In our previous article in this series, we focused on the critical importance of the relationship and flow of information between online marketplaces and sellers on their platform. This relationship, and its importance, extends to the very specific information required to describe the products sold by sellers.
Other articles in this series:
Product classification, after all, will determine what VAT rate should be applied to a specific product. This process has many moving parts: from the confirmation of the correct product description; use of the Combined Nomenclature (CN) codes system; the application of the correct VAT rate, in real-time, using a robust automated mapping tool, and the continuous education of underlying sellers and their obligations to provide correct and up-to-date information.
Risk burden for online marketplaces as the deemed supplier
Such responsibilities expose online marketplaces to a significant level of risk that needs to be properly managed. We explore these responsibilities in this article.
In general, the online marketplace has no control over the description of what is sold on its platform and is reliant on the information provided by its sellers. This reliance creates a substantial level of risk for online marketplaces when they become the deemed supplier for VAT purposes: are the products sold receiving the correct VAT treatment? If not, why not? These types of questions, typically asked at a time of an audit, underline the importance of the online marketplace-to-seller relationships.
Explanatory Notes guidance on product classification
On this point, the EU provides guidance in their Explanatory Notes. The Notes state that online marketplace should exercise a “duty of commercial care” to educate (through FAQs or support teams) its underlying sellers of their obligations to provide the correct product description. In this regard, page 25 of the Notes provides examples of exercising such a duty of commercial care that includes requesting information and verifying it. The Notes encourage due diligence in stating the following:
“The electronic interface requests the underlying suppliers to properly communicate the [necessary] information to the electronic interface (e.g. requires them to upload description of the goods, provides clear guidance on how to classify the products listed by them on the electronic interface, requests them to communicate the location of the goods from which they will be shipped, etc.).”
The Notes continue with the following guidance:
“The electronic interface has set up reasonable verification processes as regards the information provided by underlying suppliers for certain product categories (e.g. product categories where a variety of VAT rates could apply based on specific product characteristics). This could be based on visual verification (matching product picture with description) as well as machine learning techniques (using search terms applied for products listed with key tax rate characteristics of the product).”
Use of Combined Nomenclature (CN) codes
Once a clear, accurate and up-to-date product description has been provided there is additional work involved in mapping the product description to the correct VAT rate. Here businesses can avail of the Combined Nomenclature (CN) codes system, a tool for classifying goods.
Our solution includes AI tools to map seller descriptions and product data to CN codes, which are then mapped to VAT rates at product onboarding or through periodic review. It also offers the following benefits:
- AI tools to map seller descriptions and product data to HS codes, which are then mapped to VAT rates at product onboarding or through periodic review
- AI-driven with a continuous AI learning cycle, consistently feeding results back into the Classification Engine
- Copes with marketplace speciﬁc vocabulary and product descriptions
- Can detect erroneous/inconsistent classiﬁcation in historical data and manually performed categorisations
It should be noted that certain products, regardless of value, are also factored into this tool as marketplaces are not liable for goods subject to excise duty (e.g. alcohol), nor for goods subject to special schemes (e.g. second-hand schemes).
VAT rate mapping complexity
There is significant complexity involved when attempting to map specific product descriptions to the various standard, reduced, super-reduced VAT rates (as well as mapping for zero-rated products) that exist in the EU.
What adds to the difficulty is when EU Member States decide to change VAT rates with little lead-in time allowed. This occurred recently when the German and Irish governments, attempting to soften the blow caused by the ongoing pandemic, introduced temporary VAT reductions. Ireland reduced its standard VAT rate from 23% to 21% for six months from September 1, 2020, to February 28. 2021. Germany, meanwhile, reduced standard and reduced rates in July 2020 for a six-month period.
Any temporary changes have far-reaching consequences for businesses as they involve updates to ERP systems and potential pricing changes. The fact such changes were temporary merely adds to the burden on businesses as there is the need to revert to the original position after a set period.
Not only is there difficulty keeping track of and amending systems when VAT changes are announced but the oft-spoken intention to harmonise VAT rates in the EU Member States is unlikely soon.
Today, the goods in the scope of reduced rates, for example, are listed in Annex III of the EU VAT Directive. However, the EU has a proposal to give more freedom to the Member States regarding which goods can be subject to reduced rates. As a result, there is the potential for additional disharmonisation of VAT rates in the future.
According to the EU VAT Directive, for example, there is an expressed minimum standard VAT rate of 15% but there is no expressed maximum rate. With no ceiling, there is the potential for Member States to have the freedom to raise their standard VAT rates even higher. As of January 1, 2021, standard EU VAT rates range from 17% in Luxembourg to 27% in Hungary.
Sudden VAT rate changes
Consider also that in recent times there was considerable upheaval with VAT rate changes regarding electronic books (e-books). This led to an intense discussion around the Mini One-Stop Shop (MOSS) system for VAT since digital services (including e-books) could only be subject to standard VAT rates. Therefore, e-books attracted standard rates when the MOSS system began in January 2015. However, in April 2020 there was a significant change in approach and online books were allowed to be subject (on a country-by-country basis) to the Member States' reduced rates. The situation was even more dramatic in the United Kingdom where changes were announced on April 30 to completely scrap the VAT rate on e-publications and went into effect on May 1.
These episodes are telling as from July 1 onwards we are moving to the sale of goods and digital services considerably multiplying the number of rates a product may be subjected to and, in turn, heightening the impact of sudden VAT changes on business functions.
For more information on Taxamo’s offering check out the Taxamo Marketplace page here: https://www.taxamo.com/marketplace.html
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