Many challenges in collecting correct amounts of VAT and customs duties on e-commerce remain to be resolved, according to a report from the European Court of Auditors published on Tuesday.
The auditors say that while EU controls are insufficient to prevent fraud and detect abuse, enforcement of collection is still not effective. However, recent developments and new provisions for 2021 address a number of weaknesses identified, they add.
In the EU, the European Commission is responsible for setting customs and taxation policies, strategies and legislation. As for any other goods and services, Member States collect VAT and customs duties on cross-border e-commerce transactions. By its very nature, e-commerce is particularly prone to irregularities in this respect.
The auditors assessed whether the Commission had established a sound regulatory and control framework and whether Member States' control measures helped ensure the complete collection of VAT and customs duties due on goods and services traded over the internet. They also considered the likely impact of the legislative changes of the VAT e-commerce package that will enter into force in 2021.
"Any shortfall in the collection of VAT and customs duties affects the budgets of the Member States and the EU", said Ildikó Gáll-Pelcz, the Member of the European Court of Auditors responsible for the report. "E-commerce is particularly open to abuse and its vulnerability to irregularities and fraud has not yet been fully mitigated."
International cooperation is essential to ensure the completeness of revenue collection from e-commerce. The auditors note, however, that arrangements in place are not fully exploited and exchange of information between Member States and with non-EU countries is insufficient. In addition, the enforcement of the collection of VAT and customs duties is not effective, the auditors highlight. Member States are unable to provide sound and common estimates of the VAT gap, i.e. the difference between what should be collected and what is actually collected. Overall, tax authorities cannot ensure that the right amount of VAT is paid to the right Member State at the right time.
The auditors further point out the lack of effective controls on cross-border e-commerce. Checks carried out by the national tax authorities are weak and the Commission's monitoring activities are insufficient, they say. For instance, the EU is unable to prevent abuse such as the deliberate undervaluation of goods below the thresholds for VAT and/or customs duty exemptions.
Regarding the new provisions that will enter into force in 2021, the auditors acknowledge positive developments. These aim to resolve some weaknesses of the current framework, including the gap in the VAT liability of intermediaries. However, important issues remain to be addressed. In particular, the auditors consider that under-valuations are very likely to continue under the new rules.
To better address the challenges identified, the report concludes with a number of recommendations to the Commission and the Member States. Among other things, the auditors ask them to:
- carefully check traders' compliance thresholds for VAT/customs;
- develop a methodology to produce estimates of the compliance VAT gap;
- explore the use of suitable "technology-based" collection systems to tackle VAT fraud on e-commerce.