E-commerce is widespread and transnational

E-commerce is the activity of selling products or services over the Internet. E-commerce becomes part of the shadow economy when no legislative fees or taxes are paid on transactions. The buying and selling of products over the Internet has become an international and widespread activity.

Finnish e-commerce business can be conducted in the name of an enterprise that has its permanent establishment abroad. Sometimes, this is done purely for tax evasion purposes. For example, web stores which actively sell alcoholic beverages to Finland have been established in Estonia and other Baltic countries by Finnish founders. The authorities’ observations indicate that such enterprises have failed to file and pay their VAT and excise taxes in Finland. The same phenomenon can be seen in relation to the online selling of dietary supplements as foodstuffs. For example, enterprises under Finnish ownership in the Baltic countries sell dietary supplements to Finnish consumers through web stores, while the related storage and logistics may be handled by another company on behalf of the seller. Food control does not cover such companies in their country of location – their aim is to avoid food control and the associated charges. These companies may also fail to file and pay VAT in Finland.

Obvious link between e-commerce and economic crime

The shadow economy in e-commerce is connected to economic crime in many ways, including various types of payment fraud, money laundering, identity theft, and connections to tax offences, evasion of customs duties, accounting offences and counterfeiting. E-commerce activities may also be associated with corruption, use of undeclared workers, smuggling or the manipulation of supporting documentation (e.g. invoices and receipts). It has frequently been observed that web stores have international links to organised crime.

On occasions, the original purpose of setting up a web store has been to facilitate illegal financial gains. A website may be used to sell counterfeit products or stolen goods, or an online shopping portal may be set up to enable money laundering or the phishing of personal information and credit card details for use in criminal activities.

The key tax-related risks of e-commerce now and in the future involve the transnational nature of online shopping platforms and the sellers who offer their goods through them, as well as the use of alternative payment methods (such as mobile payments and virtual currencies). Observations suggest that income has not been recorded in the accounts for tax evasion purposes. Without access to the platforms’ seller and transaction data, the identification of web store operators and measurement of business volumes is challenging. Obtaining group data from outside Finland is rarely possible.

Product and tax control have identified enterprises which are not only engaged in illegal activities, but also fail or refuse to provide information on purchases and sales volumes. It is particularly difficult to obtain transaction data from closed Facebook groups, for example, where people are selling goods.

The tax payments of foreign web stores are not always made in the right amounts or to the correct country. Besides making incorrect VAT and excise tax payments, web store operators may not record their shop's cash flow in the accounts, thus avoiding income taxes. A web store may also be run in total non-compliance with tax liabilities and other statutory obligations. 

The shadow economy in e-commerce has a wide range of impacts, affecting individuals, society and the environment.

A broad range of goods and services are sold online for anyone to buy.  Some marketplaces illegally sell products that are prohibited or subject to restrictions. For example, private individuals order tobacco products, electric cigarettes and electric cigarette liquids from foreign web stores, which is against regulations. New tobacco products unavailable on the Finnish market are also ordered from foreign web stores. Products may also wind up being sold on the black market, even to underage buyers.

The shadow economy can also be seen in the online selling of alcohol and, as in other areas of e-commerce, sales volumes are rising rapidly. As an example, a Finnish customer orders alcohol via online sales from a business established in another Member State: if the business arranges for the alcohol to be transported to the buyer in Finland, in principle this is considered distance selling and, as a rule, liability to pay taxes falls on the business established abroad. In many cases, however, this liability is neglected. Alcohol may also end up on the black market. Cross-border distance sales of alcohol are also a problem in Sweden where, as in Finland, alcohol tax is high.

A new phenomenon involves foreign individuals opening a bank account and gaining access to banking codes using the Finnish personal identity code provided to them during registration. The next step is to make fraudulent orders online. Individuals set up businesses or register as sole traders or board members of existing companies. To prove they live in Finland or have a tax-based reason to apply for a personal identity code, these individuals present a rental agreement which states that they are living in Finland. The dwelling is often used in other criminal activities as well. Falsified employment contracts are also used to obtain Finnish personal identity codes.

Some marketplaces that sell pharmaceuticals on the web are illegal. When ordering medicine online, the risk of receiving counterfeit medicine instead of a quality product is high if the online pharmacy is not a registered, legal operator.

