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How Amazon and eBay became a tax haven for Chinese sellers

In Europe, their marketplaces are used for a major tax fraud

Illustration by Alex Castro

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For years, Amazon customers in Europe have enjoyed the shopping giant’s ability to deliver everything from best-selling books to phone chargers within days, if not hours, at prices that brick-and-mortar retailers often cannot match. Much like in the United States, online sales are eating up physical retail market shares. By 2023, it’s predicted that 21 percent of all non-grocery retail sales in Europe’s biggest economies will be online, up from just 13 percent last year. But, increasingly, the large digital platforms, which also operate as marketplaces for third-party sellers, have come under fire for helping foreign retailers skirt taxes.

In the EU, practically all marketplace sellers are required to report and pay a sales tax called value-added tax, or VAT. In the UK, the standard VAT rate is 20 percent; in Germany, it’s 19 percent. But recent reports indicate that thousands of vendors that are selling on Amazon and eBay’s marketplaces, many of which are from China, are not paying their VAT, which allows them to undercut local physical and online retailers even further. Now, the UK, Germany, and the EU Commission are stepping forward to hold marketplace operators accountable for tax fraud amounting to around $5 billion a year across Europe, according to estimates by the EU Commission.

According to Mark Steier, a data analyst and e-commerce consultant who first revealed the scheme in Germany, there are approximately 15,000 Chinese traders registered on Amazon’s German Marketplace. But one-third of them have not indicated a VAT identification number in their profile, Steier told The Verge. And from his experience, many of the VAT identification numbers offered are not valid. Steier estimates that on Amazon alone, there are about 10,000 sellers from China withholding VAT from the German state. Research by public broadcaster WDR and daily Süddeutsche Zeitung shows similar numbers. According to Steier, there are over 10,000 more VAT-avoiding Chinese traders on eBay. Germany’s Ministry of Finance has suggested that the annual loss of tax revenue caused by online VAT fraud amounts to several hundred million euros.

Tax fraud amounting to around $5 billion a year

A recent purchase exemplifies the problem. This August, a Munich-based Amazon user named Michael (who requested only his first name be used for this article), found printer cartridges at a bargain: a pack of four for €8,99 with, thanks to Prime, no additional shipping costs. Amazon indicated that the price already included German VAT. The order was processed and delivered by Amazon, but the actual seller was a company called Cseein. The next day, Amazon’s delivery service brought a padded envelope containing the cartridges but no invoice. Michael sent an email to Cseein asking for it. The company replied quickly.

At first glance, the document looked good. It included an invoice number, Michael’s Munich address, and the company’s address in Guangdong, China. But there was something missing. Usually, there are three lines at the end of an invoice: the first indicates the net amount, then the VAT, and the third states the actual price, which is the sum of the two other figures. Here, the VAT wasn’t mentioned, and the company did not provide a VAT identification number.

For lawyer Nathalie Harksen, a VAT expert at Frankfurt-based law firm AWB, the incomplete invoice is an indication that the company probably didn’t pay the VAT — although there are clear reasons why the company would have been obliged to do so. Even though Cseein does provide a VAT number on its Amazon Marketplace profile page, that’s of no use in this case, Harksen explained, as it’s a British VAT number. When asked whether the company paid VAT over email, a representative from Cseein replied: “we pay the VAT to UK, all we sell on EU and it will be accepted.” The company obviously assumed that the email came from a disappointed customer and made an offer: “we can refund you the VAT. can you accept it.” When shown the correspondence, Harksen said, “There doesn’t seem to be any knowledge of European tax law here.”

For governments, lost taxes can impact budgets. But for vendors who play by the rules and pay their VAT, competitors who undercut their prices by avoiding VAT are a threat to their very existence.

He’s forced to pay VAT or else risk a prison sentence

Martin, a German Amazon Marketplace retailer (who also asked that his real name be concealed), has been selling bags on Amazon and eBay for years. “When I see the students walking by, I immediately recognize this backpack is from China, this backpack is from China, and the next backpack is also from China,” he told The Verge.

