Goods and services are purchased constantly online in Estonia, yet our online retailers have untapped potential – we are lagging a bit behind the European Union average in cross-border online retail. It is worth putting more effort into sales of electronic goods and services to consumers in other member states, especially given that the European Commission has and will continue to simplify cross-border e-commerce, including changes in the tax system.
One measure for facilitating e-commerce came into effect in early December of last year, with a regulation ending unjustified geo-blocking. The European Commission[1] explained that they were continually receiving complaints about cases where consumers had been discriminated against based on citizenship, place of residence or location. Traders, without having an objective reason, were often unwilling to sell or supply goods to customers in other member states or provide prices that were just as low as the ones enjoyed by local customers. Examples of location-based discrimination also include blocking website access to people in other member states and/or a situation where a foreign customer cannot complete a purchase or is asked to pay with a debit or credit card issued in a certain country.
With the entry into force of the Geo-blocking Regulation on 3 December 2018, clear guidance has been issued for operators of physical and online stores: A European Union customer must be able to shop in any member states as if they were a local. For example, a customer in Germany must be able to order goods from an online merchant in Estonia, pay for them and receive the goods on the same conditions as customers in Estonia. This does not however mean that an Estonian online retailer should offer delivery to Germany if its general terms specify that it delivers only to parcel lockers in Estonia.
Businesses have already been fined for location-based discrimination. Last December, the European Commission fined the US clothing manufacturer Guess 40 million euros for preventing its European distributors from selling goods to other member states, as it wanted to market its products at higher prices in Central and Eastern Europe. Guess admitted its error and the European Commission reduced the fine by half.
VAT and distance selling thresholds
Taxes are an important topic for commerce, including e-commerce. Retail customers are affected most by VAT, while e-commerce is generally tax-neutral for legal persons.
It is important for online sellers to be aware of the distance selling[2] thresholds. Until the distance selling thresholds are reached (in Estonia, 35,000 euros a year, and in other member states, between 35,000 to 100,000 euros a year), online sellers can, in organising transport, apply the VAT rate of their own country of location, not that of the destination country. For example, until the threshold is reached, sales of goods from Estonia to customers in Scandinavian countries enjoy up to a five-per-cent advantage over the VAT rates in Scandinavia.
In any country where the threshold for distance selling is exceeded, the undertaking must register as a VAT payer and account for, declare and pay VAT according to the VAT rules of the destination country. This formality can be an additional burden. Fortunately, the European Commission is dealing with regulation of this area as well as part of the package of single digital market measures.
In 2019, a new annual cross-border threshold for provision of e-services came into force – 10,000 euros. Upon provision of e-services below this threshold, companies founded in the European Union do not incur an obligation to charge VAT on supply to a country of consumer’s country of location to the e-services; rather, the services are taxed at the VAT rate of the member state in which the service seller is located. Only cross-border e-services count toward the threshold. As a result, it is above all smaller companies operating mainly on their home market who benefit from the change.
As regards physical goods, the same rule – 10,000-euro threshold and simplified VAT payment procedures – will be introduced in 2021.
All this will lower the administrative burden on companies and make competition fairer, because online sellers in the EU currently compete against those located outside the EU who can use import VAT exemptions or thresholds so as not to pay VAT on goods bought from outside the EU. This places EU merchants in an unequal position. Starting in 2021, the situation will improve, as the rules will even out.
Simplified tax payment system
Already now, the payment of VAT on cross-border e-services is simplified by the one-stop-shop system, which will come into effect in 2021 for sale of goods. This means that it will be possible to assess and declare VAT through the Estonian tax authority according to the rules of each EU consumer’s destination country on the supply taking place there, and the Estonian tax authority will settle and transfer the VAT.
Accounting on the threshold with regard to customers located in other member states must be distinct, and a number of criteria apply to how the accounting is to be kept. The question that has come up the most for online sellers is about selling goods in their online store to consumers in EU member states. The sellers find it hard to distinguish customers if the customer’s place of residence or IP address is located in one member state and the credit card was issued in a different member state. Fortunately, these rules will also become simpler due to the establishment of the new VAT requirements.
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[1] European Commission: questions and answers about the Geo-blocking Regulation. https://www.tarbijakaitseamet.ee/sites/default/files/ettevotjale/ksimusedjavastusedasukohaphisetkestusemrusekohtae-kaubanduses.pdf
[2]Distance selling is the transfer of goods to a legal person or individual who is not registered as a taxable person in another member state, on condition that the goods are delivered by or on behalf of the seller to the member state of the buyer’s location.
