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However, they face numerous challenges in navigating various legal and compliance frameworks that govern areas like VAT, customs regulations, General Data Protection Regulation (GDPR) and the recently introduced Directive on Administrative Cooperation 7 (DAC7). By understanding and addressing these challenges, digital marketplaces can ensure compliance and pave the way for sustainable growth.
Chapter 1 VAT
Digital marketplaces are not only confronted with VAT when they take part in the actual sale as seller (buy-sell model) but equally when the goods and services sold in the digital marketplace fall within the scope of the deemed supplier provision[1] (as deemed suppliers).
VAT is a significant challenge for digital marketplaces operating across borders, as VAT rules differ from one country to another, and digital marketplaces must grapple with an intricate web of rules, rates, and thresholds. Failure to navigate this complex landscape successfully can result in legal and financial consequences, leaving digital marketplaces liable for unpaid VAT and penalties.
Determining the VAT liability and compliance obligations of the goods and services transacted on a platform demands a thorough understanding of the VAT rules applicable to each category. Digital marketplaces must accurately classify goods and services, ensuring the correct VAT rates and exemptions are applied in line with the rules of each country involved.
Thankfully, the introduction of the One-Stop-Shop (OSS) and Import One-Stop-Shop (IOSS) schemes under the EU’s VAT reforms has simplified VAT compliance for digital marketplaces. These schemes provide a centralised mechanism for reporting and paying VAT, avoiding multiple VAT registrations on cross-border supplies of goods and services. However, digital marketplaces must still ensure they are registered correctly and meet the eligibility criteria for these schemes, and manage the proper collection and remittance of VAT through them.
It's also important to note that both the OSS and IOSS schemes have certain limitations. In some cases, they put the burden of compliance and VAT liability (deemed supplier provision) on the platforms themselves. The absence of the right to deduct VAT under these schemes is a further limitation.
- OSS: Not feasible for digital marketplaces using multiple EU warehouses, as no ‘deemed’ intra-community acquisitions can be reported. OSS can also not be used for in-country supplies.
- IOSS: Has a threshold limit of €150 per parcel, which restricts its applicability for sellers dealing with higher-value goods. Sellers (like digital marketplaces under a buy-sell model) exceeding the threshold must handle VAT compliance for those transactions outside the IOSS scheme. This creates additional complexities, VAT registrations and administrative burdens.
The ViDA proposal addresses some of these limitations, along with a further extension of the deemed supplier provision. It suggests removing the current €150 threshold for the IOSS scheme. This will allow marketplaces to use IOSS for a wider range of transactions without the need for separate VAT registrations and related VAT compliance obligations.
Under the OSS, it will become possible to declare in-country sales, and a separate scheme for the transfer of own goods will be introduced, eliminating VAT registration obligations for (deemed) intra-community acquisitions. However, ViDa does not address the right of VAT deduction under IOSS and OSS, and imposes further obligations on digital marketplaces through clauses like the extended deemed supplier provision.
It is important to note that ViDA is still under discussion and subject to potential amendments.
Chapter 2 Customs
Customs regulations add another layer of complexity for digital marketplaces engaged in cross-border trade. There are a huge number of non-financial measures in place that cover a range of EU rules: health and product safety, counterfeits and intellectual property rights, as well as many local rules and regulations regarding areas like plastics, extended producer responsibility and national consumption taxes. Critically, authorities expect platforms to take full responsibility for compliance.
The EU Customs Reform proposal of May 17, 2023 aims to make online platforms key role-players in ensuring that goods sold online into the EU comply with all customs obligations, including all non-financial measures. This means platforms will become responsible for ensuring that customs duties (besides VAT) are paid and that products are safe and in line with the EU environmental, safety and ethical standards.
As a result, digital marketplaces will have to carefully consider compliance with customs requirements such as tariff classification (where simplifications have been proposed), valuation, origin and all other product-related requirements. Most of these requirements are strictly related to physical products crossing EU borders. The fact that platforms have little to no involvement in handling physical goods further amplifies the challenges of customs compliance.
