The second pillar of the European Commission’s proposal for the VAT in the Digital Age is the one that is entirely focused on the modern, technologically advanced, and exponentially growing type of business sector – labeled with not-so easily comprehensible term Platform Economy.
The thorough and broad work conferred to the selected number of tax experts, who on behalf of the EU Commission, have had in a detailed manner examined the landscape of Platform Economy, has undoubtedly shown the discrepancy between expected and actual VAT revenue from the supplies made through the usage of Digital Platforms as facilitators.
It’s interesting to note that EU legislation still hasn’t captured through the definition the structure, possible tax-wise scenarios, and legal challenges of the possible operations processed through the Digital Platform through which the underlying services are provided, and not goods which have been covered and explained in the EU e-Commerce package from July 2021.
To understand the economic force of the Platform Economy, just within the EU 27 context, it’s necessary to emphasize that between 2015 and 2019, the money generated through this multi-sided business model has tripled.
Just to put some numbers in the picture to have a more transparent answer as to why the EU is pushing for the review and amendments of the EU VAT legislation:
- There are more than 1,500 operative digital platforms with significant presence just in the EU;
- Digital Platforms(excluding the ones operating in the advertising sector) generated around EUR 67 billion in 2019;
- Service providers operating through those platforms generated EUR 191 billion in 2019.
To shed more light on how this calculation has been made and which groups of digital platforms are used to establish this observation.
To make this calculation, the Impact Report made by well-known experts in this field, has taken into calculation the following groups/sectors of Digital Platforms:
- E-Commerce;
- Transport Services;
- Accommodation Services;
- Real Estate;
- Finance (crowdfunding);
- Professional and household services.
These sectors of the Platform Economy generated around EUR 258 billion in 2019.
For many hours, one doesn’t need to wonder why the EU Commission has prepared a proposal for the necessary modification of the legal landscape, which defines the present looks of the Platform Economy.
What are some of the drivers that led the EU Commission to propose the change of the VAT rules for the Platform Economy?
Let’s take a first step into something that could be easily described as a legal maze when it comes to mind what it is and how it’s seen from the tax/legal or business perspective.
Initially, we already had an open dialogue and uniform approach to this modern business ecosystem from the perspective of EU Law. This is because there isn’t a uniform – close to the reality(from tax/legal scenario) definition/explanation.
This is also addressed through the Impact analysis of the Platform Economy and VAT in the Digital Age proposal – Pillar 2.
Let’s start with an explanation of what digital platforms are, how they operate, and what business processes they establish, and then from this, we can see the key ingredients that altogether contribute to the establishment of the Platform Economy ecosystem.
Digital Marketplaces enable transactions to be processed electronically by connecting two or more interdependent types of users( suppliers and customers). In this multi-sided business operation, the supplier offers access to different assets, resources, time and/or skills, goods, and/or services to the other party in return for monetary or not monetary consideration or implicit barter exchange( e.g., when services are supplied in exchange for access to the personal data).
The Impact analysis has shown that these are the most important drivers that create challenges for the adequate VAT treatment of the Platform Economy:
- The rapid scaling of the platform economy;
- The variety of business models needs to be more transparent on how to treat participants and transactions within different scenarios uniformly;
- Variation of the VAT rules across types of services.
On what grounds the EU Commission is proposing to tackle the challenges of the Platform Economy?
The EU Commission has identified that the most significant portion of the EU VAT revenue, which is losing continuously due to the inadequate tools to combat the challenges of the Platform Economy, derives from the short-term rental accommodation and passenger transport services sectors.
These are the main reasons why the EC proposal is focused on regulating Digital Platforms operating in the services business through the usage of the two sectors mentioned above as the leading ones:
- Digital Platforms facilitating connection services between providers and users of short-term rental accommodation and transport services compete directly with traditional types of business in this sector. i.e., hotels and taxi drivers;
- Many service providers(users of platform services) are exempt SMEs, non-taxable businesses, and private persons not registered for VAT;
- Lack of straightforwardness when it comes to liability for charging, collecting, and remitting VAT in this business ecosystem( in comparison to Digital Platforms operated under E-Commerce rules);
- Distortion of competition due to the lower prices of providers operating through platforms in comparison to traditional service providers in this sectors;
- Lack of guidance for SMEs, private persons, and non-taxable businesses on their VAT liabilities;
- Non-existence of clear rules for Deemed Supplier obligations for various multi-sided transaction scenarios present within Digital Platforms operating in the services ecosystem;
- Lack of transparency as regards how to treat, tax, and define the type of service provided by Platform to the underlying suppliers as well as to customers.
What is the Commission’s proposal regarding how it plans to decrease the level of these challenges?
The EC proposal as regards the Platform Economy, precisely short-term rental accommodation sector and passenger transport business are:
- Introduction of the Deemed Supplier mandate for Platforms operating in the short-term rental accommodation and passenger transport sector;
- Practically, it means that the VAT compliance duties will be transferred to the Digital Platform for all transactions where VAT hasn’t been levied by the underlying supplier;
- Unification of the definition of the facilitation service provided by the Platform and related comprehension of the approach when and how the transaction should be VAT treated.
The progressive growth and expansion of the Platform Economy ecosystem has caught the eye of many, but most importantly, the observations of the legislators – globally. The legal landscape at the moment in the EU isn’t developed well enough to combat the challenges derived from the complexity of the multi-sided interdependent structure of the transactions handled through some types of Digital Platforms. This is why the EU Commission has presented the proposal for necessary “updates” of the present legislation as the only way how to “try” to harmonize digitally driven new business systems.
Aleksandar Delic
1stopVAT Indirect Tax Researcher (Global Content)