Martin says he sold some of the same imported Chinese-made products as Chinese dealers on Amazon, but because he’s based in Germany, he’s forced to pay VAT or else risk fines or even a prison sentence. Meanwhile, he says Chinese vendors are avoiding their 19 percent VAT and spoiling his business. He cites the VAT fraud as the main reason for the lower prices of rivals from China that already benefit from cheaper procurement.

“We once developed our own toilet bag, of which we sold 10,000 to 12,000 units per year on Amazon Marketplace. Now, we only sell 400 a year.”

Although Martin mainly blames politicians and the government for failing to enforce VAT, he also criticizes Amazon and eBay. “The marketplace operators should have an interest in things being right there. But they don’t seem to care where their commission comes from,” he said. After all, many of the tax-fraudulent Chinese vendors use the Fulfillment By Amazon (FBA) service. That enables them to deliver just as quickly as German retailers because their goods are already stored in local Amazon warehouses.

VAT evasion is not unique to Germany. In 2014, a group of UK sellers formed an online initiative called “Campaign against VAT Fraud on Ebay & Amazon in the UK.” Thousands of Chinese dealers are suspected of not having paid the 20 percent VAT and thus harming domestic vendors. Due to online VAT fraud, UK taxpayers lost $1.3 billion to $1.9 billion in 2015 and 2016, according to estimates by a government agency.

Efforts to enforce online VAT in the UK have fallen short. In 2016, new powers to tackle the fraud were introduced, including making online marketplaces potentially liable for non-payment of VAT of overseas sellers that are using their platforms. “From these laws, thousands of non-compliant overseas businesses have been removed from online marketplaces, and over 40,000 overseas sellers have registered for VAT,” Ruth Stanier, director general for customer strategy and tax design at Her Majesty’s Revenue and Customs (HMRC), told The Verge. However, not everyone was satisfied with the way HMRC made use of its new powers.

“A game of cat and mouse”

In October 2017, the Public Accounts Committee of the British Parliament criticized the authorities for not doing enough to combat online VAT fraud. In a report, the committee described HMRC as “playing a game of cat and mouse” with companies based outside the UK. Since then, HMRC has further strengthened its rules and has also pushed online marketplaces to sign a voluntary agreement committing them to provide data about individual sellers to HMRC, including the volume and value of their sales. Amazon, eBay, and four other companies have already signed in. An eBay spokesperson told The Verge: “We work closely with HMRC to ensure our sellers comply with their VAT obligations.”

Germany is also taking legislative action. On August 1st, Angela Merkel’s cabinet passed a bill from the Ministry of Finance that, if approved by Parliament, will force online marketplaces to cooperate with tax authorities from 2019 onward. Starting January, they’ll have to report data about their seller, just like in the UK. If sellers still don’t pay their taxes, Amazon, eBay, and other marketplaces will be held accountable for lost funds. The bill is expected to pass into law.

Back in 2016, Amazon’s stance on the German VAT problem could be described as none of our business, or in the company’s own words: “Amazon dealers are independent companies and responsible for fulfilling their tax obligations.”

After two years of bad press and political debate, today, the company sounds more committed to enforcing sellers to pay VAT. Though Amazon didn’t want to comment on the government’s plans, the company told The Verge that it fully supports VAT compliance and offers extensive information, training, and tools to assist sellers. “If we are notified by a German tax authority that a seller is not VAT compliant, we will promptly block the account,” a spokesperson said.

Amazon and eBay marketplace vendors evading VAT could face even more pressure soon: the European Union is working on laws that will make online marketplaces responsible for ensuring VAT is collected on sales on their platform. The legislation should apply from 2021 on.

But the fixes could be short-lived: as Chinese e-commerce giant Alibaba expands in Europe, merchants could start placing cheap VAT-free offers there, too. European authorities have less control over Alibaba than Amazon and eBay.