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A platform specializing in second-hand technology, recently alerted the French tax authorities that a competing e-commerce platform may not be performing adequate checks on its sellers. According to the Platform, this alleged negligence allows some sellers to engage in VAT fraud, offering prices up to 20% cheaper than on other platforms, thereby distorting competition.
A Legislative Loophole Affecting VAT Collection
This issue stems from a specific loophole in current EU and UK VAT legislation, as highlighted in a recent question posed by the French delegation to the European Commission. Under the current framework, marketplaces are liable for VAT only when facilitating sales by non-EU/UK sellers if the goods are located within the EU or UK at the time of sale. For sellers based within the EU or UK, the responsibility to remit VAT remains with those sellers, even when sales are made through a marketplace.
This fragmented approach imposes a significant burden on marketplaces, which must determine both the location of the goods and the seller’s location at the time of sale. The situation becomes even more complex when sellers maintain stock both inside and outside the EU/UK. As a result, marketplaces must invest heavily in system updates and seller verification processes—time-consuming and costly measures that can hinder operational efficiency.
Exploiting the Loophole
Some non-EU/UK merchants exploit this complexity by falsely claiming to be established within the EU/UK. By doing so, they can avoid having VAT charged on their sales and gain a price advantage. In some cases, these sellers charge prices close to VAT-inclusive levels and pocket the difference; in others, they simply offer goods at heavily reduced prices. Both tactics undermine legitimate sellers, disadvantage consumers, and result in lost tax revenue.
Media coverage brought these issues into the spotlight when HM Revenue & Customs (HMRC) discovered that 11,000 foreign merchants had fraudulently used a single taxpayer’s address to register for UK VAT, circumventing the marketplace VAT collection requirement. In response, Amazon and other marketplaces introduced stricter verification measures. However, these tightened procedures created friction, including delayed payments to genuinely EU/UK-based merchants, illustrating how attempts to mitigate fraud can inadvertently harm compliant businesses.
The VIDA Proposal and Its Limitations
The VAT in the Digital Age (VIDA) proposal aimed to address these issues, among others. Although the final agreement announced in early November was broadly welcomed, a key measure was curiously dropped: expanding the “deemed supplier” rules to include EU-based sellers. Had this been implemented, marketplaces would have been liable for VAT on sales by both non-EU and EU sellers when goods were located in the EU.
No clear explanation was given for removing this measure. It may have been set aside due to concerns that EU sellers would frequently end up in a refund position, or because securing agreement on broader obligations—such as those affecting rental accommodation and transportation services—proved challenging. Nonetheless, the omission leaves a gap in the regulatory framework, and it was noted that further reviews should occur by July 1, 2027.
Challenges and Perspectives
The lack of expansion of the obligation on marketplaces leaves them in the costly and inefficient position of having to manage the complexity of determining where their merchants are or face potentially a joint liability. This is an especially burdensome situation for the smaller, niche-market marketplaces.
Indeed, marketplaces are subject to joint liability if they fail to exercise sufficient due diligence. The recent inquiry from the French delegation to the EU Commission is particularly relevant here. It highlights this fraud and that while marketplaces could be held liable, they at least deserve a standardized, proportionate set of due diligence criteria to ensure fairness and certainty. The French proposal suggests a common two-stage verification framework:
- Presumption of EU Establishment:
The supplier provides an EU business address, is registered in an EU trade register, and has a valid VAT number consistent with that address, with no contrary notification from tax authorities. - Two Supporting Evidence Items:
The supplier must then provide two non-contradictory pieces of evidence, such as the legal representative’s EU home address, EU-based IP addresses, EU bank account details, EU telephone numbers, or other commercial data. These criteria resemble those already used for determining customer location in the sale of digital services, potentially allowing marketplaces to leverage existing systems.
If neither the presumption nor the two pieces of evidence are met, the supplier should be considered non-EU, and the marketplace would assume liability. Suppliers can nevertheless still override this presumption by providing additional documents, such as identity records, utility bills, or official tax statements, to prove their EU establishment.
Conclusion: Balancing Compliance, Foundational Tax Principles, and Robust Systems
Marketplaces are integral to the digital economy’s growth, and their critical responsibility in helping to achieve robust tax compliance will only increase as e-commerce continues to evolve. Aligning tax rules with modern business models and technological advancements is crucial. While proposals such as the French delegation’s due diligence framework is a welcome effort in helping to verify a supplier’s location more reliably, ongoing collaboration between tax authorities, marketplaces, and policymakers remains essential.
As new frameworks evolve, it’s important to uphold the principles of the Ottawa Taxation Framework—neutrality, simplicity, efficiency, certainty, and fairness. Shifting liability to marketplaces may streamline tax collection and reduce fraud, but it must not impose an undue and unfair burden on these platforms. To achieve this balance, robust, well-designed verification and reporting systems are vital. Such systems, backed by clear guidelines and standard protocols, will enable marketplaces to meet their compliance obligations efficiently without stifling innovation or competition.
By embedding these Ottawa principles into the evolving VAT landscape, and ensuring that marketplaces have the robust systems they need, stakeholders can foster a more stable, equitable, and efficient environment—one that protects revenue, encourages compliance, and maintains trust in the digital marketplace.
Thanks to Audrey Vivaldi from Arsene Taxand for providing the reference to the French Delegation’s question to the European Commission.
Disclaimer: The views, statements or opinions expressed in this article are solely those of the author and do not represent tax advice and are not to be designated to be the views, statements or opinions of any other person, group, association or company.
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