From 1 March 2019, Amazon and every other electronic marketplace in Germany will be held liable for the evaded value-added tax (VAT) of its merchants.
The Bundestag — the German national parliament — passed this amendment to the Annual Tax Act 2018 on 8 November, the Bundesrat (Federal Council) approved it on 23 November 2018.
The law for the prevention of value-added tax losses with the trade of goods on the Internet states that each electronic marketplace must pay for the neglected VAT payment of its merchants. Amazon & Co. bypass this liability by ensuring their sellers have a German tax registration — and by barring them in case of fraudulent behavior.
Update: Amazon has now confirmed that sellers who are obliged to register for VAT in Germany will be required to upload their German tax certificate. Keep reading to find out if you need to take action.
What’s it all about?
According to the Federal Ministry of Finance, sellers from third countries in particular, i.e. countries outside the EU, gain a tax advantage by omitting to transfer the VAT paid to them by the EU-purchaser to the tax office — and simply keeping it.
Thousands of unruly sellers evade taxes this way, even by conservative estimates. The German treasury is deprived of several hundred million euros.
The biased playing field places European sellers at a considerable disadvantage. Dealers who stash VAT can offer better prices — The sheer size of the unfair competition is an almost insurmountable obstacle in an already fiercely competitive market.
To make matters worse, most of the crooked merchants are based in China, making it almost impossible to track them down and hold them accountable.
The new law amendment intends to bring justice: In future, Amazon and Co. will be held liable for the evaded taxes of their sellers. Online marketplaces can free themselves from this liability by fulfilling certain recording requirements — i.e. collecting business data such as name, address, tax number, and turnover and transmitting it to the tax office — and by banning tax fraudsters from their platform.
Amazon has made it compulsory for respective sellers to submit their German tax certificates.
How will the German tax authorities deal with a sudden influx of registration requests? Plans are in motion to make this massive administrative adjustment fast, electronic, and automated. The need for such a tech development is urgent: The Berlin tax office in Neukölln, responsible for the registration of third-country online merchants, is already being swamped with thousands of inquiries.
Germany is the second largest Amazon marketplace after the USA. The staggering number of sales are almost as high as the rest of the world combined (without Japan, US, and the UK). The scenario in which the primarily Chinese traders withdraw from the German market seems, therefore, highly unlikely.
It’s reasonable to rule out a competitor exodus. Bargain sellers, whose extremely long delivery times and poorly translated product texts make them suspicious anyway, might be deterred by the new law.
The more serious competitors, however, are well organized and will want to retain the German purchasing power. They will, in all likelihood, raise their prices to maintain their profit margin. The move won’t be entirely painless: Well-established and successful drop shippers and FBA dealers from Europe are already lying in wait in this price segment.
But… If the fraudsters suddenly pay taxes even though they should have registered ages ago — surely they incriminate themselves?
Newly registered traders are, in fact, checked for possible tax crimes — as much as this is possible, that is. While the high number of registrations in a short time indicates a massive tax evasion, it also represents a colossal administrative effort.
The high financial and temporal costs stand opposed to a criminal prosecution with only a limited chance of success. The authorities might, therefore, prefer to focus on mastering the technical challenges of the new law and on promoting a culture of honesty.
Sellers Should Prepare for Regulation by Amazon and Co.
In accordance with its terms, Amazon currently pursues all indications of fraudulent trading and blocks sellers if necessary. From 2019, the marketplace will probably be more active in taking action against them — otherwise it could face fines in the millions.
Since Amazon has always been very prudent about taxes, sellers should prepare for heightened bureaucracy. To stay exempt from liability, Amazon will presumably request sellers to hand over the business data needed to comply with the government’s recording requirements. Amazon has asked all obliged merchants to upload their German VAT number.*
*Update: Thank you for your comments regarding this statement. Here are some clarifications:
Am I required to register for VAT in Germany?
The answer is probably yes, but let’s break it down:
You need to register for VAT in every country you store your goods (except your own, if you stay below the registration threshold). There are no thresholds for storage in another country! That means if your business is in Germany and you want to send 10 boxes of tissues to France and sell them from there (to anywhere), you need to register for VAT in France. The only time you don’t need to register is if you store and sell only in your “home” country, ie the place your business is registered in, and you stay below the local VAT registration threshold. In Germany, this is fairly low at 17.500 € per year, and you have to register as a company that stays below this sum.
The “Distance Selling EU VAT Threshold”
If you’re selling to an EU country, you will not have to register for VAT there if you stay below the local threshold. In Germany, this is the highest possible at 100.000 €. That means: If you are a French seller storing goods in France and selling to Germany below 100k €, you will not have to register for German VAT.
In short, you DO need to register if, for example:
– You are a non-German business storing goods in Germany
– You are a non-German business storing goods elsewhere, but selling to Germany for more than 100k €
– You are a German business storing goods in Germany and earning more than 17.500 €
These points are particularly important if you are taking part in Amazon’s Pan-European fulfillment service. While this service opens all of Europe to you by automatically distributing your goods across the participating countries, it also means you have to register for VAT in each respective country. It’s up to you to make sure you comply with this law.
