Is the deemed supplier concept fair?

2.1 The deemed supplier concept

In July 2021 a new article was implemented in the EU VAT Directive, article 14a. The article is called The Deemed supplier provision since it sets forth that an electronic interface (platforms) can become liable to VAT as a deemed supplier.3

“A deemed supplier is the taxable person who is deemed to receive the goods from the underlying supplier and to supply the goods to the final consumer. Thus a deemed supplier has the same rights and obligations for VAT purposes as the supplier.”4

Even if not acting as either supplier, buyer or importer of record, a platform can become liable for VAT if facilitating a supply of goods, under certain conditions. In practice this means that the transaction is fictitiously (for VAT purposes only) divided into two supplies, one from the actual supplier to the platform (supply from the underlying supplier) and one from the platform to the consumer (the deemed supply). In order for the platform to be compliant, it needs to receive sufficient information from the actual supplier about the transaction, to know how to treat the deemed supply to the consumer.

As of now, only certain business to consumer (B2C) supplies fall within scope of the deemed supplier concept. However, the legislative proposal ViDA published in December 2022, envisages to extend the deemed supplier concept by increasing the obligations put on platforms. That is done by introducing or amending the following provisions in the EU VAT Directive (not an exhaustive list):

• (Art 14a) The deemed supplier concept, which up until now has only been applicable to certain low value supplies from outside the EU, is extended to apply to all supplies of goods within the EU facilitated by a platform, irrespectively of origin of the products, where the underlying supplier is established or the status of the buyer. To clarify, through ViDA a platform can be deemed supplier also for B2B supplies.

• (Art 28a) Under certain conditions, the deemed supplier concept should apply on provision of short term accommodation services or passenger transport.

• (Art 46a) The facilitating service provided by a platform should be treated as an intermediary service for VAT purposes.

• (Art 136b) The supply made by the real supplier, or underlying supplier, should be exempt from VAT.

• (Art 135) Provision of short-term accommodation should be considered similar to the hotel sector and thus not be exempt from VAT. Hence, the deemed supply from the platform should be treated the same as other hotel accommodation services.

• (Art 172a) The deemed supply to the final customer should not impact the right to deduction of input VAT for the platform.

• (Art 242a) For supplies out of scope of the deemed supplier model, the platform should still be obligated to keep records relating to both B2B and B2C supplies.5

2.2 Facilitating a supply

There is limited guidance available to assess if a legal entity falls within the deemed supplier concept. Based on what has been described above, one key prerequisite can be identified; a platform can obtain VAT liabilities by facilitating a supply. The term facilitates was defined in the explanatory notes and implementing regulation published when implementing the E-commerce package in 2021, and is therein described as:

The use of an electronic interface to allow a customer and a supplier, offering goods for sale through the electronic interface, to enter into contact, which results in a supply of goods being made through that electronic interface to that customer.6

Further, the situations targeted are described as transactions concluded on an electronic interface (website, portal, gateway, marketplace, application program interface (API), or similar means) and thus not determined by the physical flow of goods. To narrow the scope a bit, transactions that do not meet all the following conditions are not considered a facilitation:

1. the platform does not set, either directly or indirectly, any of the terms and conditions under which the supply of goods is made, and

2. the platform is not, either directly or indirectly, involved in authorizing the charge to the customer, and

3. the platform is not, either directly or indirectly, involved in the ordering or delivery of the goods

In addition, the below activities do not constitute facilitating a supply:

1. the processing of payments in relation to the supply of goods, and/or

2. the listing or advertising of goods, and/or

3. the redirecting or transferring of customers to other electronic interfaces where goods are offered for sale, without any further intervention in the supply.

According to the ViDA proposal the deemed supplier model is a simplification measure to facilitate collection of VAT when the intermediary in a transaction (the platform) is better placed to ensure collection of VAT due on the transaction, than the underlying supplier. Moreover, levying the VAT obligation on the underlying supplier would be too burdensome and/or it would be more secure to levy the liability on the platform.7

2.3 The intermediary concept as we know it

When analyzing the concept of “intermediaries” we have traditionally experienced a difference between VAT taxation and civil law. From a VAT perspective, in order to become liable for the underlying transaction, we often refer to the need of (1) acting in its own name on behalf of oneself (i.e. acting as a reseller) or (2) acting in its own name but on behalf of someone else (i.e acting as an undisclosed agent/commissionaire).That in comparison to acting as an intermediary supplying a separate intermediary service and thus (3) acting in the name of and on behalf of someone else (i.e. acting as an disclosed agent). For services in general this is set forth through article 28 of the VAT directive.

