In 2015, the European Union (EU) started a small revolution by introducing the first of its kind regionwide value-added tax (VAT) registration mechanism, the mini one-stop shop (MOSS). The MOSS was created to ease compliance with changes in the sourcing rules for business-to-consumer (B2C) sales of telecommunications, broadcasting, and electronically supplied services (TBE services), which are now taxable where the consumer is located, regardless of the vendor's place of establishment.
MOSS replaced a previous simplified registration mechanism applicable only to non-EU vendors of e-services, which was almost never used in practice. After two years of experience with MOSS, the European Commission (EC) has laid out a proposal to modernize VAT for cross-border e-commerce. Before addressing the proposed changes, this item covers how MOSS operates and explains why certain provisions need to be amended.
What is the mini one-stop shop, and how does it work?
The 2015 changes in EU sourcing rules resulted in a B2C TBE service provider's being required to register for and collect VAT in each EU member state in which a customer of the provider was established—thus potentially requiring a provider to be registered in 28 jurisdictions currently. This is where MOSS comes in.
MOSS is a system designed to alleviate the registration burden on companies providing TBE services in EU member states. Currently, two MOSS mechanisms operate in the EU: (1) the Union scheme, which applies to EU-established businesses; and (2) the non-Union scheme, which applies to non-EU businesses. From a procedural perspective, the schemes differ, but the main features remain broadly similar for EU and non-EU companies.
As a simplified and optional registration mechanism, MOSS allows companies to register, file quarterly MOSS returns, and remit VAT due to all member states through a single member state, also known as the member state of identification (as opposed to the member state of consumption). The information included in the MOSS return, along with the VAT paid, is transmitted by the member state of identification to the corresponding member state(s) of consumption via a secure network. All compliance matters relating to the provision of TBE services are centralized and handled through the tax authority of the member state of identification.
Is it really that simple? MOSS challenges
To the casual observer, MOSS might appear to be a rather effective, simple, and flawless regionwide compliance mechanism. However, the incomplete harmonization of EU rules, combined with strict MOSS rules, may pose some challenges to companies selling TBE services. Those challenges are a consequence of:
Discrepancies in the treatment of EU and non-EU business: One of the main distinctions between the Union scheme and the non-Union scheme is that non-EU businesses that are already registered for VAT in one member state (e.g., because they perform taxable training services) may not register under MOSS for their sales of TBE services on an EU-wide basis and must register in each member state in which they make B2C sales of TBE services. As a consequence, non-EU businesses may be deprived of benefiting from MOSS simply because they complied with the general VAT rules.
Lack of a registration threshold: Under EU VAT case law, the registration threshold applicable to domestic vendors is not applicable to foreign vendors, whether they are EU or non-EU businesses. When the EU introduced MOSS, it therefore did not introduce a registration threshold that would have prevented small and medium companies with a low volume of gross receipts from being required to register for VAT purposes. The lack of a threshold means a small sale (e.g., one or two ebooks) can trigger registration, making the compliance costs of this transaction outweigh the tax collected. Consequently, small vendors that may have neither sufficient resources nor the expertise to comply with the VAT obligations are facing a disproportionally heavier compliance burden.
Information requirements: Under the 2015 TBE services sourcing rules, the EU requires businesses to determine where the customer is located and thus where they should source the transaction. For certain transactions (e.g., sales via telephone networks), the EU has tried to simplify the rules by establishing a "presumption" about the place where the transaction is to be taxed. When a presumption applies, the vendor rendering the service need not obtain any further evidence to justify the member state to which the vendor sources the transaction. If the vendor wants to rebut the presumption, it must identify the customer location based on three pieces of noncontradictory evidence. If a presumption does not apply, the vendor must obtain and keep two pieces of noncontradictory evidence to substantiate the jurisdiction to which it sources a transaction.
EU law provides the following list of "pieces of evidence": the customer's billing address, the IP address of the device used, the customer's bank details, the SIM card country code, the location of a fixed landline, or other commercially relevant information. As a consequence of these customer location requirements, many vendors of TBE services must gather and retain two or three pieces of information for each customer in up to 28 member states. This information is not always readily available, which further increases the compliance burden. Under MOSS, companies must retain the records of their transactions for 10 years, which is far beyond the average recordkeeping requirements throughout the EU.
Lack of harmonization withinthe EU: The VAT treatment of TBE services is based on the laws of the member state of consumption, which preserves all the remaining taxing powers (i.e., applicable rates, exemptions, invoicing requirements, etc.) and, as previously mentioned, finally receives the revenue the transaction generated. In other words, MOSS effectively deals with only a portion of the compliance burden facing a vendor (i.e., registration and return and remittance filing). A vendor of TBE services must, therefore, know and have systems to apply all other individual member state tax administration rules to its transactions.
Audit exposure: As the VAT enforcement authority remains with the member state of consumption, taxpayers are potentially subject to up to 28 audits, each following different administrative procedures, rules, and potential penalties. The limited harmonization of VAT rules among EU jurisdictions leaves taxpayers exposed to significant risk when selling TBE services.
