Note: This post is made from a non-EU provider perspective. However many points raised concern both EU and non-EU sellers.

Disclaimer: This post tries to cover the subject as generically and objetively as possible. Take in mind that every Country in the world has its own Laws and your situation can be entirely different in your particular case due to your country of origin, fiscal status, citizenship status, etc. In some cases it could diverge a lot, but the taxation principles are often more or less stable so this aims to provide some guidance for the majority and hopefully a basis for changes in EU legislation. This post must not be considered as tax advice.

So, I found out about VATMOSS on the 1st January. At first I was terrified it would include me, but thankfully I’ve only dealt with selling to other business, and personal services aren’t included; so I am not affected.
However, at some point in my life in the future I may end up selling software directly, and that means VATMOSS is of my interest, although remotely.

So a few areas of interest:

The Good

The EU switched from VAT liability will switch from the country where the product is sold to the country where the consumer buys it.

I live in Argentina. Argentina had been like this since a very long time (forever?). Many other countries use the same convention. When both countries (buyer’s and seller’s) use the same convention, taxation is fair.

If I, as an argentinean, sell a good to another argentinean, it will get taxed by 21% which is the local VAT here. That means I will have to charge $121 for a $100 product.

Before 1st January, if I, as an argentinean, sold a service to a european consumer; I would sell it for $100 and call it a day. The Argentinean law states that the product being sold must be completely free from any VAT. They will even reimburse me the VAT I paid for any raw materials (i.e. that includes computer equipment and electricity bill; although there are monthly limits). This is very convenient for me, but unfair for european administrations and unfair for local EU shops competing with me.

After 1st January, if I sell to a european consumer; I will have to charge $121; $115; $120; or whatever the VAT rate is in the country of the buyer. That sounds very troublesome, but is fair; since local EU shops will also sell at the same price as I do; and the price I sell resembles very much the one I would charge a local fellow argentinean.

Note that this switch should never affect b2b (business to business), because when the european business who bought (imported) my products or services integrated them into their own products and services and then sells them locally within their european country, the price will implicitly contain my price as cost; and thus will be taxed via VAT. The problem only appears when the end consumer is the one buying the product/service.

I can totally understand why the EU would like switch their VAT criteria; even though it’s obviously against my personal interests. That’s within their rights.

However…

The Bad

No thresholds

Remember what I just said about VATs in Argentina when I charge local argentineans, and how I would get reimbursed for the VAT I paid for raw materials related to my exports? Well, I lied a little. They don’t apply to me.

That’s because I’m a small business and the VAT regime comes together with a very expensive pack of other taxes that are meant for bigger companies. Therefore, I’m on a different much cheaper system: That means I charge a fellow argentinean $100, not 121; and I won’t get reimbursed for my exports either. This is nothing new. The UK has a similar system (a £81.000 threshold I am informed).

It’s completely crazy that even a $1 sell to an European has to fall under the same regime as say… Amazon. Thresholds would greatly simplify this mess.

Taxation principles being broken

Neutrality

The VAT regime is fundamentally different for “e-commerce” than the rest, adding significant costs and unnecessary bureaucracy (go to the “ugly” part to understand why it’s unnecessary) that needs to be dealt with. This is an unfair discrimination with no objetive basis whatsoever.

Equity

Taxes should equally burden all individuals or entities in similar economic circumstances. This is clearly not the case when Amazon has the same burden as a very small business.

Convenience

Taxes should be enforced in a manner that facilitates voluntary compliance to the maximum extent possible. Do I have to say more?

De minimis – aka “Trifle”

Trifle, “Something of very little value or importance”. In simple terms, stealing a simple pen is technically breaking the Law. But the police will ignore you and the judge will quickly dismiss any trial because they simply have more important things to deal with. Not to mention the cost of retrieving the pen and a trial is greater than the value of the pen.

Unfortunately the definition of triffle is often very vague and even when it’s clearly defined, it still varies greatly on what and how much constitutes “trifle” in every Country.

But there is no denying that forcing to open a business in the country of the buyer even for a single $5-sale in an entire year will definitely fall under the De Minimis principle. This goes tie in tie with thresholds.

The really, really UGLY

This is where it gets really, really bad: Foreigners are forced to open a business in Europe and/or the MOSS system. Wait, what?. The EU legislation has no power over them, how could they demand this? It amazes me that my own (often retarded) government solved this problem in a much more practical way; even though the motivations were different (not VAT related, rather income-tax related; intended to discourage the exodus of dollars out of the Country):

Just require the payment system to withhold the VAT. That means the credit card issuer, bank, or PayPal, or any of its clones.