Where a taxable person acting in his own name but on behalf of another person takes part in a supply of services, he shall be deemed to have received and supplied those services himself.8

However, there is not really an equivalent provision for supply of goods. The closest hereto is article 14.2 c of the VAT Directive:

In addition to the transaction referred to in paragraph 1, each of the following shall be regarded as a supply of goods:

(…)

c.

the transfer of goods pursuant to a contract under which commission is payable on purchase or sale.

But, under the deemed supplier concept, also when acting in the name of and on behalf of someone else, VAT liability is triggered. Thus, the new rules forming part of the E-commerce package and ViDA goes beyond how we generally view intermediary roles as the deemed supplier concept is more extensive than the scope of article 28 or 14a. When the deemed supplier concept through ViDA is suggested to be extended to all supply of goods within the EU facilitated by a platform, basically all businesses having either intermediary-, undisclosed agent- or commissary structures acting on a digital platform, webpage or through similar means need to assess whether or not they are acting as deemed suppliers. This would also be applicable to intra-group transactions.

3.1 Undermining fundamental principles of the EU VAT system

We have up until now in a more factual manner described the concept of the deemed supplier model and tried to put it into context by comparing it to the intermediary rules. Let us proceed by reflecting on the question if the deemed supplier concept is proportionate and fair.

Four fundamental prerequisites have to be met in order to fall within the scope of VAT, in accordance with article 2 of the VAT Directive. The fourth prerequisite is that the supply must be performed by a taxable person acting as such. A taxable person is anyone who independently carries out economic activity. It can be questioned if the deemed supplier concept is tossing this principle aside.

The rules now levy VAT on a transaction that fulfills these prerequisites, but put the obligation to report it on an entity (a platform) that does not perform the supply nor take part in the transaction.

One could argue that those criteria are meant to focus on the transaction itself and not on the obligation to report it. Especially since reporting VAT on a sale performed by someone else is not a new thing – there are several examples of that in the current system. One such example is the reverse charge mechanism where the buyer reports the VAT on their acquisition instead of the seller on the supply. But in those situations the entity reporting the VAT is at least a part of the transaction and thus automatically has quite extensive knowledge about the characteristics. Now, the importance of the fourth fundamental prerequisite is reduced since it can no longer be used as a guiding principle when evaluating if the business activities one takes part in triggers any VAT obligations. Instead, the variety of lex specialis, e.g. the deemed supplier provision, also needs to be consulted in order to assess if any obligations arise. This could be argued to be somewhat illogical, since in this case it means an obligation to pay tax on sales made by others.

We understand that it is difficult to create a one-size-fits-all VAT system, a point also raised by the VAT Export Group.9 However, when the exemptions and special regimes become too many and it is no longer possible to lean against fundamental principles, it can then be questioned if it really makes life simpler and fairer for all, as the original purpose of the new rules states. In our experience, VAT is a complex and illogical area of taxation for many. The purpose of introducing these new rules was to make the system easier to comply with as well as avoiding fraudulent behavior and tax avoidance. As pointed out by the European Council, both when the E-commerce package was implemented and again in September 2023, many taxpayers have unproportionate costs for tax compliance when making EU sales, which undermines the purpose of fair competition within the internal market of the EU.10 We understand the desire to prevent tax avoidance, but is the purpose of designing a system that is easy to comply with really achieved here?

3.2 Difficulties to know when a platform is a deemed supplier

We have come to the conclusion (as Westfahl and Ohlsson did in their article on the subject)11 that it is very difficult for an organization to know if they fall within the scope of the deemed supplier concept and hence might be liable for VAT on other organizations’ sales.

In our view this challenge consists of the difficulty to assess (1) if a business falls within the definition of a platform, (2) if they are facilitating transactions or not and (3) if the transactions in question should be taxed at all.

The challenge is further supported by the fact that the term facilitate should be interpreted extensively and that the provision itself aims to include situations where the platform does not have any formal role in the supply or any intel around the transaction.

For example, should a social communication platform such as Facebook’s Marketplace be considered as a deemed supplier facilitating all sales on Marketplace as Facebook set the general terms for using the platform? They might. That obligation may arise even though the details such as price, delivery terms, product information etc. are decided between the supplier and the consumer without any involvement from Facebook. Furthermore, which specific transactions should be taxed? Additionally, which should Facebook report, provided they are able to obtain details from all transactions. This reasoning is also elaborated on by Ek and Ek.12

3.3 Difficulties in mapping transactions to report

One way of setting up routines and transparency for in-house VAT management is to map the transactions passing through the organization. Such mapping is generally done with support from the bookkeeping records. But in this case, under the deemed supplier concept, we have a platform liable for VAT in a number of different transactions where neither of them are present in their books nor hold any supporting documentation substantiating the correct treatment. Hence, to know which, how and where the platform should report transactions as deemed supplier can be a very expensive and time consuming exercise – an exercise that needs to be updated frequently to guarantee compliance.

