According to a new report by the European Court of Auditors, many difficulties remain to be resolved in the collection of the correct amounts of VAT and customs duties in e-commerce. In particular, EU controls are insufficient to prevent fraud and detect abuse, and the implementation of recovery measures is not yet effective. However, recent changes and new provisions for 2021 address some of the weaknesses identified, the auditors point out.
In the EU, it is up to the European Commission to establish customs and taxation policies, strategies and legislation. As in the case of other goods and services, Member States are responsible for the collection of VAT and customs duties applicable to cross-border e-commerce operations. By its nature, e-commerce is particularly exposed 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 contributed to ensuring full collection of VAT and customs duties due on goods and services traded over the Internet. The Court also examined the likely impact of the legislative changes in the VAT package on e-commerce that would enter into force in 2021.
International cooperation is essential to ensure full collection of e-commerce revenues. However, the auditors indicate that the existing mechanisms are not fully exploited, and that the exchange of information between Member States and with non-EU countries is insufficient. In addition, they stress that the enforcement of VAT and customs duty collection measures is not effective. Member States cannot present reliable and common estimates of the VAT noncompliance gap, i.e. the difference between what should be collected and what is actually collected. In general, tax authorities cannot ensure that the correct amount of VAT is paid to the right Member State at the right time. The auditors also point to the lack of effective controls on cross-border e-commerce. The controls carried out by national tax authorities and the Commission’s supervisory activities are insufficient, they say. For example, the EU cannot prevent abuses such as the deliberate undervaluation of goods below the thresholds for VAT or customs duty exemptions.
With regard to the new provisions that will enter into force in 2021, the auditors acknowledge that positive progress is being made to address some of the weaknesses of the current framework, such as the gap in the accountability of intermediaries. However, important issues remain to be resolved. In particular, the auditors consider it very likely that undervaluations will continue to occur with the new arrangements.
In order to respond better to the challenges identified, the report concludes with a series of recommendations addressed to the Commission and the Member States. Among other things, the auditors ask them to:
- meticulously check operators’ compliance with the VAT and customs duty thresholds;
- develop a methodology for producing estimates of the VAT non-compliance gap;
- study the use of appropriate technology-based’ collection systems to combat VAT fraud in e-commerce.
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Special report no 12/2019: Ecommerce: many of the challenges of collecting VAT and custom duties remain to be resolved
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