Dietary supplements are a large product group among the foodstuffs sold by web stores. The information provided about products may be misleading, inadequate or otherwise in violation of regulations.  The products may include ingredients that are hazardous to the health or different to those stated in the list of ingredients. The Federation of Finnish Commerce has estimated that health foods (most often dietary supplements) and health products accounted for 5% of all online purchases made by Finnish people in 2017 (Digital commerce 2017 in Finnish (PDF 305 kt)).

Difficult to assess the scope or cost of the shadow economy in e-commerce

In 2017, more than 60% of the packages handled by the leading Finnish postal service company Posti came from non-EU countries, and the share of such parcels keeps growing. More than 60% of counterfeit goods stopped by Finnish Customs are detected among postal deliveries sent from third countries to the EU. The strong growth in e-commerce also means that the associated shadow economy is growing. This is leading to a fiscal deficit due to missing VAT, excise and income tax payments and unpaid customs duties, in addition to distorting the competition for those Finnish and foreign businesses that pay their taxes. The Federation of Finnish Commerce has estimated that the total value of services and goods purchased by Finnish consumers online in 2017 was EUR 8.5 billion (Digital commerce 2017 in Finnish (PDF 305 kt)). The Finnish Tax Administration assesses the scale of this phenomenon by monitoring issues such as the amounts of payment transaction and turnover data and the number of operators involved. The Tax Administration's estimates support the Federation of Finnish Commerce's impression of the total value of e-commerce.

As a result of the control measures exercised by Finnish Customs and the Finnish Tax Administration, many large operators engaged in the distance selling of alcohol and tobacco no longer sell their products to Finland. Customs investigated the online selling of alcohol in 2015 by inspecting roughly 1,500 alcohol deliveries. The number of sellers identified in the investigation was approximately 200. Sales volumes are currently only a few percent of the amounts imported from Estonia by travellers. However, this is a growing phenomenon and the number of web stores selling to Finland is increasing. Dozens of sellers have been identified, with establishments in several EU countries. The amounts of taxes unpaid by individual companies can mount to tens of thousands of euros a year. In addition to alcoholic beverage tax and beverage packaging tax, web stores may fail to pay VAT on remote sales.

The Tobacco Act prohibits distance sales of tobacco products, but this occurs to some extent despite the ban. There appears to have been a recent downturn in the ordering of oral tobacco (moist snuff) and kits for making moist snuff at home from foreign web stores, while the ordering of hookah tobacco online has increased.

Cooperation enhances the prevention of harmful effects

The Finnish Police, Tax Administration, Customs and enforcement authorities cooperate closely to prevent the shadow economy in e-commerce, by means such as actively exchanging information on various phenomena. These bodies also cooperate with Local Register Offices and the Finnish Patent and Registration Office. The Finnish Police and Border Guard have provided training to the other authorities on how to identify falsified documents.

The Police conduct special, domestic control operations regarding online crime, take part in international special control operations, and implement targeted control operations as required alongside other police control tasks and investigative work. In addition, information is disseminated about said police control operations and policing in general via the social media, among other channels.

The Finnish Tax Administration has used effective controls to prevent the shadow economy in e-commerce. Several foreign remote and distance sellers have been registered as liable to pay taxes and VAT, and excise tax payments have been determined for them; in some cases, the Finnish Tax Administration is considering filing a report to the police. Voluntary filing has increased with the help of communication campaigns. One example is the increased filing of shared economy income and profits from virtual currency trading. Overall, the measures taken by the Finnish Tax Administration have influenced the actions of thousands of taxpayers, helping to achieve an additional EUR 200 million in taxable income.

The Finnish Tax Administration is tasked with guiding, analysing and targeting tax audits at Finnish and foreign companies engaged in e-commerce. Staff are trained to detect new phenomena associated with the digital economy. Comparative data has been acquired from brokers, as well as based on international tax information exchange agreements (TIEAs) and through tax control work. The Finnish Tax Administration's active efforts to develop and improve international regulations on access to information have resulted in the European Commission’s proposal to provide the tax administration with access to the cross-border payment transaction data of digital platform economy operators for tax control purposes.

Finnish Customs is responsible for tax control under the Act on Excise Duties, which also covers the import of alcohol. The import of alcohol from a non-EU country is subject to submitting a customs declaration. Finnish Customs is the authority responsible for carrying out pre-trial investigations on customs offences. As regards intra-EU trade, Finnish Customs’ control tasks are based on their authority to intervene in suspected offences, although control of alcohol imports has not been expressly assigned to Customs in the context of intra-EU trade.

In the future, access needs to be obtained to the data of digital platform economy operators in particular, which enable the business activities and related payment transactions of third parties, in other words, the actual traders.