High risk of tax losses on international digital services rendered to consumers

Businesses that provide digital services in Austria from abroad can expect a high probability of not being audited by the Austrian tax administration. In view of the increasing internationalization and digitalization of services, the Federal Ministry of Finance has so far not sufficiently fulfilled its responsibility under tax law to secure revenue. This is revealed by the Austrian Court of Audit (ACA) in its report "VAT on International Digital B2C Services".

The ACA audited at the Federal Ministry of Finance the VAT charged on international digital services provided by businesses to consumers – business-to-consumer (B2C) services. These are cross-border services in the field of telecommunication, radio broadcasting and television. Electronic services such as apps, software, games, music, films, books and online newspapers are also included. The audited period spanned the years from 2015 through 2019.

Participation in the MOSS system is voluntary

Basically, foreign companies that provide digital B2C services in Austria are obliged to register in Austria, file VAT returns and pay the outstanding VAT.

To simplify this process, the mini One Stop Shop (MOSS) system was created. Businesses providing digital B2C services in EU Member States where they are not resident can meet their VAT obligations through this electronic one-stop shop for tax returns and tax payments. Participation in the MOSS system is voluntary.

The state in which a foreign business has registered in the MOSS system (“state of registration”) acts as a postbox and paying agent: it forwards payments made to the respective EU Member State of consumption ("state of consumption"). In 2019, for example, Austria, in its capacity as the “state of registration”, passed on some EUR 17 million to other EU Member States and received some EUR 145 million as the “state of consumption”.

Checks only on a case-by-case basis

In the course of its audit, the ACA identified numerous risks in connection with the MOSS system. A particular risk arises, for example, when a business leaves the MOSS system - especially if this business continues to generate revenue but is not taxed in any EU Member State. The state in which the said business’s services were used did not receive any automated information about the withdrawal. Checks in this context were only carried out in individual cases by means of time-consuming research. According to the tax office responsible for foreign businesses, a targeted risk analysis of such cases did not take place due to a lack of human resources.

Lacking overview

Although e-commerce is a rapidly growing industry, the Federal Ministry of Finance was not aware of the (estimated) extent to which international digital B2C services were provided in Austria and how substantial the possible revenue losses in VAT were. It was neither able to assess the risk of tax losses and consequently could not deploy resources in a targeted manner.

Illegal competitive advantage

With the exception of individual cases, the tax administration did not take any measures to identify businesses that were not registered for the purpose of taxation. It therefore could not ensure that all digital B2C services performed in Austria were recorded for tax purposes. Foreign businesses that provided digital B2C services in Austria and did not comply with their tax obligations could expect with a high degree of probability that they would not to be audited by the tax authorities. Consequently, they had an illegally obtained competitive advantage over their competitors.

As also other noted by other audit institutions, the risk of unintended tax losses will increase with the extension of the MOSS system to cross-border sales by mail order and other cross-border services.

Information remained unchecked

In their report the auditors furthermore point to the lack of resources in the tax offices. As the data collected by the ACA show, both data and turnover in the MOSS system remained almost unchecked. As a result, equality of taxation was not guaranteed. The ACA critically notes the decrease in staff that was responsible for processing such cases.

The ACA recommends the following: in the spirit of equality of taxation and the safeguarding of Austrian tax claims, an adequate level of control should be ensured with regard to the revenue indicated in the MOSS system.