ABSTRACT
A new e-commerce package has been introduced by the EU as of July 2021 and the purpose of the changes in the current package is basically to build a more reliable and less complex "Digital Single Market Strategy for Europe". In the light of these changes, there will be fair competition for EU companies in the supply chain, and regional cross-border trade facilitation along with combating VAT fraud. This article explains the VAT rules changes for cross-border e-commerce and clarifies who will be affected by this new VAT application.
Keywords: EU VAT Rules, VAT Reforms, e-Commerce, VAT Package, VAT in e-Commerce, B2C
INTRODUCTION
The EU has set a date to introduce its new e-commerce package, which is effective by July 1, 2021, and one of the most important changes has been made regarding the VAT rules. Since all businesses in the e-commerce supply chain in the EU will be affected by the new VAT rules within the package, they will need to reconsider their VAT requirements after the announced date, while they are trading with the countries within the EU.
- The changes concern whom?
Anyone in the e-Commerce supply chain is affected, from online sellers and electronic interfaces such as marketplaces, platforms, etc. both inside and outside the EU to postal operators and couriers, customs, and tax administrations, right through to consumers.1
- What are the purposes of the VAT reforms made in the EU?
The main purpose of VAT reforms in the EU for e-commerce is boosting the cross-border trade in online sales by making the obligations, preventing tax fraud, and creating fair competition conditions.
By removing different thresholds applied by EU countries and instead, using only one threshold of €10,000 will simplify the VAT reporting process. Furthermore, with the new reporting system called "One Stop Shop", businesses will be able to register VAT in one EU state and they can meet their VAT liabilities for all their EU sales.
On the other hand, new changes will prevent VAT fraud and establish fairer competition conditions between EU and non-EU businesses. Namely, businesses in the EU will be also allowed to compete on an equal level with businesses outside the EU which did not charge VAT.
It is anticipated that businesses will save a significant amount of money on cross-border VAT compliance. In this regard, Member States are expected to gain a huge increase in VAT collections.
- Changes in the e-Commerce VAT Package
By the date of July 1, 2021, Business to Consumers ("B2C"), online sellers, and marketplaces will be affected by the changes to be introduced in the VAT rules.
The relevant changes are explained below.
- Withdrawal of VAT Exemption at Importation
The VAT exemption at importation into EU for delivery to the final consumer amounting up to €22, "low-value consignments", will be withdrawn and accordingly VAT will be applied for all goods that are imported into the EU, including suppliers outside of the EU.
According to the indicators, with this exemption, there were a lot of abuses made by sellers from outside the EU mislabelling consignments of goods in order to benefit from this said exemption. This loophole allows these companies to undercut their EU competitors and costs EU treasuries an estimated €7 billion a year in fraud, leading to a bigger tax burden for other taxpayers.2
- Threshold in the Distance Sales Regime
Previously, the threshold for distance sales VAT threshold amount in each EU Member State was different. With the new amendments, these different thresholds will be removed and only one threshold will be applied, which is €10,000.
This threshold amount will apply distance sales of goods and digital services to customers in the EU Member States. In case that the total sales amount of an EU-based company is less than €10,000 per year, the related country's own local VAT rate will be charged.
- The One Stop Shop (OSS) and The Import One Stop Shop (IOSS)
In July 2021, the existing Mini One Stop Shop (MOSS) which is an optional program that allows persons to account for VAT in one EU nation rather than several EU countries will be extended with the introduction of the One Stop Shop (OSS) reporting system. The new OSS will also be made accessible for local sales of goods within the non-EU established sellers and will apply to a certain domestic supply of goods facilitated by electronic interfaces.
Businesses selling goods and supplying online services to final consumers can easily meet all of their VAT responsibilities in the EU in a centralized manner by filing an OSS declaration using the online business portal OSS. According to the global declaration, which should be made quarterly, the VAT tax of sales must be declared at the applicable tax rate in the Member State where it is shipped to the customer or where the consumption occurs. As of July 1, 2021, taxpayers registered in the many Member States can declare VAT through a single OSS, that can be filed in the country or region where the company is located since the threshold for distance sales is exceeded. In this way, multiple VAT registrations for distance sales can be avoided.
Another new scheme, called the Import One Stop Shop (IOSS), will be developed for distance sales declaration, and VAT payment of low-value goods (less than €150) imported from outside the EU. IOSS enables those suppliers can pay VAT for previous transactions in a Member State through a single VAT record. A monthly declaration and payment of the VAT apply this way at the rate applicable in the Member State where the transport reaches the customer.
- Electronic Interfaces
As of July 1, 2021, electronic interfaces such as online platforms, marketplaces, etc. that facilitate distance B2C transactions will have new roles for VAT in the EU, and they may be deemed to collect VAT on such sales since they will be deemed supplier of the goods.
VAT is collected by the electronic interfaces when the sale takes place and is reported in the IOSS and OSS reporting systems.
Electronic interfaces will be considered as a deemed supplier if they facilitate:
- Distance sales of goods imported into the EU with a value of no more than €150; or,
- The goods are delivered to the consumer within the EU, and the supplier is a non-EU established business.
- Simplification Scheme for Collecting and Payment of Import VAT
A simplification scheme is introduced for the collection and payment of import VAT unless IOSS is used. This alternative scheme is only applicable when;
- The consignments do not exceed €150;
- If it facilitates distance sales of goods to customers in the EU, when the actual seller is not in the EU
Logistic service providers such as express carriers and postal operators collect and pay import VAT on behalf of customers as part of the simplification mechanism. Accordingly, they will collect VAT from the customer, declare and pay monthly. Therefore, they also need to ensure that VAT is paid at the correct tax rate under this mechanism.
CONCLUSION
There are many reasons that caused a boost in e-commerce; however, the Covid-19 pandemic is probably the most effective one among the others.
Due to this dramatic increase in e-commerce, the EU has introduced a new VAT e-commerce package which includes new amendments in terms of e-commerce and VAT. As these amendments concern, all businesses in the supply chain, all distance sellers within the EU or trading with the EU should reconsider their VAT requirements.
1 European Commission, "VAT for e-Commerce", Access Date: 18 June 2021, https://ec.europa.eu/taxation_customs/business/vat/vat-e-commerce
2 European Commission, "Modernising VAT for cross-border e-commerce", Access Date: 16 August 2021, https://ec.europa.eu/taxation_customs/modernising-vat-cross-border-e-commerce_en
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
