EU Grapples with VAT Rules for Online Platforms

The European Union (EU) is pressing toward its goal of a uniform value added tax (VAT) for electronic commerce that would reduce compliance costs for e-commerce traders. Many of these traders are using online platforms to sell goods and other digital products.

Online platforms are an important part of the digital economy and strong drivers of innovation. They increase consumer choice and improve companies’ efficiency and competitiveness. The popularity of the platform business model is on the rise. The four most valuable companies in the world in terms of market capitalization – all U.S.-based tech giants – derive much of their value from this business model.

The European Commission (EC) estimates that 1 million EU businesses currently sell goods and services via online platforms. And more than 50 percent of the small and medium enterprises that sell through these online marketplaces do so across national borders. As the EU represents only 4 percent of the total market capitalization of the largest online platforms, the platform economy presents major innovation opportunities for European start-ups and established market operators. The EC has acknowledged that “facilitating and supporting the emergence of competitive EU-based platforms is both an economic and strategic imperative for Europe.”

One of the challenges platform operators face is the complexity of the legal rules they must comply with. In the near future, this complexity is going to increase, at least in the area of VAT. Two years ago, the EU enacted a set of rules to modernize the VAT system for the purposes of electronic commerce. The new rules, commonly referred to as the Digital VAT Package, will apply beginning Jan. 1, 2021. They feature two new provisions establishing the liability of online platforms that facilitate certain transactions.

However, some member states did not want to wait for the EU-wide legislation to take effect but enacted their own special rules on the VAT liability of online platforms. In my next post, I’ll look at how Germany and a soon-to-be-former EU member state – the United Kingdom – are tackling the issue.

If more countries decide to head in the same direction, the European Commission’s objective of establishing a balanced and uniform regulatory framework for online platforms seems unlikely to be achieved.