Digital economy presents new challenges

THE INTERNET has improved the availability of goods and services from all around the world and people can get almost any item with just a few clicks.

Online shopping can sometimes be tricky.Online shopping can sometimes be tricky. (Source: Sme)

But these changes are also presenting new challenges for shoppers, who can unwittingly end up paying more if they don’t pay attention.

“Despite the effort to find the cheapest option, the goods can increase in price unexpectedly due to the value added tax (VAT), custom duties or the costs of additional service,” said Jozef Dvorský, executive director of the Slovak Association for Online Trade (SAEC).

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“Different legislations on VAT put into disadvantage traders from other [EU member ] countries, who have to pay the VAT regardless of the value,” Finance Ministry spokeswoman Alexandra Gogová said, adding that purchases of goods of small values up to €22 from third countries are exempt from payment of VAT in Slovakia.

Daniela Vojtková, tax manager at PwC Slovensko adds that all goods of value over €22 are subject to VAT and you might end up paying even the custom duty if the value exceeds €150.

If a customer orders small items from abroad of overall value below €22, they can be shipped for free because they can be easily fit in containers with other goods. Shipping costs change with a larger volume. Moreover, many entrepreneurs experience problems when complaining about damaged goods because of the different market practices between Europe and other parts of the world.

Cultural differences aren’t the only hurdle. In October 2015 the OECD presented regulations designed to prevent tax evasion and registering businesses in tax havens. Although they are aimed against the big multinationals, when implemented they could affect the whole business environment.

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Hidden costs

“The biggest problem for the ordinary people in online shopping are the hidden costs,” said Dvorský, adding that the seemingly cheap goods might increase in cost when VAT, custom duty and sometimes even inevitable service are counted in. If an item gets damaged, there may be costs for returning it.

When ordering goods from abroad, the customers should check the country from where the goods are shipped and the country where the seller is registered. Several people had negative experiences paying additional VAT on goods transported from China and other countries.

Dvorský confirmed that the ownership and where the shop is registered is the most important information.

“For example, if a customer from Slovakia purchases goods from a shop abroad but its owner is registered in Slovakia, they actually are not shopping abroad,” he explained. “In such cases Slovak legislation applies if the owner did not specify explicitly a different one in the shop’s terms and conditions.”

A more complicated situation occurs when the Slovak owner registers premises abroad.

If the revenue of the seller exceeds a certain sum or they buy goods from abroad, they have to register as VAT subjects. These sums vary amongst countries, which opens space for manipulation and deception.

Another danger lies in the transparency of the seller. If the shopper is caught buying fake products, they may need to pay a fine.

Therefore experts recommend checking the reliability of the seller and their references. Also, consumers should be careful with disclosing their personal data and banking details.

Experienced shoppers are able to choose wisely in order to make their purchase really cost effective, Dvorský said. Experts recommend to look for APEK, SAOP or Heureka logo on the webpage, which is a guarantee of quality.

The situation for sellers is more complicated than that of ordinary customers. Countries of the European Union, European Economic Area and Turkey can freely import and export goods amongst one another. However, the seller is subject to VAT when selling goods abroad if the receiver is not a registered VAT subject.

Targeting tax relocation

Apart from an increase in online crime, the digital economy, where companies have little or no physical presence, broadened the options of relocating tax duties in order to benefit from the mismatches between tax rules in different countries.

As a response, the OECD in cooperation with the EU laid out the BESP (Base Erosion and Profit Shifting) package in October 2015. It targets tax evasion at big corporations and brings additional duties that can negatively affect the small and medium sellers even within the EU. Under the changes, they will have to disclose quarterly returns, sales revenue and VAT liabilities across Europe and keep them on file for 10 years.

The OECD urged governments to pursue more efficient tax collection on international e-commerce. These measures will affect the foreign businesses that sell goods across borders, but also consumers in the target countries.

“The OECD is focusing mainly on tax base relocation of the multinational companies abroad,” said Dvorský. “Most of the Slovak online shops have the character of family businesses run by a group of individuals and do not fulfil the criteria of multinational companies.”

According to Dvorský, even the bigger sellers such as Alza, Hey and should not be affected by the OECD regulation.

However, Vojtková of PwC pointed out that even private individuals might be liable for VAT if they are considered the importer of the goods from a non-EU country and the shipment exceeds a certain value.

“Import of goods is free from VAT and customs duties if it costs less than €22, and free from customs duties if it costs less than €150,” said Vojtková. “From May 1, some changes in the customs rules are expected due to implementation of the new Union Customs Code. “

All tax subjects will be affected by the BEPS package to a certain extent, PwC wrote in a report on the OECD action plan.

“OECD members and G20 countries defined an Action Plan of 15 items to address the key taxation challenges of today’s global economy,” explained Vojtková. The majority of the items should ensure taxation of the digital economy activities in the territories where the consumers are located, she said.

“Slovak entrepreneurs who run an e-shop and sell goods also to other EU member states to customers that are not VAT payers (e.g. private customers residing outside Slovakia) may be required to register for VAT in the country of destination of the goods and charge local VAT of the respective member state,” Vojtková continued.

It is compulsory if the volume of internet sales exceeds a certain annual threshold set by each member state, in most of the countries around €35,000, she added.

Electronic services like software, films, games, music and digital database to individuals is subject to VAT in the customer’s country of residence, therefore the Slovak e-shops offering services abroad should register for VAT in the target countries too.

The process of registration is facilitated by the Mini One-Stop-Shop (MOSS) simplification system.

“A Slovak e-shop provider can register on a single Slovak MOSS portal, and make a single VAT declaration to report sales and VAT collected in each EU country. The Slovak Tax Office will then distribute the VAT to the appropriate countries,” Vojtková said.

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