When considering international expansion, not only potential benefits are worth analysing, but so do the barriers and obligations resulting from Internet activities, in particular the tax issues.
Concerning matters related to tax settlement of business activities with the local tax authorities, many questions arise in respect to the value added tax (VAT). The unified VAT system within the European Union (EU) enables entrepreneurs to extend their activities beyond the borders of their own countries, basing on the general principles, common for all EU Member States. Problems may arise in the case of non-EU sales, where the customs regulations should be also taken into account.
Online sales of goods by EU entrepreneurs to consumers from non-EU countries are called ‘exports of goods’. In turn, sales made to consumers from EU Member States shall be considered as ‘distance sales from the territory of the country’. Those two issues are regulated by the VAT Directive 2006/112/EC which applies to the territory of the EU (VAT Directive).
As a rule, in such cases the EU entrepreneur must be registered for VAT purposes as a so-called active VAT payer. Unlike for distance sale within the territory of the country, foreign sales cannot benefit from the VAT exemption applied to a situation where the annual turnover is low (up to PLN 150 000 in Poland).
For exports of goods, when some set specific documentation obligations are met, the rate of 0% VAT may be applied. Should the EU entrepreneur fail to comply with such obligations, the exports of goods shall be taxed similarly to domestic sales. This means that, under certain conditions, such sales of goods may be beneficial due to a VAT rate of 0% while maintaining the right to deduct VAT.
On the contrary, distance sale from the territory of the country are in principle subject to VAT in the consumer’s country of residence. It should be pointed out here that in such a case the consumer shall be the entity which does not have the status of a VAT payer and has no obligation to settle the intra-EU transaction in this regard. There is however an exception to this general principle, used by a substantial part of EU entrepreneurs. If the total value of the distance sales to a given EU Member State during the year and the previous year did not exceed a specified amount, sold goods should be taxed by the EU entrepreneur in their country, according to the general rules. The VAT Directive indicates that the limit value for those sales is the net amount of EUR 100 000, the EU Member States having the possibility to set it lower, the minimum being EUR 35 000. In most EU Member States (including Poland), the limit of EUR 35 000 (PLN 160 000 according to the Polish VAT Act) applies. This means that if the value of distance sale to a given EU Member State will exceed the limit amount, such sale shall be subject to VAT in the consumer’s country of residence. In that case, regulations in that country should be verified as regards the possible obligations related to registration as a VAT payer and settlement of VAT in accordance with local regulations.
In some cases, maintaining the place of taxation in the country of residence of the EU entrepreneur can be beneficial due to the VAT rates, which may be lower there than in the consumer’s country of residence. It is important to note that the limit amount for distance sale performed by the EU entrepreneur via several sellers (e.g. subsidiaries) applies separately to each entity holding the status of a VAT payer.
The question of documentation of distance sale is also an important issue. Under the regulations of the Polish VAT Act, in all cases of distance sale from the territory of the country to an EU buyer, the taxpayer is required to issue an invoice. It is important to note that in the case of domestic sales such an obligation can be avoided.
The sales of electronic services (not goods) are a specific issue which can result in some problems, not only organizational ones, but also connected with the method of tax settlement. Examples are e-books, smartphone apps or electronic games, which for VAT purposes are treated as the supply of electronic services. Since the 1st of January 2015, a separate system of settlement of this type of services has been introduced through the use of MOSS (Mini One Stop Shop), which allows to avoid the obligations related to VAT registration in each country in which potential consumer is located. It is also worth highlighting here that the concept of applying MOSS to distance selling of goods has arisen within the EU structures. Similarly, the European Commission has entered into consultations to evaluate the possibility of simplifying VAT obligations related to e-commerce cross-border transactions within the digital single market.
For the above reasons, any direction of expansion – whether to EU Member States or outside the EU territory – can result in some VAT obligations for EU entrepreneurs, potentially affecting the settlement of their sales performed via online platforms. One can only hope that such obligations will be greatly simplified in the case of intra-EU operations, thus making development of cross-border e-commerce trade possible.