"The main goal of the change is to reduce the VAT red tape for undertakings,” said Grant Thornton Baltic partner and Head of Tax Kristjan Järve in the Äripäev radio programme “Kasvukursil”.
In the system currently in place, it is common for undertakings that sell physical goods to other EU member states to have to register themselves as VAT payers and file separate declarations everywhere. That’s as long as the supply in a given country exceeds the threshold established there – in the EU it ranges between 35,000 and 100,000 euros. ˇ”Registering as a VAT liable person in France takes four months for example, and incurs thousands of euros in fees. Yes, the service can be outsourced but it presents a major administrative burden for the beginner,” said Järve.
The new system does away for the need for this and introduces an alternative, which to this point has been piloted in the sale of e-services within member states. What it means is that companies that sell goods to Europe will have the option of declaring all taxes in the domestic Estonian-language Tax Board portal. They only need to know the tax rate on the specific target market and after that, the Tax Board sends the data and taxes where they need to go. The amendment will enter into force on 1 July for sellers of physical goods whose clients are non-VAT-liable EU residents – consumers.
Burden of proof lies on the undertaking
At the same time, the adoption of the new more streamlined system means additional obligations for the undertaking. As mentioned, it is necessary to know what tax rates it has sold its good to the European Union, and knowing this requires knowing the client’s tax residency. “Identifying a client and structuring one’s platforms accordingly is a big challenge, and as many know, use of a bank link is complicated for international payments,” said Järve.
To declare taxes to a specific country, the undertaking must be able to demonstrate on the basis of at least two data points that their client is located in the respective country. “These data points can be obtained in three ways – first, by asking the payment intermediary; second, checking the buyer’s IP address; and third, asking the person themselves,” said Heigo Protten, CEO and founder of OÜ Rackly, a web hosting provider that is already using the new system as a seller of e-services.
If at least two data points indicate the same country of location, that is considered a match. Protten said there were also bad actors who intentionally conceal their tax residency by using VPN services. “That could cause a situation where the credit card is from one country, the IP is in another one, and the client says he is in a third country,” said Protten. The motivation for concealing location is the different prices of goods in different markets.
Still, if the evidence contradicts itself, but there are at least two data points for more than one destination country, the undertaking can choose where it will pay taxes. That is an important alternative, as VAT rates vary inside the EU. For example, the VAT rate is 20 per cent in Estonia, while it is higher in Latvia and Scandinavia.
Järve emphasised that the documents substantiating payment of taxes and destination country must be retained for 10 years in any case. “A tax authority from a different country may ask to see them at any time through the Estonian Tax Board,” said the expert.
Not valid outside the union
Although the system makes life easier inside the European Union, it does not apply beyond the community’s boundaries. “For example, Brexit has made us have to decide whether to register as VAT payers in Great Britain or leave that market,” said Protten. “I tried to register, but it was futile, as the service provider would charge 2000 pounds for it, plus 500 pounds every month for keeping things running, so we decided to bow out of the UK market.“
Järve added that there is an exception to use of the new system that applies inside the EU as well. “The new VAT scheme set to come into force cannot be used in countries with a stock of goods sold to customers in the respective country,” he cautioned. “There you would have to declare VAT directly to the specific country through the local VAT payer number – i.e., if the journey of goods sold from Estonia does not begin here, it is not possible to use the simplified system.”
Tax-exempt minimum scrapped
Ordering goods will become costlier as a result of the reform. As a result, the current 22-euro minimum for paying VAT when importing goods will be abolished. Järve says the reason is that it is possible to use various schemes – such as declaring items as gifts – to get 80 per cent of all goods shipped to fit under that bar.
From 1 July, VAT will have to be paid on all goods ordered from outside the EU. “It doesn’t matter whether it’s an LED lamp from Alibaba or something more expensive,” said Järve.