For cross-border e-commerce, VAT regulations are a key topic. For years, the European Commission has been aiming at simplifying VAT obligations for companies carrying out cross-border sales of goods or services to final consumers and to ensure that VAT on such supplies is paid correctly to the Member State of the customer, in line with the principle of taxation in the Member State of destination.
As the Taxation and Customs Unit writes on their website, the Commission proposed EU legislation in this area in two stages. Firstly, measures concerning telecommunications, broadcasting and electronic services were introduced in 2015. The second package of measures was adopted by the Council in December 2017 and included new rules for distance sales of goods as well as for any type of service supplied to final customers in the EU. The latter measures, also referred to as ‘the VAT e-commerce package’ are set to apply from 1 January 2021 – or rather: were.
Because of the practical difficulties created by the coronavirus pandemic, on May 8th 2020 the Commission proposed to postpone the introduction of new e-commerce VAT rules by six months. Once adopted by the Council, the rules will apply as of 1 July 2021 instead of 1 January 2021, giving Member States and businesses enough time to prepare.
Distance sales within the EU
- €10,000 threshold for all goods
On the way to establishing a simplified system, the EU introduced an annual €10,000 threshold for EU-established sellers of digital goods in 2019. As of 2021, it will also apply for physical goods. If a trader’s annual cross-border revenue does not exceed €10,000, they can simply charge the VAT rate of their home country. This single-tax-rate policy can save companies the costs of VAT compliance, especially if the company is a SME.
After all, it is not mandatory. A trader can make use of the OSS scheme (introduced below) or choose to charge the VAT in the member state of the customer. If they do so, they commit themselves to this choice for two years. Yet, this will only be attractive and justify the effort, if the rate is significantly lower. If the annual turnover exceeds the threshold, only the two latter options are available.
As of 2019, another threshold has been introduced for the field of electronic services: When a trader’s cross-border revenue stays below €100,000, only one piece of evidence (instead of two) is needed to identify the customer’s location, e.g. an invoice address. From July 2021 on, this applies for all goods. Furthermore, for more simplification, the invoicing rules of the EU country of the trader apply.
- The new One-Stop Shop (OSS)
As a further step, the so-called One-Stop Shop (OSS) will be established. It is an extension to the MOSS scheme*, that simplifies the distance sales of electronic services since 2015. As of July 2021, it will include the distance sales of physical products as well. This rule should create a fairer competition and eliminate disadvantages for local, EU-based companies. Sellers charge the local VAT of their customers, while handling the process with their own VAT administration. In a single quarterly declaration, vendors can state their revenues. The local VAT amount is then transferred to the consumer’s member state.
Import into the EU
Abolishment of the VAT exemption for low value goods
As the regulations for distance sales have been established long before the internet has taken over our daily lives, it was quite foreseeable that current rules and exemptions were sooner or late to be redefined. Hence, as of July 2021, the EU will abolish the frequently used VAT exemption for the import of consignments of a value lower than €22. This means, every single shipping from a non-EU country is subject to VAT upon importation. Indeed, it sounds like a massive bureaucratic and financial burden for international traders importing into the EU. Fortunately, there are a few options slimming down the declaration process for low value consignments.
- Value < €150: The new Import One-Stop Shop (IOSS)
To omit extra hassle, the One-Stop Shop can also be applied for import sales. A company that is not based in the EU can appoint an intermediary and gets granted an IOSS EU VAT identification number in an EU member state of choice. When providing the IOSS VAT identification number to the customs authorities, the consignments are then “import VAT exempt” upon importation. On basis of the monthly OSS VAT return, the responsible party declares VAT and it is then transferred to the customer’s VAT administration.
- Value < €150: Special arrangement
If sellers do not make use of the simplified IOSS scheme, the system still falls back on special arrangements in the declaration process and payment of import VAT. In this case, a third party (postal or logistics operator) can take care of the import formalities and the VAT payment on the (EU-based) final customer’s behalf, will charge the customer and pay VAT via monthly return. In this scenario, the member states can subject these transactions to the standard VAT rate.
- Value > €150: Full declaration
Only if the intrinsic value of the imported goods exceeds the threshold of €150, the OSS cannot be applied, and a full import declaration is needed. Nonetheless, the rule still applies, that the VAT rate of the final customer’s country is asked. Consequently, individual VAT identification numbers are required for every EU member state the company has customers in.
The new responsibilities of online marketplaces
A new role comes to the operators of online marketplaces. Since the beginning of this year, they are held responsible for the correct declaration of VAT and the corresponding compliance activities. When a sale is made through an electronic interface, such as a marketplace, platform or portal or similar, they are deemed to have received and supplied those goods. In other words, the platform becomes “the seller”.
This marketplace liability implies, that a sale from a non-EU trader to an EU-based end-customer via an electronic interface is divided into two supplies. The first one is the supply between the seller and the electronic interface (without transport) and the second one between the interface and the end-customer. If the goods are already located inside the EU (e.g. in the platform’s warehouse) they are deemed to be sold from the seller to the electronic interface within the EU and therefore subject to local VAT.
Since each and every marketplace (EU/non-EU) can be held liable for unpaid VAT of their sellers, they cover themselves by demanding a §22f USTG (VAT Act) certificate of their vendors. If vendors do not provide this certificate, they will likely be blocked from the marketplace. Electronic procedures are planned but not implemented yet.
In the case of high value sales (above €150), the non-EU seller must register for VAT in all EU member states of consumption.
Aiming to strengthen the European single market and offer a more level playing field for EU businesses, the Commission continues to rewrite the rules of global e-commerce. Whereby one must note, that for EU customers, imports of low value goods may become less attractive due to customs clearance costs and import duty. Considering the process, there are real simplifications, yet also new obligations and challenges for electronic interfaces and logistic operators, that are quite significant. It can be assumed that logistics processes are affected in terms of delivery times, storage capacities and the recover payment of import duties.
Hermes International, a division of Hermes Germany, assists its customers with all the necessary steps along the logistics chain. Hence, companies seeking the experts’ advice are fully prepared when the changes and new rules apply.
*2015: MOSS for electronic services
Since 2015, the “place of consumption policy” already applies for electronic, telecommunication, and broadcasting services, such as mobile apps. It aims to ensure a more level playing field for EU based businesses: E-services sold online from another country are taxed the same amount, domestic providers are. The so-called Mini One-Stop Shop (MOSS) scheme was established to simplify the process. Traders do not have to register for VAT in every country of their customers individually. In a single quarterly declaration to their home administration, vendors can state their revenues. The local VAT amount is then transferred to the consumer’s member state. Non-EU traders only have to register in one EU country of choice, which will henceforth be their member state of identification. Looking ahead, this scheme is to pave the way for further rules for cross-border e-commerce.