The European Union is carrying out a modernization of cross-border eCommerce that will introduce new VAT rules across all 27 member states of the EU. This comes into effect on July 1, 2021 and will have an impact on everyone within the e-Commerce supply chain. This implies that online stores and market places within and outside the EU that sell merchandise coming from outside the EU have to operate within the boundaries of these set of VAT rules, likewise the postal operators and courier services that operate within this supply chain.
The changes will enable a simpler cross-border online trade and reduce compliance bottlenecks posed by VAT regimes for items sold over the internet and imported low-value consignments. In this blogpost we give a breakdown of the most important changes under the new EU VAT rule and their implications for businesses.
The EU VAT as it stands
In the European Union, the Value Added Tax, or VAT, is a broad-based consumption tax assessed on the value added to products and services. It covers almost all products and services purchased and sold in the European Union for use or consumption. Imports to the EU are taxed to maintain a fair system for EU producers so that they can compete on an equal ground with suppliers from outside the EU on the European market. The current EU VAT regime stipulates;
- VAT associated cost is borne by the end consumer but collected by the seller.
- Suppliers and sellers may be required to register in multiple Member States in order to collect EU VAT at different rates on their services and sales.
- Suppliers of B2C digital services may choose to use the optional VAT declarative system known as Mini One Stop Shop (MOSS) to declare VAT owed in a single quarterly VAT return by registering in only one EU Member State.
- Imported goods from non-EU countries with a value of less than €22 enjoy an exemption from VAT.
The new changes that will be effective 1 July 2021
An augmented MOSS scheme simply referred to as One Stop Shop (OSS) will now require businesses to register under a new VAT rules via an electronic portal so they can use to comply with their VAT obligations on e-commerce sales to consumers within the EU. With this merchants only need a single VAT return filing system for all the EU member states they ship to.
The current EU member states Distance Sale Thresholds will be phased out in favour of a new unified EU-wide threshold of €10,000 to which B2C EU cross-border supplies remain subject to the VAT rules of the Member State of dispatch, and beyond which the supplies become subject to the VAT rules of the Member State of destination.
The VAT exemption for the importation of goods of a value not exceeding €22 will be phased out and consequently VAT will be levied on all goods imported to the EU.
A single report scheme referred to as Import One Stop Shop (IOSS) covering sales of imported goods to EU consumers for a value up to €150, for which a VAT exemption will apply if the supplier declares and pays the VAT at the time of sale using the IOSS VAT declaration system.
The option of making Customs declarants such as postal operators and courier firms liable to collect import VAT from consumers on a monthly basis
Enactment of EU VAT rule that put liabilities on marketplaces and platforms that facilitate delivery of goods, now referred to as ‘deemed supplier’ implying that they received and supplied these goods themselves and are required to abide by new record keeping requirements for up to 10 years.
Transactions affected by the new rules
- Distance sales of goods within the EU carried out by suppliers or deemed suppliers.
- Domestic sales of goods within the EU by deemed suppliers.
- Supply of services to EU consumers by EU and non-EU sellers.
- Distance sales of goods within the EU imported from third territories or third countries carried out by suppliers and deemed suppliers.
Who is affected?
Businesses selling to EU consumers
Depending on the amount of the items, the origin of the items, and whether marketplaces facilitated the sales, the new VAT rules will affect their reporting duties and margins. The new rules will result in the systematic application of the VAT of the EU Member State of final arrival of the goods, with the introduction of a unified EU-wide threshold of €10,000 across the EU.
Small businesses providing goods and services to consumers in other Member States for less than €10,000 per year will be able to charge domestic VAT and declare their sales below this threshold in their regular domestic VAT return.
B2C businesses that ship their goods from a single EU Member State will no longer be required to register for foreign VAT and file multiple VAT returns in the EU Member States where they sell their goods: instead, they can complete and file a quarterly return under the One-Stop-Shop declarative system in addition to their regular domestic VAT return.
Non-EU sellers may also use the One-Stop-Shop declarative system by registering as a “non-Union” taxpayer with the tax authority of the EU Member States of their choice. They can then file quarterly returns under the One-Stop-Shop declarative system but must also file a regular domestic VAT return in at least one EU Member State.
Businesses selling imported goods will be required to charge VAT only at the point of sale if they use the Import One-Stop-Shop so no VAT will be due on import, or they may choose to have the import VAT collected from the final customer by the Customs declarant (postal couriers)
In the situation where a business uses online marketplaces to facilitate transactions, they may de-register for VAT in certain EU Member States because the marketplace may become the deemed supplier of the goods, responsible for collecting VAT at the time of sale.
Marketplaces and platforms facilitating cross-border sales of goods
To combat VAT fraud, digital marketplaces will be responsible for collecting VAT on the following cross-border B2C sales of goods they facilitate under conditions such as:
- Consignments of goods imported from third countries by EU or non-EU sellers to EU consumers not exceeding €150.
- Non-EU sellers selling goods in the EU of any value to EU consumers.
- Marketplaces will also be required to keep a record of all transactions made by sellers in order to allow VAT audits.
How will this impact businesses?
Enacting a threshold of €10,000 will see cross-border B2C sales of goods being frequently subjected to VAT rate of the Member State of destination of the goods, this will give rise to fluctuations of sale price and the seller’s margin.
Given the disappearance of low consignment relief, sales will be subject to VAT at the standard rate applicable in all EU countries of sale. This will also have an effect on the product’s price and margin.
The new rule will bring see businesses making Savings on compliance costs by using a single VAT return and reducing the number of VAT registrations in the EU
Appointing an intermediary with the right knowledge and access who will report the sales on behalf of the seller and account for the VAT will be crucial to businesses.
Contracts and agreements with market places
Contracts and agreements with market places and drop shipping platforms that facilitates cross-border e-commerce will be reviewed to reflect the new rule and clarity in VAT accounting responsibility.
With these new rules coming into force in 1 July 2021, Businesses need to get ready as quick as they can giving that these changes are quite complex and have the potential to impact your entire business process to a large extent.
To learn more or get help with the EU VAT registration and Vat filing under the new rule we strongly recommend you consider reaching out to these service providers listed below;