Europe targets tax evasion by Chinese online vendors

Retailer complaints of lost sales prompt moves to tighten rules

Only an estimated 10% of 20,000 Chinese vendors selling into Germany from online shopping platforms are properly paying taxes due. © Reuters

HAMBURG, Germany — European governments have begun to act on complaints from retailers claiming to have lost sales to tax-dodging Chinese vendors.

The German cabinet last month approved a draft bill that would require e-commerce platforms to pay a 19% value-added tax on local online sales if they cannot prove that the vendors have already paid the VAT due. Sweden, Switzerland and the EU are also tightening their VAT rules to combat tax evasion by online sellers. The U.K. meanwhile has corralled Amazon.com and eBay into pledging to share data and weed out tax dodgers.

At the same time, the U.S., in a drive that German, Swiss and Austrian retail groups have supported, is pushing at a summit this week in Ethiopia for an overhaul of international postal rates that allow vendors from China, as a developing country, to send packages into Western countries at a cost below that of domestic deliveries. And under a new law adopted Aug. 31, China has tightened its own VAT rules for domestic online vendors.

EU nations will receive around 670 million packages from China this year, with evaded taxes adding to more than 7 billion euros ($8.1 billion), according to Austrian retail association Handelsverband. The group says that taxes were paid on only 3% of parcels arriving last year, though no taxes are due on gift packages containing goods worth less than 22 euros.

In dozens of test orders of higher value goods, association members consistently received packages declared as gifts with values below the threshold.

“Sneakers and T-shirts that are ordered online for 30 euros to 49 euros and charged that amount on a consumer’s credit card typically arrive with a price tag of less than 22 euros,” said Rainer Will, managing director of Handelsverband. His group puts the Austrian government’s annual loss to VAT evasion by China vendors at 120 million euros.

According to estimates by the Berlin finance department, only about 2,000 of an estimated 20,000 Chinese vendors selling into Germany from online shopping platforms are paying VAT properly. Spokeswoman Eva Henkel said compliance was even lower until recently.

“The e-commerce platforms pampered the Chinese vendors with turnkey solutions that made entering the market here very easy, but, astonishingly, they failed to convey any information on VAT,” she said. “It was not until last December when we threatened the platforms with confiscation of goods in their warehouses that they canceled the accounts of some Chinese vendors, which then led to a surge in the number of Chinese vendors who properly registered themselves with the Berlin tax office.”

Harald Gutschi, chief executive of Austrian online shopping site Unito, estimated that his company’s sales were dampened last year by about 4% due to business lost to untaxed Chinese vendors, particularly those selling clothes and mobile phones.

Said Michael Atug, chief executive of German online tool vendor MAW Werkzeuge, “We struggle to support our families and employees and that becomes increasingly difficult due to VAT evasion.”

Amazon and eBay have sought to defuse the drive for tighter rules by striking a conciliatory tone.

“When the relevant authorities inform us of a vendor’s illegal activity, we react by deleting their illegal articles on eBay and will generally bar them from future use of the eBay marketplace,” said an eBay spokesperson in Germany.

“However, ultimately only the authorities can judge whether a case involves illegal behavior and a marketplace like eBay is unable to make such a judgment,” the spokesperson said.

U.K. officials have estimated that Chinese vendors avoided around 900 million pounds ($1.16 billion) in tax last year. The customs and revenue service has responded in recent months by compelling Amazon and eBay to sign pledges to police their vendors more closely and to share their data with the authorities. Amazon in June was reported to have weeded out thousands of vendor accounts.

Other European governments are also taking action. Switzerland, for example, has proposed amending its rules to bring mailers sending low-value parcels into its VAT net if their yearly total exceeds 100,000 Swiss francs ($103,000).

In March, Sweden introduced an administrative fee of 75 krona ($8.23) payable by recipients on packages originating from outside the EU. Consumers then declined to take delivery on around 400,000 parcels ordered before the change, which PostNord, the Swedish postal service, ultimately shipped back to China. Since then, PostNord has negotiated a deal with online shopping site Wish for the platform to collect VAT at time of purchase and has opened talks with other sites.

The EU itself, under a new measure adopted in December, will begin requiring that European consumers pay VAT directly to online platforms when they make purchases beginning in 2021, rather than relying on vendors to collect VAT.

At the special congress of the Universal Postal Union, a UN agency, member countries are considering overhauling the rates at which postal services compensate each other for local delivery of international packages.

At an earlier meeting, delegates agreed to begin merging the rates for developed and developing countries and, starting this year, to set separate rates for small packages. The latter rule has increased charges for Chinese vendors by around 3% or 4% according to estimates by German retail association Haendlerbund.

Although the German parliament has yet to begin debate on the bill to make online platforms liable for paying VAT, it seems likely to pass despite opposition from some business groups given the governing coalition’s comfortable majority.

“We are putting an end to the illegal practice by some e-commerce vendors who gain unfair advantages by evading VAT,” said German Finance Minister Olaf Scholz after the cabinet vote. “With the new regulation, we protect all tax-honest enterprises and level the playing field for foreign and domestic competitors.”