Charging with VAT of acquisitions through the Internet

When organising sale of goods through the Internet, so called online sale, there occur supplies which go outside the scope of the generally accepted statutory provisions of VATA and require special attention.

Question: A Bulgarian limited liability company operates as a Dropship online retailer – I will try to provide an explanation which is as detailed as possible: The company has an online store, makes sales all over Europe and outside EU, it does not actually possess any goods, it does not actually receive it, it publishes photographs on the site which are provided by the Chinese manufacturer, and the company adds a surplus charge, for example, the end customer buys an item of clothing from the site of the Bulgarian company at the price of 20 EUR – the Bulgarian company in turn processes the order and sends the code of the product, as well as 10 EUR to the Chinese vendor, and the Chinese vendor in turn sends the product directly to the end customer, i.e. the Bulgarian company actually only makes a profit from the difference in prices – a kind of commission to the sale. My question is: Is the limited liability company supposed to pay VAT within the meaning of distance sales, or are there any special taxation regulations, considering the fact that payment goes through the PayPal system or via bank transfer.

Answer: When organising sale of goods through the Internet, so called online sale, there occur supplies which go outside the scope of the generally accepted statutory provisions of VATA and require special attention.  

Such are the sales conducted under the conditions specified in the question. According to them, the company in question is engaged in the sale of goods in its capacity as an entity which acts as an intermediary in the transaction between the seller and the buyer. According to the information contained in the question, during the performance of this activity, the company makes a profit from the difference between the cost of the product being sold, which is due to its seller, and the cost at which it was sold to the buyer. The taxation regulations pertaining to intermediary services depend of whether in the performance of intermediation the intermediary acts in its own name, but for the account of the seller, or if the intermediary acts in its own name and on its own account. In both cases, the compensation of the intermediary is in the form of commission rate, but the procedures for documenting and charging its supplies with taxes is totally different.

When in the performance of its obligations in connection with the act of intermediation an entity acts in the name and for the account of the vendor which has engaged this entity, the entity does not take part in the supply of goods and/or services in reference to which the entity acts as an intermediary. As a result of this, the intermediation provided by this entity is not directly associated with the charging of VAT on these supplies, and such charging may only be sought for the compensation received by the entity for the provision of the intermediation service. As a result of this, for the purpose of VATA, this entity is not listed, and should not be listed, as a supplier in the invoices for the supply of goods and services which are subject of the intermediation provided by it.

Totally different is the case when intermediation is provided on the grounds of a commission agreement. Pursuant to the provisions of Article 127, paragraph 2, of VATA, when a commission agent is acting in its own name, but for the account of its principal, three supplies shall be effected:

-    supply of goods between the commission agent and the third party;
-    supply of goods between the commission agent and the principal, the subject of which is the transfer of the real rights over the goods “by” the third party;
-    supply of goods between the commission agent and the principal.

In its actions in connection with the acquisition or sale of the goods of services, which the commission agent has sold or acquired in its own name, but for the account of its principal, the commission agent has acted in its own name, due to which, formally, it is the owner of the subject of the conducted transaction. At the same time, however, on the grounds of its internal relations with the principal, the actual owner of the subject of this transaction is the latter. Therefore, commercial law determines the transfer of the rights over the subject of the transaction from the commission agent to the principal as an “accounted transaction”. The subject of this transaction is the same product or service, acquired or sold in the name of the commission agent to the third party (parties). Therefore, the supply under the accounted transaction shall have a subject and value which are identical to the value of the transaction between the commission agent and the third party. This is stipulated in the provision of Article 127, paragraph 2, subparagraph 2, of VATA, in compliance with which the taxable amount of the transaction between the principal and the commission agent shall be equal to the taxable amount of the transaction between the commission agent and the third party.

The circumstances described in the question serve as grounds to presume that in this case the Bulgarian company is engaged in the sales in the capacity of an entity acting in its own name, “the ordering of the traded products is done on its site”, but for the account of the Chinese seller of the goods. Therefore, for the purposes of the tax treatment of its supplies under the provisions of VATA, the procedures stipulated in Article 127 of  VATA shall apply.

You would like to know whether the company in question is supposed to pay VAT within the meaning of the distance sales or if there are any taxation regulations, considering the fact that payment goes through the PayPal system or via bank transfer.

Irrespective of the fact that there is no information in your inquiry about the tax status of the entities to which the title to the goods being sold is transferred, “taxable legal entities or natural persons”, due to which it is impossible to make an accurate assessment of the procedure for documenting and charging with taxes the supplies which occur in the case of the sales in question, the information provided is sufficient to determine explicitly that no distance sales arise in this case. For a sale to be a distance one, in addition to being intended for a non-taxable person which is established in a EU member state, the goods being traded must be dispatched from the territory of the country – which circumstance in this case is missing.

In view of the fact presented above, it is very likely that the place of performance of the supplies made by the company is outside the territory of the country, in which case the company will not be charged with tax in this country. In order to give a legally correct and accurate answer to your question whether liabilities exist for the company, associated with charging and/or payment of VAT in this country, additional information is necessary, both for the entities to which the goods are sold – taxation status and country of establishment, and the exact document type and content – commercial, taxation and accounting, which are used to document and account for the sales in question. You did not even provide information in your inquiry whether the company is registered under VATA or not. The fact that payments are effected via bank transfer or through the PayPal system does not change the need for such documents to be exist and the obligation related to their issue.

In conclusion, we will add that the difference between what the parties to a transaction assume to be doing under certain circumstances and what turns out to have been done by them pursuant to the trade, legal and document analysis of their actions in connection with it, are particularly important in case of intermediation for supply of goods performed for the account of foreign entities.