If your business sells or plans to sell goods online to EU-based customers, there are VAT changes coming, whether or not you're located in an EU country. The coming changes focus on cross-border e-commerce B2C transactions, such as sales of clothes, jewellery and smartphones to private individuals. The new rules are aimed at lessening administrative burdens for businesses and combating VAT fraud.
The measures will take effect in 2021, and are part of the biggest changes to the EU's value-added tax system in over 20 years. When the rules come into force your business will no longer need to register for VAT in each EU member state where you sell products, nor will you have to study and comply with local VAT rules.
This is the first part of a two-part post explaining the changes and what they mean for businesses based inside and outside the EU. This first post addresses businesses that have an EU presence — such as an entity in Germany — and sell goods online to EU customers. The second post addresses businesses without an EU presence that sell goods online to EU-based customers.
The EU's current VAT reforms can be traced to a European Commission study that found the EU lost an estimated 168 billion euros of VAT revenue in 2013 due to the so-called "VAT gap," which is the difference between VAT amounts that should have been collected by EU authorities and the actual amounts collected.
In 2016, the EU adopted its VAT Action Plan. According to a European Commission press release, the plan was needed to "reboot the current EU VAT system to make it simpler, more fraud-proof and business-friendly," and in particular "facilitate cross-border trade and keep pace with today's digital and mobile economy." The release notes that cross-border fraud alone makes up 50 billion euros of the EU's annual VAT gap.
The plan includes the creation of a single EU VAT area, including the establishment of a "definitive EU VAT system." The EU has now agreed on the main features of the definitive VAT system and has clarified the technical details for implementation.
Before addressing the coming VAT changes, it's worth briefly summarizing the following two elements of the EU's existing VAT system, for context:
- Distance sales for EU-based businesses
- The EU's mini One Stop Shop (MOSS)
Distance sales for EU-based businesses. The EU has specific VAT rules that apply when EU-based businesses sell goods online to private individuals and ship those goods from one EU member state to another. The rules use thresholds to determine the place of taxation of supplies. The seller charges its local VAT only if the amount of supplies has not reached a certain annual threshold in the member state of destination. Once the threshold is exceeded in a particular destination member state, the seller must register in that state and start applying its VAT rate. (Thresholds vary by member state and are currently either 35,000 or 100,000 euros.)
In practice, these distance sales rules mean that a business must understand the location of its private customers, track the amount of sales made in each EU member state, and know the threshold of each state where it ships goods. In addition, it must register for VAT in each member state when it meets that state's VAT threshold and comply with local VAT requirements, for example by submitting regular VAT returns.
VAT reporting system of the mini One Stop Shop. The EU operates an electronic VAT system known as mini One-Stop-Shop, or MOSS. MOSS was introduced in 2015 as a pilot scheme with a limited scope of services covered. It currently covers only e-services — including telecommunications, broadcasting and electronically rendered services — that are provided from EU or non-EU suppliers to end-customers in the EU. (It does not cover goods or supplies of any services to business customers.)
MOSS allows companies to pay the VAT due for all their e-services sales (as described above) in the EU by paying only one member state and reporting on only one VAT return. The member state of registration then distributes the VAT between the respective member states where the e-services have been purchased and consumed.
There are two schemes running under MOSS: 1) the union scheme, for businesses established in the EU or with at least one entity based in an EU country; and, 2.) the non-union scheme, for businesses without any EU entities.
The coming VAT changes: Online distance sales of intra-EU goods
The new EU VAT rules will take effect in 2021, and will extend MOSS to cover the following:
- EU goods sold online to private individuals in the EU (subject to the current distance sales regime)
- Non-EU goods sold online to private individuals in the EU
- All types of services (not just e-services) sold to private individuals in the EU
The new rules will recognize the following two main categories of distance cross-border supplies of goods to final consumers:
- Distance sales of EU goods (i.e. intra-EU goods, which are discussed in this post)
- Distance sales of imported goods (i.e. non-EU goods, which are discussed in part two of this post)
Under the coming distance sales rules for intra-EU goods, there will be a new One Stop Shop (OSS) online portal that will combine and extend the current MOSS system and distance sales rules. Under the new, simplified rules, businesses will no longer need to: register in all member states where they exceed the VAT threshold; submit local VAT returns in each member state where its customers are located; or meet other VAT-reporting obligations (which can vary by country).
EU online distance sellers will fulfil their VAT obligations through the OSS portal hosted by their own tax administration and available in their own language. EU online sellers that sell to private individuals located in other member states will have to register in only one member state using OSS. They may use that registration to pay for VAT on sales made to customers in any EU state, and will need to submit only one OSS VAT return (in the state where they are registered) to do so.
New VAT threshold
Under the new rules, a single VAT threshold of 10,000 euros will apply to all member states. As is now the case, the threshold will determine the place of taxation for distance sales. As a result, the online seller will still have to check the amount of its sales it makes in each country. They will also of course need to apply VAT sooner in each destination member state as the threshold will be lower than either of the current thresholds of 35,000 and 100,000 euros.
Under the new rules, sellers will also have to calculate VAT thresholds differently. The threshold should include not only distance sales made in one member state, but also all goods and services sold in that particular member state.
The new rules will allow companies to reclaim VAT paid on purchases in a particular member state. That is, a company may deduct VAT in a particular member state against another VAT obligation in that member state. For example, if a German online retailer has paid VAT in the Netherlands for purchases in that country, the company may use a single OSS return to deduct VAT amounts it has already paid to Dutch suppliers in the Netherlands.
In the whole picture of the current VAT rules, this will be an alternative way of reclaiming VAT paid in an EU country where the company is not registered. Currently, there are different mechanisms in place (the 8th and 13th Directives) to allow these kinds of VAT claims.
OSS VAT return
The changes will affect the content of the current MOSS return. The new OSS VAT return will need to include additional details to account for the expanded rules and the possibility of reclaiming input VAT. The periodicity will also be changed to allow for monthly submissions.
Part two of this post addresses new VAT obligations for non-EU businesses selling goods online to customers in the EU.
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.