EU – Cross-Border E-Commerce and Deemed Supply Chain

Introduction 

Deemed supplier provision became part on July 1, 2021 of the EU’s VAT regulatory framework. Almost five years have passed since its introduction, and the official reports show that it has been a great success. The deemed supplier rule was primarily introduced to reduce tax fraud by vendors who make supplies to final customers through facilitation services orchestrated by e-commerce marketplace operators. 

In a nutshell, the deemed supplier provision established, for the first time, a new tax framework for marketplace operators. This provision includes e-commerce marketplaces in the presumed supply chain for online transactions. 

The deemed supply chain is established between the principal supplier (underlying supplier), the digital platform operator (facilitator of the underlying supply), and the customer. The principal goal of this rule was to collect more VAT from the online sales, provide tax administrations with less difficulty for monitoring trade flow of cross-border commerce; less struggle with identifying non-compliant behavior by underlying suppliers and platform operators. 

Deemed Supplier Provision 

Under the deemed supply chain, digital platform operators became accountable for VAT in a wide range of situations on behalf of the principal supplier. Tax authorities’ work became more efficient, as it is much easier to track the compliance of digital platform operators than that of hundreds of thousands of underlying suppliers who supply through one or more e-commerce marketplaces. 

As part of the deemed supply chain, the digital marketplace becomes accountable(instead of the underlying supplier) for VAT in the following trade scenarios: 

1. Distance sales of low-value imports(B2C supplies), no matter where the supplier is established for business purposes, and 
2. Domestic or intra-EU supplies of goods that are already within the EU(free circulation), and the supplier is not established in the EU 

Under the deemed supplier provision, what should have been one transaction is for VAT accountability, split into two tax transactions:

1. Underlying supplier to digital marketplace operator(deemed B2B supply); could be tax-exempt or zero-rated VAT depending on the type of supply, and  

2. Marketplace operator to final customer(deemed B2C supply); supply that involves actual transport of goods 

Deemed Supply Chain: Clarity

With the deemed supplier provision, e-commerce marketplace operators are now accountable for VAT rather than the main supplier for billions of online transactions processed each year. With the enforcement of the deemed supplier provision, as explained above, the marketplace became accountable for VAT instead of the non-EU established suppliers for: 

• B2C transactions of domestic and intra-EU supplies of goods(no matter the value, if the goods are in free circulation in the EU) 
• B2C transactions that cover supplies of low-value imports 

Establishment for VAT purposes 

Digital marketplace operators needed to develop effective validation tools to verify the tax status of vendors registered on their platforms. The verification of third-party vendors’ establishments for VAT purposes is one of the core criteria that determine who should be held accountable for VAT on transactions concluded on the marketplace. 

An e-commerce marketplace is accountable for VAT on B2C transactions (supplies of goods) concluded online through the marketplace when the underlying supplier is not established for VAT purposes in any of the Member States. 

When defining the criteria for determining whether a foreign person meets the business establishment requirements to be considered a taxable person for VAT purposes, there are common rules across the EU. 

The applicability of the deemed supply chain is connected closely with the vendor’s VAT residence. The mere vendor’s physical presence in the EU’s Member State doesn’t per se define the VAT residence. The principal criterion for determining VAT residence is the place of economic activity. 

When there is contradictory evidence regarding the location of economic activity, the location of decision-making takes precedence. According to the CJEU, the existence of a postal address, a mailbox company, or a VAT number doesn’t automatically determine that the vendor has a Member State residence for VAT purposes. 

A fixed establishment can also be one of the factors that determine whether the overseas vendor has a residence in the Member State for VAT purposes. 

In the UK, for example, a business is established if it has a permanent place of business and its decisions are made there. However, the existence of a registered office (without staff) or an address based on the tax advisor’s mailbox is often insufficient to trigger UK VAT-residency for overseas retailers. 

Deemed supply chain: Challenges 

Digital marketplace operators should also, in the general context(without a clear prior B2B agreement), account for VAT in cases where the foreign underlying supplier is VAT registered in the EU, if the vendor doesn’t meet the criteria for being positioned as the taxable person that meets the EU’s VAT establishment conditions. 

Exemplary Case: 

The vendor registered on the e-marketplace may have an EU VAT number issued because it has stock in one of the marketplace’s fulfillment centers. The EU VAT number in this case is issued solely on the basis of meeting the requirements for registration to use the marketplace’s fulfillment network. 

If the marketplace operator doesn’t have a proper verification mechanism in place for determining if these vendors meet the requirements of the EU’s establishment for VAT purposes, it could “miss” VAT accountability for B2C transactions of these vendors. Marketplace operators should account for VAT for third-party vendors that aren’t established in the EU, for distant sales of goods or LVG imports.

The marketplace operator could, at some later point, notice that the vendor isn’t EU-established and that, under the deemed supplier provision, it should have accounted for VAT rather than the supplier. This could be “noticed” after more thorough screening of the vendor’s status, or after tax authorities reach out to the marketplace for non-remittance of VAT. 

Under these circumstances, the marketplace could suspend the vendor’s account until VAT is reimbursed. The vendor’s operations could be suspended until the VAT is reimbursed; the credit balance is blocked. If the vendor has paid VAT for these transactions instead of the marketplace, it could request a tax refund from the tax authorities after the marketplace has paid the VAT. 

Incorrect vendor validation also occurs when an EU-based third-party supplier is classified by the marketplace as a non-EU-based seller. Under deemed supplier rules, an EU-based vendor is accountable for VAT on marketplace sales. If it doesn’t account for VAT and the tax authorities notice, it will most likely need to pay additional VAT, penalties, and interest. 

How to Reduce Risk 

Non-EU-established third-party marketplace vendors should evaluate whether they meet the EU requirements for VAT establishment before registering as a marketplace vendor. The existence of the deemed supplier provision entails caution by both e-commerce marketplace operators and third-party vendors registered on the marketplace. 

E-commerce vendors should evaluate whether their EU presence qualifies them for EU VAT-residential status, while marketplaces should develop a robust validation (screening) tool before third-party providers register on the marketplace. 

How to Stay Compliant 

The proper applicability of the deemed supply chain VAT regime could be quite complex for both e-commerce marketplaces and vendors.

We have successfully assisted many non-EU-based businesses in determining who is responsible for VAT accounting. In addition to successfully managing your VAT registration, we offer comprehensive VAT compliance services for your EU e-commerce sales. Such as: 

• Assistance with Tax Reporting(preparation of returns, filing, and remittance)
• Tax Advisory and Ongoing Tax Management
• Correspondence with Tax Authorities 

Takeaway 

Frequently Asked Questions