All change for e-commerce VAT rules in the EU
Originally slated to enter into force on 1 January 2021 but delayed due to the ongoing COVID-19 pandemic, new VAT rules regarding e-commerce will now take effect in the European Union (EU) from 1 July 2021. These rules apply to all businesses involved in cross-border sales of goods to consumers in the EU, irrespective of the country in which the business is established. With the explosive growth in e-commerce caused by the pandemic, these changes are set to be far reaching and – in some cases – complicated and may require changes to systems and processes.
In this Q&A, Marisa Hut, Senior manager VAT & Customs Advisory from The Netherlands, explains the most important changes to come into effect in just over two months’ time.
Who do the new VAT rules affect?
Marisa: The new rules, effective 1 July 2021, are relevant for:
- Businesses that sell goods to consumers in the EU if the goods are sent directly from a non-EU country to a consumer in the EU
- Businesses that sell goods to consumers in the EU if the goods are held in stock in an EU country and sent from that EU country to a consumer in another EU country
- Platforms (marketplaces) that facilitate sales to consumers
- Payment service providers
- Postal and courier companies and customs agents.
The important point to note is that the country in which your business is established, is not relevant to these new rules. The rules apply to businesses established in the EU, but also to businesses established in a non-EU country.
What are the key changes for goods from outside the EU sent to a consumer in the EU?
Marisa: There are two key changes coming into effect: (1) the abolishment of the import threshold; and (2) a new way of levying VAT upon import.
Until 1 July 2021, the import of low-value consignments (up to €23) is exempt from VAT. This exemption will be abolished under the new rules: every import into the EU will be VAT taxed, regardless of the value of the goods. This means that businesses will be liable for VAT on these sales to consumers in the EU.
With every import of goods subject to VAT as of 1 July 2021, special schemes will be introduced to make the payment of VAT by businesses easier. However, these simplifications are only available for consignments with a value not exceeding €150.
The first simplification is the Import One Stop Shop (IOSS). If a business wishes to make use of the IOSS, it must specifically register to do so. For businesses that are not established in the EU, an intermediary (often a logistics service provider) must be appointed to be able to use the IOSS. If a business uses the IOSS, the import into the EU is exempt from VAT and the sale to the consumer is VAT taxed in the EU country of destination. The VAT due is paid using the IOSS.
If the business does not make use of the IOSS and imports the goods in the name of the consumer, the party that takes care of the clearance must collect the VAT from the consumer and pay the VAT to the tax authorities. Due to a second simplification, the payment to the tax authorities can take place monthly (Scheme for postal and courier services). This prevents import VAT having to be paid ‘directly at the border’.
If the value of the consignment exceeds €150, the IOSS and the scheme for postal and courier services are not applied. In such a case, the question arises in whose name the goods are imported into that EU country: in the name of the supplier or in the name of the consumer. The VAT consequences are determined based on the answer to this question.
What are the key changes for goods from inside of the EU sent to a consumer within the EU?
Marisa: Businesses that maintain stock in an EU country, in their own warehouse or that of a third party (for example a logistics service provider), or those that sell these goods from stock to consumers in another EU country will face significant changes.
The current thresholds for distance sales will come to an end, and, as of 1 July 2021, a new turnover threshold of €10,000 will be introduced aimed specifically at ‘small’ businesses. This threshold applies to the sum total of all B2C EU supplies and B2C electronic services. If the turnover from these supplies remains under this threshold, the B2C EU supplies of goods are subject to the VAT of the EU country where the transportation of the goods initiates, and the B2C electronic services are subject to the VAT of the EU country where the service provider is established.
But businesses need to be aware that the €10,000 threshold only applies to businesses that are established in an EU country. The threshold does not apply to businesses that are established outside of the EU.
A Dutch business operates an online shop. Parcels are sent from the Netherlands to customers. The Dutch business has a high volume of sales within the Netherlands. It does not yet have many customers in other EU countries. The annual sales to consumers in other EU countries totals around €6,000 per year. The business does not supply B2C services to individuals in other EU countries. The Dutch business does not exceed the threshold of €10,000 per year. Therefore, it charges Dutch VAT on the sales to consumers in other EU countries.
However, if a business exceeds the threshold in a given year, the sales are subject to VAT in the EU country of destination of the goods from that moment onwards. To prevent the need for local VAT registrations and reporting obligations in each EU country, these businesses may account for the VAT due by means of a special VAT return, namely the OSS return. If a business is established in an EU country, it must register for OSS in that EU country. Non-EU established business must register in the EU country in which the dispatch or transport of the goods begins. In the situation that the dispatch or transport of the goods begins in multiple EU countries, the non-EU established business can choose its EU country of identification.
As soon as the registration has been arranged, the business can report the VAT which is due in other EU countries in the OSS return. It then files the OSS return in the EU country of registration. The payment of VAT due also takes place in the country of registration. The EU country of registration subsequently ensures that the VAT due is then paid on to the authorities in the other EU countries. The OSS system is a great opportunity for businesses to expand their market in the EU, as the VAT reporting obligations become a lot simpler and also more cost-effective. For completeness’ sake lease note that B2C supplies of goods that do not involve a cross border shipment within the EU, cannot be reported via the OSS and remain to be reported via a local VAT registration.
A business established in the United States keeps stock in the warehouse of a logistics service provider in the Netherlands. The US business sells goods to consumers in all the other EU countries, through an online shop. These goods are shipped from the Dutch warehouse to the EU customers. The online shop is doing well, with annual EU turnover of around €500,000. The US business is liable to VAT in all EU countries. The correct pricing is applied in the online shop, and VAT is collected from the customers. The US business is registered for OSS in the Netherlands. In its Dutch OSS return, the US business reports the VAT due on the supplies to the EU customers and pays this to the Dutch Tax Authorities.
If however, the US business was to ship the goods to its clients directly from the US (so not through a Dutch stock location), the rules for goods imported from outside of the EU would apply.
New tax rules of any kind invariably bring additional headaches as businesses grapple to understand their reporting obligations.
Does this latest set of VAT changes bring any opportunities for businesses?
Marisa: The abolition of the VAT exemption for low-value consignments and the new schemes upon import will – in many cases – lead to more complications and obligations.
On the flip side, the new rules for businesses that hold and sell stock within the EU may offer advantages: the OSS return will make it easier for these businesses to declare and pay the VAT due, to the various EU countries. This, in turn, offers an opportunity for market expansion.
How likely is it that the new rules will be postponed again?
Marisa: There were rumours late last year of another postponement. However, these rumours no longer exist; it has been confirmed that the rules will come into effect on 1 July 2021 irrespective of the status of the pandemic. We understand that a couple of Member States faced challenges, but these States have since confirmed they are ready. Our message to clients is clear: get prepared now! Businesses should be analysing the flow of goods, determining the VAT consequences, registering for IOSS/OSS and adjusting their systems to apply the correct VAT rates per country because retrospective adjustments always lead to additional costs.