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Distance Selling - The International VAT issues arising

By Mike Molony

The incidence of cross border distance selling to consumers over the Internet has had explosive growth in recent years. Many businesses are now increasing their concentration on this business, especially as the global recession makes trading in domestic markets more difficult. The trade has long since  moved  beyond  cassettes  and  small  value items and now includes main ticket items like expensive, designer/branded clothing, bicycles, outdoor equipment, and even complete bathrooms delivered cross border to consumers in flat pack format. There have been significant advances in transport of goods ordered, with next day delivery common in many parts of the world.

Businesses have to grapple with the international VAT issue that comes with this business, often requiring local VAT registration in multiple countries across the EU.

The distance selling thresholds in the EU, above which businesses have to register in foreign jurisdictions, are set at quite low thresholds, with EU legislation allowing Member States discretion to set this at either Euro 35,000 or Euro 100,000. The strict application of the combined rules in EU Legislation of articles 33 and 34 of the Principal European VAT Directive leads to a three stage process for a proper assessment of the taxation of distance sales which is quite complex.

This can cause problems, if companies are not monitoring their foreign turnover thresholds and exceed the distance selling thresholds in a number of countries, without registering in the country where the thresholds have been exceeded.

The application of this set of rules presents clear challenges for Traders, and if they are not compliant, they can be exposed to significant penalties and interest,   due   to   lack   of   compliance  with   VAT legislation in the country that they are selling into.

Foreign  tax  administrations  are  increasingly concerned at the lack of compliance in this growing area of business, as this can result in material VAT sums lost to the foreign tax authorities, and have set up specialist sections to deal with this specific area. With European VAT rates ranging currently between 15% and 25%, this can lead to very material understatements of tax.

There have been a number of recent developments that have come to our attention, where local VAT authorities are now contacting foreign businesses directly, to make enquiries as to their distance selling operations to consumers in their country.

In one case, the Swedish VAT authorities contacted a UK business in the motor accessories industry enquiring as to the level of turnover in Sweden.

In another case a German business in the specialist clothing industry, was contacted by the Danish authorities, to enquire as to the extent of their distance selling in Sweden, and there are other examples.

Tax authorities are also using Mutual assistance programs, to ensure compliance with local legislation.

Meridian provides all necessary support to assist all clients engaged in cross border distance selling operations, and provide practical help to deal with all aspects of foreign VAT compliance. This includes any systems support that may be necessary, voluntary disclosures required to recover VAT incorrectly charged in the Member State of establishment of the supplier and to provide any risk management and penalty /interest mitigation on behalf of clients.

Distance Selling Thresholds published by the EU in September 2011:
Country Distance Selling Threshold Euro equivalent
Austria €35,000
Belgium €35,000
Bulgaria 70.000 BGN €35,791
Cyprus €35,000
Czech Republic 1.140.000 CZK €46,570
Denmark 280.000 DKK €37,557
Estonia €35,151
Finland €35,000
France €100,000
Germany €100,000
Greece €35,000
Hungary 8.800.000 HUF €32,257
Ireland €35,000
Italy €35,000
Latvia 24.000 LVL €34,052
Lithuania 125.000 LTL €36,203
Luxembourg €100,000
Malta €35,000
Netherlands €100,000
Poland 160.000 PLN €40,293
Portugal €35,000
Romania 118.000 RON €28,012
Slovakia €35,000
Slovenia €35,000
Spain €35,000
Sweden 320.000 SEK €36,232
United Kingdom 70.000 GBP €81,843


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