Should online retailers use the Value Added Tax calculation service (VCS) on Amazon or are the weaknesses of this system too serious?
What is your experience with the Amazon VCS so far?
Experience with the Amazon Value Added Tax calculation service (VCS)
We will answer this question in the following sections. But there is one thing you must always be aware of.
From the point of view of the tax office, only you as the entrepreneur are responsible. Therefore, you should fundamentally understand the systematics behind the automation of your business processes - especially if they are processes for tax determination.
One can anticipate the answer to the initial question a little.
The pressure to use the Value Added Tax calculation service on Amazon is increasing due to Amazon . The weaknesses of this system are small to considerable, depending on the setup. We at Taxdoo offer solutions for this via our platform.
Amazon Value Added Tax -Berechnungsservice (VCS): a brief history
When Amazon 2017 Amazon Business was launched as a B2B marketplace, it was clear that this marketplace would only be a success if the buyers - which now includes the entire DAX group - received legally compliant invoices from the sellers.
Due to the heterogeneity in the online trade, which is very much dominated by companies from the SME segment, it quickly became clear that the calculation of Value Added Tax and the invoicing could not be left to the seller.
Any larger company with appropriate tax security mechanisms would have immediately prohibited its own procurement department from purchasing goods via Amazon Business as soon as the first invoice written via Word appeared there.
How should Amazon ensure that this never happens? The answer is simple: You take these processes completely out of the hands of the salespeople.
The Value Added Tax calculation service (in the following VCS for VAT Calculation Service) calculates Value Added Tax for each transaction and creates an invoice - for each Amazon business marketplace in the EU. You can read more about how it works in our first article from 2017 - or in the renowned taxtech.blog.
The VCS is a development by Vertex for Amazon. As we have explained in our previous publications, this solution has had some weaknesses for years.
In the meantime, the (gentle) pressure on merchants by Amazon to use the VCS is increasing. The so-called VCS lite, where the Value Added Tax calculation remains with Amazon , but the invoicing is done by the merchant, should create more acceptance.
The weaknesses are identical for both systems - VCS and VCS lite - and are summarized below.
Invalid VAT IDs on Amazon Business and missing check by the Value Added Tax calculation service (VCS)
The VCS unfolds its full functionality - and you can hardly avoid it - in the context of B2B transactions. Cross-border deliveries to entrepreneurs in the EU are tax-exempt as so-called intra-Community deliveries.
Since 1 January 2020 at the latest, this only applies if the customer can show a valid VAT number abroad at the time of delivery .
If this is not the case, you must submit this transaction to Value Added Tax .
Taxdoo therefore checks a very high six-digit number of VAT IDs every month. According to our results, between five and eight percent of the VAT IDs deposited on Amazon are invalid.
Does the VCS check the buyer's VAT ID immediately before the sale?
According to the Amazon-AGB, Amazon or the VCS cannot guarantee this.
As a result, Amazon or the VCS evaluates intra-Community deliveries as tax-free even if the VAT ID of the purchaser is invalid.
Risk: As part of an audit by the tax authorities, the auditor will retroactively charge Value Added Tax at the latest since 1 January 2020 if the buyer's VAT ID was invalid at the time of delivery. In the case of retrospective taxation, the interest that the tax authorities have to levy will be added. In Germany, this is - after a short period - 0.5 percent per month on Value Added Tax. In other EU countries, this is often several times higher.
But it is not only invalid VAT IDs that pose a problem for the Amazon Value Added Tax calculation service.
Amazon Value Added Tax -Billingservice (VCS): the missing implementation Quick Fixes 2020?
The VCS seems to have slept through an important sales tax reform - the quick fixes mentioned earlier.
Background Quick Fixes: The Quick Fixes kicked off a comprehensive reform of the VAT law on 01.01.2020, which is still largely at the 1993 level and thus no longer meets the requirements of the digital age and online commerce. We will see the next stage on 1.7.2021 - in the form of the One Stop Shop or the second stage of the E-Commerce Package.
