Canarian companies and VAT on electronic commerce

Dec 29, 2022 | News, Uncategorized

The initiative 

Some articles have recently appeared at the press commenting on the initiative,  a platform aimed at facilitating the marketing through the internet of Canarian products in the national and international market (hereinafter Canarianmarket or the platform). According to the news, there would actually be more than 60 Canary Island’s producers who benefit from this initiative.

The platform is aimed not only at hotel and restaurant professionals but to final consumers as well, who can purchase products with a delivery time of between 24 and 48 hours, in the case of the peninsula, and up to 72 hours when it comes to the rest of Europe. To facilitate shipments, there is a logistics base located in Madrid, where a stock of more than 400 references is stored.

In line with this news, we must remember the importance for those companies and professionals established in the Canary Islands to ensure correct treatment for the purposes of indirect taxation of the operations they carry out when the recipients of their purchases are final consumers established in the peninsula or the rest of the European Community, given the great impact on the distance sales sector resulting from the introduction into our legislation, as of July 1, 2021, of the new VAT treatment of electronic commerce.

Among the novelties introduced, there are two of special importance due to their practical impact on this type of operations, namely:

  1. On the one hand, the practical disappearance of the previously existing thresholds for distance sales for the case of suppliers not established in the member state where the final consumer is located (in most states 35,000 euros), which simplified the treatment for VAT purposes of this type of operation as it allowed the supplier to continue applying the VAT of the member state from which it carried out its operations, provided that the corresponding threshold of the member state where the buyer was located was not exceeded.

With this disappearance, companies that carry out distance sales to final consumers within the European Union are obliged to charge the corresponding VAT of the member estate of consumption, with the consequent obligation to register therein and comply with the local VAT formal obligations.

  1. On the other hand, the disappearance of the VAT exemption for imports corresponding to small shipments of less than 22 euros, from which Canary Islands companies had been benefiting in their sales to final consumers on the peninsula and other European community territories given its condition of third territory for VAT purposes. Under the new legal framework existing as of July 1, 2021, this implies the obligation to liquidate the VAT on importation taking place on said sales.

However, in parallel with such changes, the new regulation also contemplates certain simplification measures to counteract its negative impact for electronic commerce operators, such as:

  1. As an alternative to the need to register for VAT purposes in various EU countries resulting from the virtual disappearance of thresholds, special optional one-stop-shop regimes are introduced:
  • Either specifically foreseen to those companies that are not established in the territorial area of the European VAT, such as the companies in the Canary Islands that do not have establishments in the peninsula or another member state, as the so-called “foreign Union regime” is specifically directed.
  • Or meant in general for any company that meet their requested conditions, such as the so-called “Union regime” and “import regime”; with the specialty in relation to the latter of the requirement specifically meant for companies operating outside the EU, including those from the Canary Islands, to appoint an established intermediary to represent them in the compliance with their VAT formal obligations.
  1. To limit the impact of the disappearance of the exemption for small shipments, a new exemption is introduced for those imports carried out because of distance sales carried out by companies having opted for the special import regime, as long as the Customs value of the shipments do not exceed 150 euros.

Finally, the aforementioned measures of the new framework of the electronic commerce are completed with the establishment of an obligation to keep a record of the operations covered by any of the special one stop shop regimes, as well as a specific treatment of the platforms facilitating the electronic commerce operations that, in addition to said reporting obligation, acquire direct responsibility with respect to the declaration and payment of the VAT corresponding to the operations they facilitate in the case of products coming from outside the territorial scope of the European VAT or when the supplier is established outside of the EU, as could be the case of Canarian producers or their products.

Bearing in mind our above comments and coming back to the news that originate our article, the Canarianmarket initiative represents an additional advantage for those Canary Island’s producers whose only sales to final consumers outside the Canary Islands are those made through said platform. For this case, it will be the platform and not the producer who is to comply with the VAT obligations derived from the application of the e-commerce special regime. This is so because, given the operative followed by the platform:

  1. The Canary Island’s producers do not appear in front of the final consumers but, instead, they will be carrying out local supplies in the Canary Islands to the platform subject to IGIC.
  2. For its part, it is the platform, acting in its own name and on behalf of the Canarian producer, who would appear as the seller of the products marketed through it and who must be obliged to the liquidation and payment of the VAT and, when applicable, it could apply for any of the special one stop shop VAT regimes.

In practice, the correct determination of the VAT to be applied by the platform to its operations can be a particularly complex task, since the determination of both the country to which the VAT is to be liquidated and the amount thereof, will not always be easy, depending on various factors that must be considered, such as:

a) Whether or not the buyer is a VAT taxpayer acting as such (who would not be affected by the special VAT regime for electronic commerce) or, conversely, a final consumer.

b) The location of said buyer and place to which the products are transported, which may be different from the former.

c) The impact on the determination of the taxable base of refunds, non-payments, and product losses.

It does not seem necessary to highlight the importance for the platform that the VAT applied to the sale of its products is correct, since only in this way can it determine, out of the published final sale price , which is its operating margin. Any error in the determination of the VAT on sales to final consumers could not be corrected after the sale is completed, given the impossibility of carrying out subsequent corrections. So, any error in the VAT determination by the platform may result in a lower amount of its commission as it will be liable for the correct VAT payment before the affected member state.

Finally, it must be remembered that the describer “VAT free scenario” may not apply to those Canary Island’s companies that, in addition to using the Canarianmarket to commercialize their products outside the archipelago, use other marketing channels, such as platforms different, its own online store, distribution agreements with intermediary companies located on the peninsula or other EU countries, etc.

Hence the importance that, as a prior step to configuring their ERPs, companies carry out an adequate analysis of their business flows and their implications as far as indirect taxation is concerned that allow them to have the information necessary for the correct fulfillment of its VAT/IGIC obligations, facilitating the automation of these.

Manuel Pérez

Manuel Pérez de Algaba

Managing Partner  de  IVA CONSULTA
Expert Tax Advice