Chapter 3 DAC 7
The recent introduction of DAC 7[2] introduces significant additional reporting obligations for digital marketplaces, adding to the complex web of tax, legal, and regulatory demands they already face.
This directive aims to give tax authorities better oversight of online transactions and ensure proper tax compliance of the sellers. As a result, digital marketplaces now have to collect and report detailed information about sellers, including their identity, transaction volume, and the goods or services sold.
Digital Marketplaces will have to assess their existing systems and processes to ensure compliance with the reporting obligations. They must establish robust mechanisms for collecting and storing data, implement reliable reporting procedures, and ensure data privacy and security. This could potentially require significant upgrades to infrastructure and data management systems.
Digital marketplaces must also familiarise themselves with the specific reporting requirements and specialties set by each EU member state. Non-compliance with DAC 7 can result in penalties and reputational damage, making it crucial for digital marketplaces to stay up to date with the evolving tax regulations and seek expert advice when needed. By embracing DAC 7, digital marketplaces can stay compliant and contribute to a transparent digital marketplace ecosystem.
Chapter 4 GDPR
The EU’s General Data Protection Regulation (GDPR), and further regulations on data protection and IT security, has significantly affected the way that marketplaces collect, process, store, and transfer personal data. This becomes particularly complex when it comes to international transfers of personal data and cloud solution usage.
To stay compliant, marketplaces must implement robust data protection management systems that include:
- Technical and organisational measures for data protection;
- Mechanisms for handling consent of data subjects; and
- Records of processing activities that demonstrate compliance with data protection rules.
Non-compliance is not an option, since breaches of data protection not only result in reputational damages, but may also attract significant fines and other consequences.
Chapter 5 DSA - the new “Digital Services Act”
The Directive on Digital Services Act (DSA) and the Digital Markets Act (DMA) are two significant EU initiatives to address the challenges posed by digital marketplaces. These directives aim to establish a comprehensive regulatory framework for online services and shape the digital single market. Their impact is profound, as they create new obligations and opportunities while promoting a safer and more transparent online environment.
The DSA aims to enhance trust and accountability for digital platforms - including digital marketplaces - by introducing transparency requirements, content moderation obligations, and dispute resolution mechanisms. “Online Platforms”, which is the DSA’s wording inter alia for digital marketplaces are expected to implement clear and easily accessible terms and conditions, provide transparent information about their ranking and recommendation mechanisms, and establish effective complaint-handling systems.
They must also take measures to combat illegal content and products, such as counterfeit goods or infringements of intellectual property; implement robust notice-and-takedown procedures and work with authorities to address illegal activities on their platforms; and adopt proactive measures to prevent the dissemination of illegal content.
One of the key aspects of the DSA is the requirement to ‘Know Your Business Customer’. Digital marketplaces are expected to conduct due diligence on their business users, including verifying their identity, to mitigate risks associated with illegal or harmful activities conducted by anonymous or unverified sellers.
The DSA also introduces obligations around recommender systems and algorithms used by digital marketplaces to ensure such systems are transparent, accountable, and do not contribute to discriminatory or harmful outcomes. Digital marketplaces will have to monitor and assess the impact of their algorithms on user experience, competition, and fundamental rights.
In summary, the DSA will have a significant impact on digital marketplaces in the EU. While they impose additional regulatory obligations, they also provide an opportunity for digital marketplaces to enhance user trust, promote fair competition, and contribute to a safer digital environment. By embracing these directives, digital marketplaces can navigate the evolving digital landscape and contribute to an aligned and user-centric digital single market.
[1] The ‘deemed supplier’ model aims to facilitate the collection of VAT in specific situations. This is typically the case when the intermediary in a transaction (the marketplace) is better placed than the underlying supplier to ensure the collection of the VAT.
[2] DAC 7, short for "Directive on Administrative Cooperation" is a recent legislative measure from the European Commission; Council Directive (EU) 2021/514 of 22 March 2021 amending Directive 2011/16/EU on administrative cooperation in the field of taxation (OJ L 104/1, 25.03.2021) (Mutual Assistance Directive).
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