VAT | 19. February 2021

Closing the VAT gap

This year, EU states will miss out on 164 billion euros in VAT revenue. The VAT regulations for merchants selling goods to other EU countries are notoriously complicated. Many companies unintentionally misapply VAT. The EU has been working for years to simplify VAT. eClear already offers companies legally compliant solutions. by

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11 Die Mehrwertsteuerlücke schliesen2880x1400 scaled

There is a vast VAT gap in the EU. Every fall, the European Commission laments the difference between the VAT revenue that individual member states expect to collect and that they collect. In 2018, EU states missed out on €140 billion, according to the Commission’s report on Sept. 10, 2020. To be sure, the trend has been slightly downward recently. But the Commission estimates that the gap will widen again to 164 billion euros in 2020 due to the Covid-19 pandemic.

Challenges in e-commerce

However, the EU has yet to make it easy for online retailers to calculate and pay VAT. The destination principle applies when merchants sell their goods across borders within the EU. This means that merchants must collect VAT from the consumer according to the regulations in the country of the delivery address and pay it to the tax authority there. And that’s just where the problems begin: Different tax rates apply depending on the country, and across the EU, there are over 7,000 national, regional and product-specific exemptions. Without a local tax advisor, it’s impossible to cope – a cost for each of the 27 member states. Most recently, the European Commission estimated that cross-border companies face 11 per cent higher compliance costs than those working only domestically. As a result, European e-commerce companies short-change billions of euros in VAT yearly in cross-border trade, even due to ignorance.

EU transitional regime

The issues have long been known in Brussels. The EU Commission is working on a fundamental simplification of VAT that will apply throughout the EU. The EU has been governed by the VAT System Directive, a confusing web of regulations intended as a transitional solution. It goes back to the 6th EC Directive, which came into force shortly after creating the single European market. Since the beginning of 2020, four simplifications (the so-called “quick fixes”) have been in force, which were also intended only as a transitional solution.

eClear’s solution

eClear has developed a “VAT engine” for online merchants that knows all VAT rates and regulations throughout the EU and automatically pay the VAT to the relevant tax authority. To use eClear’s VAT engine, online merchants implement a plug-in into their shop system or system landscape. The interface contains the tax rates for millions of products from eClear’s database. As soon as a customer adds an item to his online shopping cart or specifies the delivery location, the plug-in recognizes whether the order is a cross-border order within the EU, calculates the correct total price for the product and subsequently pays the VAT to the responsible tax authority in the country of destination. eClear thus frees merchants from the liability risk arising from cross-border e-commerce and gives them legally secure access to the European Single Market. — An essential contribution to closing the VAT gap in the EU.