It’s been in the news frequently how online supplies to private individuals between the UK and the EU suffered from the new VAT rules introduced in the UK on January 1, 2021. As of that date, retailers must now report and remit UK VAT for their online sales to UK citizens. Simultaneously, sales from the UK to EU individuals became problematic because of the additional customs formalities and charges.
These issues are often considered directly linked to Brexit, but this is only a part of the equation. On January 1, the UK has introduced new VAT legislation for online sales, and comparable rules will enter into force in the EU by July 1, 2021. As of that date:
- There will no longer be an exemption for low-value consignments <€22;
- Every vendor selling over €10.000 annually to private individuals in the EU will have to collect and remit VAT of the countries of destination;
- The foreign VAT mentioned under #2 can be reported through a One-Stop-Shop (OSS) VAT return in the home country of the vendor;
- For imported goods, this foreign VAT can be reported via an Import One-Stop-Shop return (iOSS);
- Marketplaces and platforms for specific transactions become the deemed sellers for VAT.
The main underlying reason for these changes is to ensure a level playing field for VAT by implementing a system that ensures sales to private individuals are always taxed in their country of residence. As a result, gaps in the VAT rules should no longer cause competitive (dis)advantages.
Let’s look at a few scenarios to make the above changes more tangible:
Scenario 1: Incidental cross-border sales
When annual online sales to private individuals stay below the overall EU threshold of €10.000, nothing will change for the vendor. There is no obligation to calculate and remit foreign VAT.
However, as soon as a vendor exceeds this threshold, foreign VAT must be calculated and remitted for all destination countries in the EU. This can have quite an impact because, under the current rule, a sales threshold of either €35.000 or €100.000 per country EU applies.
When a vendor has sales amounting to €8.000 per country to Germany, Belgium, and Sweden, local VAT is due in the country where the vendor is established under the current rules. With the new rules, the vendor will have to calculate and remit German, Belgium, and Swedish VAT.
The above implies a vendor needs to be aware of all the VAT rates and rules for the goods sold across the EU. And these VAT rates and regulations need to be captured in the ERP or e-commerce system. Next to this, an OSS registration is required to facilitate reporting of the foreign VAT. And finally, the vendor may want to reconsider pricing as VAT rates for the same products differ between EU countries.
Scenario 2: Frequent cross-border sales
For vendors that currently already exceed the existing sales thresholds of €35.000 or €100.000, there is not much change. These vendors already have local VAT registrations and are already used to calculating foreign VAT for the countries where their customers reside. However, the number of countries for which VAT needs to be calculated and reported may increase.
If current sales to Germany amount to €120.0000 and to Belgium €40.000, the vendor should already have local VAT registrations. When sales to French customers is around €20.000, no French VAT registration is required. However, under these new VAT rules, French VAT will need to be calculated and remitted. And even for a €10 sale to a customer in Poland, Polish VAT will be due.
It should be noted that this group of vendors can opt to withdraw existing foreign VAT registrations and report all foreign VAT via the OSS return in their home country. The main disadvantage of this is that the OSS return does not facilitate input tax deductions.
Scenario 3: Sales through marketplaces
When an EU vendor sells through a marketplace, the above rules apply unless imported goods are sold. This is discussed in scenario 4. The VAT liability for marketplaces only applies for:
- Sales within the EU by non-EU vendors and
- Sales of imported goods with a consignment value not exceeding €150.
In any of the above supplies, the VAT in the country of destination will not be due by the underlying vendor, but instead, the marketplace will be the deemed seller for VAT purposes. As a result, the marketplace will have to calculate and report the VAT of the countries of destination, and the sale by the underlying vendor to the marketplace will be exempt from VAT.
Scenario 4: Drop-shipments
With drop-shipments, the online retailer purchases a product from a vendor, and this product is shipped directly from the vendor to the consumer. The current practice is that this business model is frequently used for low-value consignments coming from China. Under the current VAT rules, these products are often exempt from import VAT because their value does not exceed €22.
This exemption will be abolished under the new rules, and destination country VAT will need to be reported via the iOSS, as mentioned earlier. If this iOSS is used, an import VAT exemption applies. If there is no iOSS registration, the customs authorities will collect import VAT before releasing the product.
If this drop-shipment model runs via a marketplace, then the marketplace will be the deemed seller for consignments with a value not exceeding €150. The recently introduced rules in the UK have triggered marketplace facilitators and couriers to adjust their terms and conditions to cover for the additional formalities and liabilities. It also appeared many online retailers were caught by surprise by the VAT reporting requirement in the UK.
For many e-commerce businesses, timely preparation for the new VAT rules in the EU is key to assess the taxability of products and tax liability across the EU. With only a few months before go-live, there is still time to gather information and, where needed, look for automated solutions.
This blog post was contributed by Americaneagle.com partner, Vertex.