It’s at this point that the tax evasions occur. Fraudulent sellers simply don’t register for VAT. Without a VAT number, it is nearly impossible for authorities to identify tax evaders within Amazon’s jungle of sellers.
The new German law sets out to change this. To avoid being held liable, electronic marketplaces are likely to pass on the verification pressure to their sellers. Germany isn’t the first country to force responsibility on sales platforms. Amazon sent out reminders to upload VAT numbers and banned sellers in the UK, where VAT verification became mandatory in 2018.
An important takeaway from the UK experience: Many UK sellers were surprised and outraged about the seemingly unjust bans, lamenting losses in the thousands as a result of the ban and arguing that they were correctly registered and had supplied all the necessary documents. Unfortunately, this only means the intervention is working: In many cases, the ban had been triggered because there were differences between the name registered on Amazon and the name on the VAT certificate. Keep this in mind when Amazon asks for your German VAT.
Who controls the merchants?
History shows that compulsory registration does not necessarily mean that all taxes are paid in good faith. Will fraudsters be able to abuse the new liability of the marketplaces? If a provider does not pay attention to all the unfamiliar obligations during this conversion, the repercussions could be extremely damaging.
At least in the transition phase, alleged fraudsters could see a shift of the debt in their favor.
So how will the tax office react if a merchant ignores his tax obligations?
“The tax office needs a well-founded suspicion first,” says Amazon tax expert Andreas Honisch of amaZervice. “Then the process begins: the tax office contacts Amazon to obtain the suspect trader’s sales data. The officials check: Did he pay taxes? If not, they could withdraw his VAT registration. The exact procedure remains to be seen.”
Amazon may have fulfilled its recording requirements in this scenario — but the platform is still liable for the tax evasion as long as it allows the merchant to make further sales. Because technically, this would also work without a VAT registration.
Amazon, therefore, has no choice:
Liability can only be avoided by collecting business data and blocking an “implicated seller”.
Only now is it up to the tax authorities to pursue the tax evader and collect the evaded tax.
The data provided by Amazon and Co. will probably make this process easier than it has been so far.
And yet overall, the upheaval is a costly one. Platform providers like Amazon don’t just need to impose data collection — they also need to constantly monitor and control their marketplace to respond to calls from the tax office.
Law scholars such as Dr. Ulrich Hufeld criticize the law as unconstitutional.
Dr. Hufeld is Professor of Tax Law at the Helmut Schmidt University in Hamburg. In his report “Betreiberhaftung im Internethandel” (Provider Liability in Internet Trade), he commends the legislator’s pursuit of legitimate goals — but cautions the observation of the fundamental rights.
The providers of electronic marketplaces are ‘neither debtors nor disrupters’. In the system of value-added tax, the consumer is the ‘tax carrier’ — sellers, in turn, are tax debtors and should be held liable for the amount.
If platform operators such as Amazon, regardless of fault, pay for the misdeeds of others, “they assume a payment guarantee outside of the system,” writes Hufeld. The goals pursued by the bill thus serve a “purely fiscal purpose” and are inconsistent with constitutional law.
Amazon is unlikely to hang around for a possible revision of the law.
They can already freeze parts of a dealer’s sales — a strategic precaution to retain assets of fast-growing sellers with potentially risky return rates.
The technology to urge sellers to submit the necessary documents is, therefore, already in place. Anyone without a German VAT ID should expect notifications from Amazon as of January.
With its VAT service, Amazon already offers an in-house solution for managing the relevant processes. For 400 € per year, merchants can process their VAT registration, tax declaration, and filing directly via Seller Central.
It would also be conceivable for Amazon to use this technology to alert merchants about the due amount of tax.
The “Annual Tax Act 2018” comes into force on 1 January 2019 — for the enclosed “§ 22f UStG: Prevention of value-added tax losses with the trade of goods on the Internet “, there is a transitional period, also because of the technical challenges. EU sellers have nine months until 1 October 2019 — for third-country companies, the law already applies from 1 March 2019.
This step is the first of many in a large-scale attempt to increase tax transparency in online trading. A Europe-wide regulation is due in 2021 — possibly spelling an end to the low tax laws Amazon currently enjoys via its European headquarters in Luxembourg.
Disclaimer: The information contained within this article is provided for informational purposes only and is not intended to and must not be taken as a substitute for obtaining accounting, tax, legal, or other professional advice from a tax resolution professional (e.g, an Enrolled Agent, CPA, attorney, etc.). Presentation of the information via the internet is not intended to create, and receipt does not constitute, a tax professional-client (or attorney-client) relationship. Internet subscribers, users, and online readers are advised not to act upon this information without seeking the service of a tax resolution professional.
In any case, sellers should prepare for turbulent times on Amazon. How will competitor prices change? What will relevant keywords cost when thousands of merchants suddenly pull out of the game? How do I optimize my PPC campaigns to respond to — or benefit from — this change? We look forward to your comments!
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