>Starting 1 January 2021, the EU will implement new VAT rules on the cross-border trade of products sold through online platforms. Companies making online sales of tech gadgets, clothing and other tangible goods to EU-based customers will have to understand the updated VAT requirements, make any changes to their internal ERP systems to capture the newly required information and take other steps as necessary to comply.
Background: The VAT e-commerce package
The new rules are part of a system of EU VAT changes referred to as "the VAT e-commerce package." The package was developed in response to the rise of the digital economy, in particular cross-border trade and online supplies in the EU.
The package's first measures came into effect in 2015 and addressed telecommunications, broadcasting and electronic services. The changes set to take effect in 2021 — and the subject of this post — are part of the package's second measures and were agreed to in 2017, with additional details adopted at the end of 2019.
The new rules recognise the evolution of e-marketplaces, platforms and portals, such as those provided by Amazon and eBay. These online marketplaces help facilitate the supply of goods in the EU from suppliers based inside and outside the EU. The measures attempt to align VAT legislation with current economic realities, including digital trade, which is now part of everyday life.
The 2021 VAT rules seek to capture the business activity of these online marketplaces and the businesses that use them, without imposing onerous administrative burdens on the respective businesses. The new rules also aim to make it easier for EU tax authorities to control e-business activities, collect VAT income, ensure that VAT has been correctly applied and in general improve VAT compliance.
The enforcement efforts of EU VAT authorities will be focused on electronic interface (EI) platforms, which are relatively few in number. This shift in emphasis will relieve authorities of having to closely monitor the large number of businesses that sell through electronic interfaces. (It should be emphasised that these businesses will still need to provide correct details to the EI platforms and keep correct records for their supplies.)
Businesses affected by the VAT changes
Businesses that sell products online through an EI must comply with the updated VAT rules. EIs include e-platforms, portals, digital marketplaces and e-shops. Specifically, the new rules apply to the following businesses that sell through EIs:
- Non-EU businesses that import or sell goods already located in the EU to EU customers
- EU businesses that import goods up to a certain value into the EU and sell them to EU customers
The electronic marketplaces themselves — such as Amazon, eBay and other companies that provide EIs — must also, of course, comply with the EU's new VAT rules.
Summary of the VAT changes
The rules coming into force in 2021 essentially state that companies which facilitate certain supplies of goods in the EU through the use of their EIs will be deemed to have received and supplied those goods themselves. Based on that assumption, such e-facilitators will be liable to pay the VAT due on these transactions.
From a VAT perspective, under the new rules a single supply of goods will be regarded as two transactions. The first transaction involves the online retailer and the EI that it is using to make the sale. The second transaction involves the EI and the individual EU customer making the purchase.
The changes cover certain supplies of goods to EU citizens provided by non-EU suppliers and by EU suppliers where the goods arrive from outside the EU.
The additional rules adopted at the end of 2019 further clarify what is meant by "facilitating" supplies. The rules define facilitation as "the use of an EI to allow a customer and a supplier, offering goods for sale through an EI, to enter into contact which results in a supply of goods through that EI." The rules also provide clarification on cases in which there is no intervention in the payment, in the delivery and in setting the terms and conditions of the supply, as well in cases involving only the processing of a payment (such as a PayPal transaction).
In an attempt to balance the administrative burden imposed on the businesses that operate EIs, the new rules also limit the EIs' responsibility and make it clear that EIs will not be held liable for VAT in certain situations. For example, if an EI has relied on a third party to provide transactional details, those details are inaccurate, and the EI could not reasonably have known the information was incorrect, then it would not be liable for the resulting incorrect VAT charge and remittance.
To reduce VAT-related administrative burdens, the new rules offer a simplified approach that allows EI operators to regard all sellers on their platforms as taxable persons and all buyers as non-taxable persons, unless the EI operators have information to the contrary.
For those businesses (such as online retailers) that sell products through e-markets, a sale made through an EI will be regarded as made to the EI itself, not to the end customer. Therefore, the seller will need to charge, account for and ensure the VAT due on their supplies to the EI is duly documented and paid. Sellers will also need to ensure the information they are providing to the EI is correct.
When charging and accounting for VAT due on the supplies made through their platforms, EI operators can use either a standard VAT registration in the particular EU country where the VAT is due or can register for the mini One Stop Shop ( MOSS) scheme in one EU country.
Given the complexities of the EU's new VAT rules, most businesses that operate EIs — and the many businesses that use their platforms — will need to understand the rules' implications. They'll also want to update internal policies and practices to ensure compliance in time for the January 2021 deadline.
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.