Read more about the Quick Fixes and Amazon's problems with them in this article.
What is behind the Quick Fixes in connection with intra-Community supplies?
Since 01.01.2020, intra-Community deliveries are only tax-free if the buyer can present a foreign Value Added Tax identification number (VAT ID) at the time of delivery.
Further conditions for a tax-free intra-Community supply are explained in this video.
However, the European Court of Justice (ECJ) took a different view, so that it was regularly possible to defend oneself against taxation of intra-Community deliveries with the rulings of the highest court in the EU if the tax office wanted to collect Value Added Tax in the case of a missing or invalid VAT ID.
This no longer works since 01.01.2020 - the effective date of the Quick Fixes.
Concrete case: Error in the Value Added Tax calculation service (VCS) and the answer from Amazon
In the context of a specific case, which is unlikely to be very frequent in relative terms, but which, given the size of Amazon Business in absolute terms, could cause extensive fiscal damage if it is not an isolated case, the following has occurred.
A buyer in France buys from a German merchant via Amzon Business. The buyer uses his/her German VAT ID. The VCS exempts this supply and thus violates the law in force since 2020 (Quick Fixes).
What does the law say? § 6a UStG clearly regulates that a valid foreign Value Added Tax identification number (UStID) must be available at the time of the delivery.
By foreign it is meant that this must not have been issued in the EU state in which the delivery starts.
In this case, a French UStID should ideally be available. According to the law, the buyer can in principle also use any other foreign UStID - e.g. a Dutch, Italian, ... It may only not be a German VAT ID.
The answer of the Amazon support is therefore unfortunately not correct. It is pointed out that no Value Added Tax was calculated because the buyer has deposited a German VAT ID.
However, since the delivery was from Germany to France, this is not sufficient under EU law and also under German law.
Another source of error is the storage of an incorrect storage location.
Incorrect result due to incorrect storage location
If you ship your products yourself, the VCS can only work with one storage location. If you have more than one own warehouse from which you ship the goods to the customers, the VCS may come to wrong results in B2C transactions if the following constellation is present.
- The delivery is cross-border AND
- your second, third, fourth. camp is in a different EU country than the first camp AND
- the delivery threshold of the country of destination has not been exceeded
Risk: For the above constellation, the VCS calculates the wrong VAT rate for the wrong country. In this case you owe Value Added Tax twice: the tax which is on the VCS invoice and the tax which has actually been incurred in the country of storage - plus interest if applicable.
The Amazon Value Added Tax calculation service (VSC) has another open flank when it comes to determining the correct tax rates.
Determination of the incorrect tax rate
If you do not make any settings, the VCS will always apply the standard tax rate of the respective EU state.
If you sell products that are taxed at a reduced rate, you must classify these products using the product tax codes provided by Amazon . These are not official classifications, so a classification is not legally binding.
Especially in the area of food and food supplements you should have a so-called tariff classification of your products carried out by a customs expert. Only with the help of the customs tariff number determined in this context can the VAT rate for your products and for each EU country be safely determined.
Risk: A considerable risk exists if the VCS calculates a tax rate that is too low. Example: In France, coffee is taxed at 5.5 percent. Due to your incorrect classification, the VCS applies the third reduced tax rate in France of 2.1 percent. In this case, you would reduce or evade 3.4 percentage points Value Added Tax per delivery.
We at Taxdoo work exclusively with the customs tariff number and can make you a proposal for each product and EU country using an automated logic.
Monitoring of delivery thresholds by the Amazon Value Added Tax -Berechnungsservice (VCS) not possible
The Amazon VCS cannot monitor delivery thresholds and is also quite slow to deal with them. However, this will still be necessary until at least 30.06.2021 - see here.
You must enter an exceeded or opted-in delivery threshold yourself in the Amazon VCS. This is done by registering for tax in the respective country of destination and depositing this foreign VAT ID in the VCS.
