While overall EU retail sales fell again this week according to Eurostat, cross-border EU online revenues remain strong - now attracting interest from tax authorities across Europe.

While overall EU retail sales fell again this week according to Eurostat, cross-border EU online revenues remain strong - now attracting interest from tax authorities across Europe.

There is nothing quite like a persistent recession to spur the European tax man into seeking new ways to raise much-needed tax revenues.  Add to that governments that are eager to fund cuts in business taxes to attract and retain multinationals, and the hunt is on for new revenues.

For the hard-pressed European taxman targets don’t get much more appealing than cross border e-commerce with its recent explosive growth.  But it is not so easy for the taxman to keep up with the new and beguiling e-commerce industry.

Finance ministries from Lisbon to Riga have been initially stunned by the success of foreign retailers – especially from the internet-savvy UK (Asos, M&S and Sports Direct are just three examples) – opening up local language e-commerce websites to grab market share.  And thanks to the EU’s single market, there is no need for local companies, sales staff, management or offices.  This means no locally payable corporation, payroll or council taxes. 

But the taxman is now cottoning on to how to get his fair share.  It’s that most modern of taxes, VAT.  This is the one tax that national governments still receive when it comes to cross-border retail.  (Ignore the recent controversy about lost VAT on ebooks from Luxembourg – the EU will stamp out this anomaly within two years).  VAT is all local.

This is spurring the national taxman to hike rates to fill the Euro-crisis budgetary gaps and fund cuts in business taxes.  The average EU VAT rate has risen 3% to 21% in the past five years, including 2.5% and 2% in the UK and Ireland, respectively, while business taxes have fallen on average by 3%.  Recent VAT rises in Spain, Italy, Finland and the Netherlands will probably be joined by hikes in France and Belgium.  This means either a 10% reduction in consumers’ available income, or an equal squeeze on online retailers’ margins if they can’t pass the VAT rises on in the form of higher prices.

So whilst e-commerce may be the rare bright spot for retail, Europe’s tax authorities are looking to cash in.

  • Richard Asquith heads TMF Group’s global VAT service