At Vertex, we know that online marketplaces are a vital channel for online sellers. In our recent research report, ‘Taxing times for the marketplace and seller relationship’, 90% of businesses say at least 20% of their revenue comes from this channel with 87% saying the percentage is increasing. In addition, 80% of sellers tell us they are increasing the number of online marketplaces they use. However, navigating marketplace tax compliance can be a real challenge, as governments work to expand the breadth and depth of VAT (Value Added Tax) obligations for the marketplace trade. VAT marketplace laws and regulations are rapidly evolving and changing. The report found that a significant number of organisations see online marketplace VAT as a barrier to unlocking the growth potential of new markets and geographies. In our research, 32% of sellers think that selling through marketplaces is becoming more difficult, and 68% of sellers predict the indirect tax challenges will probably deter them from using 3rd party marketplaces in the future.
There are many cross-border regulations and frequent changes to consider. Businesses need to stay abreast of VAT rates, thresholds, liability determination, reporting requirements, e-invoicing requirements, and currency exchange rates. Plus, every single online marketplace transaction creates multiple points of additional complexity. For example, from sticking to the right rules that determine the applicable VAT rate according to the customer location and item category, to using an invoice process that is compliant with a country’s digital and invoicing and reporting regulations. One customer’s online shopping basket with multiple items can trigger an indirect tax liability for the seller, the marketplace, and even the consumer. The marketplace VAT landscape is hard to navigate and can strike fear into the hearts of business owners. After all, it’s not often that business owners are also tax experts - with time to keep up with the latest changes and details of VAT marketplace tax obligations. The focus of medium size business owners is core business activities, and rightly so, however, marketplaces still need to have their compliance right, ready for VAT reporting.
So, what do you need to know?
What’s covered in this marketplace VAT guide
- Key points for marketplace operators, sellers and business consumers
- Dealing with the complexity of location in online marketplace for VAT
- Where relevant. applying VAT One Stop Shop (OSS) rules in EU member states
- Understanding e-invoicing vs digital invoicing
- Online marketplace tax - a quick reference checklist
Key points for marketplace operators, sellers and business consumers
VAT online marketplace requirements involve more than just calculating and paying taxes. VAT registered businesses have obligations to comply with tax laws and regulations, which include filing tax returns, maintaining accurate records, and providing significant documentation in the right format to tax authorities. Failure to meet marketplace VAT requirements can result in penalties, interest charges, or even legal consequences.
Marketplace Operators need to comply with VAT regulations in the locations where they operate or trade. This usually means understanding the thresholds for VAT registration, collecting and remitting VAT on behalf of sellers, and dealing with complex VAT rates and exemptions across many different jurisdictions. Marketplaces have a duty to report and disclose information related to cross-border transactions, and this includes transactions made by sellers using their platforms. They need to maintain proper records and implement systems to track and report transactions efficiently. In some cases, marketplace operators may be held liable for VAT ordinarily applicable to sellers, and they are often responsible for verifying seller information, ensuring correct VAT registration, and monitoring seller activity on the platform.
Sellers Using Marketplaces need to be aware of the VAT registration thresholds in the countries where they operate and correctly charge and collect VAT from customers - making timely payment to the appropriate tax authorities. With varying VAT rates, exemptions and invoicing requirements across so many different jurisdictions, compliance can be challenging. For example, once distance selling thresholds are exceeded, they may need to register for VAT in the buyer's country and comply with local reporting obligations. This means accurate records of cross-border transactions, invoices, and shipping is needed to support VAT reporting and compliance efforts.
Business Consumers may need to self-account for VAT, depending on their VAT registration status and the nature of the transaction. Business consumers will need to make sure they receive valid VAT invoices from their suppliers because these are necessary for both compliance and VAT reclaim.
Dealing with the complexity of location for online marketplace VAT
Online marketplace VAT obligations and liabilities are determined by location - whether of the business trading, the ultimate consumer or the marketplace operator.
