Cross Border eCommerce: EUR 120 million damage due to tax fraud in Austria

Trade Association calls for the introduction of digital customs clearance and a processing fee for third country shipments

Cross Border eCommerce: EUR 120 million damage due to tax fraud in Austria

Every year, 560 million Chinese parcels arriven in the EU by cross-border trade via dominant Chinese mail order companies. 97 per cent of these shipments reach the EU duty-free and VAT-free, and a large part of the remaining 3 per cent, arrives free from import duty.

This tax evasion is enabled by the EU import VAT exemption for postal deliveries from third countries under EUR 22 in value of goods as well as by the duty free limit of EUR 150. Many Asian online retailers use these exemptions by all means, such as by deliberately declaring shipments wrongly.

“The EU states thereby misses millions of tax revenue, at the same time domestic traders are forced to leave the market, as the Asian competitors can offer their products even cheaper. The extent of damage caused by escaping VAT payments in Austria amounts to more than EUR 120 million and around EUR 7 billion in Europe”, says trade association vice president Frank Hensel.

The dimensions are huge: “For Austria, we assume a figure of about six million Chinese packages in 2017. This year, there are likely to be around 7.5 million parcels if we do not take action,” explains Harald Gutschi, spokesman for the Unito Group’s management and head of the retail association’s Mail Order & E-Commerce division.

The trade association has made a total of ten test orders on AliExpress. Sneakers, T-shirts and sweaters with a price between EUR 30 and 49 were ordered online, the result was the same every time: the products were delivered after about four weeks, and the actual price of the goods was deducted. However, in each case, the declaration on the label was wrong, because the value of goods was always shown below the limit of EUR 22.

“All declarations were faked to avoid import sales tax. This is no longer a marginal problem, but a criminal mass phenomenon. Incidentally, many of the ordered products were counterfeit, as confirmed by the manufacturer,” reports Rainer Will, Managing Director of the trade association.

Apart from this, product piracy causes damage as well: Austrian Customs Authorities seized almost 250,000 counterfeit products totaling more than EUR 13.7 million last year. Thus, the number has increased by 237 per cent compared to 2016.
The trade association thus recommends five actions that are vital for the domestic trade:

· Action 1: Taxation & digital customs clearance from the first cent on single parcel shipments to the EU
The import tax exemption up to EUR 22 and the duty-free limit up to EUR 150 should be abolished as soon as possible in order to tax Asian online retailers. This requires digital customs clearance with pre-dispatch messages on the Swiss model, which can be implemented with little personnel resources in the customs authorities. “Given the annual growth rates of 20 per cent in the Chinese cross-border trade, the EU’s planned abolition in early 2021 is unfortunately far too late,” said the trade association.

· Action 2: Introduction of a processing fee for shipments from third countries
The introduction of digital customs clearance goes hand in hand with the introduction of a processing fee for shipments from third countries, for example, in the amount of EUR 6. Germany and Sweden have considered such a fee, because in view of the steadily increasing parcel volumes a single parcel check by the customs officials is actually impossible today.

· Action 3: standard conditions throughout the EU for flat-rate pallet customs clearance
Currently three countries in the European Union (Great Britain, the Czech Republic and the Netherlands) have extremely favorable conditions for the customs clearance of pallets from Asia. In the future, this should be standardised in Europe in order to prevent an impending downward spiral.

· Action 4: hold online marketplaces accountable
If necessary, European tax authorities should apply VAT directly to online merchants from third countries directly at the marketplace (eg.Amazon Marketplace) if they do not prevent the trade of dishonest entrepreneurs without a tax number on their platform.

· Action 5: Introduction of a virtual business location
The introduction of the a digital or virtual permanent business location, which has been announced by the German Federal Government and the European Commission, will also tax e-commerce platforms without physical presence in Austria and thus stop corporation tax avoidance by digital groups. However, tackling income taxation on a national scale goes not without problems, which is why an international alliance – at least within the EU – can prove effective here.