The European Commission is using the rulings of two cases involving Apple and Amazon, and reforming the way VAT is collected to make sure that all online businesses pay their taxes.
The Apple & Amazon Cases
The rulings on cases involving Apple’s operations in Ireland, and Amazon’s in Luxemburg are to be used to close loopholes for those multinational companies operating in Europe and seeking to allocate profits to entities not (directly) involved in the provision of the goods or services to which the profits relate, as a means of reducing the amount of corporation tax they pay.
There have also been accusations that governments appeared to have allowed the companies to channel their profits through companies that existed mainly for tax arrangements from which they stood to benefit.
In Apple’s case, last year the Irish government was ordered to retrieve €13 billion in back taxes by the EC (the European Union's antitrust and competition watchdog). The EC has now taken the Irish government to court for failing to recover the money from Apple, thereby firing a warning shot to other multinationals that they’re not going to let companies (however powerful) off the hook when it comes to taxes owed. The tax bill for Apple is equivalent to 5% of its cash reserve / one quarter's global profit, so could be enough to have an effect.
In Amazon’s case, the EC ordered Luxembourg’s government to recover $250 million from Amazon because Amazon’s reduced tax bill was deemed to be ‘illegal state aid’. This amount equates to a little over the global profit for the last quarter, and is, therefore, a significant amount for Amazon.
The EC has also moved to close more loopholes where VAT is concerned. These moves could create a proposed new, unified system of value-added tax (VAT) collection across the EU. This could stop companies from ‘jurisdiction shopping’ to pay the lowest rates, and it is estimated that it could help governments recover VAT of up to €150 billion a year (including €50 billion lost to fraud). With this scheme in place, governments in countries where purchases are made could receive revenue, and (cross border) businesses would know the right amount of tax to pay and collect, and could have their compliance costs reduces. The proposed VAT changes, however, are unlikely to be introduced until 2022.
What Does This Mean For Your Business?
These moves and the very public announcement of them last week are clearly designed to send a message to all companies, online or offline, in whichever country their tax liability actually lays, they will be expected to pay their taxes in the EU for sales made in the EU from now on. The fact that the EC has challenged huge corporations and whole countries shows that it is serious.
Hopefully, the proposed new VAT changes will be less complicated and costly for small businesses than the Commission's last attempt to simplify EU cross-border VAT collection with the mini one-stop shop" in 2014.
It is possible to see why, for the benefit of their economies, countries like Ireland may have been reluctant to go after Apple for the money, but for many people, seeing big corporations (with big profits) being held to account like other businesses, the EC’s announcements and actions have a positive aspect to them.
The Commission now has to make sure that the proposed changes help all online businesses not just multinationals like Apple and Amazon that can afford expert help with their tax advice.