We understand that there are a few major organizations out there that are targeted with these rules that can comply with them fairly easily. But the rules are not written to include only these larger platforms. Instead, the rules have a broad scope and thus also include SMEs. In our view, this goes against the general goal of creating fair competition also for SMEs which the European Council has mentioned as an overarching goal several times, now latest in September 2023.13 We will elaborate on this further below.

3.4 Heavy burden for SMEs falling within the scope of the new rules

When looking at another current phenomenon, the so-called shared economy, we see many similarities with the platform economy and the challenges for platforms. In Sweden, the concept of, and tax challenges caused by, the shared economy were raised by the Swedish tax agency in a report issued on behalf of the Swedish government.14 The report shed light on the new ways of doing business and the new roles within businesses that are created through the sharing economy. The sharing economy especially entails challenges for taxation as taxation is generally based on a distinction between business activity and private activity.

In both situations (platform economy and shared economy) we have some sort of electronic interface/platform supplying a platform service to a supplier (the actual supplier) using the platform to supply services or goods. In both situations the platforms are considered as better suited to take responsibility and collect the VAT as the underlying supplier and buyer often is a natural person or an entity using special schemes for small enterprises.15

Again, we understand and agree with this reasoning looking at larger platform organizations. However, the rules for deemed suppliers are written with a broad scope and expressly state that this scope should be interpreted extensively. As such, SMEs also fall within the scope of the deemed supplier concept. The proportionality hereof can be questioned as small enterprises (then referring to the actual suppliers and not the platforms) are considered too small to bear the burden of reporting their own sales. On the one hand SME’s are considered too small to bear the burden of reporting the sale as a supplier and on the other, a same size SME should instead bear the burden of the sale but through the role of a platform. That could be argued as a bit of a double standard. The working documents do not contain any consideration or analysis of the question whether there should be a turnover threshold for the deemed supplier concept to be applicable. In our view, that would have been a good idea.

3.5 The responsibility connected with a power position

Platforms enable activities and growth and thus, by using platforms, added value is created. The challenge seems to be to find a way to tax that added value. With different sets of rules, legislators are trying to capture the added value by increasing the responsibility for the platform organizations.

A topic discussed in connection with the sharing economy is that it is relevant to consider the power position the platform holds, vis-a-vis the underlying supplier, when appointing responsibility. This power position is also relevant to assess when determining whether the underlying supplier acts independently and thus should bear responsibility for its actions tax wise. Within the sharing economy appointing increased responsibility to the platform organisation makes sense as we in those situations may end up in an employer/employee situation. However, in our view the deemed supplier rules do not aim to target and ease the burden of private individuals. Thus assessing fairness based on a power position within the deemed supplier rules are in our view not as proportionate.

The European Commission also stressed the importance of a proper assessment based on economic reality,16 which could be argued to deserve a more extensive meaning in comparison to the presumption of fairness based on an assumed general power position for all platforms.

There is some overlap between the issues arising in the sharing economy and platform economy. When it comes to attributing a greater amount of responsibility and obligation on platforms, our conclusion is that the legislators have found such a burden fair due to these platforms holding a power position.

In other areas of taxation, increased reporting obligations are often balanced against the size of the company (e.g. public Country-by-country reporting for transfer pricing purposes). But in this case, through the wide definition of simply by being a platform, a company is deemed to hold a power position that – according to the legislator – would justify such extensive obligations.

The rules as they are written do not consider if the underlying supplier, looking at the economic reality, is in fact submissive in relation to the platform. Thus, entities comparable in size and power also fall within the rules of the deemed supplier concept.

3.6 Final comments and conclusions

Our conclusion is that within several of the new economic phenomena around the globe, an increased amount of obligations are put not only on large companies (which has been the case for quite some time) but now also on organizations in a presumed power position, regardless of their actual size.

There are many states that differentiate between small and large enterprises when it comes to the level of administrative and reporting responsibilities. The difference is often based on volume or turnover, maybe in some cases on the number of employees. Our conclusion is that we now experience a similar shift in the way taxation is enforced and sustained by targeting organizations with a presumed power position looking at the character of their role rather than their size.

For a handful of large organizations with power we agree that this shift might be considered fair. But for all others trying to compete with these larger companies on the internal market, in a digital era, the administrative burden to be compliant is too complex, time consuming and expensive. For those companies, the changes are not making their lives simpler, more effective, cheaper or fairer at all. Instead it is an increased burden to report VAT which is not in line with the basic fundamentals of the VAT system.

Johanna Jakobova and Sara Lörenskog are VAT advisors at PwC.