EU: Enhanced enforcement of VAT rules on non-resident digital economy businesses

Under EU value added tax (VAT) rules, non-resident digital economy businesses are required to register for, collect, and remit VAT if they:

• Directly sell “electronically supplied services” to final consumers in the EU
• Directly sell imported goods valued at less than €150 to final consumers in the EU
• Directly sell goods within the EU to final consumers in the EU
• Act as a platform facilitating the sale of the above transactions, provided certain conditions are met

It's important to note that "electronically supplied services" currently refers to services delivered via the internet or an electronic network, with minimal or no human intervention. Starting 1 January 2025, live-streamed events, which are currently excluded from the definition, will be subject to the same requirements. Additionally, certain EU Member States impose a VAT compliance requirement on non-EU businesses providing any type of services to final consumers in their jurisdiction if they consider the service to be used and enjoyed in the jurisdiction.

In recent years, EU tax authorities have increased audit and enforcement actions against non-resident vendors of goods or digital services. However, tax authorities seemed to lack an appropriate tool to identify non-compliant taxpayers and verify sales reported by taxpayers adhering to the rules.

Effective 1 January 2024, the EU will require payment service providers established in the EU to transmit information on cross-border payments originating from Member States and on the beneficiary ("the payee") of these cross-border payments. The definition of payment service provider for this requirement is broad, potentially including not only EU-based credit, electronic money, post office giro, and payment institutions but also certain EU-based platforms facilitating sales.

EU payment service providers will need to monitor the payees of cross-border payments and transmit information on those receiving over 25 cross-border payments per quarter to the administrations of the Member States. The information transmitted needs to enable tax authorities to identify potential non-compliant taxpayers and provide an assessment basis, as it includes the payee's name, VAT ID (if available), address (if available), and details of the cross-border payments and any related refunds.

This information will be centralized in a European database, the CESOP, where it will be stored, aggregated, and cross-checked with other European databases. All CESOP information will be made available to anti-VAT fraud experts of Member States via a network called Eurofisc. The reporting obligation will occur on a quarterly basis, starting from Q1 2024, with the first reporting due by 30 April 2024.

Non-resident digital economy businesses not yet compliant with EU VAT rules need to carefully review their operations and determine if they need to file voluntary disclosures in the EU. Non-compliant businesses identified through this new information-sharing mechanism could be considered by some EU tax authorities as grossly negligent or purposefully evading taxes, potentially leading to increased administrative penalties and, in some Member States, criminal proceedings.

Furthermore, digital economy businesses already complying with EU VAT obligations need to carefully review the data they use for compliance and be prepared to answer any questions from tax authorities if discrepancies are found between VAT return data and payment data obtained through this new information-sharing mechanism.

For more information, contact a KPMG tax professional:

Philippe Stephanny | philippestephanny@kpmg.com

Chinedu Nwachukwu | chinedunwachukwu@kpmg.com