Within the EU, new VAT rules for remote selling will go live on 1 July 2021. Americaneagle.com partner, Vertex, discussed some details of this change in their previous blog, " How Selling to Consumers Abroad Becomes More Complicated Within the EU."
In essence, the new rules ensure sales to private individuals are taxable for VAT in the country where the customer resides. As a result of these new rules, many remote sellers will have to deal with VAT regulations in multiple EU countries. Also, non-EU countries like Norway, Switzerland, and the UK have introduced similar destination-based taxation, so the issue for remote sellers goes beyond the EU only.
But what does “having to deal with VAT regulations in multiple EU countries” mean in practice for remote sellers?
The first and most obvious step is to make yourself aware of the VAT rates in the various EU countries where you have customers. This information is relatively easy to find online. But unfortunately, this is not all even half of the work. Countries sometimes have precise definitions on which products qualify for a specific VAT rate. So, in every EU country and for every product you sell, you will need to assess the product-VAT rate combination. A digital or printed book is sold to a customer in Belgium at a reduced rate. The same book sold to a customer in Denmark or Bulgaria is taxed at the standard rate. And to round it off, this book would be taxable at 0% for an Irish customer, but not if it is electronically supplied.
Of equal importance is understanding that your products for VAT purposes may have different meanings in different countries. As an example, clothing and footwear for children are not the same everywhere. Ireland, for example, applies a 0% VAT on clothing and footwear for children of average size under the age of ten. On the other hand, Luxembourg applies a 3% super-reduced rate on clothing if clearly intended for children of a maximum age of 13. And for footwear for boys up to and including size 40, while for girls, this is size 35.5 for pumps and 38.5 for any shoe type where the heel height does not exceed 4cm. So, the classification of your products to country VAT requirements may be challenging.
Once you have figured out the applicable VAT rates for your products across Europe, you may also need to consider pricing. In Europe, it is common that products for end-consumers are priced including VAT. As a result, the applicable VAT rate impacts profit margins or your competitive edge. For an Irish vendor of children’s clothing, it makes quite a difference if he has to remit 0% Irish VAT under the current/old rules for a sale to a consumer in Hungary or 27% Hungarian VAT under the new rules. Vice versa, a Hungarian vendor of children’s clothing promoting its products on the website including 27% VAT may be perceived as too expensive by Irish customers.
The final topic is the impact of how an online retailer has arranged his supply chain. Multiple VAT registrations are needed if you use stock points or fulfillment in other EU countries from where supplies are made. This impacts VAT calculations and reporting. Also, if a remote seller uses drop-shipments for imported goods, VAT calculations and reporting are impacted.
For marketplace facilitators (MPF), the above issues apply to all products they sell themselves. But on top of that, the complexity increases because of the VAT liability that will be introduced for specific transactions. The MPF needs to understand where the underlying vendor is established and requires a good understanding of the classification of all products sold via their platform.
Any of the challenges mentioned above can be a valid reason to look for automated solutions for keeping your VAT rates and rules up to date, classify your products or ensure efficient reporting.
This blog post was contributed by Americaneagle.com partner, Vertex.