Online selling is often synonymous with VAT fraud. Easy and effective solutions have been suggested by members of Parliament. Will the government take them up?

By Sophie Dorin


Sophie Dorin has published a few weeks ago an article in La Tribune on VAT fraud and online selling and specifically on article 3 of  the French financial Law for 2016.  This article 3 has finally been implemented at article 258 B I 1° of the French tax code. The new taxation threshold of “distance selling” from others EU countries to France is  therefore €35,000 (excluding VAT) as from 1/01/2016.

On reading the Finance Bill for 2016, the limited number of provisions related to VAT is surprising, this tax being the source of around 140 billion euros in annual income, i.e. over 50% of the State’s annual budget. Of only two clauses in the bill concerning VAT, one deals with cash register fraud and the other with the reduction of the VAT threshold in France for mail order sales. The disappointment is undeniable, since with regard to fraud and online sales, the time is ripe for extensive new regulation.

Companies are very well aware of this, they have been hearing over the last few years about the OECD’s 15 action plans to prevent "Base erosion and Profit Sharing" more commonly referred to as "BEPS".


In France “mail order” sales of goods are subject to French VAT rates where a Community trader’s pre-tax annual turnover exceeds a threshold of 100,000 euros.

“Management” of this threshold by e-traders established in countries where the VAT rate is low thus remains a vector for fraud, as was recently reported on the DGFiP [General Directorate for Public Finances] website relating to wrongful arrangements. The projected reduction of this threshold to a pre-tax amount of 35,000€ from 1 January 2016 would indeed increase the number of transactions which may be considered as being subject to VAT in France, and therefore limit the competitive distortion suffered by French traders. It doesn’t however tackle the substance of the matter, collection of French VAT. Yet that is the crux of the matter.

Once a sale is considered to be taxable in France, how may the authorities be enabled to recover the French VAT, which foreign operators are supposed to collect on their behalf? In the age of the digital economy, the stakes involved are significant.


With turnover of almost 57 billion euros in France in 2014 and an annual rate of growth of 11%, online trade has permeated all sectors of the economy and is now common practice amongst nearly 2/3 of French consumers. The loss of revenue for the State, represented by the difference between the theoretical amount of revenue due and the amount indeed received has thus become a cause for concern.

Regulation of mail-order selling requires that European suppliers register with the DGFiP, to collect and pay to the Trésor Public [State Treasury] the VAT received from individual buyers. In fact, it seems that only 979 non-resident companies have complied with this obligation, whilst over 715,000 e-commerce sites have been identified as being active in Europe.


The bill is all the more disappointing in that a genuine will exists amongst French parliamentarians to make progress on this question. The Senate's financial commission has, in fact, recently published an interesting report concerning recovery of VAT in e-commerce, offering an innovative solution: establishment of at-source VAT debit on online purchases, through a split payment mechanism.

For each transaction, the consumer’s bank would by default levy 20% of the amount paid, corresponding to the normal VAT rate, in order to then pay it on, automatically, to a State Treasury account. Such an at-source debit would make it possible to consider VAT as being “collected” by the company and would thus free the company of its obligations, the e-trader's right to deduct becoming de facto, a VAT credit.

This system, which is easy to understand and is above all neutral from the point of view of consumers, would be implemented for all online sales and would thus enable the Treasury to protect itself against failure to collect and pay French VAT by foreign operators.

A simple system, but a reform that requires unanimity on the part of Europe, unless…

The idea is a courageous one in that it accepts a paradigm shift, to focus solely on financial flows and on the principal players of those flows that are the banks serving consumers. Nonetheless, adopting this proposal would involve, above and beyond significant technical and legal planning, a substantial change in the functioning of VAT, based on split payment. Implementing it would in fact involve amending the VAT Directive, which in turn involves unanimity on the part of Member States.

It remains to be seen whether the European Union considers that the issue of recovering VAT for Member States is such as to justify such an overhaul.

France could indeed pave the way, insofar as Member States are authorised by Article 395 of the VAT Directive to derogate from the common VAT rules in order to simplify the procedure for charging the tax, or to prevent certain types of tax evasion or avoidance. The Senate report moreover specifies that, as of 14 July 2015, Italy has already been authorised to test split VAT payments in public procurement.

Although the proposal stands little chance of being adopted, it is nonetheless noteworthy for clearly setting out the issue: how to plan future public spending if we no longer have tax policies and procedures which make it possible to effectively collect the tax?  Let us hope that, in spite of this very timid bill, France will achieve an appropriate response…

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