Risk: If you do not have processes in place to monitor your delivery thresholds, the VCS will inevitably produce incorrect results. In the worst case, you will owe Value Added Tax twice: Value Added Tax on the invoice and Value Added Tax, which has actually been incurred - plus interest if the tax authorities discover it later.
Checklist Amazon VCS: Which setup?
In summary, the following can be said.
- You are taxable only in Germany, do not sell cross-border and your products are subject to the standard tax rate: you can use the VCS without any problems.
- You are only liable to tax in Germany and your products are subject to the reduced tax rate: You should make sure in advance that a customs expert has determined the customs tariff number of your products. Then you can use the VCS without any problems.
- You sell B2C across borders within the EU and are registered for tax purposes in all countries where you have exceeded the delivery threshold and can monitor this continuously: You can use the VCS without any problems.
- You also sell cross-border B2B within the EU: In this case you must be aware that some of the VCS evaluations are wrong and that you will have to pay tax arrears and interest if in doubt.
- You are liable to pay taxes in other EU countries - e.g. because of delivery thresholds, shipping warehouses, ... - but do not yet have tax registrations in all/some states: In this case the VCS leads to wrong results, which in the worst case leads to double taxation.
- You are liable to pay taxes in other EU countries - due to the use of dispatch warehouses - and also have tax registrations in the corresponding countries, in which you have not exceeded the delivery threshold: In this case, the VCS leads to false results, which also lead to double taxation in the worst case.
Amazon Value Added Tax -Berechnungsservice (VCS) and the One Stop Shop
On 07/01/2021, we will see the biggest sales tax reform for online retailers - going hand in hand with the One Stop Shop.
You can read more about it in this blog post.
The crucial question is: Will the Amazon Value Added Tax calculation service (VCS) be compatible with the One Stop Shop?
The answer to this question cannot yet be given, as Amazon or the provider behind it - Vertex - have not yet commented.
However, the following chart illustrates what you have to pay attention to as a Amazon trader - especially if you participate in the Pan EU or CEE program.
You must note that:
- due to the EU-wide delivery threshold of only 10,000 euros net per year for all B2C deliveries to other EU countries together, you will become liable to pay tax in the country of destination,
- you can report these deliveries via the OSS in your country of residence - even B2C deliveries from e.g. a Amazon warehouse in Poland to a final consumer in France,
- you are no longer legally required to bill for the transactions for which you use the OSS,
- the buyers and thus also Amazon will, however, with a certain probability continue to insist that they receive invoices. In this case, according to the above logic, the tax rate of the country of destination must then be regularly shown on the invoice.
- local deliveries from a foreign Amazon warehouse and all transfers and acquisitions you still have to declare locally in the EU foreign country.
Conclusion to the Amazon Value Added Tax -authorization service: Look carefully!
Without the automation of the essential business processes, online trade in its current form would hardly be conceivable.
As a trader or tax advisor, you have to take a very close look at the processes involved in finding taxes, such as Amazon's Value Added Tax calculation service.
The VCS is not a masterpiece of automated cross-border Value Added Tax compliance and in the cases shown can lead to subsequent claims by the tax authorities that threaten the existence of the company.
But sooner or later you will hardly pass the VCS.
We at Taxdoo therefore offer security mechanisms via our platform to absorb these risks.
Taxdoo is the platform for automated and secure Value Added Taxprocesses
... and forms for the leading online retailers in Europe besides the handling of the current EU-wide Value Added Tax-Compliance, Intrastat and financial accounting also offers numerous other compliance services via a unique platform.
We have a database of more than half a million VAT IDs, which we check regularly to significantly reduce risks.
If you want to know more about how you Value Added Taxcan efficiently and securely map compliance, financial accounting and much more via a platform, then book your individual and free initial consultation with the compliance experts from Taxdoo!
You are also welcome to register for our regular demo webinar in which we will introduce Taxdoo and our compliance services and answer your questions personally.