The development of e-commerce has caught the VAT administration unprepared. Revenues from this tax are not guaranteed
Press release to audit No. 17/12 – 10. 9. 2018
The Supreme Audit Office focused on VAT administration in cross-border e-commerce between traders and consumers in the years 2015-2017. Auditors examined how the EU's tax administration system had been set up and how it had worked in practice. They also reviewed how the financial and customs authorities had proceeded in the VAT administration and what impact the tax collection had had on revenues of the state budget. In cooperation with the Federal Court of Auditors of Germany, the auditors verified the functioning of the so-called minimum one-stop shop (MOSS).
The audit has shown that the value of the goods sent and the selected services delivered as well as the value of VAT paid to the Czech Republic are not known at all. Nonetheless, this will be a significant amount of money as from 2015 until mid-2017, transactions supported by evidence worth at least CZK 100 billion were sent from the Czech Republic.
The reason is that the VAT administration is not well set as for the goods dispatch between EU countries and the provision of selected services. The problem lies mainly in the insufficient international exchange of information and the inadequate distribution of competences among the individual countries of the European Union. Taxation is the responsibility of the country where the goods or services have been provided from another country. However, this country is very often not informed about the deal.
"If a Czech consumer orders some goods, for example, from an e-shop in Germany, the supplier is liable to pay VAT - in this case, a German e-shop - to the Czech Republic. The problem is that if the supplier does no report the transaction, the tax administrator does not maybe know about it. And if he does not know about it, he cannot assess or impose the tax", explained Jiří Kalivoda, a Member of the SAO, who conducted the audit.
Despite the inappropriately set up system, financial authorities were able to engage actively in cross-border transactions and identify whether individual entities levied taxes as required. The SAO found out that the audited tax authorities had failed to look for taxable persons and to check them - the search was random and rather isolated. There are, however, specific inspiring procedures, for example, in the UK, Finland, Latvia, Denmark, and Bulgaria. These countries actively target taxable persons and apply other tax collection measures - from co-operation with card and payment companies through communication with carriers and shipping companies to the control and monitoring of web domains and e-shops and the determination of their responsibility for correct taxation.
The auditors chose generally well-known websites of 15 foreign e-shops and e-market operators and asked the Financial Administration for the Moravian-Silesian Region whether these e-shops were registered in the Czech Republic for the payment of VAT and, if so, how they fulfilled their obligations. The Financial Administration did not dispose of the information needed to know if and how these operators should pay VAT in the Czech Republic. Simultaneously, many of the suppliers offer delivery to the Czech Republic and are therefore likely to be subject to VAT.
The auditors also focused on the VAT levy associated with the import of consignments from non-EU countries as well. The control system set up by the customs authorities works, but it has mainly a preventive function. This is owing to the large number of shipments that travel to the Czech Republic, as well as the high costs on additional tax assessment. This is due to the fact that the whole process regulated by legislation and international agreements is administratively demanding and lengthy.
The audit was carried out parallelly with the German Federal Court of Auditors in order to verify the functioning of MOSS, which would make the VAT levy on cross-border transactions easier. MOSS allows suppliers which are active on markets of several EU Member States to fulfil their VAT obligations through the tax authorities of one Member State and do not have to pay their VAT in a number of countries where it would be complicated to register. Despite some shortcomings, the special regime has proved its worth, because it has reduced the administrative burden on both tax administrators and taxable entities.
The forthcoming joint international report on this parallel audit will serve as a basis for discussing solutions at European level.
Supreme Audit Office