Filing deadline: A final concern of businesses filing MOSS returns is that they must submit quarterly MOSS returns within 20 days of the end of the filing period. The short filing deadline and the strict rules for not filing timely returns create additional pressure on businesses that want to comply but may face challenges gathering all the required information for filing accurate returns within the time allowed.
Proposed amendments to MOSS
As a result of concern about these challenges, on Dec. 1, 2016, the EC announced a proposal to modernize VAT rules for cross-border e-commerce. The proposal would allow non-EU businesses with a VAT registration in an EU member state to qualify for MOSS registration. Moreover, the proposal would introduce two thresholds: (1) a gross-receipts threshold of €10,000 ($10,600) under which cross-border sales for EU companies are treated as domestic sales, with VAT paid to the tax authority of the state in which the seller is established; and (2) a gross-receipts threshold of €100,000 ($106,000) under which businesses would not be required to collect a minimum of two pieces of noncontradictory evidence. Under this threshold, businesses can presume the customer's location based on a single piece of evidence.
However, under the current draft, these thresholds would only apply to EU-established businesses, meaning non-EU businesses would continue to be required to register in the EU regardless of the volume of sales and to collect the required information regardless of their gross receipts. The EC further proposed to simplify compliance under MOSS by (1) extending the filing deadline from 20 days to 30 days following the end of the quarterly tax period; (2) replacing the recordkeeping period of 10 years with the recordkeeping period in the member state of identification; and (3) imposing the invoicing rules of the member state of identification rather than the invoicing rules in the member state of consumption. However, in a move that could be seen as counter to further harmonization, the EU issued a proposal to allow member states to apply reduced VAT rates to ebooks, which would increase the complexity of the EU VAT system for businesses.
Beyond this, the EC is considering extending MOSS to all B2C sales of services, intra-EU cross-border B2C sales of goods, and imports of low-value goods into the EU.
Is MOSS a model to simplify U.S. sales-and-use-tax administration?
In the United States, states have for nearly three decades undertaken various efforts—state legislation, negotiations with sellers, litigation, and federal legislation—to encourage or require sellers that do not have a legal obligation to collect sales and use taxes on sales into the states to do so. To date, those efforts have come to naught. Much of the resistance to those efforts has revolved around concerns that compliance with current state and local sales tax systems is complex and is burdensome on sellers of all sizes that do business in states in which they are not physically located. In particular, attention is drawn to the multitude of state and local tax rates, differing tax bases among states (and localities in some instances), and the widely varying tax administration procedures among states.
A mechanism such as MOSS, modified for the U.S. sales-and-use-tax landscape, would likely ease the compliance burden for many sellers if the requirement to collect were expanded. To date, however, states have resisted these "joint tax administration" proposals, using them only in the area of motor fuel use tax and the International Fuel Tax Agreement (which was, in fact, required by Congress). Instead, states, as exemplified in the Streamlined Sales and Use Tax Agreement (SSUTA), have tried to focus their simplification efforts on uniform definitions, procedures, and requirements in various areas, as opposed to establishing a single tax administration mechanism for certain multistate sellers. Like MOSS, the SSUTA provides a simplified system through which sellers can register: the Streamlined Sales Tax Registration System (SSTRS), which will issue a sales tax account to collect and remit sales and use tax in all streamlined full member states and in each associate member state of the sellers' choice. However, unlike MOSS, vendors cannot file a single return in one state for all the states, and sellers are thus subject to varying compliance rules and procedures.
In its current form, MOSS would seem to simplify not only registration but also return filing and remittances. The experience with MOSS, especially taking into consideration some of the proposed changes, would seem to demonstrate certain steps that would be beneficial to making such a simplification measure most effective, including imposition of a harmonized reporting standard and a high threshold of revenue before requiring registration, as well as applying the administrative and enforcement rules and procedures of the state of registration or some other sort of uniform set of processes.
Finally, several proposals have been floating around Congress to address, at least partially, these issues. The proposed Marketplace Fairness Act (S. 698 is the latest version) and the Remote Transactions Parity Act (H.R. 2775) take into consideration the progress made under the SSUTA. Both bills would grant a state authority to require online and catalog retailers (remote sellers) to collect sales tax after a state's sales tax laws were simplified. For this purpose, states would have two options: either implement simplifications listed in the bill or join the SSUTA.
Another approach is proposed by Rep. Bob Goodlatte, R-Va., with the Online Sales Simplification Act of 2016, which would make a remote seller subject to sales taxes in the state of origin, provided the state participates in a clearinghouse, taking into consideration the tax base of the state of origin but applying the rate of the state of destination (if the destination state is part of the clearinghouse and imposes tax at a single rate for all sales made by sellers without a physical presence in the state).
On balance, then, the EU has gone further than the U.S. states in terms of trying to simplify certain aspects of tax administration for multijurisdictional sellers with the advent of MOSS. The ability of states to extend the sales/use tax collection to sellers that do not currently have a legal obligation may well depend on the adoption of greater simplifications in the United States.
Mary Van Leuven is a director, Washington National Tax, at KPMG LLP in Washington.
For additional information about these items, contact Ms. Van Leuven at 202-533-4750 or email@example.com.
Unless otherwise noted, contributors are members of or associated with KPMG LLP.
The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG LLP. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. ©2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.