In Europe, when both sellers and buyers are within member states of the European Union (EU) they benefit from some simplification schemes like the VAT One Stop Shop - designed to help simplify VAT compliance for businesses engaged in cross-border sales of goods or services within the EU. For non-member states the situation is far more complex. For post Brexit UK and non-member state countries such as Norway and Switzerland - marketplace VAT is even more complex. For example, VAT registration thresholds that trigger a requirement to register for and charge VAT on sales will vary by country, as will distance selling rules, VAT rates and exemption categories.
Selling beyond Europe adds further considerations and complexity. For example if expanding into North America, Canada uses ‘place of supply rules’ to decide on tax obligations. So, a UK online business selling goods or services to customers in Canada may need to register for Canadian Goods and Services Tax (GST) or Harmonized Sales Tax (HST). The registration thresholds vary by Canadian province and some provinces also have their own Provincial Sales Tax (PST).
Applying VAT One Stop Shop (OSS) rules in EU member states
- Simplified Reporting: a single VAT registration, return and payment covers B2C cross-border sales to customers within the EU, reducing administrative burden and costs.
- Reduced Compliance Complexity: simplifies the calculation and collection of VAT using a single electronic portal streamlining the VAT payment process.
- It’s not applicable to Business-to-Business (B2B) transactions, which may still require separate VAT registrations in each EU member state.
- There’s no VAT rate or registration threshold harmonisation - so businesses must still apply the correct VAT rates and rules applicable to each member state.
Understanding e-invoicing vs digital invoicing for marketplace VAT
In the fight against VAT fraud, many countries have made e-invoicing mandatory or have plans to do so. It’s important to know what’s involved and the difference between e-invoicing and digital invoicing. They may appear to be the same, but they are not.
E-invoicing (short for electronic invoicing) is about automation and integration of data to streamline processes, reduce fraud and improve accuracy and VAT compliance. When it comes to online marketplace tax compliance where e-invoicing is required, invoice data is exchanged in a machine-readable format and validated automatically between marketplace operators, buyers and tax authorities’ systems.
Digital Invoicing is when an invoice is delivered to a buyer in a digital format replacing paper-based physical invoices. So, this means reduced paper and postage costs, faster processing and easier storage of the invoice data but it doesn’t mean exchanging data between systems or integration with tax authorities.
Online marketplace tax - a quick reference checklist
Understand marketplace VAT:
Become familiar with the specific rules and requirements related to VAT registration, collection, remittance, and reporting for marketplace operators and sellers. Monitor updates from tax authorities regularly and ask for clarification when you need it.
Establish a record-keeping culture:
Responding to inquiries from tax regulators is far easier if you accurately track and document all the elements of your marketplace transactions. Implement robust processes and systems associated with marketplace VAT compliance - such as verifying seller VAT registration and monitoring compliance and e-invoicing.
Be open and transparent with tax authorities:
It’s important to have a positive and productive relationship with tax authorities. This will help smooth the way for VAT compliance. Submit accurate VAT returns by the deadlines. If you have any concerns or questions, reach out to them proactively for guidance and clarification.
Minimise audit risk:
If you simulate internal audits on your VAT compliance practices, you can identify and work on the areas that need improvement and avoid potential non-compliance penalties.
Use technology and professional advice:
Seeking expert guidance on compliance requirements will help your business interpret complex regulations and meet obligations. Intelligent tax technology solutions like Vertex for Marketplaces and Vertex VAT Compliance help you navigate the complexities of international tax regulations, mitigate compliance risks, and keep you focused on business success.
At Vertex, we help mid-sized to corporate businesses simplify their tax calculations and compliance through automation - streamlining VAT processes to support business ambition. Contact us today to find out more.
Please remember that Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information. The views and opinions expressed in Tax Matters are those of the authors and do not necessarily reflect the official policy, position, or opinion of Vertex Inc.