That is how civilized countries with a slight grain of common sense handle taxes internationally: tax withholding. Instead of trying to force foreigners to open a business in europe (something they can’t enforce) even when they never set a foot there, they could just force MasterCard/Visa/PayPal/etc to add a little extra to take care of the VAT.

They’re in a much better position to determine country of origin. The argentinean government implemented this already. Like I said, the motivations and context behind it are completely different (and this extra charge is technically a tax advance people could deduce if they happen to be covered by the income-tax regime; and not really a VAT charge per se), but the thing is that tax withholding is much more technically and bureaucraticly feasible than that pile of crap they want to force called MOSS (Mini-One-Stop-Shop).

There’s also something to be considered:

1. The EU seems to expect foreigners to either deal with very expensive schemes (MOSS; or open a business in every country) or use an intermediary third party (in exchange for a commission, of course!!). However they seem like they don’t realize it is very easy (and convenient!) to sell directly through my own website.
2. If I sell directly through my site, the payment options are limited to either credit cards, wire transfers, or paypal (or similar). May be Western Union. Notice a pattern here? Those are all giants that are in a position of withholding tax. Instead, the EU wants non-EU to go through intermediaries, which also are getting paid with credit cards, wire transfers, or paypal. It just adds unnecessary costs because the payment option’s costs are always going to be there. So it’s logical that the ones in charge of handling the VAT should be there, not at an intermediary website.

So… as a non-european, I’m covered because the EU legislation has no power in my country?

Not exactly. There are several ways this is an issue (assuming that you have fallen under the radar of an european tax authority; since this is, in practice, very hard to control on small business):

1. Don’t think about travelling there, either for business or vacations. Most likely the most they can do is to deny your stay. But if the amount of money you owe them is considered “evaded” (depends on the laws of each EU country) and hits a given threshold (again, it depends…), criminal charges could be brought on you. Although if you hit this threshold, I would question your “small business” status; because it tends to be very, very large.

2. The tax authority could try to sue you under your own country’s courts. You should try to contact your local lawyer and/or tax professionals for information regarding this. For example in my Country,  I doubt they could win considering their claims about a debt with them is based on VAT laws that violates taxation principles protected by the Argentinean Constitution and its laws. Additionally, local judges are often wary of ruling against their own citizens in favour of foreign State Administrations (since they could literally make up any rule for their own convenience). Also reciprocity needs to be analyzed (basically, if the situation would be reversed, would the EU country cooperate with the Argentinean government?) Good faith plays a role here, too: how big is your european market? Does it excuse you from not knowing about EU laws? how big is your company? etc etc.

A foreign’s country is not entitled to ask from your more than what your own Country would (while you were under your own Country’s jurisdiction).

3. When you perform anything foreign-related, your local legislation probably requires you to sign affidavits stating that you don’t have foreign debts. If you sign that, you could be lying; and this could carry consequences under your own Law. Again, this is sketchy/gray area because the basis over that debt is completely bogus and can be challenged (see point 2 again). But it could give you a headache.

Final words

It pains me to see the EU had decided to apply these measures in order to stop tax avoidance from corporate giants, dynamiting a plethora of basic taxation principles and real small business both in- and outside the EU in the process; favouring… corporate giants which are going to be the only intermediaries that can afford it.

The fact that the EU came up with the MOSS/open-a-business-here schemes instead of going for tax withholding demonstrates a lack of understanding of how basic taxation works, how e-commerce works, the available payment options in the digital era, the day to day operation of medium and small business, and how technology works. It is incredibly scary to see such level of major ignorance and incompetence in high places.

What’s so important about taxation principles? when they’re are broken, people are encouraged to either leave, close business, or go underground. It causes the opposite effect of what they’re trying to achieve.

I hope common sense prevails and alternatives to the MOSS scheme start getting proposed. I’m not against changing the VAT liability to the country of the buyer; I’m against the method in which the VAT is getting collected.

The Argentinean government did it; and they’re far, very very far from being a role model when it comes to tax legislation; and yet the EU managed to screw up worse.

I’m sure the MOSS scheme is useful for a few, particularly the giants like Amazon and Apple. But the EU should seriously rethink their strategy about VAT collection for medium and small business.