order to prevent exclusion from electronic trading platforms.
New record-keeping obligations
In accordance with strict liability, the operator of an electronic marketplace is obliged under section 22f (1) VAT-P to record the deliveries of an entrepreneur operating on its platform which start or end in Germany. Five criteria must be recorded for these deliveries:
- the full name and address of the supplying entrepreneur;
- the tax number of the entrepreneur, and if appropriate the VAT ID number;
- the start and end dates for validity of the certificate pursuant to point 2 above (for more information see below);
- the place where dispatch or shipping begins, and the destination; and
- the date, and quantity of sales.
The operator of the electronic trade platform must therefore record all the information required to assess the online platform user's VAT.
Operators must also record information about users not registered as entrepreneurs. Pursuant to section 22f (2) VAT-P, the information to be recorded includes name, address, the place where the dispatch begins and the destination, the date and amount of sales. The date of birth of private users must also be recorded.
Record-keeping duties will mean considerable additional expense for marketplace operators. Compliance with this obligation is, however, guaranteed by the corresponding liability requirement stipulated in section 25e VAT-P. Tax authorities consider the financial burden on the operator to be moderate. The Federal Ministry of Finance assumes the cost of one-off recordkeeping for trade platform operators (upon the assumption there are 129 operators affected) to amount to EUR 1.382 million. The subsequent annual recordkeeping expense for all platform operators is estimated to be only EUR 98,000. There is no information regarding any additional revenue as a result of this new liability. There are doubts whether these figures are accurate or not.
New tax certificate for traders
Under section 22f (2) 2 to 5 VAT-E, traders who trade as an entrepreneur on an electronic trade platform must obtain a tax registration certificate. Traders who have neither a domicile nor a registered office in Germany or the EU must appoint an authorised recipient in Germany or an authorised recipient with a registered office in the EU to obtain such a certificate (e.g. a tax advisor or lawyer.) This means that it is no longer possible for a foreign retailer to use an online trading platform without a representative in Germany.
This certificate is an additional formality that should not, however, excessively burden traders. All affected traders are already obliged to register for VAT in Germany if they carry out deliveries in Germany (from a German warehouse to a German customer). They will of course have to submit VAT returns in Germany. A German tax advisor is required in this situation (at least for entrepreneurs from countries outside the EU) who can also act as the authorised recipient for any future correspondence with the tax office.
Of course, this requirement is problematic for traders who have not correctly dealt with VAT matters in the past. If they are not able to submit a tax registration certificate, their commercial activity over electronic platforms in Germany will be stopped. Whether this certificate would be sufficient to prevent VAT evasion should again be weighed up by lawmakers in the course of further legislative procedure. (It should be noted that these certificates are transmitted electronically to the operator of the online marketplace. The entrepreneur gives its consent when applying for the certificate.)
Summary: tightening of the rules for operators and users of electronic marketplaces
The new sections (22f and 25e VAT-P) of the Annual Tax Act 2018 in the ministerial draft version dated 21 June 2018 considerably tightens the rules for operators of electronic marketplaces. This is because operators are now classified on the basis of their activity of "endangering VAT" in Germany, and are liable to pay VAT for their users.
In addition, there will be a considerable extra burden on operators owing to the recordkeeping duties stipulated in section 22f VAT-P. In essence, operators are being outsourced as tax fraud investigators who must now monitor the trading behaviour of private users for tax reasons. If they do not do this, operators are at considerable risk of having to pay these users' VAT. The fact that tasks originally carried out by tax authorities are now being transferred to private operators of trade platforms is a matter of concern.
Users who pay their VAT also have an extra but acceptable expense: they must apply for a certificate of tax reliability, which tax authorities assume will only take minutes to do. Whether submitting this certificate is sufficient as a requirement for trade on an online platform should be carefully reviewed in the course of further legislative procedure. In this case, the operator should always demand a presentation of a certificate if the user's sales exceed the limit for a small undertaking pursuant to section 19 (1) VAT Act.